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Thoughts from the Frontline

Back to the Basics

July 15, 2011

Choose your language

This week we are going to revisit some themes concerning the problems of the debt and the deficit. I am getting a number of questions, so while long-time readers may have read most of this in one letter or another, it is clearly time for a review, especially given the deficit/debt-ceiling debate. I will probably offend some cherished beliefs of most readers, but that is the nature of the times we live in. It is the time of the Endgame, where things are not as black and white as they have been in the past.

Let’s begin with a question that is representative of a lot of the questions I have been getting, from reader John:

“John, it appears that you're arguing that two contradictory things have the same effect: adding government spending doesn't help the economy, and reducing government spending hurts the economy. Which is it? At first, you say that adding government spending doesn't help, no new jobs are actually created, it fails the sharp pencil test,…

Discuss This

31 comments

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Comments

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Joel Arney

July 17, 2011, 8:49 a.m.

With a rapidly aging and increasingly healthcare-consumptive population, a major key to deficit reduction is controlling healthcare costs and especially government/free healthcare.  A rational, nonemotional approach has been implemented by the Oregon Medicaid program for 22 years.  Although a cost per life-year (or quality life-year) is the most simple way to approach this problem, emotional concerns make this nearly impossible. .www.oregon.gov/OHA/OHPR/HSC/PrioritizationHistory.shtml website shows us a pragmatic, rational way to solve this problem:  prioritize care interventions by considering the views of the public and healthcare professionals along with cost/value measures.  A cutoff for determining which interventions are covered is then determined by the dollars allocated in the state budget. 
The demand for services by patients going forward far outstrips the future supply of healthcare providers, so further cutting of per-service reimbursement will provide very limited savings and eventually have an adverse effect on quality of care.
Joel Arney, MD

Mary Lee Stromquist

July 17, 2011, 8:46 a.m.

Would that it were so simple.  I stand in the camp which does not see the data as describing a business cycle recession.  The debt supercycle is the primary obstacle, however a combination of structural unemployment added to the cyclical element is having a profound effect.  Fewer taxpayers, government income down to 14% of GPD rather than the more usual 18%, and the cumulative effects of the neoconservative philosophy/legislation over 30 years skewing income away from the middle class, ie, the spenders while the world economy globalized.  Individual productivity in America has shot skyward, due to mechanization and remaining workers squeezing everything they can into their efforts.  Simultaneously, as poster Rodger Mitchell points out, few, if any of the people in power grasp how modern money works.  Bank reserves on depost still regarded as the source of loans/capital investment?  Ridiculous.  We are living the result of the financialization of our economies, and an “end game” it is indeed.  Debt jubilee and reinstatement of Glass-Steagall anyone?

Tony Heppelmann

July 17, 2011, 7:09 a.m.

Isnâ??t it true that one significant difference between the US and Greece is that we can print our own money.  The bond markets can not increase the interest rate on our debt if the Fed buys up the treasuries at whatever interest rate they set, which is what they do.  The one thing that can happen is that our dollar is devalued, which means the price of imports go up and exports go down.  This could be a good thing because it could get people back to work.  It obviously also means that everyones standard of living will go down as prices go up.  I agree the government needs to cut spending but I think, like you said, we need to be careful about reducing the deficit too fast and creating a depression.

Stephen Decruz

July 17, 2011, 2:09 a.m.

A few observations which the articles overlook:
1. If the huge corporations are made to pay their share of taxes, revenue will go up;
2. Wealthy Americans do not invest in start-ups, most of their wealth are managed and the funds are invested in esoteric financial products;
3. It is easy to pick up economic studies to support your argument as there are lots of economic studies that are bias to different perspectives to pick from. Look at studies from institutions that are objective and neutral in bias.
4. Managing an economy is different from managing a household. If the governing of a country can be as simple as managing a household, every country can be successful;
5. Congress initiate legislations, so why should the onus be on the President to flesh out the plan for the $4 trillion cuts in spending?
6. Government grew because business could not be trusted to police themselves. For the mighty dollar, business are willing to churn out products that could hurt consumers and in the production process harm our environment. While business pockets the profits, we pay for the external costs.
If the true cost of production (internal and externalities) are absorbed by business, then government can be cut back.

Tsachy Mishal

July 16, 2011, 8:39 p.m.

It is disingenuous of you to suggest that the Bush tax cuts were responsible for higher tax revenue. Do you think the credit bubble might have had something to do with that? Might the bursting of the credit bubble have had something to do with the worsening of the deficit? Your politics are getting in the way of what was once a great weekly letter.

richard percoco

July 16, 2011, 6:06 p.m.

hello and good day!

what a great article, however, I didn’t see any information of how one can protect his /her wealth in these trying times? Any suggestions of a safe place to put one’s savings?

RAP

Emil Assentato

July 16, 2011, 4:58 p.m.

In regards to the beginning of this article which started out explaining the seemingly contradictory statements you made;  if we cut gov spending it will shrink the economy, but if we increase gov spending it will create more debt creating more of a problem I think hyou failed to mention the cost of funds created by more gov spending which would make it impossible to continue to finance the debt. But I believe there is a growing school of thought that believes that an additional government job, which is the route this administration prefers to take, does not create any additional growth over the actual cost. This seems to be much different than the theory that a new job in the private sector has a multiplier affect, which is still has a significant following to in modern economic theory. The difference between the two is thencost of the government job which has to be borne by the taxpayer. In short the. Keynesian model probably works until we cannot afford to fund government excesses anymore. And that is where we are now.

As far as raising taxes it will slow growth for sure and will more than likely shrink our tax base. The problem Washington has it predicts outcomes based on static studies. If taxes go up, there will be changes in behavior.

Thanks.

Rodger Malcolm Mitchell

July 16, 2011, 4:01 p.m.

Joe Toronto,

You are correct.  That is the primary thrust of Modern Monetary Theory (MMT), which has many concepts in common with Monetary Sovereignty.  MMT calls it ELR—Employer of Last Resort, and suggests this as a powerful deflationary cure.

Roosevelt thought so too, with the WPA.  The ultimate example may have been WWII, during which the government employed millions of men and women.  Federal employment is highly stimulative.

Rodger Malcolm Mitchell

Gary Given

July 16, 2011, 4:01 p.m.

Hello John.
Many thanks.  I am sending your article to all my friends and family and hope that they read it several times.  Let the re-education of America begin.

The discussion on healthcare will be especially difficult.  If my aging parents are an indicator, they feel cheated by medicine…rightly or wrongly, that is how they feel.  In their minds, “the miracle of modern medicine” had essentially promised them a cure for cancer and all of the other diseases of old age.  They truly expected to live well into their 100s.

The generation that came home from WWII had it all.  They had social security, medicare, the GI Bill, pensions plans, a growing robust economy, a growing real estate market with ever rising valuations…the US was a mighty power and they were immortal.  They had it all…they still want it all, and they taught their children (yes, us boomers) to have it all as well.  The re-education of America will be very difficult.  I sure hope the milleniums, gen-x’ers, etc. are watching and learning.  The scientific community that was formed after WWII promised the world and today’s scientists are still doing so.  The same mistakes are being made over and over again.

I am glad your voice will be there in the discussion.
Best regards,
Gary

Rodger Malcolm Mitchell

July 16, 2011, 3:19 p.m.

The following comments demonstrate Mr. Maulding does not understand Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ):

” If your home or your government is debt financed, you are forced to cut back. While the US is not there yet, we soon (as in a few years) will be.”  Wrong. You are monetarily non-sovereign; the U.S. is Monetarily Sovereign. Those who do not understand the difference, do not understand economics.

“The polls say a large, bipartisan majority of people want to maintain Medicare and other health programs (perhaps reformed), and yet a large bipartisan majority does not want a tax increase. We canâ??t have it both ways . . . “ Wrong.  A Monetarily Sovereign government can have it both ways, because it does not rely on or even use tax money.  If taxes fell to $0 or rose to $100 trillion, neither event would affect the federal government’s ability to spend.

“For some 65-odd years, we have added to the national debt â?? individually, corporately, and as governments. But as Greece is finding out, there is a limit.” Wrong. Greece is monetarily non-sovereign, just like you and me and Illinois and Chicago.  The U.S. is Monetarily Sovereign.  Completely different.

“A country can run a deficit below (the nominal growth rate of GDP) forever, without endangering its economic survival.” Wrong> Historically, reduced deficit growth leads to recessions.  See: Item #4 at http://rodgermmitchell.wordpress.com/2009/09/07/introduction/

“There are only two ways to grow an economy. Just two. You can increase the working-age population or you can increase productivity. Thatâ??s it.”  Wrong. You can cut taxes and/or increase federal spending, both of which are stimulative.

” . . .  business-cycle recessions are normal and that recoveries . . . are not caused by increased government debt and spending but by businesses adjusting and entrepreneurs creating new companies. Correlation is not causation. Just because recoveries happened when the government ran deficits does not mean that they were the result of government spending.” Wrong. He actually believes the recession would have ended without federal government deficit spending, ignoring the fact that virtually every recession and all depressions came as a result of reduced deficit growth. Do you believe federal spending was unnecessary?  Do you believe federal purchases of goods and services do not help “businesses and entrepreneurs”?

The errors go on and on, the point being that Mr. Mauldin uses economic demagoguery to show that federal finances are similar to personal finances—in short to prove he does not understand Monetary Sovereignty.

Rodger Malcolm Mitchell

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