In past recessions gov't workers were laid off. Today gov't workers are not being fired because of the political strength of public sectors unions.
Economists on the RUN
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Many intuitively believe that you have captured, in brief words, serious faults in our nation. We are right to feel discouragement at times. Just look around us and see what is happening in our country today. I'm concerned, I'm worried, but I'm not ready to pack my bags for Canada.
So I did a ridiculous thing. I wrote a very long, detailed response to you because your post interested me very much, and I wanted to clarify my own thoughts. Writing them down helped. I hope you will have time to read it. I'll understand if you don't. I know few others here will bother. But thank you for a great post that summarizes the frustration that so many of us feel.
I am just addressing a few of your comments, which I have quoted below, where I think I have something worth contributing.
The fed and treasury are really one coordinated operation made by statutory law to look as though they are independent of each other. For practical reasons, however, the fed and Treasury have no choice other than to closely coordinate their operations. This can be seen by examining the consolidated accounts of the Treasury and the Central Bank.
Of course there are factors out of the control of both the fed and the Treasury that affect inflation. There can be no question, however, that the fed can create inflation if wants to. The fed however, using only the fed funds rate, can only control inflation rather imprecisely.
An artifice I attribute, perhaps inaccurately, to Minsky, considers money in the economy to be of two kinds: "outside" and "inside" money. The outside money is the money created at will by the government and spent into the economy. The government has absolute control over this kind of money. The inside money, however, is less easily controlled. It is the additional money created by credit as a consequence of fractional reserve banking. This inside money appears in the economy when banks make loans and disappears when the loans are paid off. Under normal circumstances, inside money is the big factor in determining the "money supply."
Because the demand for credit is only weakly affected by incremental changes in interest rate, the Fed's primary control tool, the fed has difficulty in controlling the amount of inside money in the private sector economy.
Price inflation is a function of the amount of money – outside+inside, the amount of goods and services available for purchase and the demand for those goods and services. Demand, in turn, is a function of where in the economy money is located and the state of the economy. If the fed wants to create inflation, it can in cooperation with the Treasury flood the economy with excess outside money poured into the demand side of the economy. The fed tries to avoid this. Even now, with Trillions of outside money being pumped directly into the economy you will not see much inflation because demand is down, new credit is replacing lost earnings and the velocity of money is down.
This is, of course, correct, but is this necessarily a bad thing? There is a common perception that deficits are bad. This arises, I think, out of our penchant for equating personal and government finances, despite personal and government finances having practically nothing in common. Having studied this issue at length, it's now quite clear to me that some deficits are essential, some are not, and much of the time deficits are either too large or too small. The idea that deficits can be too small, is shocking to some, although certainly not to economists.
First, a little background. Government is the source of money, and as such it is impossible for the government to run out of money. Taxation is one of the things that gives money value. Bonds are not required for the government to spend in excess of it's tax revenue. In reality the government regularly spends money before it obtains it via revenue from taxes or bond sales. The appearance is that of the government borrowing money via bond sales in order to engage in deficit spending. But appearance here is misleading. Bonds are not required for the government to spend in deficit. Instead they serve other purposes. One is as an interest bearing store of money, and another is as a means of removing money from the economy and replacing it with a Treasury liability.
I would argue that there is such a thing as an essential deficit, one type of such would be those deficits needed because of natural growth in an economy. By recognizing that the way government puts money into the economy is to spend it in, is easy to understand that if the government repeatedly ran surpluses, revenue > expenditures, eventually the economy would be drained of money such that it would be thrown into recession, deflation, and then depression. If population and productivity remain stagnant, the best the government can do is to balance its budget. On the other hand, if population and productivity grow, the government must spend in deficit to maintain the status quo. Thus in a large modern economy regular small deficits are a part of maintaining a robust economy! These normal deficits will never be paid off, and will never need to be paid off. They represent the necessary expansion of outside money as GNP increases over time. Naturally this is a hard pill for most of us to swallow since we were brought up on the idea that deficits are bad.
Another example of essential deficits are those arising in times of economic dislocation and disruption. In these instances, the government routinely increases the amount of outside money flowing into the economy to counter a contraction in inside money and its velocity. This can occasion massive increases in outside money flowing rapidly into the economy, as we have recently seen. At present, much of the new outside money is flowing to the demand side. In addition, new low (or zero) interest, forgivable, credit channels administered by commercial banks have been opened. To control inflation, as the normal flow of credit and money resumes with recovery from the Covid crisis, the Fed will withdraw excess money from the economy via bond sales. Note that the politically sensitive alternative of raising taxes would directly reduce the net deficit, as well as removing money from the private sector without incurring a Treasury liability. Although selling bonds also removes money from the private sector, it does not reduce the deficit. It simply replaces money in the private sector with a Treasury liability.
There is yet another kind of deficit , and that is the deficit due to new outside money being spent into the economy aimed specifically at supply-side stimulus. The supply-side stimulus concept became popular with politicians and economists in the 1980s, and still has its advocates. Here I can only give you my personal view after having made a serious study of economics over the past 15 years. It is that supply side economics is beneficial to the supply-side of the economy, but has not lived up to its promise of lifting all boats ; it leaves the majority of them on dry land. It turns out that in supply-side economics we have a nice example of our intuition being right – you wouldn't expect that you could help the lower middle class much by making the rich richer, and it turns out you can't.. And no, supply-side stimulus in the form of collapsed upper tax brackets and a drastically reduced, uppermost, marginal rate does not pay for itself. It does result in increased federal tax revenue by putting more spending money into the pockets of those that pay over half of all the federal income tax and via increased taxes from "stimulated" profits of those that sell goods and services to the government, but it also has created huge deficit increases. The present administration even experimented with massive supply-side stimulus into a full employment economy. That's never been done before at anything like the present scale. This did provide the fed with an opportunity to began reducing its balance sheet by selling bonds into an economy flooded with outside money. That was short lived, however, as a world-wide pandemic interrupted. The clearest supply-side economics critique I know of is in Australian economist, John Quiggin's book “Zombie Economics” , which often appears on graduate course reading lists. I recommend this little book highly to you if you're interested in these topics.
Non-essential economic stimulus into an already robust economy will later occasion stepped up Treasury sales if inflation is to be controlled without raising taxes. It remains to be seen what the long- range consequences of ever increasing Treasury liability will be, but we can be certain it will not be the same as a continual increase in personal liability. The government cannot run out of money, but you and I can. Certainly the government can reduce or increase the purchasing power of a unit of money through its control of the money supply relative to productivity. For that reason, I think it makes good sense, in our world of fiat currencies to think of Countries with their own fiat currencies as being on a productivity standard.
That we need tax code reform is something I strongly agree with and a topic that has keenly interested me. I don't, however, share your cynicism regarding the chance of achieving reform. I believe a golden opportunity to achieve it may present itself, next January, if we find ourselves with unified government.
We have thought that divided government would protect the minority from being trampled by the majority, but we have learned that when the divisions are polarized to extremes, divided government results in legislative paralysis. Little or nothing gets done, and the door to corruption is left wide open since a paralyzed government is incapable of preventing it. The Courts are far too slow to be helpful. Government miscreants know this and push every controversy into the courts knowing their deeds will be a fait accompli long before the courts respond. Divided government can make it well neigh impossible to achieve meaningful reform so long as there is opposition in one house or the other, even when that opposition represents the minority view nationally. If we want to have any hope of moving our country in any productive direction while it is still a democracy, barring a miracle, we will need unified government to do it. I suppose the thing that guarantees an authoritarian government's “efficiency,” in the dictionary sense of the word, is that they are always unified because they liquidate their opposition.
For reasons I discussed above, I see no point in tax reform for the purpose of reducing the national debt. Reform for the purpose of reducing the influence and abuses of special interests would be welcome. It's always on the table. But beyond this it seems the most important reason reform is needed is to provide opportunity to improve one's lot in life and simultaneously reduce the chances of a badly skewed wealth distribution becoming a danger to our democracy.
This is a topic that takes us into the area of socio-economics, and I am not qualified to to go there. Of course, I do have an opinion. It's that a highly skewed wealth distribution threatens democracy because it puts too much power in the hands of too few. Then it is only a a matter of time before those few fail to appreciate the struggles of the lower economic classes, and great turmoil results. My position on this is quite simply summarized. I belief what is best for the lower classes is also best for the wealthy. I wish our economists would pay less attention to efficiency of resource allocation and more to what history has told us of the insidious effects of a badly skewed resource distribution. We are a mess, all democracies are*, but what are the alternatives? They're not very attractive I would say.
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*At least we are not such a mess as India, the worlds largest democracy.
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Good! I don't know if I agree with everything here, but Good, nevertheless.
Globalization is not inevitable nor is it necessary but it is doable for the benefits of all. But in order to be doable, like I said before, it requires ALL participants to be operating in good faith, honest and have the same understanding and agenda in terms of what they want to achieve from globalization. With all the different cultures and mentalities of all the countries, that's very very challenging and this is why globalization, although in theory is a very noble concept, in reality is very difficult to implement.
I most categorically disagree. If a nation wants to develop they simply won't be able to do it with a closed economy. If a developed nation tries to close its economy it will prove impossibly difficult. We are already globalized, and we will get more globalized with time. Trump and his craziness is an aberration. How long the aberration will last I don't know, but not long in any case. Ever since travel by foot lost out to the horse, the inexorable progress of mankind has all been in the direction of maximizing "interconnectedness"; not away from it. Globalization will occur despite disputes, armies, and wars. The next generation will be more interconnected than the last. We we make a mess of it from time
to time. Nevertheless, it is inexorable.
I think we will know who is right soon enough. Let's watch and see what happens to any leader who tries to stand in the way of globalization. Let's see how well she succeeds.
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A nation cannot develop with a closed economy, that is true but it does not mean it has to embrace globalization. Non-globalization does not equal to a closed economy. A country can very well develop through international trade. The purpose of globalization is to increase productivity and efficiency so everybody in the globe wins, not just for one nation to develop at the expense of others. That's the problem and the misunderstanding of the purpose of globalization that has necessitated the need now for its readjustment.
OK. That makes sense. I'm using the wrong definition of globalization. Your definition of globalization is benign. I can see very well your viewpoint. Thanks.
We have been trying globalization and it has not worked especially well for us. We as a nation are weaker and more dependent. Certain fundamental economic functions should always remain domestic.
Globalization is like just in time inventory. It works until it doesn't.
Disruptions to the supply chain are certainly more probable with globalization than domestic production.
Like equity trading, only engage in outsourcing if you achieve an advantage.
Like in equity trading, if you do not have an advantage in outsourcing eventually you will be crushed.
Globalization is like just in time inventory. It works until it doesn't.
Disruptions to the supply chain are certainly more probable with globalization than domestic production.
Like equity trading, only engage in outsourcing if you achieve an advantage.
Like in equity trading, if you do not have an advantage in outsourcing eventually you will be crushed.