The budget battles

[phil_20686]

Many retired people here no longer receive wages, but live on income that is fixed, such as an annuity or a set pension. Inflation reduces the buying power of these folks.

 

Yes, but Technology and GDP growth tend to increase it buy making things cheaper. In reality 3-4% inflation will not reduce their buying power as PPP generally increases by more than this. Further, you can always correct for this through state pension schemes if it becomes an issue.

[phil_20686]

On the velocity Issue:

 

I had always assumed that it was mostly a book-keeping device to make the units fit, but now that I have been thinking about it I think it does show something. Suppose that we lived in a barter economy, now the money supply is precisely those good which are traded, so M = PT, and V=1 trivially. In a monetised economy the velocity accounts for the difference between the money that is involved in doing trades, and the total money supply. Suppose that of the total money supply K is used in trades and M-K is not, by the same argument given above K=PT trivially (the money used in trades = the value of those trades by definition), and hence V = K/M: I.e. the fraction of money that is used for transactions.

 

This would suggest that V=1 is a limiting case, that if all money were used in transactions the velocity of money is asymptomatically one. Velocities greater than one are measured because in the equation of exchange one tends to look only the velocity of "narrow money" which is only a fraction of "total money". Of course, the implicit assumption above is that we have chosen a time frame small enough that repeat trades are impossible. With this restriction, it is clear that V=1 is a limiting case. IF no player can trade more than once in the time step, the most trades that can happen is if all players trade.

 

The concept of repeat trades in a barter economy is interesting in its own right, either two people keep making the same trade (i.e. the trade creates no value) or more likely A trades with B, and then recognises that he can trade what he bought from A for even more from C. Now, evidently, one can have a velocity greater than one. Here the velocity is measure in the complexity of the economy. The fact that C wants what A has but A does not want what C has and therefore they have to trade through intermediates. Is it clear then that higher velocity is a good thing? I would say a tentative yes, as it indicates that all players in the exchange brought something of value. A lower velocity would occur if no one wanted the others goods.

 

 

Thus low velocity can suggest lots of things. A greater fraction of income devoted to savings. A general reduction of debt. A change in the relative proportions of the money supplies. A change in prices. Or real growth. Or it can indicate that no one wants to buy the goods that are being created. In a complex economy every finished product represents a large number of trades, so velocity represents some hard to unpick group of factors, including consumer spending, overall complexity of the economy, and the effect of various monetary policies, but as to whether it has a direct impact on anything in particular, I would say probably not. Its more a general indicator of the health of the economy.

[PassedOut]

It seems like one of the major problems in the US economy is a failure to invest. One could attempt to see to this shortfall via ever larger deficits to transfer money from private investors into public investments, but it seems like not only is this not really working, but it is also storing up trouble for the future, in the sense that as the debt gets paid back it will put pressure on companies to invest during the boom, which will lead to a real danger of overheating in the economy. Alternatively, by raising inflation one can attempt to force private companies to invest on their own, as holding on to capital becomes ever more expensive.

 

Inflation will also reduce the indebtedness of private consumers, which might to a little to alleviate suppressed consumer spending.

Yes, the low levels of investment now are hurting the US economy. Lawrence Summers discussed this yesterday in the Washington Post: How to avoid a lost decade

 

After bubbles burst there is no pent-up desire to invest. Instead there is a glut of capital caused by overinvestment during the period of confidence — vacant houses, malls without tenants and factories without customers. Meanwhile, consumers discover that they have less wealth than they expected, less collateral to borrow against and are under more pressure than they expected from their creditors. Pressure on private spending is enhanced by structural changes. The publishing industry provides a vivid example. As local bookstores have given way to megastores, megastores have given way to Internet retailers and Internet retailers have given way to ebooks, two things have happened. The economy’s productive potential has increased and its ability to generate demand has been compromised as resources have been transferred from middle-class retail and wholesale workers with a high propensity to spend up the scale to those with a much lower propensity to spend.

I agree that inflation (a very modest level of it) would help to solve that particular problem. With a graduated income tax, mild inflation also helps to bring down the federal deficit via bracket creep.

 

However, I see inflation having more of a negative impact on retirees than you seem to. I can remember a time (admittedly the inflation rate was more than 3% then) when elderly home owners were forced to sell homes owned free and clear because they could no longer afford to pay their property taxes. You can point out that they made substantial paper profits by selling, but the reality is that they had no desire to move and found the whole business very disruptive.

[phil_20686]

Further to my previous post here are some intersting graphs:

 

% Changes in Money Supply

 

(sorry apparently .svg files are not supported so you will have to go to the source.)

 

http://upload.wikimedia.org/wikipedia/commons/b/bf/M3_Velocity_in_the_US.png

 

Bearing in mind that M2 is much bigger than the other measures of money supply we might expect to find that large changes in M2 are reflected in the large velocity changes. further, since M2 is probably not really used in trading as much as other forms we might expect that whenthe % change in M2 is larger than other measures of money, the velocity should fall, when it is smaller than the other measures we might expect velocity to grow.

 

Between 1960 and 1984 (ish) the change in M2 lwas larger than other forms of money and the veolcity fell throught this time. Sharp peaks appear in 1961, 71. Both of these show up as sharp drops in the money velocity. The next big divergence is the period 90-94 when M2 grew much more slowly than M0&M1, and this was associate with a large growth in the money velocity. What does this tell us? Well, large changes in the money supply do show up in the money velocity. Moreover, this supports the fractional analysis as a strong component, as increasing M0 (currency) with respect to the total supply M2 does seem to increase velocity, as predicted. However, there are many other features on the velocity graph that must be due to other factors, as they do not seem to correspond to any apparent trends in the money supply.

 

Basically I have come to the conclusion that velocity might be related to the health of the economy, or it might not. :) Helpful, I know.

[phil_20686]

However, I see inflation having more of a negative impact on retirees than you seem to. I can remember a time (admittedly the inflation rate was more than 3% then) when elderly home owners were forced to sell homes owned free and clear because they could no longer afford to pay their property taxes. You can point out that they made substantial paper profits by selling, but the reality is that they had no desire to move and found the whole business very disruptive.

 

Well I am from the Uk, and here inflation has only been below 3% for 12 years in the last 50, and we seem to be doing ok :).

 

You can count them if you like: My link

 

In the US inflation has been a bit lower, but your long term average inflation over the last century is above 3%, so it doesnt seem like a terrible imposition on pensioners to have to put up with business as normal :)

 

(The US inflation rate was below 3% 22 years in the last 50 you can count them here).

[PassedOut]

The US inflation rate was below 3% [only for] 22 years in the last 50 you can count them here.

Yes, the terrible US inflation that your chart shows for the 1970s and early 1980s was very disruptive. Those were the years where retirees encountered severe financial problems here.

[blackshoe]

From the prologue to David Weber's novel The Short Victorious War:

 

"What this country needs is a short, victorious war to stem the tide of revolution." — V.K. Plehve, Russian Minister of the Interior to General A.N. Kuroparfon, Minister of War, 200 Ante-Diaspora (1903 C.E.), on the eve of the Russo-Japanese War

 

"The belief in the possibility of a short decisive war appears to be one of the most ancient and dangerous of human illusions." Robert Lynd — (224-154 Ante-Diaspora)

 

Russia lost their war. The Republic of Haven lost theirs too — the Republic was overthrown in a coup, and became The Peoples' Republic of Haven, ruled with an iron fist by the Committee of Public Safety.

 

Nothing directly to do with economics, I suppose, but something in the last couple of posts triggered my memory of it.

[PassedOut]

Thus low velocity can suggest lots of things. A greater fraction of income devoted to savings. A general reduction of debt. A change in the relative proportions of the money supplies. A change in prices. Or real growth. Or it can indicate that no one wants to buy the goods that are being created.

Yes, there are many factors that affect velocity, and the government can't force folks to spend all of their money or to spend it quickly. Indeed there is a tension between the value of saving to us as individuals and the importance of spending to the health of the economy overall. What the government can reasonably do to increase velocity -- and thereby boost the economy -- is to direct governmental spending so that the money reaches the pockets of those most likely to spend it rather than to those who will sock it away.

 

The Bush administration's TARP program did avert the disastrous failure of our banking system, but didn't boost the economy to the degree that they had hoped. Instead of loaning the money to businesses and consumers, which would have helped to jumpstart the economy, the banks protected their corporate interests (as corporate officers are obligated to do) by sitting on the billions that they were loaned.

[PassedOut]

Although the US Senate voted to retain the ethanol subsidy yesterday -- pandering once again to the free lunch farmers of the midwest -- it was heartening that 34 republicans broke with Grover Norquist's powerful free lunch lobby to vote against that subsidy. In contrast, all but 7 democrats voted to continue the free lunch: Senate vote to repeal ethanol tax credit fails, but some in GOP break ranks

 

“You’ve got 34 Republicans that say they’re willing to end this, regardless of what Grover says,” Coburn said, referring to pledge creator Grover G. Norquist, the founder of Americans for Tax Reform. “That’s 34 Republicans that say this is more important than a signed pledge to ATR.”

 

Many GOP senators were emphatic in their support for the Coburn measure, suggesting that a crack may be opening in the Republican front against new revenue — a development that could help ease a path to a debt-reduction compromise with Democrats, who are insisting on additional revenue as part of any deal.

 

“Everybody’s entitled to their own opinion,” said Sen. John McCain (R-Ariz.), when asked whether wiping out the ethanol credit is tantamount to raising taxes. “It’s my opinion that it’s a disgraceful subsidy that is unwarranted and a waste of taxpayer dollars.”

 

Rep. Chris Van Hollen (D-Md.), a participant in bipartisan talks led by Vice President Biden aimed at forging a debt-reduction agreement, said Coburn’s “willingness to cut special-interest tax breaks for the purpose of deficit reduction is encouraging.”

 

“A realistic conversation about deficit reduction must include both cuts and revenues, and Senator Coburn’s amendment to eliminate $6 billion in tax earmarks for ethanol is an important part of this discussion,” Van Hollen said.

Both of my senators voted to continue that particular free lunch and have heard from me about it. I hope other voters put pressure on their people in congress to stop this kind of crap -- and to thank the republicans who had the courage to thumb their noses at Grover Norquist's free lunch lobby.

[phil_20686]

In somewhat unrelated news, Britians Austerity package seems to be working ok, as unemployment has registered a large drop despite government layoffs. No idea how significant this will be in the long term, but we will see.

[y66]

UK unemployment is indeed at its lowest level in nearly 2 years. But if this is what OK looks like, god help the UK.

 

http://media.ft.com/cms/93864f40-9737-11e0-9c9d-00144feab49a.gif

 

Paging Mr. Keynes.

[phil_20686]

UK unemployment is indeed at its lowest level in nearly 2 years. But if this is what OK looks like, god help the UK.

 

http://media.ft.com/cms/93864f40-9737-11e0-9c9d-00144feab49a.gif

 

Paging Mr. Keynes.

but then I could produce this graph:

 

Sorry teh forums do not support .gif extensions

 

and point out that following a recession 7% really is not that bad to start with. And that this fall of 88000 was in the face of government layoffs of 140000 or so, so private sector employment grew my nearly a whole percentage point. I am quite up beat about the state of the UK economy, I think productivity is rebounding strongly, but the statistics are masked by falling deficit spending (masks real gdp growth) and government layoffs (which mask employment growth in the private sector).

 

Obviously there is still some way to go, but I am optimistic.

[PassedOut]

US health-care reform is changing incentives, and hospitals are responding: Hospitals courting primary-care doctors

 

The law will reward teams of doctors, nurses and others if they coordinate to provide better care at lower costs. As front-line doctors, primary-care physicians are key to this effort.

 

In some cases, hospitals are seeking to take over existing practices; in others, they are hiring new graduates or relocating doctors from outside the region to prepare for accountable-care organizations.

Change is always difficult for some, but change that injects accountability is needed to cut the waste from the medical system that the US endures today.

[PassedOut]

But change is easier for politicians. If you wish to blame something for your failures -- earmarks, for example -- you simply abolish the word "earmark" from your vocabulary and choose a new, less vivid, phrase for it: House earmarks morph into programmatic requests

 

Cutting the $553 billion base Defense Department budget is made that much harder when House members continue their long-standing habit of slipping into it little multimillion-dollar items that once were called earmarks.

 

In the House version fiscal 2012 Defense Authorization Bill they became en banc amendments approved without public discussion in committee (Armed Services) and on the House floor, and financed from a $650 million Mission Force Enhancement Transfer Fund, which was created by reducing other programs.

 

The House Appropriations Committee has taken a more subtle approach. Instead of its old habit of soliciting earmarks, it now asks members to provide programmatic requests ahead of subcommittee markups.

Yep, a truly bipartisan agreement to maintain business as usual. Who says the parties can't find common ground?

[luke warm]

Who says the parties can't find common ground?

not me, although some still use the term 'free lunchers' when talking about some, but not all, politicians... they're *all* free lunchers, some are just better at hiding that fact

[blackshoe]

Ron Paul?

[luke warm]

at least you know where he stands on issues... get rid of the fed, simplify the tax code, pull back the military

[Winstonm]

at least you know where he stands on issues... get rid of the fed, simplify the tax code, pull back the military

 

Reduce the states to 13 colonies, reinstitute agrarian economy, wear powdered wigs...

 

"If I could turn back time." Cher

[blackshoe]

Of course. You don't agree with him, so you ridicule him. Typical. :(

[PassedOut]

they're *all* free lunchers, some are just better at hiding that fact

Ron Paul on the free lunch

 

The truth is that many politicians and voters essentially believe in a free lunch. They believe in a free lunch because they don't understand basic economics, and therefore assume government can spend us into prosperity. This is the fallacy that pervades American politics today.

It's reasonable to debate what expenditures the government should make. And many of the expenditures are disastrously foolish, with the Iraq war at the very top of the recent list. But that war was authorized by our representatives -- as is every dollar that has been spent, whether wisely or foolishly. As a citizen, I'm obligated to pay my share (in reality, more than my share) of that debt, whether I agree with the spending or not.

 

Anyone -- regardless of party -- who takes tax increases "off the table" in our circumstances is properly labeled a free luncher. The alternative to paying higher taxes to cover the deficit and to chop away at the debt (as Bill Clinton so responsibly did) is stealing from our children and grandchildren. Every politician -- democrat or republican -- who has signed Grover Norquist's free lunch pledge is a thief, pure and simple. (Or, if he or she did not really mean it, a liar.)

 

Let our children and grandchildren pay for their own mistakes, not for ours.

[luke warm]

Reduce the states to 13 colonies, reinstitute agrarian economy, wear powdered wigs...

 

"If I could turn back time." Cher

does that mean you're against any/all of those things?

 

As a citizen, I'm obligated to pay my share (in reality, more than my share) of that debt, whether I agree with the spending or not.

if you're amongst the 50% who pay any taxes at all you're paying more than your fair share

[Winstonm]

does that mean you're against any/all of those things?

 

 

if you're amongst the 50% who pay any taxes at all you're paying more than your fair share

 

I am against attempts to live in the past - like nothing ever went wrong prior to the Fed.

[Winstonm]

Of course. You don't agree with him, so you ridicule him. Typical. :(

 

You really think I am against pulling back the military?

 

Yes, I ridicule Paul because he relies on dogma rather than reasoning. Abolishing the Fed and reestablishing the gold standard won't do squat to help anything, but it fits on a bumber sticker.

 

Just like "Go Galt" fits on bumber stickers of the terminally hopeless believer in fairy tales.

[blackshoe]

You really think I am against pulling back the military?

 

Yes, I ridicule Paul because he relies on dogma rather than reasoning. Abolishing the Fed and reestablishing the gold standard won't do squat to help anything, but it fits on a bumber sticker.

 

Just like "Go Galt" fits on bumber stickers of the terminally hopeless believer in fairy tales.

 

Did I say that I think you're against pulling back the military? No, I said that you ridicule someone because you disagree with him. And asserting that things with which you disagree are "fairy tales" or "dogma" is just more of the same bullshit.

[awm]

if you're amongst the 50% who pay any taxes at all you're paying more than your fair share

 

There are a number of problems with this statement, which is a frequent Republican talking point.

 

First, it's not true that 50% of people don't pay taxes. What's true is that roughly this percentage don't pay federal income taxes. However, most of them are still paying the various payroll taxes, state and local sales taxes, and a portion of various national taxes which are passed on to consumers (notably the gasoline tax). They may also pay state income taxes (which tend to permit fewer deductions) and even property taxes.

 

Second, it's quite possible to argue what "fair share" means. With a few exceptions, most of the people not paying federal income taxes are also not making much of an income. Many of them are families with kids subsisting on one or two minimum wage jobs, who can barely make ends meet. These families have basically been screwed over by the lack of a government safety net, by the bad economy, by predatory lenders, etc. It's not clear to me that their "fair share" is the same as the "fair share" of wealthy people who have in some cases massively benefited from recent government policies (i.e. huge payments to the military-industrial complex, bailing out of various big banks).