The Fair Tax and Common Sense
No discussion should be without facts, so before discussing the FairTax, let’s get some facts from the Internal Revenue Service Tax Stats, available online at www.irs.gov.
Total personal income in the United States in 2004, $6.8 trillion dollars.
Total Federal Government budget, $2.8 trillion dollars.
Total of Personal Income Tax collections, $831 billion.
Average Personal Income Tax rate, 12.10%.
Short fall of Income taxes to budget, roughly $2 trillion dollars.
There are real world numbers from the best source. No one invented these numbers to sell a book.
If the FairTax is imposed and every taxpayers spends every dollar of their personal income on new items taxes at the “quoted” rate of 23 percent inclusive, the federal government debt would increase at least $1.6 trillion dollars before the Federal Government pays the prebate. After the prebate, which is given on page 85 of the FairTax Book at $6,072 per household times 130 million households, the Federal Debt would increase by $2.3 trillion dollars.
The FairTax, going by real world examples, will not fund the Federal Government and would increase the Federal Debt by $2.3 trillion dollars each year at a theoretical 23 percent inclusive rate.
The FairTax is a sales tax on new items only. Can you spend more than your income? Sure. And, under the FairTax, you would be taxed for that borrowing. At least 23 percent. And, even with all possible borrowing included, the FairTax will not collect enough revenue to fund the Federal Government.
Assuming every taxpayer increases personal debt by 30 percent, far more than any bank would loan in one year, the FairTax would only collect $2 trillion dollars in revenue at the quoted rate of 23 percent inclusive.
Let’s make it simple, because it is really simple.
The present budget is $2.8 trillion dollars. Add the “prebate” of over $789 billion dollars. The new budget will be over $3.5 trillion dollars. Unless Americans borrow huge amounts of money to buy new things, the real tax rate will have to be 51.4 percent on all sales.
Maybe the Federal Income Tax average rate of 12 percent seems high. But, why beg to be taxed 51 percent as a tax protest?
Jan, you said,
“Which often creates jobs too but, they are still tax free which was the point and also creating government jobs is not increasing tax revenues but spending tax revenues and it requires spending tax revenues to pay the interest on the tax free investments.”
No, your point was John Kerry was not paying his fair share AND withdrawing money from job creation.
His money invested in federally tax free instruments did creat more long term employment IN THE PRIVATE SECTOR than resell investments in existing corporate stocks.
To put it on your level.
Buying stock currently being trade in the market is not linked to creating jobs in the underlying company. Nor does buying a re-sale of stock send any money to the underlying company. The stock market seldom represents a direct investment in jobs, nearly never.
Tax free investments are not absolutely investments in jobs. But, depending on how the underlying funds were spent, which is not always salaries for government employees, tax free investments can be expended in the private sector.
Georgia issues bonds to make special financing available for a Kia plant.
Or, bonds for new buildings and renovations. ROADS! INFRASTRUCTURE!
Bonds at a lower interest rate to retire older more expensive debts.
Only in your lunatic rantings does every dollars taken in by the government support some lazy bastard at a government job.
You didn’t address my multiple points. You just restated yours in a more narrow form. Nicely done!
Well, it is hard to deal with your knowledge that is so much greater than those in the Federal Reserve, Government, economic studies, etc. They claim one thing and you another.
You are truly a rare person to know more than all the experts, officials and people who study these things.
Enjoy the world you live in. It probably isn’t too crowded. Your concept of history is totally out of sinc with even the Supreme Court Justices views of history. You exaggerate and state I say “all” when I say much or many, etc. and you deny what the people who do know what is going on, tell you.
Again, neither party is going to get us out of this mess and only when we hit bottom will the voters start demanding the changes we need. Until then the jobs will continue to go to lower tax and better business policy nations. Until then we will continue to see grades of “C” and worse on our infrastructure. Until then we will continue to see a rising “unfunded liability.” Until then we will continue to see more listings on the London and Hong Kong Stock exchanges than here. Until then you will continue to see debt rise under either party. And unless the faith in the U.S. returns, you will continue to see the dollar decline.
Quote:
The reconstructed M3 data – the broadest measure of money – published on econometrician Gary Kuever’s website, NowAndFutures.com, shows M3 increased at a rate of 11 percent in May, compared to 9 percent when the Federal Reserve quit publishing M3 data earlier this year.
Asked why the Fed decided to stop publishing M3 data, Kuever told WND, “The Fed probably wants to hide how much liquidity is being pumped into the market, and I expect the trend to keep pumping liquidity into the market will continue, especially since the economy is slowing down.”
http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=53350
======================
Again, I don’t expect you to believe any experts on this because they don’t live in your world but, for America, in general, I hope that some are listening to them. The nation under Bush went from $20 trillion unfunded liability to $59 trillion. The national debt from $5.7 to $8.82 Trillion.
We are now trying to stop Congress and this President from legalizing probably close to 20 million and bringing in 67 to 100 million more and again there is support in both parties for this.
Nothing that is going on is going to solve the long term problems and the world knows it and that is why they are losing faith in our currency and moving to one just as bad, the euro. It like ours, is only valuable if there is demand for it by the world. It like ours, is aided by selling oil in it.
Nothing this President has done has increased the faith the world has in our currency in any significant long term way.
Please post any sources you have that say the dollar will strengthen as more nations move away from using it.
quote:
HOW TO PROFIT FROM THE WORLD’S BIGGEST CASINO
Currency trading is often derided as quintessential “casino capitalism.” Leverage is high, costs are low, and liquidity is deep. With daily turnover exceeding $2.7 trillion, the value of currencies traded on world markets is 10 times that of stocks. The world’s most famous trade — the one that “broke the bank of England” — was a currency trade. It was right down the street from me in London that the British press swarmed George Soros’ house on the morning of September 16, 1992, when his bet against the English pound netted him over $1 billion.
We are all currency investors, whether we know it or not. By investing in GE or Microsoft, you are betting on a dollar-denominated stock. Foreign investors in U.S. stocks appreciate this situation better. Despite the S&P doubling over the past four years, foreign investors in the U.S. market have made minuscule returns. Once profits from U.S. dollars are converted into pound sterling or euros, nominal dollar profits quickly evaporate.
The rules of currency investing are hard to get your head around. Much like a three-dimensional chessboard, currency investing can be fascinating to some but annoyingly complex to others.
First, currency is a zero sum game. In the stock market, a rising tide lifts all boats and all investors make money. But in currency markets, if you win, someone else has to lose.
Second, there is nothing inherently volatile about currencies. Like commodities, it’s the leverage that makes all the difference. For every $50,000 you have, you can control one million dollars. Small swings in exchange rates can make you a mint — or wipe you out — overnight.
Third, macroeconomic indicators such as inflation, the balance of payments and money supply are what matter. High inflation, a growing balance of payments deficit and a weakening currency often go hand in hand. Print a lot of money, and its value will go down.
Although highly paid currency strategists will never admit it, the reality is that most currency trading is pure speculation. Currencies are a financial Rorschach test onto which analysts can project their own narrative fallacies. Animal spirits govern rationality. Perception trumps reality.
A good rule of thumb? Think of a currency as the stock of a country. The currency of a robust economy with stable prices is more valuable than a politically unstable country with high inflation. Another thing to keep in mind: once a currency starts to trend, it tends to last months, or even years.
http://paracom.paramountcommunication.com/hostedemail/
email.htm?h=5ea38ca6be0c27536db16f2f3f8bb365&CID=
1318057810&ch=5E0B3E1D266FBA52175BD2A2931859E4
=======================
One think that is currently hurting the dollar is that so many big money people are betting against it. As they sell the dollar to buy the eruo or NZ dollar or Australian Dollar, etc. the dollar gets even weaker and the other currency even stronger which means the price of whatever we get from them goes up and what ever we sell to them, they can buy more of.
Some hope this will bring the trade deficit down but so far, it hasn’t.
quote:
The analysis shows money supply lately has been flowing “backwards” – the consumer is liquidating investments and taking on new household debt in order to maintain daily purchases and to pay interest on debt already incurred. This could have serious consequences for the economy and potentially lead to deflation if the process accelerates.
Simply put, the Fed calculates money supply in a building block manner. M-1 is basic money supply, consisting of consumer checking accounts and other cash instruments. This is folded into M-2, which includes consumer investment accounts. M-2 is then a component of M-3, which incorporates corporate cash and investment balances. The Fed tends to concentrate their attention on M-3, and considers the lesser M’s as unreliable, but this analysis shows why these consumer M’s behave the way they do.
http://agonist.org/node/21646/print
===================
The rest of the article will give more information on M-1 and M-2 which as the article states aren’t the indicator M-3 is. Trying to use M-1 and M-2 alone isn’t enough. They can be affected differently by a number of factors like those brought out in the article. They have even been “in deflation” mode.
M-3 is more important but since we stopped reporting it, who knows what it is. While many guess it is in double digit growth, can they really be sure? I believe it is and that can occur with or without changes in interest rates. Also, foreign lenders are now taking some of the effect of the Fed’s interest rate moves away. Now they sell loans to China and other investors around the world and they set their own rates which so far have been good.
Still all of this isn’t tied to anything of value only “demand” for the dollar. That is the point of all of this. The dollar is only of value as long as there is more demand for it than supply of it. That is why the 1971 agreement was so important when the dollar was collapsing then.
Thanks for ignoring the facts, moving the goalposts, and withdrawing from reality.
Everytime you’re hit with a fact, you run to a opinion site that supports your opinion.
All I do is hit you with more facts.
You beg, “Please post any sources you have that say the dollar will strengthen as more nations move away from using it.”
But, you’ve already said the dollar has no “value.” So you’ll never be satisfied with any bit of information or fact contrary to your hatred of all “fiat monies.”
It doesn’t matter to you that it is impossible to have a single commodity currency.
It doesn’t matter to you that no major economy in the world is based on commodity money.
You’re the true economic child. You want what you want when you want it!
How does it feel to want?
AND,
even if we had a miracle and had a commodity currency, that would have no effect on the components of M3.
You ignore the difference between currency and credit.
Peg the currency to the number of craters on the moon. How will that change credit?
Changing interest rates doesn’t change currency supplies.
If it did, you’d post some data to support that.
Wouldn’t you?
You’re quoting biased sources and claiming to post from the FED, Treasury, or other real actors in currency and fiscal matters.
In effect, you’re quoting opinion to support opinion.
As if that belongs in a fact based debate.
Mad Dog states:
Changing interest rates doesn’t change currency supplies.
If it did, you’d post some data to support that.
==============
Since it is so basic, I didn’t think it was needed.
Quote:
Basically, by increasing the discount rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.
http://www.investopedia.com/articles/06/interestaffectsmarket.asp
===================
The article then covers more on how that works.
Yes, I am quoting opinion. The opinion of experts that deal in it every day. Fed Board, members, economists, people who study it. Where are your sources? Who are you quoting? Whose opinions are you using. If they are your own, please give your credentials as a monetary expert.
Why do you think you know more than the Fed Reserve board members or the economic experts?
Instead of posting sources you claim I won’t like them. So what? Other people read this and whether I agree or not, you should be courteous enough to give the other readers your sources so they can evaluate your sources against mine.
Jan,
you say, “Your concept of history is totally out of sinc with even the Supreme Court Justices views of history.”
This is a classic example of how you make sweeping statements that can’t be defended by facts.
Are the Supreme Court Justices historians by training?
No. Judges more or less.
Some Supreme Court justices were appointed with no prior judicial experience. Washington made appointments on political terms, not judicial ability.
Consider Cushing and Rutledge. Or, Bushrod Washington, George’s nephew.
Any of these men great judges, justices, or historians?
John McKinley? Never a judge before being a justice.
For activist judges, see the appointments of Jefferson and the 1st Marshall Courts.
Joseph Story, never a judge before a justice.
John McLean, Monroe’s political appointment. Never a judge. Always a would be candidate for President from his seat on the bench.
You’re accusing me of being a historical idiot.
And, the Justices ALL of them are being praised as historians.
You didn’t know that many of the Justices were political candidates while sitting on the Supreme Court?
You problably think Justices are nearly as God like as the President of the United States, who you name as a sovereign in the manner of the Divine Rights of Kings.
Justices are just men except when they’re women.
Justices are very political in the history of the Court.
The Taft Courts were headed by former President Taft.
Do these master historians you see in black robes report the very mixed history of the early courts? Oh no? They don’t? Of course they don’t.
Harlan Fiske Stone, never a judge before being a Justice. He was a buddy of Calvin Coolidge. But, his former position as Dean of the Columbia Law School made him one of those horrible, liberal academics, eh? What was his legacy when he suddenly died in 1946? Personal freedoms and Individual liberties.
George Sutherland was never a judge before being a justice. Nominated by Harding, one of the most corrupt administrations in history. Served in the House and the Senate before being a Justice. Republican.
How aboout James Clark McReynolds? Racist. Openly anti-Semitism behavior. Won’t even speak to his Jewish members of the Court. Wilson may have appointed him to the Court just to get rid of him as he was a burden to the administration.
Stanley Reed? Roosevelt appointee, also maybe to get rid of him for political reasons.
Hugo Black? Former member of the KKK. Roosevelt appointee. Never a judge before being a Justice. Practiced law in Ashland, AL. Democrat. Might have been a good justice.
William O. Douglas, polio victim like Roosevelt. Nearly FDR’s running mate ( no irony intended ) in 1944. Which would have made him a candidate and a Justice at the same time. Longest serving member ever on the court.
Now how about Frank Murphy?
Never a judge before being a Justice. But, was a Justice and an infantry officer at Fort Being. (Active duty only during recesses of the Court.) Strong liberal.
Now a Truman pick that went bad. Tom C. Clark, father of Ramsey Clark. What did Truman say of Clark? Something to the effect that Clark was a good man but the “dumbest SOB” Truman had ever met. Clark resigned the bench when his son was appointed as Attorney General under LBJ. (never a judge before being a Justice).
Byron White. Never a judge before Kennedy picked him for Justice. Professional football player. Detroit Lions. Organized the Colorado campaign for Kennedy’s presidency. Repaid with a seat on the Highest Bench in the U.S.
Sandra Day O’Connor. Two terms as a State Senator before two years as an appointed to the Arizona Court of Appeals by the Democratic Governor. Only two years of Judicial experience before being a Justice, the first woman Justice. A good Justice but a pick to satisfy a campaign promise by Reagan to put a woman on the Supreme Court.
How’s the historians on the bench doing on telling it like it was?
Political appointees with little sense of history.
Jan,
You said, “Basically, by increasing the discount rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.”
Key word in the opinion article is ATTEMPTS. In the opinion of the author, the FED attempts monetary changes by controlling the discount rate.
That isn’t the only function of the discount rate. Nor is it a direct function of the discount rate.
All of your sources are hackeyed and not worth reading. NONE of them are actors or agents in the economy. Your economic sources are whiners in the nose bleed seats, watching the game, not coaching it! Playing it! Officiating it!
I’ve yet to see you rebutt any data.
Got Milk? Or, got Data?
Jan, you say,
“Mad Dog states:
Changing interest rates doesn’t change currency supplies.
If it did, you’d post some data to support that.
==============
Since it is so basic, I didn’t think it was needed.
Quote:
Basically, by increasing the discount rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.(source deleted to save space)
You posted an opinion piece. Not facts.
Not data.
If you’re such an expert yourself that you know what is and isn’t common knowledge in the field of monetary policy, fiscal policy, FRB policy, Treasury policy, grab the raw data and prove it.
Where is there in all your posts hard data.
If you are such an expert on who is an expert, you could find data.
After all, only a teacher gets to grade sources.
I’m a private researcher/consultant who has attended several colleges, universities, and banking institutes. I have trained bank employees including managers on regulations, policy, and compliance procedures.
All of which means pretty much nothing. I’m certain you have met plenty of academics. You’ve also met plenty of Economists who don’t agree with you.
Perhaps, like President Truman, you’d like to meet a one armed economist. Cause that feller couldn’t say, “On the other hand … ”
The soft sciences, which includes economics, have many internal rifts. Freud is not the current main school in psychology. Weber does not lead sociology. Marx still has a very strong following in politics and political economy world wide. Adam Smith’s particular theistic view of economics has fallen back into a historical niche.
Facts and data are important.
Present some, please, that shows monetary supply always falling when interest rates rise? Hmmm?
Mad Dog states
You problably think Justices are nearly as God like as the President of the United States, who you name as a sovereign in the manner of the Divine Rights of Kings.
—————–
No, they are terrible but their rulings are the “law.” We have to live with their decision and go by them until another Court decides to reverse them. That happened in 1925. Some say it was wrong and some say it was right. I just say it was history. They made a change in the basis for rulings. You don’t have to agree with it or like but you have to live with it until a new Court reverses them.
At that time, millions will scream that the Court is being “unconstitutional” and they can scream all they want but that will be the law that the nation has to live with.
History isn’t what you want it to be. It is just a set of events that were recorded.
This is what the Federal Reserve board says about its own policies on their own site.
Quote:
Furthermore, changes in monetary policy affect the exchange value of the dollar on currency markets. For example, if interest rates rise in the United States, yields on dollar assets will look more favorable, which will lead to bidding up of the dollar on foreign exchange markets. The higher dollar will lower the cost of imports to U.S. residents and raise the price of U.S. exports to those living outside the United States. Conversely, lower interest rates in the United States will lead to a decline in the exchange value of the dollar, prompting an increase in the price of imports and a decline in the price of exports.
http://www.federalreserve.gov/pf/pdf/pf_2.pdf
==========================
They very clearly state how their interest rates affect the value of the dollar. The value of the dollar, in turn, affects how much people “demand” the dollar. The site also goes into how they use the interest rats to control the flow or supply of money as well as using the “market operations” where the Fed buys and sells on the market to hold the interest rate they have set. On another site it is described this way.
Quote:
How the Federal Reserve Controls the…
The Discount Rate and Open Market Operations
The Discount Rate
Banks may borrow from the Fed. The interest rate charged by the Fed is termed the “discount rate.” In turn, banks loan out money at higher interest rates. When the Fed lowers the discount rate, banks find it less costly to borrow from the Fed, and as a result, increase the amount of money borrowed from the Fed. The more money they borrow, the more they can loan out, and the higher the money supply becomes. As a result, when the Fed wants to increase the money supply, it can lower the discount rate. Conversely, the Fed can raise the discount rate in order to lower the money supply.
http://wps.prenhall.com/bp_casefair_
econf_7e/0,8233,2032008-,00.html
=============================
It also states how they can use the open market to add and remove money.
quote:
….to influence the money supply is open market operations. In essence, this tool involves the sale and purchase of U.S. government securities in the open market. It allows a more precise and rapid control of the money supply than any of the other monetary policy tools.
==============================
The Federal Reserve themselves state they affect money supply with interest rates as well as their purchase and sales of notes. If you have some sources that claim the Feds don’t use these to control the money supply, I am interest in reading them. Again I just am going by what the Fed themselves are saying they use to control money supply.
Again, don’t say I am saying only interest rates are used. The reserve requirements for banks, buying and selling of bonds in the open market are all very important and for some of the money supply the greatest influence. All are used by the Fed.
The question today is that with the trillions in the hands of Japan, China, Russia, OPEC, etc., How much power does the Fed still have in the open market? Could that be why the dollar has continued its decline in value? Maybe the Fed doesn’t have that much power anymore.
Jan,
Here’s one of the leading problems that you have.
“.to influence the money supply is open market operations. In essence, this tool involves the sale and purchase of U.S. government securities in the open market. It allows a more precise and rapid control of the money supply than any of the other monetary policy tools.”
You didn’t read this or you can’t understand what it means. “It allows a more precise and rapid control of the money supply than any of the other monetary policy tools.”
The FED isn’t saying interest rates are the best tool. They are not saying interest rates changes are precise or rapid.
In terms of MONETARY POLICY TOOLS!!!!
Not fiscal policy, nor credit policy.
The FED controls stock margin purchases. Increasing the cash necessary for stock purchases takes money out of circulation. Less money in circulation isn’t a change in money stocks.
Just like raising reserve requirements does not reduce money stocks.
It may change spending and credit.
You have fixiated on money stocks and “fiat money” when actual currency, “fiat money,” doesn’t show a direct relationship with currency supplies or money supplies.
That’s your biggest error and one you can’t see.
Better stick to the FED on how the FED works than op ed pieces, btw.
The FED correctly explains changes in dollar values in “currency markets.”
As in, “Furthermore, changes in monetary policy affect the exchange value of the dollar on currency markets.” Direct from the FED site as you used it.
The FED isn’t saying the dollar is worth less. The FED is saying that monetary policy “affects” currency exchange rates.
The FED is not saying effect which as a verb means to cause to come into being. The verb ‘effect’ goes beyond mere influence; it refers to actual achievement of a final result Example, “The new administration hopes to effect a peace settlement” The uncommon noun ‘affect,’ which has a meaning relating to psychology, is also sometimes mistakenly used for the very common effect. In ordinary use, the noun you will want is effect “Waiting for the new law to take effect.” “The weather had an effect on everyone’s mood.” (as a cause or agent)Affect can mean some emotional or to influence).
Interest rate changes influence not change monetary supplies which are so very different from currency supplies and credit.
You’re just confused about verbs. You think interest rate changes EFFECT currency supplies. NO. They don’t even influence currency supplies.
Interest rate changes INFLUENCE monetary supplies in the broadest sense of MONETARY SUPPLIES.
Here’s another example of your deceptions, Jan.
“Again I just am going by what the Fed themselves are saying they use to control money supply.”
No you are not going by what the FED says. You are going by what you have heard others say the FED is doing.
MD
p.s. Let me cover some observations on Theory.
How about a little Santayana to set the tone.
” I have become aware that anyone’s sense of what is good and beautiful must have a somewhat narrow foundation, namely, his circumstances and his particular brand of human nature; and he should not expect the good or the beautiful after his own heart to be greatly prevalent or long maintained…”
Do I need to give a reference on quotes and dictionary meanings? Common knowledge or should be common knowledge.
Theory might function as a framework or a set of hypotheses subject to real world verifications. A measure being used to observe the world.
A set of hypotheses is an attempt to explain how things really work.
Few sets of hypotheses if any correspond EXACTLY to the real world.
In my opinion, too damn many humans! Just can’t predict exactly what humans might or might not DO! Dangit all to heck!
Most people forget that economics is a study of social as well as economic environments.
When someone points to an institution or policy or theory and says it works or doesn’t work, the social aspect of economics is ignored.
Economics is twofold. The ‘mechanisms’ and the society.
Science, even the soft sciences does not seek to PROVE theory! It seeks to disprove theory. DISPROVE!
Enough on theory.
One minute you’re praising Justices for being great historians and then slamming them for being “terrible.” Whatever that means to you.
You’re usually trying to make the monetarists argument. Moneterrorists in a slip of the tongue.
Keynesian theory is the opposite (over simplified for you) position.
Keynesians theorists and Monetarists both agree money has something to do with the ‘level of economic activity.’
What is very lacking in Economics (with the BIG E) is the ability to run experiments. Not that I personally think that would help.
Events are shaped by many forces at once. Seldom could an experiment recreate and control ALL the possible variables.
Internal economics can be influenced by external economics. National vs. International.
Competition or the lack of competition.
Psychology.
Politics.
Social norms or the changing of social norms or the lack of a social norm.
Nature. Hurricane Katrina for example, eh?
Like Santayana suggests, beauty can be singular in experience. Suggestions of totally impartial judgments … trash.
Every researcher KNOWS, knows! bias means SHOULD BE! What ought to be.
Historians hire me to do research not because I’m impartial. Because they know my bias and I know I’m biased and because I will bring back as much of everything as I can find. And, I will find things other researchers overlook.
Hospitals hired me because I followed the dang rules. Part of my bias is to follow the rules. Except when my bias is against following the rules.
Correctly positioned, I’m great. In the wrong assignment, worthless.
You don’t know your bias toward current policy, past policy, past decisions.
But, you know you don’t like them.
You might recognize the right goals, but you have no chance of picking the most likely methods of obtaining those goals with the least dysfunctions.
So where are those numbers that show interest rates going up and currency supplies going down?
How about a little Ernest Tanner?
“Discretionary monetary policy is an extremely fragile instrument of general economic control.”
Discretionary vs. automatic.
Did you think about the difference (this ties back into the fairTax issue and various anti-government positions you’ve misarticulated.
Do you know how much of a lag time there is in discretionary actions to control the economy? Some say as much as eight quarters! 2 YEARS!
So what are the lags?
1. To know that there needs to be a correction always comes after the time when actions become necessary. Things happen. Analysis is based on very recent history but history all the same.
2. There is always time between the recognition of the need for change and putting a change in place.
3. Lag between the time the change is put into place and the time the EFFECT happens.
The FED has been a discretionary policy maker.
Fiscal policy, which is very different from monetary policy can be automatic.
As you noted, tax policy can be an automatic force for stopping rapid change UP or DOWN in economic activity. If the tax structure is progressive enough.
( I won’t do annoucement effects, too much for you to handle. But, you as an active beneficiary of the stock market should already know about the effects of announcements. )
FLAT TAXES SALES TAXES VAT TAXES have no economic mediations. None.
Social Security taxes rise as employment rises ( a theory not a rule but a good theory for most of my experience ) This slows recovery and prevents double recessions to a degree and recoveries from becoming booms.
Unemployment compensation. Employment falls but a base of income cushions economic activity from falling in direct proportion (again a workable theory ).
Welfare also is automatic. Welfare payment increase when employment falls. Slowing economic decline.
Government healthcare same as Welfare and Social Security.
The ‘wealth’ among our retired has a stabilizing affect as opposed to how the elderly once lived in poverty when ‘retired.’
My critique of Reagan’s 45 % change in progressive rates (a number sometimes in dispute. No one believes it on the right side of the floor) is that a flatter tax rate structure could increase volutility in change unless other measures compensate.
Partial list of authors used:
Just a few.
Klein,
Fischer,
Hamilton,
Bodin,
Weber and Webber, (VAY ber in the Germain)
Swartz,
Keynes,
Mellon (not the Mellon) and Mills,
Friedman (yes THAT Friedman)
Publications and web pages, mostly the FED and Treasury some from the IMF.
Some arcane academic journals and a few professors with PhDs and some dusty text books.
A dictionary.
Santayana.
Citibank. (one of those students I helped tutor in finance was from Bangladesh. He now or will soon have his doctorate in Economics and already lives in Japan where he works for Citibank. But, not as a customer relations employee. BUDGET! I helped review his work).
Now, since you’ve wanted me to ask, but I haven’t, … what are your bonafides in economics?
Besides the Konop school of Cut and Paste?
What exactly makes you qualified to say the FED and Treasury are wrong in using the humble tools that they have in the way that they use them?
Oh, and bank borrowing from the FED isn’t to increase lending operations.
Or at least it used to be heavily sanction when a bank tried to make it a practice.
I’d suggest reading a few financials for U.S. banks, adding up the FED funds borrowed and reporting back to your audience on the average percent of loans on the books are directly supported by FED FUNDS BORROWED.
Unless you want to quote another opinion web page.
Here’s one of the leading problems that you have.
“.to influence the money supply is open market operations. In essence, this tool involves the sale and purchase of U.S. government securities in the open market. It allows a more precise and rapid control of the money supply than any of the other monetary policy tools.”
You didn’t read this or you can’t understand what it means. “It allows a more precise and rapid control of the money supply than any of the other monetary policy tools.”
The FED isn’t saying interest rates are the best tool. They are not saying interest rates changes are precise or rapid.
=======================
That is why I pointed that out. That is more critical than other things but they are even losing the ability to have as much power in that area as well.
Interest rates do control money supply but not in the sense you are looking at it. They first create the “demand” or the lack of it with the rate. Then as the fed stated, they supply or restrict the supply of money based on the change in demand. They still controlled it but through the laws of supply and demand.
In the “market” they do the reverse, the use supply of money to control the rate of interest they desire in the market.
The interest they set is the rate they charge the banks that get money from the Fed. They also control the amount of reserves the bank must hold. If it is 10%, then the bank can loan $10 for each $1 they have. (China has been raising their reserve requirements recently to try and control the money supply in China). The interest rate in the market is set by the buying and selling of bonds.
That is why M-1, M-2, and M-3 are all important measuring devices. To have the total picture of the money flowing out in both the method controlled by interest rates and the money flowing out to control the market rate, you have to have all three measurements.
You stated,
In my opinion, too damn many humans! Just can’t predict exactly what humans might or might not DO! Dangit all to heck!
———————
How true. This is why so many “predictors” of the market have been wrong over the years and right now are still trying to figure out why they can’t “time” this market.
Human nature, like what is going on in China, with 400,000 brokerage accounts being opened up in one day or how people making $2 an hour are saving 40% and investing it and buying stocks with virtually no value like we did in 1929, confounds even the “experts.”
I believe that it is quite possible to have a recession start this year or not start for 4 or 5 more years just as easily. Human nature being what it is and the fed no longer having the power it did, may cause either to play out.
Still without the “trend” we have virtually nothing to base policy on. The trend is what we see over decades, not years and what we can attribute to the trends.
For example, when people talk about the trend in debt, they usually leave out the money loaned from Social Security and other trusts that also has to be paid back. When you look at the chart of both public debt and trust fund debt, placed on top of each other you can see that even when public debt was dropping, trust fund debt was still climbing.
Chart
http://www.aaas.org/spp/rd/debt04b.pdfhttp://www.aaas.org/spp/rd/debt04b.pdf
===================
For the sake of argument, let’s say you are correct on your money supply points, What then do you attribute the loss of value in the dollar to?
You mentioned inflation and various types but all are rooted in money supply either locally, nationally or internationally in both the private and public sectors.
Demand-Pull Inflation
Cost-Push Inflation
Look at Cost-Push, money supply directly or money supply indirectly, in another country that affects prices to us, or government purchases (ours or another) that increases the demand with the extra money supplied by the government for those purchases (either by increasing total money supply or diverting from one area to another). At first glance some wouldn’t see that money supply was playing a role in all the ways cost-push inflation works, but it is, it just may not be our money supply that is rising. And, all that can happen whether total money supply rises or not. But, again, when total supply isn’t rising, it means the money being supply is being diverted from something else and probably lowering the price of it because demand for it has dropped.
In Demand-pull, it is still money supply at work. Money supplied for wages or construction materials can cause those to fluctuate and send prices higher even if the money supply driving up material prices is in China where their demand for copper, aluminum, etc are driving prices up even in nations where that nation’s demand for the material is dropping or stable and they aren’t increasing money supply locally.
It is the movement of money that can (if reported inflation is accurate) allow the government to say we only have a 2.1% inflation rate when food is going up 14% on an annualized basis, and gasoline has gone up 50% since it dropped to $2 a gallon several months ago and is now $3. Money, if supplies of money haven’t gone up are being moved from purchases (homes, remolding, landscaping for example) which drops prices in one area while they rise in another. Depending on the amount of money being pulled out from one area and supplied to another it can show inflation as tame in the reports even though seniors who spend more on food with their social security check may think it is terrible. Again, human nature has come into play with decisions on where money will be supplied and withdrawn from.
We may never agree on money supply but, we do know that our dollar keeps dropping in value. Just since we have been debating this the last couple of days, my dividend ratio from Canada has risen another 2% just from the dollar losing value to the Canadian dollar. Now that the Yuan is rising too, the prices of our Chinese imports will rise as well, but, our exports will be cheaper and that may help us avoid a recession and keep unemployment in check. They say 3rd and 4th year election cycles are normally better than 1st and 2nd and they have been good so maybe these will be even better.
Mad Dog stated
One minute you’re praising Justices for being great historians and then slamming them for being “terrible.” Whatever that means to you.
—————————
Some are both. They are a part of history, more than being historians but some have made a study of history, like Scalia, and use it. Other are a part of history in that they make monumental decisions (good or bad) based on personal opinion more than precedent. Take the recent decision where some of the Justices felt that international courts in Europe should be considered as part of the basis for their ruling on the death sentence.
How they decide a case may make the history books as a “turning” point and it will be law that we have to live with and a part of our history but, it won’t necessarily fit “original intent” for the role the Court was to have.
Again, your point about human nature applies to Justices too.
you stated
Keynesian theory is the opposite (over simplified for you) position.
Keynesians theorists and Monetarists both agree money has something to do with the ‘level of economic activity.’
What is very lacking in Economics (with the BIG E) is the ability to run experiments. Not that I personally think that would help.
===================
But, we do run experiments. We have been running the Keynesian experiment for years. We now see that it does influence job growth, GDP, etc. but that it also has some nasty side effects too.
Also, we can look all over the world at the experiments being run. About every policy we have or want to have, is being used someplace. There are about 30 countries running “experiments” on personal accounts for social security that we can gather data from. History is the recording of experiments by a nation. We see the cause/effect relationship played out every time we use a policy and combine it with other policies and then compare to other uses of that policy either here or in another nation.
We have dozens of nations that implemented tax reform when others didn’t and now we see the ones that didn’t doing their own tax reforms. Why? Because they look at the experiments that took place and decided they liked the results of them.
Take Saddam Husseins selling of oil in euros. Other nations had talked about doing it but were afraid. Some even told Saddam he was making a mistake to sell oil in a weak currency like the euro. However, when Iran and Venezuela saw the success Saddam had and how it boosted the euro while hurting the dollar, they started to move out of the dollar too. Now, Kuwait and other nations are joining in the move out of the dollar because the “experiment” proved the dollar was vulnerable to a drop in demand from moving oil sales from the dollar.
Mad Dog states:
So where are those numbers that show interest rates going up and currency supplies going down?
==============================
Are you talking about the interest rates the Fed sets for the bank lending rate or the rates they attempt to control through the open market?
With the banks, it is the rate the fed sets for banks that get their money from the Fed, that affects the supply of money as the borrowers of that money ask for more or less. With the market, it is the supply of money that affects the rate when the Fed buys and sells on the open market. Both are part of the lending business since some loans are from banks and some are from other lending institutions that get their funds from “investors” rather than the fed and all lenders compete. So first, we have to decide which interest rate you are talking about.
Also, the bank interest rate the fed sets influences their actions on the open market because they then have to try and get the “market’s “ rate to be close to the bank rate or else they lose the power to control the rate they set. The decision to expand money supply or contract it is their first step usually and then they set the rate based on what they think it will take to achieve the amount of supply or contraction they want. The interest rate they set for the banks is like an indicator of what they will do on the open market to get that rate close to the rate they set for the bank. Of course, as you pointed out, human nature can throw a monkey wrench in the plan and usually does, when combined with the lag factor and they end up overshooting their target.
Remember, they set the rate and then take steps to make it work by either adding to or removing money supply in the open market to make the “bank rate” they set stay viable. The two combined, bank rate and market rate, force the fed to usually be constantly involved in the open market to move the market close to the rate they have set for the banks that borrow from them.
You stated
Did you think about the difference (this ties back into the fairTax issue and various anti-government positions you’ve misarticulated.
==========================
What positions? That it will be fought tooth and nail by business and the AARP. That it will be difficult to implement and that it is 30% sales tax, not 23% and that prices on imports will rise 30% and be challenged by the WTO? You don’t think those things will happen? The challenges may not work but again, human nature of the WTO ruling bodies may come into play and uphold the challenges. I think those can go either way. I also don’t like it because of the rebate. I just don’t see it gaining enough support to pass. And, I don’t see it solving the problems with entitlements they think it will.
You also mentioned lag time. In the other forums, I constantly preach this and am ridiculed for saying that it can take 2 years lag time. The fed itself, says it takes about 8-9 months for just a change in interest rates to start having an effect. Tax policy can easily take years because it takes that long for the policy to be implemented, start allowing more or less money having to go for taxes that then cause adjustments in building plans, hiring, layoffs, purchases of supplies, reducing inventory etc. Or, take a company that the tax rate is driving them out of the nation. They may take even longer than two years to find a new country, negotiate a business plan with that nation, get the property, build and train and staff the business before closing the one here.
Everybody was saying the “Clinton job boom” and yet, job growth peaked (not that they didn’t add jobs but the rate they added jobs started to freefall before Bush ever took office). All manufacturing sectors peaked in job growth under Clinton.
Quote:
Nondurable manufacturing employment peaked at 7.9 million workers in January 1995. Components that peaked under Clinton included: food and kindred products (October 1995); textile mill products (November 1994); printing and publishing (May 1998); and rubber and miscellaneous plastics (February 2000). Many of these jobs were once concentrated in the South.
Durable manufacturing peaked at 11.2 million workers in April 1998. Components that peaked under Clinton included: lumber and wood (February 2000); furniture and fixtures (July 2000); primary metals (January 1998); fabricated metals (July 2000); industrial machinery and equipment (March 1998); electronic and other electrical equipment (November 2000); transportation equipment (October 1998); instruments and related products (March 1998); and miscellaneous manufacturing (April 1998). Some of the largest durables goods employment is in the upper Midwest.
http://nationalreview.com/nrof_comment/comment-kaza051603.asp
====================
This, of course, is why we heard we were heading for a recession even before Bush was elected. Yet, the lag factor would drag things out another couple of years from when these things started happening. And, since there were still more being hired each month, they said everything was fine even though the number new hires was dropping every month. It was just a symptom but an important one that told economists that a change was already in the works.
Or, look at the tax cuts that Congress passed under Bush. Many say we are only now, really seeing the effects of them. That would mean an even longer lag factor than 2 years. Yes, I believe lag factors are very important but, many people don’t believe it. They think the same year a policy is enacted is when it “takes effect” or rather “has” effect.
Yet, under Clinton the debt was coming under control (much through reduction of spending in military) and tax revenue increases especially from capital gains and other taxes on rising wages for the increased demand for tech workers and profits. Look at that chart I listed and you can see that things were terrible under Reagan and Bush one for debt and only under Clinton were they improving. Doesn’t make him a saint by any means since Congress had to first pass the legislation he signed.
That is like now, under Bush, Congress has the purse strings. Neither party is controlling them very well. The next two years will be very telling though and the GOP could easily be a party fading into history.
You said
Oh, and bank borrowing from the FED isn’t to increase lending operations.
=================================
Well, I am willing to be educated on that because I have never professed to be more than an ardent reader of economists opinions and teachings. Why does a bank borrow from the fed? Why do they even set a bank rate if the bank isn’t going to borrow from the fed when it needs more money? Do they just turn the people away the come to them to borrow money? So you are saying when the bank doesn’t have enough funds of their own to lend, they just stop lending? Even at the 10 to 1 reserve ratio, in times of high demand for loans, I can see them needing to borrow more from the fed.
RE# 124
Banks can borrow for a limited number of reasons. Or, they can sell.
You didn’t know banks sell FED FUNDS?
Banks can and do wind up loaned out. Then, they can sell loans.
Few banks are stupid enough to let themselves become loaned out.
FED Funds can be bought in very limited conditions to meet reserve requirements during settlement, to make loans to correspondent banks.
Banks do not always OWN their loans.
Some banks are cash cows with a constant influx of cash.
Others have a constant outflow of cash.
CASH as in currency. The green stuff.
Some banks follow an internally tight credit policy and have a fifty percent loaned out status. The bank next door may be agressive in leanding and be more than 70% loaned out, 17-18% invested in government bonds, and loaning out excess reserves to smaller correspondent banks that are not MEMBERS of the Federal Reserve System.
There are many interbank and corporate methods to make sure as a bank, you have the cash flow to meet daily operational needs, and continue to make loans.
I’ve never run a bank, only trained employees and worked in one.
But, you should not think of every bank as being exactly the same in management practices. That’s another error.
“Interest rates do control money supply but not in the sense you are looking at it. They first create the “demand” or the lack of it with the rate. Then as the fed stated, they supply or restrict the supply of money based on the change in demand. They still controlled it but through the laws of supply and demand.”
No interest rates are not the ‘controlling factor in money supplies.’
Monetary supplies do not move down and up with the changes in interest rates.
Influence … if money supplies are going faster than the targeted growth rate, increasing interest rates may influence a decrease in the growth rate. Without causing such a dramatic change as to remove money.
To remove or add money, the FED would buy or sell as the FED web site describes in open
market operations.
and remember, some debts get retired. Each district of the Federal Reserve can act within the geographic area to restrict credit, change deposit reserves, ‘persuade’ banks to tighten credit requirements.
Just say no. Don’t make unsecured loans. Increase what you would call down payment. It’s a loan to equity ratio applied even to consumer loans for ‘credit rating differences’ in consumers. Increase the interest rate spread for differing types of credit.
The list seems endless to me this morning.
Each bank is different.
Each region or district of the Fed is different.
The classic micro and macro separation.
(Florida banks used to be cash cows with little loan DEMAND!)
Midwestern banks had predictable demand.
Michigan banks were hammered by auto manufacturing crisis after crisis.
I’m not your source for a free education in the banking system. In fiscal and monetary policy. Or, in how monetary exchange markets work.
You’d have to unlearn a huge chunk of your current knowledge base.
Jan,
You’re quoting the National Review.
Sometime this weekend I’ll pull some of my numbers on employment that are not cherry picked.
Jobs, in a general term, and employment, continued to grow.
I’ve had this set of numbers peer reviewed.
If I can find them again.
MD
Selected and edited portions of me on employment during Clinton and during Bush regimes.
Regimes used without derivive connotations.
“People often think numbers and facts should be in any positive discussion. In heated conflicts with multiple points of view, numbers and authority based on numbers will not settle the dispute. With the understanding that sources are always open to question, including government web pages, I am presenting the XXXXX point of view, as always.
Year Civilian
Population Labeled
Employed %
Employed Labeled
Not-Employed Labeled
Unemployed Discount
Rate*
1992 192805 118492 61.5 64700 9613 3.00
1993 194838 120259 61.7 65638 8940 3.00
1994 196814 123060 62.5 65758 7996 4.75
1995 198584 124900 62.9 66280 7404 5.25
1996 200591 126708 63.2 66647 7236 5.00
1997 203133 129558 63.8 66837 6739 5.00
1998 205220 131463 64.1 67547 6210 4.75
1999 207753 133488 64.3 68385 5880 4.00
2000 212577 136891 64.4 69994 5692 6.00
I assembled the Clinton data table from only two sources. The discount rate information comes from the Federal Reserve Bank of St. Louis. This single rate figure per year does not fully reflect all changes within that respective year. The Discount Rate, as it was called, can be changed up and down within a year. Data was selected to be near the year-end. As the population grew between 1992 and 2000, more people became employed and fewer people were classified as unemployed.
Clinton Era ’92 to ’00 Data Table
Numbers in thousand unless expressed as a percentage or a rate*.
Bush Era Data Table ’01 to ‘04
Year Civilian
Population Labeled
Employed %
Employed Labeled
Not-Employed Labeled
Unemployed Discount
Rate*
2000 212,577 136,891 64.4 69,994 5,692 6.00
2001 215,092 136,933 63.7 71,359 6,801 1.25
2002 217,570 136,485 62.7 72,707 8,378 0.75
2003 221,168 137,736 62.3 74,658 8,774 2.00
2004 223,357 139,252 62.3 75,956 8,149 3.75
Numbers in thousand unless expressed as a percentage or a rate*.
I assembled the Bush data from the same sources. It shows more people unemployed and fewer people (as a percentage) as employed. This represents trends that differ strongly between the two administrations.
There is more information out there. This data is my choice. The employment numbers during the Clinton era grew under a heavier discount rate burden. The economic growth rate ( as defined by the Federal Reserve Board of Governors, including inflation ) grew rapidly. The discount rate was increased to slow that growth during the Clinton Era just as it was lowered during the Bush Era to increase growth rates (and recently raised to control inflation ).
I don’t look upon these numbers as settling any dispute. Other data to be examined include Balance of Payments, Total Debt as reported by the US Treasury, money supply, velocity of money, savings, consumer debt and its components. Some might include stock market figures and exchange rates.”
Those data sets are from 2005. Data sets like these may be adjusted seasonally, for changes in method, and for errors. So don’t be surprised if numbers are not exactly the same as currently published numbers.
No idea how my tables will look. Hoping the table retain some structure.
MD
MD JP
To be fair with the flood on illegal immigrants we do not know the real numbers.
BTW according to SS department in 2004 the number of rejects was around 9 million numbers alone which they think was mainly illegal immigrants doe to profile.
How do you build a formula based not knowing how many people and what status they are!
And how do create a formula when many used phony SS #s and when caught moved on or used a different phony card?
A report showed one company had 180,000 rejects on SS cards a year alone!
Many illegal immigrants had multiple part time jobs with bad SS#s.
And since we count part time as full time and we have no idea how many are illegal I do not know how you can debate this.
Garbage in garbage out!
the un”Fair” tax and the Flat tax are simply tax cuts for the rich. As Chris Wallace asked Gov.Huckabee on FNS recently, “make two million dollars in income, live well on 1 million, bank the 2nd million and never pay a penny of tax through probate.”
A family of 5 making $60m will spend all their money, 100% taxed including credit card debt. Great for “Republican family values.”
Would Boortz-Linder-Cain et all in the tax cult support a tax system where they pay more than today?
Lib Don,
I think you meant 60K or $60,000.
And you are right. Middle income wage earners will pay fair more than the advertised rate of 23 or 30 percent with borrowings being taxed.
John,
Real numbers? Like 1,2,3 …
As opposed to -1,-2,-3 …?
All economic numbers are estimates that attempt to model the real world, not measure the real world.
And, real actors know the limits of those estimates and make some adjustments for underground economies, plural!
MD
p.s. If you want to be a millionaire, borrow a million dollars and have your renters pay it back.
Mad Dog. I think they would like to return this to a “fair tax” topic.
I have posted my reply to you here.
http://www.phpbbplanet.com/libertytree/viewtopic.php?p=5717
The Fair Tax is treating symptoms instead of the root problem of socialism. It won’t pass and we won’t end the IRS. Instead of this we should be educating people on why the whole system we have is broken and we have to return to limited federal government. That doesn’t mean we end all the “good things” but they should be returned to the states whenever possible so they can be adapted to the unique needs of each state and the resources they have.
As long as we centralize power, we will see our rights eroded. While a state can do that too, one state with bad government doesn’t drag all the rest down but when the centralized government is bad, all the states and people are dragged down.
The Fair Tax sounds like it will bring jobs back. Don’t count on it. If we don’t solve the unfunded liability we have, the rising debt, the loss of private sector jobs while jobs in government and government funded private sector jobs (Medicare, Medicaid, Defense, Federal projects, subsidies, grants, etc), a new tax to pay for mistakes won’t help in the long run.
And, John,
If the false SS numbers are being reported and discovered, those figures are in the employment numbers, I’d bet.
So how do you think the figures are skewed?
Too little or too many?
MD
The S.S. says they don’t report these things because by law they are isolated from telling other agencies the information.
Quote:
The IRS and the Social Security Administration routinely collect strong evidence of potential workplace crimes, including names and addresses of millions of people who are using bogus Social Security numbers, their wage records and the identities of the bosses who knowingly hire them.
But they keep those facts secret.
“If the government bothered to look, it could find abundant evidence of illegal aliens gaming our system and the unscrupulous employers who are aiding and abetting them,” said Rep. J.D. Hayworth, R-Ariz.
The two agencies don’t analyze their data to root out likely immigration fraud – and they won’t share their millions of records so that law enforcement agencies can do that, either.
Privacy laws, they say, prohibit them from sharing their files with anyone, except in rare criminal investigations.
But the agencies don’t even use the power they have.
The IRS doesn’t fine even the most egregious employers who repeatedly submit inaccurate data about their workers. Social Security does virtually nothing to alert citizens whose Social Security numbers are being used by others.
Evidence abounds within their files, according to an analysis by Knight Ridder Newspapers and The Charlotte Observer.
One internal study found that a restaurant company had submitted 4,100 duplicate Social Security numbers for workers. Other firms submit inaccurate names or numbers reports for nearly all of their employees. One child’s Social Security number was used 742 times by workers in 42 states.
http://www.libertypost.org/cgi-bin/readart.cgi?ArtNum=138345
==================
I think they refer to the privacy act but, there may be other reasons they say they can’t share the information with other departments.
The social security administration doesn’t want these people reported. They need the money. What illegals pay in is about what the difference in inflows and outflows each month are. Illegals add to the surplus the general fund depends on being loaned to them.
Jan,
“They” are free to make another thread on the FraudTax if “They” don’t like this one.
Meanwhile, you should take some responsibility for your ignorance about the banking system, monetary systems, and fiscal systems used to mediate the economy.
Please feel free to respond to me on other blogs, kick your dog, and beat your chicken if that gets you ‘there.’
Jan,
Got an email back today in reference to your post number 38 I thought I would share with you.
http://www.dushkin.com/connectext/econ/ch11/inflation.mhtml
The intro level textbook used in this link is out of print.
No copies are available except maybe in used book stores.
Really nice source. Thanks.