Where is the US economy headed?

Cycloptichorn wrote:

The 'investment class' is the group of people who don't actually do any work for a living, other than making investments; making money out of moving money around.
Cycloptichorn

They aren't the only ones with investments. I would venture to guess that most of the people with investments either work or worked until retirement to build up their investments as a means to retire from. In other words, besides the people with investments that still work, there is a huge segment of the retired community that worked very hard their entire working life to create their investments. Because people worked hard, perhaps went to school by intense motivation and study, got good jobs, and saved, rather than living from hand to mouth, are these people now to be called the "investment class," implying they have somehow hit life's lottery or something?

Most of the people with "investments" are ordinary people, and people to be respected for prudent and hard working lives and careers. Even the few people that never worked hard, but live off of investments, at least their investments create capital and other resources for businesses to create jobs and help society be better off overall.

If you want to discuss "classes," go enroll in a college course talking about Karl Marx.

Richard, you have a fundamental misunderstanding of the reserve requirements. It's a percentage the bank has to hold on to, NOT a multiplier! If I give the bank $1000 in deposits, it doesn't get to make $10,000 in loans. It can loan out $900 of that money, but it has to hang on to the 10% to cover withdrawals. Or it could hang on to the entire $1000 and make $9,000 of loans... from OTHER PEOPLE's deposits. Not from the ether!

When the government wants to inject "new" money into the market, it doesn't sell bonds, it -buys- them. It pays for people's government bonds with newly-printed money. Boom, more money in the economy.

You're correct in that the government sells bonds to cover the deficit. However, those bonds are actually bought by people, NOT the fed. The money goes from bond-buyer to fed to government to government expense; no new money enters the chain. Only when the fed buys bonds with new money is new money injected into the system.

That is the key. They do hold onto the money (or more accurately deposit it as a reserve requirement) but they dont need other peoples' money. They are allowed to create checkbook money on top the federal reserve notes they have as reserve.

So okie.. When are you going to answer about your sales tax idea based on the spending per quintile? Or did you forget about it because the numbers don't support you?

okie wrote:

No, I have not read Adam Smith, but I believe I am correct to say that it can be made to be generally progressive in nature, at least progressive in the income or wealth brackets that are important, and that most modern economists would agree with that.

Which modern economists? I have asked you a couple of times to cite your sources for your economic theory. You don't seem to have any other than to claim you haven't read anything but you believe you know what they said in spite of not reading them.

Parados, before tackling that, to follow up on what I asked Avatar, a couple of questions.

Is an estate tax, which exempts tax up to an amount to a certain threshold, considered to be a progressive tax, yes or no?

Is the estate tax based on wealth or income?

Do you consider the property tax to be a progressive, flat, or regressive tax, and according to what reasoning?

http://www.bls.gov/cex/csxann05.pdf

The top 20%(quintile) earn 15 times more than the lowest 20% but only spend 4.5 times more.

The spend roughly the same on tobacco. The rich spend 4.5 times for alcohol. (Alcohol taxes are based on number of gallons, not the price per gallon.) They spend 2.5 times for utilities. They spend 5.5 times more for entertainment. They spend 5 times as much in eating out.

The only area where the top quintile comes close to spending 15 times the bottom quintile is in insurance and retirement savings.

Based on the numbers it appears there is NOTHING you could tax with a flat sales tax that would cost the top 20% more than the bottom or middle. We are not talking about a couple of millionaires here okie. We are talking about the average of everyone earning over $142,000 would not pay more in sales taxes in any general category than the bottom or middle earners. Your sales tax would have to be graduated based on earnings or very selective like yachts or other high end items that the middle class would never buy.

Richard Saunders wrote:

That is the key. They do hold onto the money (or more accurately deposit it as a reserve requirement) but they dont need other peoples' money. They are allowed to create checkbook money on top the federal reserve notes they have as reserve.

You're still not quite clear on the concept of what constitutes the money supply.

The most basic form of measuring the money supply is the actual amount of cash in circulation, true. However, nobody is under the impression that this is actually the money supply. A much more common measure, M1, is all the cash in circulation PLUS the demand deposits at banks - basically, the amount of cash there would be if everybody went to the bank and took out all their money as cash (which, thankfully, is not happening.) There are other measures that also add in things which are easily converted into cash - M2 includes things like CDs, while M3 also includes shares of stock. M3's not really useful for measuring the money supply, but M1 and M2 are.

Banks only have to hold a portion of deposits as a reserve, and can loan the rest of them out. That means that, in a sense, you're correct; a significant chunk of the bank's deposits are only "virtual money" in the sense that they don't actually have all that cash sitting in a safe somewhere. (Of bloody course not - they have to lend that money out to do business.) However, that doesn't mean that the bank can just whistle up money out of nothing if it needs to pay some out - it can only give people REAL money. If you withdraw $100 from the bank, that $100 is real money. If a corporation moves $100 million from one bank to another, $100 million actually has to move from one bank to the other.

So what happens when a bank has more withdrawn in a day than deposited? They're under their reserve requirement, which they're not allowed to have happen. So what they do is -borrow money from another bank-. These loans tend to be short-term, and banks get great interest rates from each other. They do pay interest on these inter-bank loans, however, so if a bank is seeing a significant drop in its holdings, often it will transfer its loan holdings to another bank in exchange for funds. This, however, isn't actually all that common, because the velocity of money in the economy doesn't change all that radically - basically, while individual locations may fluctuate from day to day in whether they take in or give out more money, the amount of money that people hold stays more or less the same, and so the amount of withdrawals and deposits is generally more or less constant. The interbank loans are, then, more of a shock absorber than anything else.

At the highest level, the Fed loans funds directly to the biggest banks, again along the same lines - very short-term loans. The rate at which the Fed makes these loans is the Federal funds rate. This is the rate that gets reported in the news when the Fed raises or lowers it or doesn't do anything at all. Other interest rates tend to take their cue from this rate, so changing it a little is usually all the Fed needs to do in order to keep the economy in check.

But all that doesn't mean that a bank's assets are somehow "phantom" assets. A bank's outstanding loans must, must, must equal their current deposits minus the reserve requirement. At no point does the bank loan out money that it never had! (Well, a lot of the mundane bill-swapping is done with computers instead these days. But at the end of the day, actual funds actually move.) IF a bank was somehow creating "checkbook money", why would it need to borrow money from other banks or the Fed?

The Federal Reserve is somewhat independent of the government, that's true. However, it's still a federal body and still technically under the purview of the federal government. It's set up to be independent of political decision-making because, frankly, it's good for business; businessmen like nice, stable financial environments, and having your mint in the hands of a politician is dangerous. The temptation is always there to just print money to pay whoever you want in exchange for their support. However, that's a highly inflationary policy that eventually kills your economic stability. By setting it up with a decision-making body that's nominally independent, and refraining from political interference, businessfolk are a lot more likely to take the sort of risks with their money that lead to investment and growth. (When future economic conditions are highly uncertain, investors tend to pull their money into "safe" investments, which makes it hard for businesses to get capital.)

But the independence is... well, it's not in name only, because by and large the government doesn't play in the Reserve's pool. But it's at the pleasure of the government, so if they really wanted to intervene, they could.

Look, a lot of this stuff (about money supply and how banks work) is right out of the macroeconomics textbook. Check one out, it'll help you get a feel for how these things function and save my poor keyboard some typing. ;p (My theory for demographics and future stock prices is my own; we'll see in 15-20 years. Still haven't figured out how to make a huge wad of cash from it, though...)

That's just the trick - the government certainly IS free to print however much money it wants, but at the same time, it can't prevent the resulting inflation. Not just "won't want to", but "can't" - more money into the market means a higher rate of inflation, and pretty much the only anti-inflationary tool that actually works is taking money OUT of the market. So you're correct in that the government could provide lots more currency, but that would -suck- for pretty much all parties involved except the government, and even the government would feel the pinch from the attendant reduced economic activity.

If you really didn't know how the reserve system worked, though - and there's no way to read what you wrote as anything BUT that - you shouldn't comment. You say you've read enough books on the subject, but plainly this is not the case, sorry. Healthy skepticism is good, but ignorant skepticism isn't really helpful...

Uh, yeah.. But thats exactly what theyre doing right now.. It is the entire reason of inflation.

What I was commenting on before was that the fed can provide cash to member banks by doing things like buying up bad or written off loans.

You should stop putting all your faith into believing all the textbook explanations and start looking at whats really going on.

Richard Saunders wrote:

Uh, yeah.. But thats exactly what theyre doing right now.. It is the entire reason of inflation.

What I was commenting on before was that the fed can provide cash to member banks by doing things like buying up bad or written off loans.

You should stop putting all your faith into believing all the textbook explanations and start looking at whats really going on.

Things really going on? You mean like low inflation? Or should we ignore the present inflation rate and listen to your chicken little cries?

First of all, the price of oil is a world market, not determined solely by U.S. economics.

Yeah, that's the thing about inflation - it's a rise in the GENERAL price level. Not a rise in specific commodities. Especially not a rise in specific commodities keyed to a scarce natural resource mostly controlled by religious nuts who don't like us much. ;p

It's true that the Fed can specifically intervene (or, more likely, Congress intervene) for things like the S&L scandal. That's not good - you get a bad moral risk problem. However, that sort of thing is really, really rare, precisely because it's a bad idea. You only do it when the consequences are worse - a general loss of faith in the integrity of the banking system would qualify.

It's no surprise that we have a little inflation, though, because the Fed doesn't try to completely eliminate inflation. It's hard to exactly determine the inflation rate - we engage in a lot of foreign trades, there's the foreign currency market, and frankly there's a lot of demand for dollars in situations having nothing to do with the US economy, for example. (Limitations of data, generally speaking.) Thus, the actual rate of inflation is going to bounce around your target somewhat. If you aim for zero inflation, though, you'll sometimes have very small inflation and sometimes very small deflation. Deflation, though, is a lot harder to deal with, economically speaking; a COLA adjustment 1% up is a lot easier than one that's 1% -down-, politically speaking. So in practice it's better to have low inflation than low deflation, and central banks don't shoot for zero.

The point is, if you don't understand the textbook situation, how the heck can you tell when things deviate from it in one way or another? The economy is big, big, big, biiiiiiig. It's way bigger than that. It's too big for a shadowy cabal behind the curtain to be pulling the strings. Certain very rich people can have an effect on small portions of it (for example, Soros's currency speculation has a lot to do with the Asian currency panic in the mid-90's), but that's different from actually steering the whole thing. Heck, even the Fed doesn't really steer the economy - they can give it more gas or more brakes, but it's gonna go where it's gonna go.

The price of gasoline dropped 10 cents here over the weekend.

Does that mean the Fed is not printing enough money?

parados wrote:

So okie.. When are you going to answer about your sales tax idea based on the spending per quintile? Or did you forget about it because the numbers don't support you?

No, I did not forget about it. The last thing I posted per that argument was asking you to clarify something for me before proceeding. But you never answered. This is how it went:

parados wrote:

okie wrote:

No, I have not read Adam Smith, but I believe I am correct to say that it can be made to be generally progressive in nature, at least progressive in the income or wealth brackets that are important, and that most modern economists would agree with that.

Which modern economists? I have asked you a couple of times to cite your sources for your economic theory. You don't seem to have any other than to claim you haven't read anything but you believe you know what they said in spite of not reading them.

okie wrote:

Parados, before tackling that, to follow up on what I asked Avatar, a couple of questions.

Is an estate tax, which exempts tax up to an amount to a certain threshold, considered to be a progressive tax, yes or no?

Is the estate tax based on wealth or income?

Do you consider the property tax to be a progressive, flat, or regressive tax, and according to what reasoning?

In other words, is the judgement of whether any and every tax is progressive or not by definition always determined by income?

The answer to the above question bears heavily on the relative progressivity of property taxes or sales taxes, as a couple of examples. I wanted to see how you answered this, and I also asked Avatar the same questions, but neither of you have given an answer.

Regardless of the answer to the above, back to this post of yours:

Parados wrote:

http://www.bls.gov/cex/csxann05.pdf

The top 20%(quintile) earn 15 times more than the lowest 20% but only spend 4.5 times more.

The spend roughly the same on tobacco. The rich spend 4.5 times for alcohol. (Alcohol taxes are based on number of gallons, not the price per gallon.) They spend 2.5 times for utilities. They spend 5.5 times more for entertainment. They spend 5 times as much in eating out.

The only area where the top quintile comes close to spending 15 times the bottom quintile is in insurance and retirement savings.

Based on the numbers it appears there is NOTHING you could tax with a flat sales tax that would cost the top 20% more than the bottom or middle. We are not talking about a couple of millionaires here okie. We are talking about the average of everyone earning over $142,000 would not pay more in sales taxes in any general category than the bottom or middle earners. Your sales tax would have to be graduated based on earnings or very selective like yachts or other high end items that the middle class would never buy.

If you base the judgement of progressivity solely upon income before taxes and perhaps donations to charity for the poor and other adjustments,which I don't buy,

and if you base it upon income only, which I don't buy,

and if you base it upon buying habits across the board, which I don't buy as being representative of what it could be,

then technically I will concede the point. But I do not concede because of many reasons.

I see the comparison of the ratio between the bottom 20% and the top 20%, as compared before taxes and other things as having several problems. One example being that if income tax is continued along with a sales tax, then the actual ratio of incomes is going to narrow.

The second point relates to the first part of my post. I do not see how you can base the progressivity of a sales tax solely upon income.

It is fair to base the income tax on it, because that is what it measures, and that is what it is levied from. Property taxes do not measure income, they measure property holdings, which relates more to wealth than income.

Estate tax does not measure income, it measures value of estate. If the estate tax is considered to be progressive, and is not based on income,

Quote:

why should other types of taxes be required to be based upon income instead of the money that is being measured?

Sales tax does not measure income, it measures buying power.

It is levied upon purchases, not income, and purchases are a result of the relative buying power of people. If anything, a sales tax would seem to be flat, in the same spirit that property taxes might be considered as a flat tax, and further if sales tax on necessities are exempt, it is made more progressive. As Avatar once pointed out, as the most poor more commonly do not own property, the property tax has a progressive aspect to it. Similar principle would apply to sales tax. The argument that the rich place more money in savings and investments, thus escaping sales tax, fine, because those investments will incur taxes in other ways as a substitute for sales tax. Each and every tax does not need to account for the overall economic condition of every citizen to be progressive. It should only apply to the aspect of money stream that it is applied to.

Another objection is that some of the bottom 20% income earners spend on luxuries instead of necessities. If I recall correctly, Adam Smith did not consider tobacco a necessity, but instead a luxury. So there is just one example of many things that the poor are spending on that are not necessities. If you knock out the spending by the poor on things not considered necessities, the ratio of spending by the rich would increase from the 4 to 5 times ratio that the figures appear to show now. If a luxury tax is considered to be progressive, then just because some of the poor would buy luxuries does not justify reclassifying a luxury tax as regressive.

The last point is that even if technically according to your definition, a sales tax alone could not be made progressive according to your chosen definition, you would still have to admit that the proponents of the fair tax, the consumption tax, have proposed rebates to the lowest incomes as part of the sales tax legislation, which would surely force you to even admit the overall program of sales tax and rebates would be progressive by almost anyone's measure.

parados wrote:

The price of gasoline dropped 10 cents here over the weekend.

Does that mean the Fed is not printing enough money?

Heh, cute. But you know what I mean.

In 1950 a silver dollar bought 4 gallons of gas. Today, that silver dollar will still buy 4 gallons of gas but the paper dollar will not.

Today's highs for gasoline will be lower than tomorrow's lows. Its a real shame. I know theyre advantages to having a flexible currency but I think all its done is allowed us as a country to get fat and lazy.