The wrong way to approach this is what the GOP is doing, which is talking about cutting SS which will inevitably lose them an election and even if they win they won't cut it and we know it.
Let's just own up to the fact that we are going to have a fiscal crisis over the boomers retirement and try our best to prepare for it.
You write that “the government fool[s] people into thinking that they are wealthier than they really are, by running deficits.” But (apparently) people are already making a mistake, regardless of government action. As an American, a substantial part of my wealth consists in the American government’s capacity to provide me with services. By running deficits the government reduces this capacity. But I (and other Americans) do not notice the associated decline in my own wealth, because *I never did include my share of governmental capacity in my estimate of my wealth*. Thus I was fooled about the significance of the deficits *because of a mistake I had been making all along*.
Keynes on inflation: "There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Further, "By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth." (Keynes's comments are from his 1919 "The Economic Consequences of the Peace.")
Governments practice through "necessity or incompetence, what a Bolshevist might have done by design." Of course this nefarious process is going to lead to social strife.
Here's a technical point that might or might not affect Arnold's conclusions. In his example, there are two acorns available to distribute, and $300 worth of money or near money. However, Polly has $200, and Wally has only $100. How does the price of acorns get to $150? At that price, Polly can afford only one acorn, and Wally none, in which case one acorn goes to waste. The same would be true for any price greater than $100 per acorn. Thus, unless the government taxes Polly $50 and gives it to Wally (or Polly voluntarily donates the same amount to Wally), the market won't clear at $150 per acorn.
BTW, this example also illustrates the problem with price controls. The government, say, could declare a price support for acorns at $150, e.g. to help the oak tree industry (read: farm sector, minimum wages). Without other government actions, such as in the prior paragraph, there will be a winter surplus of one acorn.
Would this be a reasonable justification for debt?
Polly would like to spend fewer hours of the day growing acorn, and fighting off pests, and losing the occasional crop altogether, and the water table is falling, and they are all at risk of extinction after the next bad crop.
Polly (and Wally) and the Government think it's wise to invest in R&D for better acorn hybrids, maybe also requiring less water.
The benefits will be felt not only by Polly and Wally but future generations who are not yet around to pay taxes. So the Government prints the money to pay Molly to invent the hybrid disease resistance acorn, and maybe she can stave off extinction.
Relatedly, my understanding is that Japan has had extremely high debts yet minimal inflation (until recently) despite low interest rate set by their fed equivalent.
What is the rough explanation for this? Deferred inflation that could get set off at some future time and that will then be very difficult to contain? Real rates that are higher than they seem on nominal level? Some unique aspect due to shrinking working age population?
I am not sure that the price of acorns in your example can go to 150$. If it does, Polly can buy 1 acorn back and sits on 50$ and Wally 0 acorns, so the bank is left with one remaining acorn it apparently doesn't do anything with.
I have a question about the simple model. You argued that the market price for acorns must rise because, at $100, the demands for acorns (=3) is greater than the supply (=2). But at $150 the demand (=1) is less than the supply (=2). So $150 can't be the market clearing price either. Am I missing something?
The central government owns more than a quarter of the land area of the U.S. with BLM alone controlling 1 in 10 acres. With such vast resources at the central governments' disposal, crying"NIMBY" and attacking Social Security benefits as too generous seem tantamount to scapegoating. As a naive realist I have to ask why these resources couldn't be exploited to create a sovereign wealth fund to pay off the debt and make up the Social Security shortfall. And in so doing unleash economic growth. But of course that won't happen so long as spending is unconstrained. As Paul's letter to the Romans informs us, there is no sin absent law. Theonly possible first step on the path to plausibly reclaiming a national future is a constitutional amendment to outlaw government borrowing.
I see your point and have thought that basically, the system we have set up is a scheme to mislead people.
The basic idea that is not really mentioned here, is that real wealth and growth is only possible in the actual market with humans working together and selling goods and services to each other. But along with this rosy picture of growth is scarcity. There is in fact a limited amount of time and resources, and price is one way of looking at that.
So conflict naturally occurs, but conflict itself can get out of control and disrupt the very system trying to make the best of a bad situation, and since humans are naturally tribal and simplistic, they would rush to change the system thinking that the grass is greener (because all of life’s problems are caused by the other) effectively killing the golden goose.
So what government does is use complex schemes and rhetoric and elects politicians who make people feel like they have a voice, to basically run circles around the populace long enough to allow the real growth to occur. The people can’t be allowed to catch onto the game because we would collapse into the natural state of humanity - full of violent conflict, tribalism, and poverty.
In short: scarcity is a fact of life, but the truth hurts. When the truth hurts, we lie.
Great first pass simplistic fable on why both printing money to cover the deficit, and borrowing money, are bad. Later. The artificial wealth of debt is especially important and subtle. When the crisis comes, money printer goes brr -- and all the US govt debt will be covered by US Fed Reserve Notes (legal tender for all debts!), which can be printed as needed, and will be.
The important educational aspect is that the crisis comes from a deficit -- too much spending (we like), not enough taxation (none like). Most voters understand that higher taxes means less econ growth (tho that might not be true for all taxes); and it's good that Republicans oppose taxes. What is needed is to to teach Dem voters that deficit spending will create the crisis -- and they deny it.
The important second pass is to add investment -- when money is borrowed (from the future) for investment today, the higher production can pay for the borrowed money. More production means "more money" can be in circulation without price increases. But the money has to be invested in stuff that creates products folk want to buy at prices higher than the costs, including interest. A positive ROI (return on investment) - "profit". Profit is the single best measure of wealth creation.
Most governments invest in stuff at a loss, tho, so that doesn't reduce inflation the way that good investments would -- which is the main reason, in practice, that tax cut deficits are far far better for the economy than govt spending deficits. Taxpayers know what they would invest in next, if they had more cash to invest, like from a tax cut.
Social Security & Medicare need reform -- but it's politically stupid to support partisan cuts for these popular programs. Republicans should warn about the crisis coming, but be going more for tax cuts to the most productive companies, those employing the most Americans in America. And claiming that the Dems are over spending into a crisis, but they're willing to cut programs Dems are willing to cut. It's politically stupid for Reps to favor spending cuts of popular programs when Dems will call them selfish and uncaring.
Cutting tax exemptions for colleges that have been illegally discriminating against hiring Republicans as professors, often also excluding Republicans from their Boards of Directors would be a tax increase that would likely help society in many good ways, and be popular with Rep voters.
"people were afraid to go to work and/or were ordered to stay home, which reduced supply."
While your example is largely correct, its simplicity does not capture what happened when the pandemic hit. Both supply and demand changed drastically. Because many people stayed home demand for many good dropped. The obvious example is that demand for gasoline dropped precipitously and so did its price. Without checks to raise demand, it is very likely the economy would have tanked worse than it did.
Were the checks (and unemployment payments) too big? I'd say that was obvious even then. Either way, your example doesn't capture that some govt payments were economically justified.
“You can think of Wally as being on welfare, or working for the government. Regardless, he produces nothing.” If Wally is a police officer or a Supreme Court Justice does he not produce anything? He produces no good or service? He doesn’t produce anything that people want?
Although I agree with the basic idea of fiscal policy as conflict two additional point are needed. a) Polly supposedly agreed to hiring Wally and he is performing a service for her (or she wished to transfer money to Wally). THAT is not the locus of the conflict. b) The bank is able to offer Polly interest because the saved acorns are productive; they can be used to produce more acorns.
In this model there is still conflict, a deficit is still bad even if Polly does not want to withdraw the two acorns because they were not in fact invested to produce more acorns. Inflation is not really important; it is failure invest the acorns, the diminished growth. The conflict is that Polly does not want to be taxed to pay for the salary/transfer to Wally, but also wants the income from her investment.
I think you should abbreviate "have a nice day" as HND. People in the know would experience a real increase in status, and it would become part of your brand, as in HND Kling.
The wrong way to approach this is what the GOP is doing, which is talking about cutting SS which will inevitably lose them an election and even if they win they won't cut it and we know it.
Let's just own up to the fact that we are going to have a fiscal crisis over the boomers retirement and try our best to prepare for it.
You write that “the government fool[s] people into thinking that they are wealthier than they really are, by running deficits.” But (apparently) people are already making a mistake, regardless of government action. As an American, a substantial part of my wealth consists in the American government’s capacity to provide me with services. By running deficits the government reduces this capacity. But I (and other Americans) do not notice the associated decline in my own wealth, because *I never did include my share of governmental capacity in my estimate of my wealth*. Thus I was fooled about the significance of the deficits *because of a mistake I had been making all along*.
Keynes on inflation: "There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Further, "By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth." (Keynes's comments are from his 1919 "The Economic Consequences of the Peace.")
Governments practice through "necessity or incompetence, what a Bolshevist might have done by design." Of course this nefarious process is going to lead to social strife.
https://www.economicsnetwork.ac.uk/archive/keynes_persuasion/Inflation.htm The short passage is well worth reading in full.
Here's a technical point that might or might not affect Arnold's conclusions. In his example, there are two acorns available to distribute, and $300 worth of money or near money. However, Polly has $200, and Wally has only $100. How does the price of acorns get to $150? At that price, Polly can afford only one acorn, and Wally none, in which case one acorn goes to waste. The same would be true for any price greater than $100 per acorn. Thus, unless the government taxes Polly $50 and gives it to Wally (or Polly voluntarily donates the same amount to Wally), the market won't clear at $150 per acorn.
BTW, this example also illustrates the problem with price controls. The government, say, could declare a price support for acorns at $150, e.g. to help the oak tree industry (read: farm sector, minimum wages). Without other government actions, such as in the prior paragraph, there will be a winter surplus of one acorn.
Would this be a reasonable justification for debt?
Polly would like to spend fewer hours of the day growing acorn, and fighting off pests, and losing the occasional crop altogether, and the water table is falling, and they are all at risk of extinction after the next bad crop.
Polly (and Wally) and the Government think it's wise to invest in R&D for better acorn hybrids, maybe also requiring less water.
The benefits will be felt not only by Polly and Wally but future generations who are not yet around to pay taxes. So the Government prints the money to pay Molly to invent the hybrid disease resistance acorn, and maybe she can stave off extinction.
This story conforms to my intuitive notion.
Relatedly, my understanding is that Japan has had extremely high debts yet minimal inflation (until recently) despite low interest rate set by their fed equivalent.
What is the rough explanation for this? Deferred inflation that could get set off at some future time and that will then be very difficult to contain? Real rates that are higher than they seem on nominal level? Some unique aspect due to shrinking working age population?
I am not sure that the price of acorns in your example can go to 150$. If it does, Polly can buy 1 acorn back and sits on 50$ and Wally 0 acorns, so the bank is left with one remaining acorn it apparently doesn't do anything with.
I have a question about the simple model. You argued that the market price for acorns must rise because, at $100, the demands for acorns (=3) is greater than the supply (=2). But at $150 the demand (=1) is less than the supply (=2). So $150 can't be the market clearing price either. Am I missing something?
The central government owns more than a quarter of the land area of the U.S. with BLM alone controlling 1 in 10 acres. With such vast resources at the central governments' disposal, crying"NIMBY" and attacking Social Security benefits as too generous seem tantamount to scapegoating. As a naive realist I have to ask why these resources couldn't be exploited to create a sovereign wealth fund to pay off the debt and make up the Social Security shortfall. And in so doing unleash economic growth. But of course that won't happen so long as spending is unconstrained. As Paul's letter to the Romans informs us, there is no sin absent law. Theonly possible first step on the path to plausibly reclaiming a national future is a constitutional amendment to outlaw government borrowing.
I see your point and have thought that basically, the system we have set up is a scheme to mislead people.
The basic idea that is not really mentioned here, is that real wealth and growth is only possible in the actual market with humans working together and selling goods and services to each other. But along with this rosy picture of growth is scarcity. There is in fact a limited amount of time and resources, and price is one way of looking at that.
So conflict naturally occurs, but conflict itself can get out of control and disrupt the very system trying to make the best of a bad situation, and since humans are naturally tribal and simplistic, they would rush to change the system thinking that the grass is greener (because all of life’s problems are caused by the other) effectively killing the golden goose.
So what government does is use complex schemes and rhetoric and elects politicians who make people feel like they have a voice, to basically run circles around the populace long enough to allow the real growth to occur. The people can’t be allowed to catch onto the game because we would collapse into the natural state of humanity - full of violent conflict, tribalism, and poverty.
In short: scarcity is a fact of life, but the truth hurts. When the truth hurts, we lie.
Great first pass simplistic fable on why both printing money to cover the deficit, and borrowing money, are bad. Later. The artificial wealth of debt is especially important and subtle. When the crisis comes, money printer goes brr -- and all the US govt debt will be covered by US Fed Reserve Notes (legal tender for all debts!), which can be printed as needed, and will be.
The important educational aspect is that the crisis comes from a deficit -- too much spending (we like), not enough taxation (none like). Most voters understand that higher taxes means less econ growth (tho that might not be true for all taxes); and it's good that Republicans oppose taxes. What is needed is to to teach Dem voters that deficit spending will create the crisis -- and they deny it.
The important second pass is to add investment -- when money is borrowed (from the future) for investment today, the higher production can pay for the borrowed money. More production means "more money" can be in circulation without price increases. But the money has to be invested in stuff that creates products folk want to buy at prices higher than the costs, including interest. A positive ROI (return on investment) - "profit". Profit is the single best measure of wealth creation.
Most governments invest in stuff at a loss, tho, so that doesn't reduce inflation the way that good investments would -- which is the main reason, in practice, that tax cut deficits are far far better for the economy than govt spending deficits. Taxpayers know what they would invest in next, if they had more cash to invest, like from a tax cut.
Social Security & Medicare need reform -- but it's politically stupid to support partisan cuts for these popular programs. Republicans should warn about the crisis coming, but be going more for tax cuts to the most productive companies, those employing the most Americans in America. And claiming that the Dems are over spending into a crisis, but they're willing to cut programs Dems are willing to cut. It's politically stupid for Reps to favor spending cuts of popular programs when Dems will call them selfish and uncaring.
Cutting tax exemptions for colleges that have been illegally discriminating against hiring Republicans as professors, often also excluding Republicans from their Boards of Directors would be a tax increase that would likely help society in many good ways, and be popular with Rep voters.
"people were afraid to go to work and/or were ordered to stay home, which reduced supply."
While your example is largely correct, its simplicity does not capture what happened when the pandemic hit. Both supply and demand changed drastically. Because many people stayed home demand for many good dropped. The obvious example is that demand for gasoline dropped precipitously and so did its price. Without checks to raise demand, it is very likely the economy would have tanked worse than it did.
Were the checks (and unemployment payments) too big? I'd say that was obvious even then. Either way, your example doesn't capture that some govt payments were economically justified.
“You can think of Wally as being on welfare, or working for the government. Regardless, he produces nothing.” If Wally is a police officer or a Supreme Court Justice does he not produce anything? He produces no good or service? He doesn’t produce anything that people want?
Although I agree with the basic idea of fiscal policy as conflict two additional point are needed. a) Polly supposedly agreed to hiring Wally and he is performing a service for her (or she wished to transfer money to Wally). THAT is not the locus of the conflict. b) The bank is able to offer Polly interest because the saved acorns are productive; they can be used to produce more acorns.
In this model there is still conflict, a deficit is still bad even if Polly does not want to withdraw the two acorns because they were not in fact invested to produce more acorns. Inflation is not really important; it is failure invest the acorns, the diminished growth. The conflict is that Polly does not want to be taxed to pay for the salary/transfer to Wally, but also wants the income from her investment.
I think you should abbreviate "have a nice day" as HND. People in the know would experience a real increase in status, and it would become part of your brand, as in HND Kling.