Art Laffer piece in today's WSJ...interesting
Participant
Bill Moldestad
William Hummel
http://online.wsj.com/article/SB124458888993599879.html
My comments on excerpts from Laffer's article:
[Laffer] Here we stand more than a year into a grave economic crisis with a projected budget deficit of 13% of GDP. That's more than twice the size of the next largest deficit since World War II. And this projected deficit is the culmination of a year when the federal government, at taxpayers' expense, acquired enormous stakes in the banking, auto, mortgage, health-care and insurance industries.
[Me] When the government acquires stakes in
the private sector industries, why is that supposed to be at
"taxpayers' expense"? Did the taxpayers receive nothing in return?
[Laffer] With the crisis, the ill-conceived government reactions,
and the
ensuing economic downturn, the unfunded liabilities of federal programs
-- such as Social Security, civil-service and military pensions, the
Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are
over the $100 trillion mark. With U.S. GDP and federal tax receipts at
about $14 trillion and $2.4 trillion respectively, such a debt all but
guarantees higher interest rates, massive tax increases, and partial
default on government promises.
[Me] According to Laffer, the economic
downturn was the result of the ill-conceived government reactions,
which seems to say that time runs backwards.
Laffer compares cumulative liabilities over a
long and unspecified period with the current year GDP and tax
receipts. That's a specious argument. If you compare a typical home
owner's total payments on a
30-year mortgage versus his annual income, you could argue
(incorrectly) he is in
serious financial trouble.
There is no guarantee at all that interest
rates will massively increase as a result of deficit spending. That
depends on the future actions of the Fed which controls the short term
interest rate. At some point, the Fed must recapture the excess
reserves in the banking system and raise the Fed funds rate to prevent
an excess of credit money creation. If credit is allowed to expand too
rapidly, it could result in inflationary pressures which the Fed would
then
have to squelch by raising interest rates to undesirably high levels.
At present, the threat is an extended period of high unemployment, low
economic growth rate, and possible deflation.
William
Bill Moldestad
Posted on Thu, 02/12/2009 - 13:32.
Hi Bill.
Your friend has confused the issue a bit. That's not really how NPV calculations work.
An NPV calculation already has all the future cash flows accounted for and the $50 trillion is a number that applies to today and today only. Next year it will be a much larger number unless the principal balance is paid down with a kicker for the assumed rate of interest.
Perhaps this will help. For the past 10 years the NPV value of the liability has expanded by more than $33 trillion. This was during periods of both growth and recession - so it was probably a pretty good approximation of how the liability changes on a yearly basis without any paydown activity by the government.
This means that the NPV liability was expanding by some $3.3 trillion a year.
Using that as a crude baseline, we can roughly estimate that the underlying liability is expanding by some 6% or more per year currently.
We might think of this as the implied discount rate for the NPV calculation, although I admit both that this is crude and that I do not know what the actual rate was that the government used to derive the $53 trillion liability (although I would guess that it is lower than 6%).
This is a long way of saying that one cannot simply take the time horizon of the NPV calculation and divide it into the current liability to find out how much the yearly payment would be....this isn't a mortgage, it's a moving target.
To make this point in a silly way, but not entirely, let me point out that most NPV calculations only go forward 7 to 10 years and then assign everything after that into a "terminal value" bucket that stretches into infinity. This can be done because future dollars become so negligible after a while due to the accumulated impact of the discount rate that they can be effectively ignored. And so theyoften are.
But using your friends logic, we can divide the current liability by infinity and find out we owe almost nothing at all on a yearly basis. Obviously, this is not quite the right way to think about this.
Hope that helps.
Best,
Chris"
Terry Hammonds
| For more than a decade, credit was the new currency. Banks, mortgage companies, credit card companies and retailers in effect expanded the "money supply" way beyond any controles the Fed could have managed to impose. Federal Resere figures show our 'revolving debt" alone grew fivefold, topping out at $177B in September 1988. By September 2008, that figure had dropped to $977B. Between the end of Q1 2008 and Q1 2009, American's net worth (stock portfolios, home equity, 401k accounts etc.) shrank $1.33 trillion. No matter how you figure the "money supply" it is shrinking. Spending by the Fed was the only form of liquidity available this year. Inflation should not be a problem as long as we are spending mostly within our income. Some 'leverage" is required in our consumer economy, but it can get to meltdown
levels.. --- On Fri, 6/12/09, William Hummel <wfhu...@ca.rr.com> wrote: |
William Hummel
William,
Regarding your comments on cumulative liabilities. If I understand you correctly, you're making an analogy of the NPV (net present value) of our social spending to a mortgage. I'm confused by this analogy. The quoted segment below relates to the source of my confusion. Where am I off?
I've never seen a figure that high. I assume it represented the cumulative net outlays for some extended period of time. That's different from the net present value of the liabilities. NPV is very sensitive to the assumed discount rate, especially when projected over a long period. Furthermore the depletion date of the trust funds for those programs depend on what interest rates they are assumed to earn on their balances. I think it is worth noting that the government owns the trust funds rather than the beneficiaries and can set whatever rate it chooses. The life of the funds can therefore be extended arbitrarily with a high enough earning rate.
William
Steve Conover
Your friend Chris Martenson also seems to be a bit confused. That is
understandable, because almost nobody in government ever explains to
the public the assumptions behind the "present value of unfunded
liabilities" that are the source of so much doomsday talk.
William has said, time and again, that the growth rate of the economy
is a key factor in all these projections. In my own judgment, its
importance overwhelms all other factors. Here's why: Although it is
irrefutable that deficits today will have to be "paid for" by tax
increases in the future, the doom peddlers never point out that the
spectrum of possible ways to "increase taxes" has two endpoints: (1)
increasing tax *rates* on an unchanging tax base; and (2) leaving tax
rates unchanged on a *growing* tax base.
A growing economy increases the tax base. (Federal tax receipts have
been in the 18-19% GDP range for a long time.) By growing GDP, we can
grow the tax base, and the tax receipts, without changing tax rates.
That's the best-kept-secret way of "increasing taxes" in the future.
Not only do tax receipts go up, so does everyone's after-tax take-home
pay in the aggregate.
Regarding those scary-looking "unfunded liabilities"...
Treasury Secretary Robert Rubin is the only official to my knowledge
who has ever given us a hint about the flaw in that calculation.
Without any fanfare, he inserted a few sentences into the 1998
Financial Report of the United States Government (FRUSG) that give us
the important clue. Here is what he said:
"The assets presented on the Balance Sheet are not a comprehensive
list of Federal resources. For example, the U.S. Government's most
important financial resource, its ability to tax and regulate
commerce, cannot be quantified and is not reflected...
"The expanding economy [i.e., growing GDP] over the course of the year
brought a surge in tax revenue in 1998..."
Source:
1998 Financial Report of the United States Government, page 8
http://tinyurl.com/nrwnx9
In other words, it's just too hard to predict the future tax receipts
when it's so difficult to project future economic growth rates;
therefore, the FRUSG simply ignores the problem. It's easy for the
green eyeshade guys to tic-and-tie the PV of liabilities based on
entitlement laws and actuarial tables; but it's just too hard to
project future growth rates that affect the PV of future assets.
It's like the guy looking for his lost car keys under the streetlamp,
because it's too dark to look for them a half mile back, where he
thinks they must've fallen out of his pocket.
I, for one, would be interested in (at least) a sensitivity analysis
as an addendum to the FRUSG, showing the NPV result for several levels
of real growth above and below that used in the base case. Heck, a
good start would be clear statement revealing the growth rate they
assumed for the base case.
Anyway, future growth rates are the all-important wild card, just as
William has been reminding us. As usual, the important part of the NPV
calculation is not the math, it's the assumptions behind the model.
Steve
jim blair
----- Original Message -----From: Bill MoldestadSent: Friday, June 12, 2009 10:49 AMSubject: Re: Art Laffer piece in today's WSJ...interesting
With this said, I wonder what Al Gore was referring to during the 2000 campaign? I remember him talking about putting interest savings from paying down the national debt into the social security trust fund. He said he would keep it in a lockbox. ? Probably just campaign rhetoric.
JEB:Al seemed to think the SS surplus being collected was (or could be) stored in a "lockbox" (I picture a huge box in the treasury dept basement with a lock on it ;-)What is amazing to me is that so many people, including the "experts" on the TV talk shows either agreed with him, or at least didn't challenge that picture.As for the current SS surplus starting after the Greenspan/Moynihan FICA increase to "save SS", the system changed from a pure Ponzi scheme (payments in being paid out to current recipients with the promise that later they will be paid from future entrants) to a possible real investment program with a cash reserve that could be invested in something.
On Jun 12, 2009, at 5:45 AM, Participant wrote:
The article claim the current huge deficit will cause massive inflation. But he also reviews how bad the economy and inflation were during the 1970's. But recall that starting in the early 1980's the Regan administration ran up what was then considered to be huge deficits and the inflation rate dropped to what was then considered to be the low rate of 4% increase in the CPI. Laffer does not explain why he thinks the deficits today will have an opposite effect.
William Hummel
As for the current SS surplus starting after the Greenspan/Moynihan FICA increase to "save SS", the system changed from a pure Ponzi scheme (payments in being paid out to current recipients with the promise that later they will be paid from future entrants) to a possible real investment program with a cash reserve that could be invested in something.
If the government stashed away the excess tax receipts as cash in a special Fed account (a form of "lock box") it would drain that much from the bank deposits of the public. The government would have to increase spending by the same amount in order to restore the lost bank reserves. Without an increase in other taxes, the Treasury would have to sell new bonds to the public. In effect, the public would simply be swapping the excess FICA tax payments for new T-bonds, which is basically what the trust fund is designed to do.
William
John Hermann
Interesting article. Thanks for sharing. Steve Keen would disagree with the Fed's monetary base goals. See: http://www.nakedcapitalism.com/2009/02/steve-keen-roving-cavaliers-of-credit.html
" Banks are required to retain a certain percentage of any deposit as a reserve, known as the 'reserve requirement'; for simplicity, let’s say this fraction is 10%. When customer Sue deposits say 100 newly printed government $10 notes at her bank, it is then obliged to hang on to ten of them or $100 but it is allowed to lend out the rest. "
This is not how fractional reserve banking operates. Banks do not lend out any portion of their deposits to the public or to business, nor do they lend out their reserves to the public or business. Characteristically, all money loaned out by a commercial bank is newly created credit money.
John Hermann
Tim Walsh
http://www.moslereconomics.com/mandatory-readings/an-interview-with-the-chairman/
It is long but it completely blew my mind the first time I read it.
In short: The Treasury can always just credit your bank account with
as much money as it wants. The problem isn't about what we do with the
excess FICA tax receipts. It is about whether or not a shrinking labor
force can be productive enough to support both themselves AND a
growing population of retirees in REAL terms (i.e. producing enough
food, housing, energy, health care, etc. for everyone to maintain the
same high standard of living).
Tim
On Jun 12, 10:49 am, Bill Moldestad <bill.ve...@gmail.com> wrote:
> Interesting article. Thanks for sharing. Steve Keen would disagree
William Hummel
About Social Security... I highly recommend the following reading: http://www.moslereconomics.com/mandatory-readings/an-interview-with-the-chairman/ It is long but it completely blew my mind the first time I read it. In short: The Treasury can always just credit your bank account with as much money as it wants.
If it sells bonds directly to the Fed, that is equivalent to simply printing money to spend. It could do that on a temporary basis only because the resulting increase in bank reserves would drive the Fed funds rate to near zero, and become highly inflationary in the long run. Mosler ignores the inflationary implications in his scenario.
In the real world, the Treasury must balance its books on average to enable the Fed to maintain control of the Fed funds rate. That means selling its bonds to the public to cover its deficit spending.
William
Tim Walsh
say repeatedly that collecting taxes and selling Treasury notes is
about controlling inflation, not maintaining solvency. I'm just
borrowing his point that "All constraints on government spending, such
as principles of sound finance and balanced budgets, are self-
imposed" and that it is pointless for the government to hoard cash in
anticipation of future expenditures.
This, too, would have an undesirable effect on the Fed Funds rate,
causing *upward* pressure until the Treasury finally spends all the
money that it has stashed away
On Jun 13, 10:52 am, William Hummel <wfhum...@ca.rr.com> wrote:
> Tim Walsh wrote:About Social Security... I highly recommend the following reading:http://www.moslereconomics.com/mandatory-readings/an-interview-with-the-chairman/It is long but it completely blew my mind the first time I read it. In short: The Treasury can always just credit your bank account with as much money as it wants.Not true. Only the Fed can create the money it spends. The Treasury can only spend what it has previously acquired through taxes or the sale of its bonds.
Participant
I think it would be very helpful to the group if you could provide us with the Cliff Notes version of where exactly you disagree with Mosler, in a material sense, so as to further our intellectual development of the very important subject matter being discussed here.
Thanx.
Bob
William Hummel
That would be a major undertaking because Mosler has written extensively and covered a large number of issues. If you have specific issues you would like me to address, I'll be glad to do so.
Our views on government finance and the monetary system are in fairly close agreement, when adjusted for differences in terminology. However I think consolidating the Fed and the Treasury conceptually, as Mosler does when he speaks of government spending, masks some practical issues and can therefore be misleading. It gives the impression there are degrees of freedom that don't actually exist. For example, he emphasizes the unlimited spending power of the government, but it comes at a price (mainly inflation), and thus likely to be unacceptable in the real world.
We do have some policy differences. I am quite skeptical about the practicability of Mosler's proposed ELR (Employer of Last Resort) program. I would deal with the perennial unemployment problem in a different way. It applies mainly to the low education and training end of spectrum. I would provide modestly paid government jobs in selected fields which don't compete with the private sector for manpower. The Peace Corp, Civilian Conservation Corp, and certain social services have worked well in the past. A partly subsidized apprentice program to develop skilled labor within private industry similar to the German system should also work well.
William
Participant
Michael Paulus
People who simply don't want to work probably don't deserve the same treatment.