Friday, December 30, 2011

Krugman: There's No Grand Government Conspiracy to Hide Inflation and MIT's BPP Data Confirm That

From a December 18 blog post by Paul Krugman, who I happen to agree with on this issue:

"One response of inflation-fearers to the absence of the inflationary outburst they’ve been waiting for is to reject the numbers, and claim that the BLS is hiding a much higher rate of inflation than the official numbers say. You see that a fair bit in comments, and some credulous mainstream figures (i.e. Niall Ferguson) have also bought into this story. How do we know that it’s wrong?

We now have price measures calculated independently by people not in the government — in particular, the MIT Billion Prices Project. The BPP collects prices from the internet; this means that it’s not a perfect match for the consumer price index, which includes things such as services that are generally not sold online. But if inflation were much higher (or much lower) than reported, you’d expect to see a big divergence between the independent index and the official stats. But you don’t (see chart above).

Forty months into the project, the BPP shows a price rise about a third of a percentage point higher than the CPI. That’s around 0.1% higher inflation annually -- i.e., essentially nothing. Sorry, folks, but there’s no grand conspiracy to hide inflation."

MP: A well-known government inflation skeptic is John Williams (Shadow Government Statistics), who claims that the current 3.4% "official" annual inflation rate through November (NSA) as calculated by staff economists at the BLS is being manipulated to show a downward bias, when his "unbiased and un-manipulated" inflation is closer to double that rate, or about 7% (calculated using the methodologies in place in 1980).

But Krugman makes a good point - why doesn't the alleged downward government bias show up in a huge difference between BLS and BPP inflation rates, with BBP inflation being much higher?  The current BLS-reported annual inflation rate of 3.4% is actually slightly higher than the 3.25% BPP annual inflation rate through November, so if anything, the government measure of inflation might be showing a slight upward bias.

Q: If there is a government conspiracy to hide inflation, why is the government's CPI measure of prices so close to the price index compiled from the internet by MIT?  

237 Comments:

At 12/30/2011 2:46 PM, Blogger W.C. Varones said...

What are the weightings in the BPP?

Given that the source is online prices, I suspect that the BPP is more heavily weighted toward discretionary gadgets and less toward food, energy, and services.

And does it capture shrinkage?

 
At 12/30/2011 3:37 PM, Blogger Buddy R Pacifico said...

One of the two professors that run the MIT BPP is Alberto Cavallo. Prof. Cavallo also runs the InflationVeradera.com that tracks Buesnos Aires, Argentina supermaket food prices.

For the last year Buenos Aires residents had their grocery prices increase about 25%, according to the Inflacion Anual chart at the website.

It would add some interesting texture if, Prof. Cavallo had a MIT BPP index of food prices at U.S. on-line grocery retailers.
It should be easy to track Safeway.com, Amazon Fresh and others. I hope the MIT professors do this in 2012.

 
At 12/30/2011 4:00 PM, Blogger bart said...

Good grief... does no one ever talk to seniors who have been on SS for a few years and notice how their standard of living declines substantially?

Or how about selection bias and weightings etc., and especially about how medical is about 18% of GDP but only 6.5% of CPI... perhaps corporations being people somehow magically makes their medical costs about twice of humans.

Then there's how BPP doesn't specify their entire methodology (let alone not at all covering services), most especially including reverse hedonics or how that can or box of [whatever] OJ this year has different ingredients than last year.

Gawd! I call BS and spin.

Obviously neither Mr. Perry nor Krugman pays attention to simple data.

 
At 12/30/2011 4:11 PM, Blogger W.C. Varones said...

Has any country in the world ever come back from 100% debt/GDP without inflation or default?

 
At 12/30/2011 4:18 PM, Blogger juandos said...

Why? Could the BPP be using the same questionable methology of the BLS?

 
At 12/30/2011 4:20 PM, Blogger Benjamin said...

They are hiding inflation, the true Vince Foster murderer, and UFOs.

 
At 12/30/2011 4:20 PM, Blogger hal said...

inflation picks up once the economy gets better.

 
At 12/30/2011 4:21 PM, Blogger Benjamin said...

WC--

Sure--many nations had heavy debts after WWII. In the USA, we balanced the federal budget (and had a 90 percent top federal income tax rate) after WWII.

We paid down the debt for decades, and had moderate inflation.

It is not hard to do.

 
At 12/30/2011 4:24 PM, Blogger jorod said...

There also is no credit to feed spending. Easy credit means more spending and inflation, but also easy bankruptcy. We're tapped out on credit and the economy reflects that. It's being eaten up by government spending anyway. Consider wasteful spending at the State and local level and you get an economy being eaten up by government. Also, the high price of energy acts as a break on any new spending. Consider most of the government is being funded with depositor money or the Fed and you get no real growth in capital goods. Only the appearance of growth and the prospect of either higher taxes or higher inflation, itself a tax. November 2012 can't come soon enough.

 
At 12/30/2011 4:26 PM, Blogger Benjamin said...

From here, the Fed badly needs to go to Market Monetarism--target nominal GDP growth through QE and lowered interest on reserves.

Bernanke needs to print money until Ben Franklins are pouring out his rear end, and then he needs to say he has long-term monetary diarrhea.

It will take a whole lotta loving to make this right.

 
At 12/30/2011 4:39 PM, Blogger morganovich said...

answer:

comparing bpp to cpi is apples to oranges.

at best, bpp compares to core as it mostly excludes energy and food.

but even then, it would understate core as online prices have a great deal more pressure on them than those in stores and exclude healthcare, rent, education, and many other items that have been the source of inflation.

it also heavily overweight consumer electronics, which is the space that drops in price most aggressively.

a bpp of 3.2% likely means a core of over 4% and a headline number of more like 8%.

 
At 12/30/2011 4:47 PM, Blogger W.C. Varones said...

Benjamin,

Post-WWII we had moderate inflation for a long time which, compounded, devalued the debt.

Bart,

That's because the old people aren't buying the right stuff. They should be buying iPods instead of food, medicine, and energy.

Get with the program, Grandpa.

 
At 12/30/2011 5:01 PM, Blogger PeakTrader said...

Obviously, there remains inflation bias from those who assume inflation is understated.

You can show them a circle 360 ways and they'll still tell you it's a square (and even say something about "circular thought" :)).

 
At 12/30/2011 5:17 PM, Blogger OBloodyHell said...

>>> There's No Grand Government Conspiracy to Hide Inflation and MIT's BPP Data Confirm That

Y'know, I didn't think there was, but, now that Krugman denies it, it leaves one pause to think that there must be something to it after all...

I mean, what are the chances Krugman is right? I'd bet on the Pope defecating in the Vatican before I'd bet on that happening.

 
At 12/30/2011 5:19 PM, Blogger OBloodyHell said...

>>> They are hiding inflation, the true Vince Foster murderer, and UFOs.

Heck, I'd trust Benny before Krugman.

UFOs, eh...? :-D

 
At 12/30/2011 6:42 PM, Blogger Jody said...

I thought BPP had 1) been seriously rejiggered and then 2) effectively shut down (http://www.zerohedge.com/article/mits-billion-prices-project-gets-axe).

 
At 12/30/2011 6:50 PM, Blogger Benjamin said...

O BloodyHell-

Top of the New Year to you!

And yes I am honest---you can't make this stuff up.

Real life tops any fiction story.

 
At 12/30/2011 9:30 PM, Blogger james said...

About the current condition of the american economy. This is one of the hardest periods in the countries history. Their does not seem to be any consensus about the trends for the economy one week the economic news is good the next week its bad. Their seems to be no consistency what so ever when it comes to economic matters. Mcdonald’s recently hired fifty or sixty thousand people out of one million that applied maybe mcdonald’s should change their saying you deserve a break today at mcdonald’s to you deserve a job today at mcdonald’s. Harvard excepted a larger percentage of those who applied than Mcdonald's. As far as those banksters go I say lets exchange those three piece suits and briefcases for a pick' a shovel' a bucket' and some pinstripes. Inflation Is the primary reason for much of the growing income inequality between the rich and the poor. It is also I believe the cause of the decline of the middle class. When ever the employing class and by Employing class I Mean anyone or any company That hires personal And gives them a regular paycheck. Their is always a tendency to undercompensate your personal less and less over time simply because when prices rise wages generally lag increases in prices at least for a substantial portion of the working population. Workers do not have much ability to control their wages and benifits. But companies that employ personal have much to say about the wages and benifits that their employees receive. Companies have been undercompensating their personal for decades in an attempt to increase their bottom lines. They have been systematically undercompensating their personal less than the increase in prices on purpose. The result is many workers have little income left over for any purpose other than basic needs food' rent' necessary clothing' utilities' medical bills' Its no wonder that the economy is in serious trouble.

 
At 12/30/2011 10:29 PM, Blogger VangelV said...

Good grief... does no one ever talk to seniors who have been on SS for a few years and notice how their standard of living declines substantially?

Of course not. And they haven't actually try to apply the new methodology to the data in the 1970s and 1980s. Had we used the same approach as today there would have been little inflation reported in the 1970s. But we know better and the scam is unlikely to last much longer. We will either be looking at an all out rout that destroys most of the lenders or to a high inflationary environment as the central banks do all that they can to flood the system with liquidity.

 
At 12/30/2011 10:51 PM, OpenID Sprewell said...

WCV, it never got to 100% but Canada cut their debt from 60+% of GDP to 30% by cutting spending. That's what we should be doing here in the US, but it will take a concerted effort by the tax-payers to outvote the tax-takers.

 
At 12/31/2011 1:34 AM, Blogger Ron H. said...

OBH: "I mean, what are the chances Krugman is right? I'd bet on the Pope defecating in the Vatican before I'd bet on that happening."

And just where do you think the Pope does defecate?

 
At 12/31/2011 1:38 AM, Blogger W.C. Varones said...

Sprewell,

Indeed! Canada would have been a great model for Obama to follow.

Unfortunately, he didn't, and we've now blown way past Canada's debt levels.

And the new Tea Party Congress is a fraud -- they are spending at a faster rate than even Obama/Reid/Pelosi did in 2009-10 with the huge Porkulus bill!

We are still running deficits in the high single digit percent range of GDP -- exactly the opposite of what Canada did at this stage.

When you're running 7%+ deficits in a developed economy with an aging population, you're not going to get out of 100% debt/GDP without inflation or default.

Unless you invent cold fusion.

 
At 12/31/2011 5:56 AM, Blogger PeakTrader said...

Krugman also stated on March 28, 2011 (Billion Price Preview):

"Funny how all the people screaming about runaway inflation after a few months of rising commodity prices didn’t scream about runaway deflation when those prices were falling."

 
At 12/31/2011 6:04 AM, Blogger PeakTrader said...

And there's deflation for seniors too:

Drug prices will fall sharply as patents expire
July 25, 2011

"The cost of prescription medicines used by millions of people is about to plummet.

The next 14 months will bring generic versions of seven of the world’s 20 best-selling drugs, including the top two: cholesterol fighter Lipitor and blood thinner Plavix.

The magnitude of this wave of expiring drug patents is unprecedented.

Generic competition will decimate sales of the brand-name drugs and slash the cost to patients and companies that provide health benefits.

The new generics will slice copayments of those with insurance. For the uninsured, who have been paying full price, the savings will be much bigger."

 
At 12/31/2011 6:16 AM, Blogger PeakTrader said...

Blockbuster-drug prices to drop as patents expire
July 25, 2011
LA Times

"In the next two years, six of the 10 top-selling drugs will lose their patents, meaning other companies can make the medications and sell them at a huge discount, perhaps up to 80% off."

 
At 12/31/2011 6:34 AM, Blogger PeakTrader said...

A lot of people oversimplify a large, diversified, and dynamic macroeconomy.

Even economists can't figure out the economy :)

 
At 12/31/2011 7:11 AM, Blogger PeakTrader said...

However, there are similarities between the current expansion and the expansion from 1933-37.

The current expansion is still on life support from higher spending and lower taxes from government.

And I doubt there will be enough pent-up demand to generate a self-sustaining recovery anytime soon.

Given both fiscal and monetary policies are constrained (by budget deficits and inflation), there may be a double-dip in 2012 or 2013, much like the Roosevelt recession in 1937-38 (particularly, with a weak E.U.).

 
At 12/31/2011 9:19 AM, Blogger W.C. Varones said...

Peak Trader 7:11,

Agreed.

But what do you think the monetary response to that situation would be?

The U.S. wouldn't be able to service its debt in a deflationary depression.

The political path of least resistance is more monetization.

Full-blown Zimbabwe-style monetization may not cause CPI inflation for a while in a depression, but I think it's obvious what the eventual outcome is.

 
At 12/31/2011 9:51 AM, Blogger Zachriel said...

W.C. Varones: Indeed! Canada would have been a great model for Obama to follow. "Between 1995 and 1998, a $36.6 billion deficit turned into a $3 billion surplus."

Actually, the U.S. did cut spending and increase taxes during the same period. It was under President Clinton. "Between 1995 and 2000, a $164 billion deficit turned into a $236 billion surplus."

Keynesian policy is to reduce debt during robust expansions. This tempers the expansion while setting aside money to help during the next economic downturn.

Something happened in 2001 that caused the U.S. to change course.

 
At 12/31/2011 10:45 AM, Blogger juandos said...

"We paid down the debt for decades, and had moderate inflation"...

Baloney!

 
At 12/31/2011 12:03 PM, Blogger VangelV said...

Actually, the U.S. did cut spending and increase taxes during the same period. It was under President Clinton. "Between 1995 and 2000, a $164 billion deficit turned into a $236 billion surplus."

Actually, spending went up. So did the debt. Clinton did benefit from a bubble in capital gains taxes, thank Greenspan for that, but he did not have a real surplus. No president has run a surplus since Ike had a tiny one in his last year in office. The surplus was an illusion that was based on ignoring the accrual of liabilities.

Keynesian policy is to reduce debt during robust expansions. This tempers the expansion while setting aside money to help during the next economic downturn.

No, it isn't. The Keynesians are always looking to 'stimulate' economic activity because all they care about is reelection.

Something happened in 2001 that caused the U.S. to change course.

When the NASDAQ bubble burst in 2000 the two parties panicked and got Fannie and Freddie to lend out as much as they could to create a housing bubble. By 2003 the two parties had supported two foreign wars which ensured that spending would explode. US debt now stands at more than 100% of GDP and few from either party have the courage to propose spending cuts that would allow a sustainable recovery to finally take place.

 
At 12/31/2011 12:08 PM, Blogger Zachriel said...

VangelV: The surplus was an illusion that was based on ignoring the accrual of liabilities.

Redefining terminology doesn't make an argument. A government surplus is defined as taking in more money than is spending, the same definition used when you said that Canada was running a small surplus. The U.S. had structural surpluses in 2000.

Zachriel: Keynesian policy is to reduce debt during robust expansions. This tempers the expansion while setting aside money to help during the next economic downturn.

VangelV: No, it isn't.

Again, redefining terminology doesn't make an argument. Keynesianism is countercyclical.

 
At 12/31/2011 12:09 PM, Blogger PeakTrader said...

W.C. Varones, the Fed has a dual mandate, price stability and maximum employment (not the same as full employment).

Without price stability, inflation and inflation expectations will feed on each other to accelerate inflation.

The result will be stagflation initially, when inflation is accelerating, and then a severe recession, to slow the inflation rate.

"The monetary response" is about spent. Fiscal policy needs to deregulate, cut spending, and cut taxes to spur real economic growth.

 
At 12/31/2011 12:17 PM, Blogger VangelV said...

Redefining terminology doesn't make an argument. A government surplus is defined as taking in more money than is spending, the same definition used when you said that Canada was running a small surplus. The U.S. had structural surpluses in 2000.

If you use cash accounting then yes, there was a very small surplus. But if you expect that SS contributions will have to be paid back there wasn't one.

Again, redefining terminology doesn't make an argument. Keynesianism is countercyclical.

It isn't. When was the last time you heard a Keynesian call for cuts in spending during good times? Let us note here that Keynes was very confused when he wrote the General Theory. None of the arguments in the book that are his are defensible. They had to be saved by Keynes' followers, who did their best but could not change reality given the starting point for their theory. Keynesian theory is not valid economically. It only survives because it is useful politically.

 
At 12/31/2011 12:17 PM, Blogger Michaeljc70 said...

BPP doesn't include food and energy which is where the inflation is and it doesn't account for the gimmicks that the BLS uses like adjusting for products getting better over time.

 
At 12/31/2011 12:28 PM, Blogger Mark J. Perry said...

Michaeljc70: The BPP DOES include food, see details here:

http://bpp.mit.edu/mit-sloan-professors/

 
At 12/31/2011 12:41 PM, Blogger Zachriel said...

VangelV: Clinton did benefit from a bubble in capital gains taxes ...

As was pointed out to you previously, capital gains only accounted for a small portion of the surplus.

VangelV: If you use cash accounting then yes, there was a very small surplus.

The surpluses were sufficient to pay off the entire public debt within a few years. This became a concern to some economists, as trade in U.S. securities underlies the global financial system.

VangelV: The Keynesians are always looking to 'stimulate' economic activity because all they care about is reelection.

Keynesianism is an economic theory, not a political position. Keynesianism rejects deficit spending during an economic expansion because increased government borrowing puts pressure on interest rates, government spending competes within the markets for commodities, it overheats the economy leading to market bubbles, as we saw during the early 2000s, and leaves the economy indebted and overextended when the inevitable bust comes.

VangelV: Keynesian theory is not valid economically. It only survives because it is useful politically.

Keynes is very influential in economics, and most economists recognize his contribution.

 
At 12/31/2011 2:31 PM, Blogger W.C. Varones said...

Jesse has it about right:

The Federal Reserve is expanding its power as a monetary authority and regulator of the financial system in an extra-Constitutional manner. The Fed is determined to fight the deflationary forces of global trade and credit contraction by expanding its balance sheet. They have little fear of inflation. Hyperinflation is highly unlikely in the absence of an exogenous shock. Stagflation is the new normal disguised somewhat by government statistics.

 
At 12/31/2011 4:28 PM, Blogger PeakTrader said...

W.C. Varones, and the article continues:

"...The Fed will start a new program of 'nominal GDP targeting' without stated limits in size of activity."

My comment:

Targeting nominal GDP assumes the Fed hasn't done enough, even after lowering the Fed Funds Rate to zero and two rounds of quantitative easing.

I think, targeting nominal GDP growth will lead to more inflation and higher interest rates, along with instability and uncertainty.

It's amazing some people want to fix what works, i.e. monetary policy, and ignore what's broken, i.e. fiscal policy.

 
At 12/31/2011 7:19 PM, Blogger VangelV said...

"The Federal Reserve is expanding its power as a monetary authority and regulator of the financial system in an extra-Constitutional manner. The Fed is determined to fight the deflationary forces of global trade and credit contraction by expanding its balance sheet. They have little fear of inflation. Hyperinflation is highly unlikely in the absence of an exogenous shock. Stagflation is the new normal disguised somewhat by government statistics."

I think that Arthur has a good argument. The Fed will keep inflating the money supply because it is worried about debt deflation. This is why the ownership of precious metals makes a lot of sense.

 
At 1/01/2012 2:44 AM, Blogger Ron H. said...

Z:

"paste"

"Actually, the U.S. did cut spending and increase taxes during the same period. It was under President Clinton. "Between 1995 and 2000, a $164 billion deficit turned into a $236 billion surplus."

"paste"

"Actually, the U.S. did cut spending and increase taxes during the same period. It was under President Clinton. "Between 1995 and 2000, a $164 billion deficit turned into a $236 billion surplus.""

Repeating this over and over doesn't make it any truer.

 
At 1/01/2012 9:03 AM, Blogger Zachriel said...

Ron H: "paste"

Nothing was pasted. Rather, we transformed "Between 1995 and 1998, a $36.6 billion deficit turned into a $3 billion surplus."

Ron H: Repeating this over and over doesn't make it any truer.

http://www.foxnews.com/story/0,2933,32582,00.html

http://www.cbo.gov/budget/data/historical.pdf

http://www.4president.org/issues/bush2000/bush2000budget.htm

 
At 1/01/2012 9:31 AM, Blogger juandos said...

"Keynesian policy is to reduce debt during robust expansions"...

No, Keynesian policy is to spend someone else's money to finance stupid ideas...

World's greatest example is F.D.R. who's actions made Bernie Madoff look like a mere amateur....

"The U.S. had structural surpluses in 2000"...

Yeah zach and Clinton didn't stain a blue dress either...

BTW learn how to embed your links since what you put there doesn't work...

Or consider using Tiny URL...

The Myth of the Clinton Surplus

 
At 1/01/2012 10:13 AM, Blogger Zachriel said...

juandos: World's greatest example is F.D.R. who's actions made Bernie Madoff look like a mere amateur....

FDR, though influenced by Keynes, was not a Keynesian. He raised taxes during the Depression, and tried to balance to budget in 1936 while the economy was still in recovery, leading to a deep recession. What the Depression did show, in particular, the retraction in 1937, and the huge stimulus of WWII, was that Keynes was largely correct concerning the market cycle. The recent global bubble and financial meltdown were a direct consequence of ignoring these fundamental principles.

Nearly all modern economics is influenced by Keynes's original theories, though methods and understanding have advanced considerably since his day.

juandos: BTW learn how to embed your links since what you put there doesn't work...

Try to cut and paste the URL into your browser.

juandos: The Myth of the Clinton Surplus

That's funny. We cited the CBO, a contemporary news source, and George Bush. You cite a software developer. Here are a few more citations:

"Meanwhile, we have lurched from a budget surplus in 2000 to a deficit that is projected by the Congressional Budget Office to be 4-1/4 percent of GDP this year." — Alan Greenspan, Chairman of the Federal Reserve

"How do the prevailing surplus and, especially, decisions about the allocation of future potential surpluses affect the formulation and conduct of monetary policy?" — Laurence H. Meyer, Governor of the Federal Reserve

"Today, budget surpluses abound." — The Economist

We'd be happy to provide additional citations upon request.

That's not to say that your software developer couldn't be right, and all the economists wrong about a fundamental of economics. It's possible (though highly unlikely). However, what the software developer does is simply redefine the normal meaning a federal budget surplus to argue that there isn't a surplus. Redefining terminology is not an argument, however.

However, if we want to include only on-budget, then "Between 1995 and 2000, a $226 billion deficit turned into a $86 billion surplus," while public debt dropped from $3604 billion to $3409 billion. If you want to exclude all trust funds, then the Clinton Administration took a budget with large deficits and essentially brought it into balance.

Paying down the public debt would have tempered the runup during the bubble economy, and it would have left the U.S. with much greater resources for responding to a financial crisis.

 
At 1/01/2012 11:37 AM, Blogger juandos said...

This comment has been removed by the author.

 
At 1/01/2012 12:17 PM, Blogger juandos said...

"That's funny. We cited the CBO, a contemporary news source, and George Bush. You cite a software developer. Here are a few more citations"...

Funny zach cites politicians and I site a software engineer that knows how to use links and read a treasury statement....

Good one!

BTW let me congradulate you on those mental gymnastics you went through to prove that you didn't understand a word of Lawrence W. Reed's debunking of the myths...

"Some defenders of FDR, such as economist Paul Krugman, blame the 1937-38 collapse on a reduction in government spending. In typical Keynesian fashion, they claim that the economy tanked that year because the president, after nearly doubling federal spending in his first term, caved to GOP demands to rein in expenditures. But in real terms, the reduction was puny — less than 1 percent of GDP"...

BTW consider this information when trying foist Clinton's record for what it's not: MONTHLY STATEMENT OF TREASURY SECURITIES OF THE UNITED STATES JANUARY 31, 2001

(ftp://ftp.publicdebt.treas.gov/opd/opdm012001.pdf)

 
At 1/01/2012 1:04 PM, Blogger KPres said...

"Again, redefining terminology doesn't make an argument. Keynesianism is countercyclical."

Stimulus isn't effective if it's truly applied in a countercyclical way, because people will realize that the deficits now will be paid back in a few short years, and increase their savings to compensate.

The only way stimulus can be effective is if it's inflated away, because inflation discourges those very same savings.

 
At 1/01/2012 2:48 PM, Blogger Ron H. said...

Z:

"http://www.foxnews.com/story/0,2933,32582,00.html

http://www.cbo.gov/budget/data/historical.pdf

http://www.4president.org/issues/bush2000/bush2000budget.htm
"
____________

http://finance.townhall.com/columnists/craigsteiner/2011/08/22/the_clinton_surplus_myth/page/full/

http://wiki.answers.com/Q/How_much_surplus_did_the_US_have_when_Clinton_left_office

http://www.youtube.com/watch?v=NGZEj6zjwas&feature=related

http://biggovernment.com/jdunetz/2011/10/03/time-for-some-truth-bill-clinton-never-balanced-a-budget-and-never-ran-a-surplus/

http://www.politifact.com/truth-o-meter/statements/2010/sep/23/bill-clinton/bill-clinton-says-his-administration-paid-down-deb/

http://newsbusters.org/blogs/noel-sheppard/2010/09/19/clinton-falsely-claims-he-lowered-national-debt-gregory-doesnt-challenge-him

 
At 1/01/2012 2:58 PM, Blogger Ron H. said...

Z: "That's funny. We cited the CBO, a contemporary news source, and George Bush. You cite a software developer. Here are a few more citations:"

I welcome disagreement but I find it intellectually lazy for people to say "it's just a blog" or "he's not an economist" as an excuse to ignore the possible validity of the content.

 
At 1/01/2012 3:02 PM, Blogger PeakTrader said...

KPres says: "Stimulus isn't effective if it's truly applied in a countercyclical way, because people will realize that the deficits now will be paid back in a few short years, and increase their savings to compensate...The only way stimulus can be effective is if it's inflated away, because inflation discourges those very same savings."

Keynesian economics is used to smooth-out business cycles. So, income, consumption, and saving would be higher than they'd otherwise be (since sustainable growth is optimal growth).

If people believe prices will be higher in the next period, they'll stock-up in the current period; and in the next period, if they believe prices will rise even more, they'll buy even more.

However, at some point prices won't rise or they'll fall and consumers will compensate for the overconsumption by underconsuming. Then what?

And, you're not going to get rid of a deficit or a debt by tying it to a balloon and sending it away (e.g. to another dimension, perhaps where your socks go after you wash them).

 
At 1/01/2012 3:55 PM, Blogger Ron H. said...

"That's funny. We cited the CBO, a contemporary news source, and George Bush. You cite a software developer. Here are a few more citations:"

CBO - political tool of the US Congress. Similar in nature to the OMB used by the President to support his points.

George Bush - You're kidding, right?

Associated Press - authoritative economic source?

Alan Greenspan - 1. political appointee, 2. economist

Laurence H. Meyer - 1. political appointee, 2. economist

The Economist - another news source - this one without credit or citations.

Z: "We'd be happy to provide additional citations upon request. "

Yes, please do, this is fun, even if pointless.

At least you refrained from citing any software developers, although anyone can use the handy tool provided by the US Treasury, as Mr. Steiner did to show that there was naver an actual surplus, unless one engages in "redefining terminology".


Z: "Redefining terminology doesn't make an argument. A government surplus is defined as taking in more money than is spending, the same definition used when you said that Canada was running a small surplus. The U.S. had structural surpluses in 2000."

If borrowing from other sources is allowed in that definition of surplus to make up shortfalls in tax revenue, then the budget has been either balanced or in surplus every year.

 
At 1/01/2012 5:22 PM, Blogger VangelV said...

FDR, though influenced by Keynes, was not a Keynesian. He raised taxes during the Depression, and tried to balance to budget in 1936 while the economy was still in recovery, leading to a deep recession. What the Depression did show, in particular, the retraction in 1937, and the huge stimulus of WWII, was that Keynes was largely correct concerning the market cycle. The recent global bubble and financial meltdown were a direct consequence of ignoring these fundamental principles.

There was no real recovery in 1936. While there was a bounce off the bottom the recovery was no more real than Japan's in the late 1990s. You can't 'fix' the economy by preventing the market from doing its job.

Nearly all modern economics is influenced by Keynes's original theories, though methods and understanding have advanced considerably since his day.

While anything is better than Keynes' muddled thinking in The General Theory the Keynesians did not advance anything. They started with a bad foundation and built a theory that excused big government. While that makes sense if you are a rent seeker looking for a government position it is not good for the individuals who have to support a growing population of parasites who limit their freedom.

That's funny. We cited the CBO, a contemporary news source, and George Bush. You cite a software developer. Here are a few more citations:...

You cite people who base their statements on cash based accounting principles. That means that excess contributions are counted as revenue but the accrued liabilities are ignored. This means that your statements are valid IF the government chooses to default on its liabilities. Is that your argument?

 
At 1/01/2012 9:00 PM, Blogger PeakTrader said...

VangelV says: "While anything is better than Keynes' muddled thinking in The General Theory the Keynesians did not advance anything."

I wouldn't say Keynes thinking was "muddled" and his 1936 book certainly advanced economics:

"Keynes concluded that classical economics rested on a fundamental error.

It assumed, mistakenly, that the balance between supply and demand would ensure full employment.

On the contrary, in Keynes's view, the economy was chronically unstable and subject to fluctuations, and supply and demand could well balance out at an equilibrium that did not deliver full employment.

The reasons were inadequate investment and over-saving, both rooted in the psychology of uncertainty."

******

I think people forget that the 19th century economic booms and busts, or feasts and famines (like the Irish Potato Famine), were brutal:

The Long Depression of the 1870s

"For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.

In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

With laissez-faire ideas dominant and the political system in stasis, economic decline persisted."

 
At 1/01/2012 9:30 PM, Blogger juandos said...

"I wouldn't say Keynes thinking was "muddled" and his 1936 book certainly advanced economic..."...

What Keynes' book advanced is what we're seeing in action today PT...

I can imagine if Keynesian theory is applied on rather microscopic level it might have some upsides...

Keynesian flaws

Consider the lesson Michael Barrone tries to impart regarding F.D.R....

 
At 1/01/2012 10:09 PM, Blogger Zachriel said...

juandos: Funny zach{riel} cites politicians and I site a software engineer that knows how to use links and read a treasury statement...

Actually, we cited just one politician, but also the CBO (comprised of economists mandated to provide non-partisan economic anaylsis), a contemporary news source, a non-U.S. magazine on finance, and two members of the Federal Reserve.

juandos: BTW consider this information when trying foist Clinton's record for what it's not: MONTHLY STATEMENT OF TREASURY SECURITIES OF THE UNITED STATES JANUARY 31, 2001

Yes, according to the Treasury reports, debt held by the public decreased from $3.7 trillion in 1999 to $3.4 trillion in 2000. Here's a more concise view:
ftp://ftp.publicdebt.treas.gov/opd/opdds2001n2.pdf

KPres: Stimulus isn't effective if it's truly applied in a countercyclical way, because people will realize that the deficits now will be paid back in a few short years, and increase their savings to compensate.

Depends on how the stimulus is created. If you give tax breaks to the rich, then the multiplier will be small, probably less than one. If you directly create jobs, then the multiplier can be significant. (This assumes slack in the labor market.)

Ron H (quoting a software developer): "I welcome disagreement but I find it intellectually lazy for people to say "it's just a blog" or "he's not an economist" as an excuse to ignore the possible validity of the content."

An appeal to authority is valid in this instance, yet we still responded to the substance. All the software developer did was redefine how most people, including economists, mean when using the term surplus.

The Clinton Administration left structural surpluses in the unified budget, and essentially balanced on-budget. If that course had been sustained, the debt held by the public was on course to be paid off completely. This would have left the U.S. much stronger economically.

VangelV: There was no real recovery in 1936.

The U.S. economy was still struggling to make up for losses sustained during the 1929-1932 collapse, but was growing at about 11% per year from 1934 to 1936. In 1936, the U.S. finally exceeding the inflated GDP of 1929.

VangelV: This means that your statements are valid IF the government chooses to default on its liabilities. Is that your argument?

Quite the opposite. First, we are using the terms as they are normally used. The Clinton Administration left the U.S. with structural surpluses of the unified budget, and those surpluses would have tempered the expansion, left the U.S. with the resources in the event of a recession, but would have also helped it deal with the longer term problem of entitlements. In other words, running unified budget surpluses was an important component of the U.S. meeting its liabilities.

 
At 1/01/2012 10:17 PM, Blogger PeakTrader said...

Juandos, there's a lot of misinformation about Keynesian economics, as your first link shows.

For example, Keynes proved mathematically that a liquidity trap can take place, which was also proven empirically by Japan a half century later.

However, Keynesian economics has been hijacked by the NeoKeynesians and some politicians to promote big government.

 
At 1/01/2012 10:44 PM, Blogger juandos said...

"Juandos, there's a lot of misinformation about Keynesian economics, as your first link shows"...

PT my example shows real life, not some back of the envelope equations and calculations that only work in the best of all possible worlds...

The 'liquidity trap' can't happen without government interference which you noted...

 
At 1/01/2012 10:45 PM, Blogger PeakTrader said...

Keynesian economics:

"As a corollary (to deficit spending in recession), the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked."

 
At 1/01/2012 11:51 PM, Blogger Ron H. said...

Peak: "I wouldn't say Keynes thinking was "muddled" and his 1936 book certainly advanced economics:

"Keynes concluded that classical economics rested on a fundamental error.
"

Keynes was wrong.

 
At 1/02/2012 12:45 AM, Blogger Ron H. said...

"All the software developer did was redefine how most people, including economists, mean when using the term surplus."

All the software developer did was create a table using a tool provided by the US Treasury, to show total outstanding debt, using terms also used by the US Treasure, and well understood by everyone, except perhaps you.

Debt shifting is not debt reduction.

To insist on the use of cash accounting, while ignoring off budget liabilities is either dishonest of shows an incredible lack of economic understanding. You can chose which you feel best describes you.

"The Clinton Administration left structural surpluses in the unified budget, and essentially balanced on-budget. If that course had been sustained, the debt held by the public was on course to be paid off completely. This would have left the U.S. much stronger economically. "

The Clinton Administration projected future surpluses based on unreasonable assumptions that the overheated bubble economy of the late 1990s would continue. Too bad about that unfortunate timing.

 
At 1/02/2012 12:51 AM, Blogger VangelV said...

I wouldn't say Keynes thinking was "muddled" and his 1936 book certainly advanced economics:...

Actually, the book was crap. As one critic noted, everything that Keynes got right was not original while everything that was original was wrong. There is a great book by Henry Hazlitt which refutes every paragraph in the book. You might want to read it so you don't embarrass yourself by writing things that you are clearly ignorant of.

The Failure of New Economics

 
At 1/02/2012 1:11 AM, Blogger Ron H. said...

Peak: "For example, Keynes proved mathematically that a liquidity trap can take place, which was also proven empirically by Japan a half century later."

Mathematically? Well, it must be true then.

 
At 1/02/2012 1:46 AM, Blogger PeakTrader said...

Ron and VangelV, here's the first "refutation" I checked by Hazlitt (who is wrong).

Keynes:

An act of individual saving means—so to speak—a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing today's dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption demand for present consumption demand,—it is a net diminution of such demand.

Hazlitt response:

The truth is that an act of individual saving means, for the overwhelming majority of savers, merely a decision not to have two dinners today. It is much more sensible all around to put aside enough to make sure that one also has a dinner tomorrow . . . On the basis of Keynes's own formal definitions of saving and investment earlier in the General Theory, according to which "they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing" (p. 74), this whole passage is nonsensical and self-contradictory. We can make sense of it only if we re-define saving merely as non-spending of money. . . . But in the modern economic-world, an act of saving, if it is not followed within a month or so by an equivalent spending, is almost invariably accompanied or followed by an act of investment. This is merely a way of saying that people in a modern economic community do not simply hoard money in a sock or under the mattress. Even if they merely deposit it in a checking account, the great bulk of it is immediately loaned out by the bank. If they deposit it in a savings account the whole of it is invested for them.

My comment: Hazlitt assumes that U.S. corporations saving or hoarding $2 trillion in cash and U.S. banks being very cautious in lending (even with accommodative monetary policy) is normal.

Hazlitt also doesn't understand that although saving = investment, the type of saving and investment aren't always the same.

 
At 1/02/2012 7:02 AM, Blogger Larry G said...

the idea that "saved" money is money temporarily not spent but inevitably spent is where the anti-Keynesians' get into trouble.

for instance. rather than buying dinner - either now or next week - that money goes into a 401K not to be spent - for decades.

but that money does not disappear forever into a black hole - it get's loaned out and used.

and if the economy is on it's butt and the demand for the money is reduced or non-existent - the govt will buy it.... they'll sell you as many treasury notes as you wish.

and what will the govt do with that money?

they'll spend it.

they'll spend it on "stimulus" which includes DOD/Iraq/Afghanistan

they'll spend it on unemployment and food stamps.

Soldiers and their families get paid in real money and they spend it on real things like food, gasoline, rent, etc.

that money then goes into corporate coffers..and pays employees and corporate investors.

There is long term debt consequences, no question but what happens if the govt would not sell treasury notes to pay for our wars overseas, etc.

where would that money in savings go? would it just sit there in a bank and not be used at all...essentially in a virtual mattress?

Now don't mistake my questions for the economic ideologues to recommend more reading of more wackos and software developers.

the simple question.

where does saved money go if there is no demand for it for investment?

 
At 1/02/2012 9:01 AM, Blogger juandos said...

"the idea that "saved" money is money temporarily not spent but inevitably spent is where the anti-Keynesians' get into trouble"...

What?!?!

larry g you do realize that money put into a 401K or IRA, or even a typical savings deposit is spent at least in part and temporarily, right?

If your definition of 'saved' is to take the cash and hide in a mattress or something similer (I've yet to hear an anti-Keynesian make that argument) then that's really 'saved' money...

"they'll spend it on "stimulus" which includes DOD/Iraq/Afghanistan"...

ROFLMAO! Oh dear! A pseudo benny type statement...

"where does saved money go if there is no demand for it for investment?"...

Hmmm, obviously you need to watch a few of these video clips to give you a better grip on reality...

 
At 1/02/2012 9:14 AM, Blogger Larry G said...

Juando.. thanks for that video.. it was a "riot"!

;-)

when money is put into long term investments ... tell me how some of it get's spent immediately beyond "fees"?

if we hear that the economy is "stalled" and that corporations are sitting on huge piles of money ... "afraid" to invest because of the "uncertainties".. are they holding that money in a corporate mattress?

don't you think if there was strong demand for... food, cars, homes, etc that no matter what the rules and regs were that manufacturers would strive to "harvest" that demand?

I don't see Apple complaining about govt regs and import rules on their Iphones, eh?

I mean do we hear them saying that they'd sell even more IPADS if it were not for the govt's "onerous" regs and import restrictions?

Kindle Fires ? yessir.. just the other day the Amazon folks were talking about how they're going to wait to sell the Kindle Fire until we get a new President and all those nasty anti-job regs and policies and uncertainties go away...

;-)

 
At 1/02/2012 9:29 AM, Blogger VangelV said...

I think people forget that the 19th century economic booms and busts, or feasts and famines (like the Irish Potato Famine), were brutal:...

The Potato Famine had nothing to do with free market capitalism. The English owned most of the agricultural land. Those landowners hired local farmers to manage their holdings. The managers rented out small plots in exchange for labour and cash. The high rents caused most Irish families to remain very poor and drained the local economy of capital.

The problem with the arrangements is that the Irish tenants had no right to capital improvements in the land that they were renting. That meant that they had to use the land for the growing of potatoes, which were a big component of the Irish diet. (A diet of potatoes and buttermilk had all of the proteins required to keep a person alive.)

Added to the problem were the British Corn Laws, which protected English farmers from foreign competition. These laws further limited the options for Irish farmers. All of these non-market factors made the Irish very vulnerable to the potato blight, which did not have the same devastating effect in the rest of Europe.

 
At 1/02/2012 9:29 AM, Blogger VangelV said...

The Long Depression of the 1870s

"For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt: By 1876, half of the nation’s railroads had declared bankruptcy, almost half of the country’s iron furnaces were shut and coal production collapsed. Until the 1930s, it would be known as the Great Depression.


LOL... The 1870s, "saw possibly the fastest sustained growth in American history." Since when is that a depression?

I think that like the typical Keynesian you are confusing price declines for a depression. When nominal prices are falling it does not mean that you are in a depression because we expect prices to fall when there is a huge increase in productivity. If you look at the actual data you will find that the 1970s were a period when employment and consumption were growing.

I suggest that you look beyond Krugman's false history and study the facts. In Rothbard's great book, History of Money and Banking in the United States, we read:

"Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction. It should be clear, then, that the "great depression" of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era.

Got the last part. Falling prices do not a depression make. And depressions are not periods during which you have very rapid growth and an increase in prosperity.

 
At 1/02/2012 9:35 AM, Blogger VangelV said...

In the face of economic calamity and skyrocketing unemployment, the government did, well, nothing. No federal unemployment insurance eased families’ suffering and kept a floor on demand. No central bank existed to fight deflation. Large-scale government stimulus was a thing of the distant future.

You are talking about a time when employment was growing, where real national product grew at 6.8% and productivity was rising at 4.5% per year. (Same source as above.) Why should the government do anything? It would just get in the way.

I suggest that you go beyond Krugman's false interpretation and look at the actual data. When there is a building boom that creates factories, oil refineries, and new housing units, employment is growing, and prices are falling thanks to productivity increases you are seeing a period of growth in the standard of living, not a depression.

 
At 1/02/2012 9:42 AM, Blogger juandos said...

"Juando.. thanks for that video.. it was a "riot"!"...

larry g there wasn't merely a single video there but over a dozen of them so obviously the riot took place in your head...

"when money is put into long term investments ... tell me how some of it get's spent immediately beyond "fees"?"...

Its called 'lending' which is supposed to be paid back with a certain % tacked on so that both the person with the account and the lending institution make some money...

"if we hear that the economy is "stalled" and that corporations are sitting on huge piles of money ... "afraid" to invest because of the "uncertainties""...

"I don't see Apple complaining about govt regs and import rules on their Iphones, eh?"...

How do you know?

Do you ever bother to check out that what you are supposedly hearing is indeed factual?

"don't you think if there was strong demand for... food, cars, homes, etc that no matter what the rules and regs were that manufacturers would strive to "harvest" that demand?"...

Strong demand? Strong enough to overcome excessive government taxation and regulation?

Can you say E.P.A.?

That's just one example... I'm sure that with a little looking around you could find many dozens more examples of the restraints of trade as practiced by our various govenments...

Let me give you one more example but on a state level...

Can you say Califoria?

From the magazine Chief Executive: Best/Worst States for Business
May 3 2011 by JP Donlon

"But there has been some jockeying within the ranks. The Golden State was closely followed in the hall of shame by New York, Illinois, New Jersey and Michigan, with Illinois elbowing its way past New Jersey this year for the dubious distinction of third worst"...

 
At 1/02/2012 10:09 AM, Blogger VangelV said...

The U.S. economy was still struggling to make up for losses sustained during the 1929-1932 collapse, but was growing at about 11% per year from 1934 to 1936. In 1936, the U.S. finally exceeding the inflated GDP of 1929.

Actually, inflation adjusted output in the US in 1936 was below 1929. And given the massive government spending by Hoover and FDR one would have expected some temporary recovery from the initial contraction. We have seen this many times with Japan being the latest example.

I suggest that your confusion comes from not understanding the facts. It might help you to actually do some research about the 1930s instead of relying on the court historians and the official mythology. References to real data might be helpful.

Depression, War, and Cold War: Challenging the Myths of Conflict and Prosperity

The Politically Incorrect Guide to the Great Depression and the New Deal

 
At 1/02/2012 10:31 AM, Blogger VangelV said...

Quite the opposite. First, we are using the terms as they are normally used.

Not exactly. You can use terms that are based on cash based accounting only if you mean to imply that the accrued liabilities are not important. But I would say that the promises made to SS and Medicare contributors, and to federal employees who expect their contributions to fund their pensions do matter. No rational person can count those contributions as income while ignoring the fact that they are supposed to pay future benefits and claim a surplus. Certainly no company would ever be allowed to say that its pension contributions are not offset by a future liability and should only be counted as an asset.

The Clinton Administration left the U.S. with structural surpluses of the unified budget, and those surpluses would have tempered the expansion, left the U.S. with the resources in the event of a recession, but would have also helped it deal with the longer term problem of entitlements.

It did not. It counted surplus contributions as revenues without mentioning the accrued liabilities. This is fine accounting if you are a trapper in the woods but not if you are a business or a government because it does not reflect reality. The only way that we can claim a real surplus is if we say that the contributions have not generated a liability in the form of future SS, Medicare, or pension payments. That would mean writing down the IOUs to their intrinsic value of zero and to tell SS and Medicare beneficiaries that they are on their own. But I do not believe that Clinton is ready to do that yet. Now that the contributions are less than payments Obama is not in a position to play the game that Clinton and Bush were happy to take part in.

In other words, running unified budget surpluses was an important component of the U.S. meeting its liabilities.

But the liabilities were not counted dumdum. The federal pension as well as the SS and Medicare contributions counted as revenues but were not offset as liabilities. That type of stunt would put businessmen in jail but is perfectly normal for politicians because they have redefined the meaning of the words. If the US government were a business and Clinton were its CEO, his actions would have put him in jail and the accountants would not have approved any statement that claimed a surplus.

 
At 1/02/2012 10:34 AM, Blogger VangelV said...

To insist on the use of cash accounting, while ignoring off budget liabilities is either dishonest of shows an incredible lack of economic understanding. You can chose which you feel best describes you.

I am sorry but it has to be both. Our friend is clearly dishonest but in this case I am certain that he was ignorant of the accounting and the methodology involved.

The Clinton Administration projected future surpluses based on unreasonable assumptions that the overheated bubble economy of the late 1990s would continue. Too bad about that unfortunate timing.

For true believers no assumption that supports his side of the story is unreasonable.

 
At 1/02/2012 10:39 AM, Blogger VangelV said...

My comment: Hazlitt assumes that U.S. corporations saving or hoarding $2 trillion in cash and U.S. banks being very cautious in lending (even with accommodative monetary policy) is normal.

Hazlitt also doesn't understand that although saving = investment, the type of saving and investment aren't always the same.


This only shows that you have not read enough of Hazlitt to understand him.

 
At 1/02/2012 10:48 AM, Blogger Zachriel said...

PeakTrader: "As a corollary (to deficit spending in recession), the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked."

Quite so, though the Clinton Administration did make progress on that front.

Ron H: The Clinton Administration projected future surpluses based on unreasonable assumptions that the overheated bubble economy of the late 1990s would continue.

That is incorrect. CBO projected a ~2.3% real GDP growth from 2000-2008, not unrealistic, and less than the actual value.

 
At 1/02/2012 11:06 AM, Blogger Zachriel said...

VangelV: Actually, inflation adjusted output in the US in 1936 was below 1929.

BEA Real Gross Domestic Product
1929, 865.2
1936, 866.6

VangelV: You can use terms that are based on cash based accounting only if you mean to imply that the accrued liabilities are not important.

Sorry, but that's not what the terminology means. We used the terms as they are normally used by economists, as we showed above.

It is more than appropriate to point out that the usual meaning of "surplus" is based on the unified budget, and that if we exclude the trust funds, then the U.S. still had work to do on the budget. It's not appropriate to continue to conflate the terminology to make a partisan political point.

Regardless of the terminology, the U.S. was much better off with the unified budget surpluses, and the on-budget in balance, than what followed afterwards.

VangelV: But the liabilities were not counted ...

Of course they are. We cited government sources on those liabilities several times.

VangelV: Our friend is clearly dishonest but in this case I am certain that he was ignorant of the accounting and the methodology involved.

We stated the facts, both ways, several times. The unified budget was in surplus. On-budget was near balance.

 
At 1/02/2012 2:02 PM, Blogger VangelV said...

VangelV: Actually, inflation adjusted output in the US in 1936 was below 1929.

BEA Real Gross Domestic Product
1929, 865.2
1936, 866.6


We are talking about two different things. I brought up the point that was used by Krugman and other Keynesians when they attacked the gold standard. They created the chart showing inflation adjusted output and I used it. You are using a broader figure that includes a great deal of wasteful government spending on things like payments to farmers not to grow crops, enforcement agencies that make sure that barbers do not charge too little for haircuts, make work programs, etc. Public spending that is the result of a currency devaluation or borrowing may cause a short term bump but that is not sustainable. As I said, see Japan as a perfect example of how stimulus fails to stimulate a real recovery.

Sorry, but that's not what the terminology means. We used the terms as they are normally used by economists, as we showed above.

No, that is not what the terminology means at all. Your economists are Keynesians who use the cash accounting scam to make claims that are not real when we account for the accrued liabilities.

It is more than appropriate to point out that the usual meaning of "surplus" is based on the unified budget, and that if we exclude the trust funds, then the U.S. still had work to do on the budget. It's not appropriate to continue to conflate the terminology to make a partisan political point.

True, you should stop using cash accounting to make a partisan political point. By the way, it is very appropriate to point out that Bush was just as guilty as Clinton of using similar tricks. That is why Paul O'Neill, who pointed out the accounting problems, was turfed out of his cabinet position.

Regardless of the terminology, the U.S. was much better off with the unified budget surpluses, and the on-budget in balance, than what followed afterwards.

It certainly was better off without Bush's useless wars. But that does not change the facts. Clinton never had a real surplus if we use GAAP accounting and have to count both the contributions and liabilities.

 
At 1/02/2012 2:25 PM, Blogger Zachriel said...

VangelV: We are talking about two different things.

We had said, "In 1936, the U.S. finally exceeding the inflated GDP of 1929." You disagreed. We provided a citation supporting our claim.

VangelV: They created the chart showing inflation adjusted output and I used it.

You pointed to a disembodied chart which wasn't even properly labeled.

VangelV: You are using a broader figure that includes a great deal of wasteful government spending on things like payments to farmers not to grow crops, enforcement agencies that make sure that barbers do not charge too little for haircuts, make work programs, etc.

GDP is the measure of the market value of all goods and services produced.

VangelV: Your economists are Keynesians who use the cash accounting scam to make claims that are not real when we account for the accrued liabilities.

Greenspan is not a Keynesian. The CBO provides non-partisan economic analysis.

VangelV: Clinton never had a real surplus if we use GAAP accounting and have to count both the contributions and liabilities.

The Clinton Administration set the U.S. on a course to pay off its publicly held debt, a very significant achievement that was countermanded in the following administration.

 
At 1/02/2012 2:32 PM, Blogger Larry G said...

is Cash accounting Keynesian?

Are there any countries in the world that use accrual method financing?

is this really just another anti-govt rant?

 
At 1/02/2012 3:10 PM, Blogger Zachriel said...

Larry G: is Cash accounting Keynesian?

Cash accounting predates Keynes. Accrual accounting is a more accurate system than cash accounting, though consistency is most important.

Larry G: Are there any countries in the world that use accrual method financing?

Australia, Canada, France (recently), U.K., U.S. to name a few. Governments worldwide have been moving slowly towards IPSAS standards.
http://www.ifac.org/sites/default/files/downloads/IPSASB_Adoption_Governments.pdf

 
At 1/02/2012 3:20 PM, Blogger Larry G said...

" National Public Sector Accounting Standards Similar to IPSASs
Governments that already apply full accrual accounting standards and apply accounting
standards that are broadly consistent with IPSAS requirements:
Australia
Canada
New Zealand
United Kingdom
United States of America"

is the premise here that unfunded liabilities are addressed by accrual accounting methods?

 
At 1/02/2012 3:48 PM, Blogger Zachriel said...

Larry G: is the premise here that unfunded liabilities are addressed by accrual accounting methods?

The U.S. not only provides accruals concerning its trust funds, but also long range projections of liabilities.

 
At 1/02/2012 3:58 PM, Blogger Larry G said...

correct. the estimate of unfunded liabilities come from the govt itself.

but the premise here is that they should be accounted for in the budget if we are using the accrual accounting method...

we do account for them in FICA/SS - every year the trust fund posts those numbers and every year the trust fund trustees call for changes to address those liabilities (as has been done numerous times in the past).

but on the non-FICA part of the budget ...why do we say that Medicare Part B has unfunded liabilities but not other parts of govt?

I'm not sure what that really means because the obvious way to deal with the shortfalls in Medicare Part B is to increase premiums/reduce benefits as opposed to higher tax subsidies.

why is it assumed that the ONLY way to deal with unfunded liabilities is a tax increase and therefor money put aside to pay for future unfunded liabilities?

 
At 1/02/2012 11:19 PM, Blogger VangelV said...

Cash accounting predates Keynes. Accrual accounting is a more accurate system than cash accounting, though consistency is most important.

If you collect contributions to pay future benefits you have to use accrual accounting. End of story. Congress chose not to because it allowed the politicians to postpone having to make hard decisions.

An interesting summary of the difference between cash and accrual-basis accounting and how they can make the same data lead to totally different pictures can be found here.

I will provide a brief excerpt below:

How can two such hugely different numbers one year's debt increase -- one 6.6 times larger than the other -- be provided by the US Treasury for the same thing? The answer lies in accounting methods: the difference between cash and accrual accounting.

Cash accounting is what the government uses for its official budget and deficit calculations. It counts only cash income "in" and cash expenditures "out" during the year, and comes up with a net total.

Accrual accounting, in contrast, also counts legally incurred rights to receive future income, and obligations to make future expenditures, that accrue during the accounting period.

The federal government uses cash accounting when computing its official budget deficit number.

In the private sector, cash accounting is illegal for most businesses much larger than a newsstand, and accrual accounting is required instead. The reasons should be obvious, but a simple example can make them clear.

Say you are running a business and one of your expenses is an obligation to pay pensions and health benefits to your employees when they retire in the future. Possibly, if you are fiscally responsible and a hard bargainer, you even have your employees pay to you, now up-front, amounts to cover the cost of their retirement benefits later.

With accrual accounting you count in your income for the year all the net business income you earn, plus the contributions from employees you receive, and then subtract from that amount the increase in your future liabilities, discounted to present value. (So if your liability to retirees 20 years from now increases by $1 million, and the interest rate is 5%, you incur a $377,000 charge against your income today). That gives you a full picture of your finances, looking into the future. In contrast...

With cash accounting all you count is your net cash income today, including the contributions from your employees towards their future retirement costs -- and you ignore the cost of the future retiree benefits you are running up. So those employee contributions you collect are pure profit!

Hey, do yourself a favor! Give your employees much bigger future retirement benefits, in exchange for bigger contributions from them today. Your profit just went way up! Now point out how you increased the business's profits to its happy shareholders. Give yourself a big raise and cash bonus as a reward!

Of course, a generation later, when all those retirement benefits suddenly come due as a cash cost, the business may well turn out to be General Motors or Chrysler with its shareholders howling, "if we were so profitable, what the !@#$% happened?", all the way to bankruptcy court....

 
At 1/02/2012 11:22 PM, Blogger VangelV said...

is the premise here that unfunded liabilities are addressed by accrual accounting methods?

Not when the government reports its budget and debt numbers. Those are based on cash based accounting. That is where Clinton's surpluses came from and why the reported Bush/Obama deficits were a small fraction of the increase in debt plus unfunded liabilities.

 
At 1/02/2012 11:24 PM, Blogger VangelV said...

The U.S. not only provides accruals concerning its trust funds, but also long range projections of liabilities.

Actually, the federal government uses cash accounting when reporting its official budget deficits. That was why Clinton could report a surplus even as unfunded liabilities were rising rapidly.

 
At 1/02/2012 11:28 PM, Blogger VangelV said...

I'm not sure what that really means because the obvious way to deal with the shortfalls in Medicare Part B is to increase premiums/reduce benefits as opposed to higher tax subsidies.

Actually, a premium increase can't and won't happen because the taxpayers will take to the streets and vote the idiots in Congress out of office. The better solution is to end the unsustainable programs and to stop transferring wealth from poor young people to richer older people.

why is it assumed that the ONLY way to deal with unfunded liabilities is a tax increase and therefor money put aside to pay for future unfunded liabilities?

It is only assumed that there is a need for tax increases by the idiots on the left. I suspect the reason is fairly obvious. Most of the supporters pay very little in the way of income taxes and are more than likely to be benefiting from government redistribution programs.

 
At 1/03/2012 12:17 AM, Blogger VangelV said...

We had said, "In 1936, the U.S. finally exceeding the inflated GDP of 1929." You disagreed. We provided a citation supporting our claim.

No. You said that In 1936, the U.S. finally exceeding the inflated GDP of 1929. I pointed out that the inflation adjusted output (using the Keynesians' own data) was lower in 1936 than in 1929. They are two different things. The problem of course is that there is little meaning in the data because measuring final output does not tell us much about the intermediate stages of production. While the 1933-1936 bounce showed an increase in GDP thanks to deficit spending by the government it was a period of capital consumption as depreciation exceeded new investment in productive capacity. There was no real recovery. For further support of my position I point you to Table 1 (page 67) in the paper, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis by Cole and Ohanian. The index is set at 100 for 1929. GNP in 74.7 in 1936, nowhere near 100.

You pointed to a disembodied chart which wasn't even properly labeled.

I said that it was inflation adjusted output. Can't you figure out that the x-axis is the year and that the y-axis is the index normalized for 100 in 1929? The comparison would make no sense otherwise because there is no way for all of those countries to have the same output in 1929.

GDP is the measure of the market value of all goods and services produced.

It isn't. Many goods have no market price. This is why the USSR was able to report such huge GDP growth and output even as people were lining up to buy basic goods. When Hoover had make work projects that built infrastructure the reported value of the output was whatever the government bureaucrats decided. We have seen this game many times, particularly during war times when there is a reported boom even though there is rationing and many goods are not possible to get. You really should read your Higgs on this point.

Greenspan is not a Keynesian. The CBO provides non-partisan economic analysis.

When it came to the idea of stimulus Greenspan was a Keynesian. And there is nothing non-partisan about the CBO. It uses assumptions given to it by the politicians and works for statists who want to distort the true picture. This is why the CBO has been constantly wrong about future costs of programs and about future deficit projections.

The Clinton Administration set the U.S. on a course to pay off its publicly held debt, a very significant achievement that was countermanded in the following administration.

No. Clinton ran deficits that were not reported because for budget purposes the government used cash accounting instead of accruals. While he was not as bad as Bush and Obama he still ranks as one of the worse presidents.

 
At 1/03/2012 4:57 AM, Blogger Ron H. said...

Peak:

Here's Hazlitt on Keynes on savings and investment:

" As we shall see, Keynes himself alternates constantly between two mutually contradictory contentions: (1) that saving and investment are “necessarily equal,” and “merely different aspects of the same thing” (p. 74), and (2) that saving and investment are “two essentially different activities” without even a “nexus” (p. 21), so that saving not only can exceed investment but chronically tends to do so."

Throughout his "General Theory", Keynes alternates between these two mutually exclusive contentions.

It's no wonder that his followers are confused. It's this confusion that allows for a belief in the "liquidity trap" fairy. Hayek debunked that one a long time ago. I'd imagine your familiar with the specific work, but if not, I'll find it for you.

Perhaps besides reading more Hazlitt, as has been recommended, you might want to read more Keynes also.

 
At 1/03/2012 5:42 AM, Blogger Larry G said...

I don't think it's necessarily contradictory because over the long run savings does eventually become investment but in the short run the may well not be parity.

what's harder to understand is why..in a down economy capital is not readily available..in fact.. hard to get...

what exactly happens to "reserves"? Do they sit unused in a vault or are they liquid to the point where they can become available for other investments in hours or minutes?

 
At 1/03/2012 8:39 AM, Blogger Zachriel said...

VangelV: If you collect contributions to pay future benefits you have to use accrual accounting.

The International Federation of Accountants states that the U.S. is applying full accrual accounting standards that are broadly consistent with IPSAS requirements.
http://www.ifac.org

VangelV: You said that In 1936, the U.S. finally exceeding the inflated GDP of 1929. I pointed out that the inflation adjusted output (using the Keynesians' own data) was lower in 1936 than in 1929.

You pointed to a disembodied graph that lacked proper labeling. We cited BEA data which used inflation-adjusted data. However, just to be clear, our use of the word "inflated" above doesn't refer to price inflation, but means "puffed up."

Zachriel: GDP is the measure of the market value of all goods and services produced.

VangelV: It isn't. Many goods have no market price.

http://www.investorwords.com/2153/GDP.html
http://www.worldbank.org/depweb/beyond/global/glossary.html#34

VangelV: When it came to the idea of stimulus Greenspan was a Keynesian.

Greenspan is not a Keynesian.

VangelV: And there is nothing non-partisan about the CBO. It uses assumptions given to it by the politicians and works for statists who want to distort the true picture.

Of course they provide analysis based on assumptions! Assumptions always include Congress doing nothing, or doing what they usually do, but CBO will perform analysis on any scheme Congress wants. Duh. What did you think they did?

VangelV: Clinton ran deficits that were not reported because for budget purposes the government used cash accounting instead of accruals.

Accrual accounting doesn't change that the publicly held debt was being paid down.

 
At 1/03/2012 9:57 AM, Blogger Zachriel said...

Ron H (quoting Hazlitt): "As we shall see, Keynes himself alternates constantly between two mutually contradictory contentions: (1) that saving and investment are 'necessarily equal,' and 'merely different aspects of the same thing' (p. 74), and (2) that saving and investment are 'two essentially different activities' without even a 'nexus' (p. 21), so that saving not only can exceed investment but chronically tends to do so."

Wow. Hazlitt really has to try hard to misunderstand Keynes. A clue can be found in the broad use of ellipses. The latter statements concern the decision-making process, not the equality of savings and investment.

Keynes: "They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with the decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former."

As for "saving and investment are 'necessarily equal,' and 'merely different aspects of the same thing'," well, that is in a examination of the various definitions whereby sometimes that is true and other times it is not.

Keynes: "IN the previous chapter Saving and Investment have been so defined that they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing. Several contemporary writers (including myself in my Treatise on Money) have, however, given special definitions of these terms on which they are not necessarily equal. Others have written on the assumption that they may be unequal without prefacing their discussion with any definitions at all. It will be useful, therefore, with a view to relating the foregoing to other discussions of these terms, to classify some of the various uses of them which appear to be current."

It's hard to credit an argument that relies on out of context quotes.

 
At 1/03/2012 10:16 AM, Blogger Zachriel said...

This comment has been removed by the author.

 
At 1/03/2012 10:19 AM, Blogger Zachriel said...

VangelV: You said that In 1936, the U.S. finally exceeding the inflated GDP of 1929. I pointed out that the inflation adjusted output (using the Keynesians' own data) was lower in 1936 than in 1929.

Zachriel: You pointed to a disembodied graph that lacked proper labeling.

Went to the trouble of finding the source for another one of your disembodied graphs.
http://mises.org/daily/3778

It's a graph of *industrial production*, not GDP. Industrial production only includes manufacturing, mining and utilities, and is only a portion of GDP. It excludes, for instance, the farmer who grows your food, the kid who grills your burgers. Currently, industrial production is about 22% of U.S. GDP, 31% globally.

 
At 1/03/2012 10:25 AM, Blogger VangelV said...

The International Federation of Accountants states that the U.S. is applying full accrual accounting standards that are broadly consistent with IPSAS requirements.
http://www.ifac.org


Do you even know what that means? After all IPSAS has a cash based accounting standard. And as we know, the US government uses cash accounting for reporting its deficits even as it uses accrual standards for other purposes.

You pointed to a disembodied graph that lacked proper labeling. We cited BEA data which used inflation-adjusted data. However, just to be clear, our use of the word "inflated" above doesn't refer to price inflation, but means "puffed up."

As I said, I already told you what the graph was reporting. The fact that you don't understand normalization is your problem. And for further support I pointed you to Table 1 (page 67) in the paper, New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis by Cole and Ohanian. The index is set at 100 for 1929. GNP in 74.7 in 1936, nowhere near 100.

Continued on next post...

 
At 1/03/2012 10:29 AM, Blogger VangelV said...

continued...

The Cole and Ohanian paper actually provides some interesting facts that show why our numbers are not very good and reflective of actual reality. For example, we read, "In one instance the Interior Department received bids that were not only identical but 50 percent higher than foreign steel prices (Ickes, p. 466). This price difference was large enough under government rules to permit Ickes to order the steel from German suppliers. Roosevelt cancelled the German contract, however, after coming under pressure from both the steel trade association and the steel labor union." Got that? Buying more expensive steel and building less infrastructure for the same money shows up as an increase in GDP. That makes no sense. But it does explain why investors in commodity producers made a killing and why huge fortunes were made during the Great Depression. FDR allowed some to become super rich, those that had decent jobs to do very well, while condemning those that had little job security to a marginal existence.

C&O write, "There are two striking aspects of the recovery from the Great Depression in the United States. The first is that the recovery was weak. After six years of recovery, real output remained 25 percent below trend, and private hours worked were only slightly higher than their 1933 trough level. The second aspect is that real wages in several sectors were significantly above trend, despite the continuation of the depression. The real wage in manufacturing was about 20 percent above trend in 1939, even though manufacturing hours were substantially below trend."

Now I do not know why they would consider what they found 'striking'. After all FDR, like Keynes and Hoover, thought that the problem with the Great Depression was low prices. Instead of letting the liquidation take place he let producers collude as long as they paid higher wages to their employees. With prices high the real economy was hit hard and could not recover.

Let me note that I do not like the C&O methodology. Their idiotic model building is a total waste of time and will lead nowhere near reality. But their facts are useful. And their abandonment of the monetarists myth may be a sign of progress. (Although I am willing to bet that the inconvenient data will be twisted by both the monetarists and Keynesians to come up with some other screwy conclusions eventually.)

I will end this part with the final two paragraphs of the C&O conclusion. We read:

"Our results suggest that New Deal policies are an important contributing factor to the persistence of the Great Depression. The key depressing element behind these policies was not monopoly per se, but rather linking the ability of firms to collude with paying high wages. Our model indicates that these policies reduced consumption, and investment about 14 percent relative to their competitive balanced growth path levels. Thus, the model accounts for about half of the continuation of the Great Depression between 1934 and 1939.
New Deal labor and industrial policies did not lift the economy out of the Depression as President Roosevelt and his economic planners had hoped. Instead, the joint policies of increasing labor’s bargaining power, and linking collusion with paying high wages, impeded the recovery by creating inefficient insider-outsider friction that raised wages significantly and restricted employment. The recovery would have been stronger if wages in key sectors had been lower."


FDR used barriers to competition to allow the rich producers of commodities to become much richer. Those barriers helped their employees but at the cost of high and persistent unemployment rates and a lower general standard of living. Had he stepped aside and let the market do its job, as Harding did, there would have been no Great Depression in the United States.

 
At 1/03/2012 10:38 AM, Blogger VangelV said...

VangelV: It isn't. Many goods have no market price.

http://www.investorwords.com/2153/GDP.html


http://www.worldbank.org/depweb/beyond/global/glossary.html#34


I gave the example from the C&O paper. FDR forced the government to pay 50% more than the market price for steel. That inflated the GDP number even though paying 50% more and building less infrastructure made the US worse off. As I said, there are many prices in the economy that are not set by the market. When real economic activity is low and government spends a great deal those prices distort the picture.

I guess that you have not read your Higgs yet.

VangelV: When it came to the idea of stimulus Greenspan was a Keynesian.

Greenspan is not a Keynesian.


He acted like a Keynesian because he is a politician. Keep in mind that he believed that gold is money and that a sound currency is better than fiat money. But that is not the way he acted because when the chips are down most politicians act like Keynesians. (See Bush and the GOP for perfect evidence of this.)

Accrual accounting doesn't change that the publicly held debt was being paid down.

It wasn't. You can't take steal money from the 'trust funds' and use it to pay off the debt because the total obligations are still growing. You are just like the idiots on the right who keep defending Bush's stupid war in Iraq. You refuse to concede that your man was a liar and took actions that harmed the taxpayers and the citizens of your country. Clinton used accounting fiction to make it look as if he were paying down the debt even though the total obligations grew sharply during his term in office. End of story.

 
At 1/03/2012 11:09 AM, Blogger VangelV said...

It's a graph of industrial production, not GDP. Industrial production only includes manufacturing, mining and utilities, and is only a portion of GDP. It excludes, for instance, the farmer who grows your food, the kid who grills your burgers. Currently, industrial production is about 22% of U.S. GDP, 31% globally.

That is what I said, inflation adjusted industrial output.

But the C&O table that I showed you also showed that GDP was lower than it was in 1929. There was no recovery. They also point out that real GDP per adult was 39% below trend in 1933 and the 'recovery' only took it to 27% below by 1939. the authors write. Then there is the employment issue. The show that, "Private hours worked were 27 percent below trend in 1933 and remained 21 percent below trend in 1939." Is that what you consider a recovery?

There is no way to hide the fact that FDR was a failure even though he did everything that the 'experts' wanted him to do. The money supply doubled, deficit spending was significant, and government infrastructure projects dominated economic activity. Contrast this to Harding, who cut government spending and cut taxes during his economic collapse after the end of WWI. The contraction was sharp. Malinvestments were liquidated. And the economy began to boom.

 
At 1/03/2012 12:12 PM, Blogger Zachriel said...

Zachriel: The International Federation of Accountants states that the U.S. is applying full accrual accounting standards that are broadly consistent with IPSAS requirements.
http://www.ifac.org


VangelV: Do you even know what that means?

Why yes, they provide a helpful glossary so that we know exactly how they are using the term: accrual basis, "A basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue, and expenses."

Per the IFAC, the U.S. is "applying full accrual accounting standards."

Zachriel: Accrual accounting doesn't change that the publicly held debt was being paid down.

VangelV: It wasn't. You can't take steal money from the 'trust funds' and use it to pay off the debt because the total obligations are still growing.

Now, you're just being silly. They certainly were paying down debt held by the public, which decreased from $3.7 trillion in 1996 to $3.3 trillion in 2001.

As for total obligations, on-budget was essentially balanced.

VangelV: That is what I said, inflation adjusted industrial output.

Funny. That phrase, "inflation adjusted industrial output," is not found previously on this thread.

VangelV: Is that what you consider a recovery?

No. That's why most economists believe the Depression lasted through the 1930's, and that Roosevelt made a mistake by retrenching New Deal spending in 1936 in order to balance the budget, leading to a new recession.

 
At 1/03/2012 2:32 PM, Blogger Ron H. said...

Z: "Keynes: "They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with the decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former."

Keynes failed to understand that there *is* a connection called interest rates, that act as a price signal of time preference. This failure allowed him to suppose that interest rates could be used by government planners as an tool to wreck - er, manage - the macroeconomy.

In addition his misunderstanding of the role of capital allowed him to embrace the previous work of Foster and Catchings in what he called the "paradox of thrift" - an idea previously falsified by Hayek.

 
At 1/03/2012 2:38 PM, Blogger Ron H. said...

Z: "As for total obligations, on-budget was essentially balanced. "

So far so good. What about the other part of total obligations? What a weasel you are!

 
At 1/03/2012 3:04 PM, Blogger VangelV said...

Why yes, they provide a helpful glossary so that we know exactly how they are using the term: accrual basis, "A basis of accounting under which transactions and other events are recognized when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognized in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets/equity, revenue, and expenses."

Per the IFAC, the U.S. is "applying full accrual accounting standards."


The US does not apply accrual accounting to its reporting of budget deficits. You can use cash accounting and still comply to the IPSAS standard because there is an IPSAS cash accounting standard.

Let me get you to be clear here. Are you saying that the US is using accrual accounting when it reports its deficits? Before you answer, let me point out to you that others have already established that the GAAP accounting shows a much bigger deficit than is being reported.

And before you dismiss that reference let me point out to you that in the Fiscal Year 2010 Financial Report of the United States Government the Acting Comptroller General of the United States wrote, "Most revenues are recorded on a modified cash basis. The 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, including the related notes, are also included in the consolidated financial statements. The Statements of Social Insurance do not interrelate with the accrual-based consolidated financial statements."

 
At 1/03/2012 3:26 PM, Blogger VangelV said...

Now, you're just being silly. They certainly were paying down debt held by the public, which decreased from $3.7 trillion in 1996 to $3.3 trillion in 2001.

As for total obligations, on-budget was essentially balanced.


This is not true. The government stole SS contributions and used them in its general budget. By recognizing the revenues but not the liabilities it could report a cash based surplus even though the total obligations went way up. The fact that you don't understand the implications of cash accounting is a problem you need to overcome if you want to have an intelligent discussion on this topic.

Funny. That phrase, "inflation adjusted industrial output," is not found previously on this thread.


You are right. I wrote, "Actually, inflation adjusted output in the US in 1936 was below 1929. And given the massive government spending by Hoover and FDR one would have expected some temporary recovery from the initial contraction. We have seen this many times with Japan being the latest example."

The graph came from an Eichengreen paper that was discussed previously on this thread. I have no problem using it because it comes from a source that is very sympathetic to the Keynesian view that you and Krugman favour.

No. That's why most economists believe the Depression lasted through the 1930's, and that Roosevelt made a mistake by retrenching New Deal spending in 1936 in order to balance the budget, leading to a new recession.

What 'most' believe is not important. What is important is what the people who have seen the crises come before the fact believe and why they believe it. As I pointed out by citing the C&O paper, the money supply exploded, the government ran huge deficits and spent like a drunken sailor on a short shore leave. Both Hoover and FDR were expanding the size of government but failed to 'stimulate' a recovery. But we know that Harding, who had a massive post-WWI contraction on his hands dealt with it very successful by cutting government spending and taxes. By getting government out of the way (whether by design or luck) Harding allowed the market to liquidate the malinvestments and caused a repricing of capital and labour. That allowed the economy to have a sustainable recovery. (Unfortunately, the Fed ruined it by expanding the money supply in the second half of the 1920s and by doing so created a bubble that would require another liquidation. Sadly, Hoover and FDR did not have the courage to let the markets work and created the Great Depression.)

 
At 1/03/2012 3:29 PM, Blogger Zachriel said...

Ron H: Keynes failed to understand that there *is* a connection called interest rates, that act as a price signal of time preference.

Seriously? Your argument is that Keynes was unaware of the role of interest rates in his seminal work "The General Theory of Employment, Interest and Money?"

In any case, that doesn't salvage the quote-mine you provided, which clearly misrepresented Keynes's postion by taking his words out of context.

Ron H: What about the other part of total obligations?

The on-budget was in balance, and the Trust Funds were funded. As the Trust Funds don't hold actual cash—by statute—,the cash was used to lower the publicly held debt.

VangelV: You can use cash accounting and still comply to the IPSAS standard because there is an IPSAS cash accounting standard.

The International Federation of Accountants say the U.S. is "applying full accrual accounting standards." Are you saying they don't know the meaning of accrual accounting?

VangelV: And before you dismiss that reference let me point out to you that in the Fiscal Year 2010 Financial Report of the United States Government the Acting Comptroller General of the United States wrote ...

From your source: "The accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis."
http://www.fms.treas.gov/finrep10/stmt_comp_general/fr_stmt_general.html

Not sure if you are really interested in finding out, but you might read this from the GAO.

"The accrual deficit typically exceeds the cash deficit because it includes costs incurred today but paid in the future. However, in 2009, the cash deficit exceeded the accrual deficit for the first time in the past 10 years."
http://www.gao.gov/special.pubs/longterm/deficit/

 
At 1/03/2012 4:04 PM, Blogger Zachriel said...

Zachriel: As for total obligations, on-budget was essentially balanced.

VangelV: This is not true. The government stole SS contributions and used them in its general budget.

That is incorrect. In 2000, Social Security brought in $568 billion, spending $415 billion. By law, the surplus of $153 billion was put into special-issued U.S. securities, meaning the cash stays with Treasury. Meanwhile, the rest of the budget brought in $1457 and spent $1374. The total unified cash-surplus of $236 billion was used to retire a portion of the publicly held debt. Now, it is true that the general fund owes Social Security $153 billion, but it retired more than that equivalent in publicly held debt.

VangelV: The graph came from an Eichengreen paper that was discussed previously on this thread.

There's nothing wrong with discussing a paper, but when we pointed out that GDP had reached its previous levels in 1936, you disagreed citing a disembodied chart that did not represent GDP. It's almost as if you want to make communication difficult.

VangelV: Both Hoover and FDR were expanding the size of government but failed to 'stimulate' a recovery.

While the economy imploded during Hoover, it expanded at ~11% from 1934-1936.

VangelV: But we know that Harding, who had a massive post-WWI contraction on his hands dealt with it very successful by cutting government spending and taxes.

The early 1920's recession was an engineered deflation. When the engineers were done tinkering, the economy recovered.

VangelV: Sadly, Hoover and FDR did not have the courage to let the markets work and created the Great Depression.

Hoover essentially sat on his thumbs until his last year in office.

 
At 1/03/2012 7:50 PM, Blogger VangelV said...

That is incorrect. In 2000, Social Security brought in $568 billion, spending $415 billion.

OK.

By law, the surplus of $153 billion was put into special-issued U.S. securities, meaning the cash stays with Treasury.

The cash went to Congress, which spent it. The 'trust funds' were issued special securities that were not marketable. (IOUs.)

Meanwhile, the rest of the budget brought in $1457 and spent $1374. The total unified cash-surplus of $236 billion was used to retire a portion of the publicly held debt.

The cash taken from SS and Medicare contributions was used to pay down the debt. But the accrued liabilities were larger than the contributions. These never made their way into the budget reporting because the US government uses cash accounting for budget purposes.

Essentially, Clinton/Bush/Obama have been counting contributions as revenues but not reporting the accrued liabilities. Had a business done that its management would be in jail.

Now, it is true that the general fund owes Social Security $153 billion, but it retired more than that equivalent in publicly held debt.

But you are missing the fact that the US government accrued more than $153 billion in liabilities. And let me point out what some of the references made clear. The unfunded liabilities are understated because the accountants use only a 75 year period. If they were to assume that the programs continue forever the unfunded liabilities become around three times greater.

There's nothing wrong with discussing a paper, but when we pointed out that GDP had reached its previous levels in 1936, you disagreed citing a disembodied chart that did not represent GDP. It's almost as if you want to make communication difficult.

And I also provided a link to the C&O data that shows that was not true. Setting 1929 GNP at 100 we see a decline to 74.7 by 1936 and 75.7 by 1937. You chose to ignore that data and still claim a recovery by 1936.

And note that I gave you an example that showed that what you are claiming is a recovery is a statistical aberration because there were no market prices for many of the goods being sold. When FDR chooses to pay 50% more for domestic steel than could be purchased from Germany the GDP number looks better but the real economy has less real production. As I said, you need to read your Higgs and get a better handle on the argument as you gain more understanding.

(Of course, one can argue that the last thing that you want is to understand because the truth does not play well with your ideology.)

 
At 1/03/2012 8:25 PM, Blogger VangelV said...

While the economy imploded during Hoover, it expanded at ~11% from 1934-1936.

Yet, from 1932 to 1939 the productivity per adult fell. I quote from the Morgenthau Diary, May 9, 1939, which can be found in the Franklin Roosevelt Presidential Library. Morgenthau wrote:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…I say after eight years of this administration we have just as much unemployment as when we started…And an enormous debt to boot!"

If his Secretary of the Treasury admits that FDR's efforts failed to create a recovery after seven years why are you claiming otherwise without any credible evidence? Contractions happen but the trend is not one way. There are many bounces along the way to the bottom. To cherry pick one is not exactly credible.

And let me note that FDR ran against Hoover as a small government Classical Liberal. He attacked Hoover for his willingness to spend a lot, increase taxes, and interfere free trade. He attacked him for making millions of individuals dependent on government largesse even as John Garner, his Vice President, was arguing that Hoover was taking the country down the socialist path.

So what we have are two presidents who spent big and meddled big. That was the only reason why there was a Great Depression. Had Hoover or FDR chosen to follow the Harding blueprint and let the market clear the malinvestments the recovery would have began by the end of 1931.

The early 1920's recession was an engineered deflation. When the engineers were done tinkering, the economy recovered.

No. It was caused by the end of WWI. All those economic activities that depended on war came to an end. Harding let the market liquidate the system and a real recovery began. It was the opposite of tinkering. Harding played poker and got out of the way. The economy was not 'fixed' by the 'tinkerers' but by the people. There are no buttons to push or levers to pull because the economy is not a machine. The economy is just all of us pursuing individual activities.

Hoover essentially sat on his thumbs until his last year in office.

Really? According to Lee Ohanian, who I have cited above, Hoover was pushing pro-labor policies that were responsible for more than 60% of the decline in GDP and helped turn a recession into the Great Depression. Hoover was also big on protectionism and signed Smoot-Hawley into law. He created the Reconstruction Finance Corporation, which spent money on all kinds of building projects throughout the Great Depression. He signed the Federal Home Loan Bank Act.

I could go on and on but I believe that I have made my point. You have no clue of what it is that you are writing about and are simply sticking to the usual Keynesian or Monetarist talking points. Instead of ideology you might actually try to look at the facts.

 
At 1/03/2012 8:45 PM, Blogger Zachriel said...

VangelV: The cash went to Congress, which spent it.

That is incorrect. There was enough revenue on-budget to cover on-budget expenditures.

VangelV: The cash taken from SS and Medicare contributions was used to pay down the debt.

Yes, that is correct. Under the law, Social Security is given special-securities. As the government was running a cash surplus, paying down the publicly held debt would be a good way to shore the U.S. financial position.

VangelV: But the accrued liabilities were larger than the contributions.

No. The accrued liability was $153 billion, but the U.S. paid down $236 billion in publicly held debt. There's just no way around this basic fact.

VangelV: These never made their way into the budget reporting because the US government uses cash accounting for budget purposes.

Funny, isn't it. We used government sources to provide the budget numbers, including the accrued liability. Amazing how they hide the data by using a dot-gov domain.

VangelV: And I also provided a link to the C&O data that shows that was not true.

No it doesn't. It shows that GNP was below *trend*.

Cole & Ohanian: "There are two striking aspects of the recovery from the Great Depression in the United States. The first is that the recovery was weak. After six years of recovery, real output remained 25 percent below trend ..."

You are very confused.

 
At 1/03/2012 11:01 PM, Blogger VangelV said...

That is incorrect. There was enough revenue on-budget to cover on-budget expenditures.

Was there? Your government spends a lot on off budget items that still have to be paid for. The bottom line is that the money from SS contributions go into general revenues that fund spending. If there is anything left over some of the debt is paid off. But that is not a surplus because the revenue is offset by accrued liabilities that are not reported for budget purposes.

Yes, that is correct. Under the law, Social Security is given special-securities. As the government was running a cash surplus, paying down the publicly held debt would be a good way to shore the U.S. financial position.

But there is a problem. The contributions are offset by IOUs that are not counted as liabilities. This means that the obligations have not gone down and there is no surplus.

No. The accrued liability was $153 billion, but the U.S. paid down $236 billion in publicly held debt. There's just no way around this basic fact.

No, you are mixing up contributions with future liabilities. They are not the same. There's just no way around this basic fact.

Funny, isn't it. We used government sources to provide the budget numbers, including the accrued liability. Amazing how they hide the data by using a dot-gov domain.

They don't 'hide' the data. As I pointed out, the government admits that it is not using accrual accounting when reporting the budget.

No it doesn't. It shows that GNP was below *trend*.

No. When looking at GDP the index is set to 100 in 1929 and falls to less than 80 by 1936. When you look at the number of people and the output you find out that 1929 comes off better. That makes sense given the very low unemployment rate in 1929 and the fact that capital depreciation exceeded capital investment throughout the 1930s.

Cole & Ohanian: "There are two striking aspects of the recovery from the Great Depression in the United States. The first is that the recovery was weak. After six years of recovery, real output remained 25 percent below trend ..."

You are very confused.


No I am not. Look at Table 1 on page 67 as I suggested the first time I provided the reference.

 
At 1/03/2012 11:15 PM, Blogger Ron H. said...

Z: "Seriously? Your argument is that Keynes was unaware of the role of interest rates in his seminal work "The General Theory of Employment, Interest and Money?"


Keynes: ""They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with the decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former."

He said so himself. They are not linked.

What do you think is the decider between current consumption and future consumption?

Time preference is measured in interest rate.

 
At 1/03/2012 11:31 PM, Blogger Ron H. said...

Z: "That is incorrect. In 2000, Social Security brought in $568 billion, spending $415 billion. By law, the surplus of $153 billion was put into special-issued U.S. securities, meaning the cash stays with Treasury. Meanwhile, the rest of the budget brought in $1457 and spent $1374. The total unified cash-surplus of $236 billion was used to retire a portion of the publicly held debt. Now, it is true that the general fund owes Social Security $153 billion, but it retired more than that equivalent in publicly held debt."

And, at the end of FY1999, ending 09/30/1999, total national debt was $5.656270 trillion.

At the end of FY2000, ending 09/29/2000, total national debt was $5.674178 trillion.

An increase of $17.908 billion. A deficit, not a surplus.

 
At 1/03/2012 11:46 PM, Blogger VangelV said...

Here's a couple of shale gas equity propositions:

Oasis Petroleum (OAS) in the Williston Basin: 0 secured debt and 143.5 million in cash. Pad Drilling to reduce cost.


The three year old company got financing of $363 million in FY 2010. It took in $50 in cash from operations and spent $310 million. The company's projects require quite a bit in capital expenditures. Because of the negative cash flow the company may be unable to obtain needed the financing or capital that is needed to keep its leases.

Given the fact that it is only producing less than boe/d per well and that the formation has a terrible decline profile I don't see why anyone would invest in a company like this instead of choosing a conventional player or even a tar sands operator.

Triangle Petroleum (TPLM)in the Bakken Shale; 0 secured debt and 100 million in cash. Pad Drilling with up to 8 wells drilled from each.

It is a five year old company that is still bleeding cash and is selling for 52 times sales.

Magnum Hunter Resources (MHR) in the Eagle Ford, Williston and Marcellus Shale; 20% debt/equity.

Bleeding cash flow, needed to borrow $118 million last fiscal year, and sells for 8 times cash flow. The best asset may actually be its subsidiary Hunter Disposal LLC but I do not know enough to really comment.

Chesapeake Resources (CHK): Over 1 million acres leased in the Utica Shale. Total Petroleum (TOT) of France pays for half.

Did you hear the last conference call? I did. The company is transitioning away from the shale gas it had been hyping for more than five years now because it can't make any profit from gas. Its EURs are way too high, which means that you are going to see a 'surprise' write-off of assets some time in the future. The company reminds me of Nortel in the late 1990s.

 
At 1/03/2012 11:55 PM, Blogger VangelV said...

These companies drive down natural gas prices, and make their money on the liquids from fracking.

Hmm,

Abundant energy -> abundant petroleum liquids -> abundant capital -> a stronger U.S. economy


Wishful thinking. Aubrey was talking about how great shale gas was because he would get a higher price than the $7.50 he needed to break even. That was when he was drilling his core areas. Now that gas has collapsed he is announcing a move to shale liquids even as he chews through cash and has to borrow $3 billion to keep going. This also looks a lot like Nortel.

 
At 1/04/2012 12:11 AM, Blogger Ron H. said...

Z: "Hoover essentially sat on his thumbs until his last year in office."

Is that from your high school history textbook?

Let's quote the man, himself.

"We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action…. No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times…"

 
At 1/04/2012 8:10 AM, Blogger Zachriel said...

VangelV: No. The accrued liability was $153 billion, but the U.S. paid down $236 billion in publicly held debt. There's just no way around this basic fact.

That's right. The U.S. lowered its publicly held debt by $236 billion, and provided special securities, i.e. IOUs. to the Social Security Fund.

VangelV: As I pointed out, the government admits that it is not using accrual accounting when reporting the budget.

Treasury: "The accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis."

VangelV: Look at Table 1 on page 67 as I suggested the first time I provided the reference.

Great! Let's look at the description of Table 1: "Table 1 presents the data: real GNP, real consumption of nondurables and services (C), real investment (I), including consumer durables, total factor productivity, (TFP), the real wage in manufacturing, and total private hours worked. All quantities are divided by the adult (16 and over) population, and all variables are measured relative to their trend-adjusted 1929 level."

As for real GDP, we cited the BEA.

BEA Real Gross Domestic Product
1929, 865.2
1936, 866.6
Table 2A
http://www.bea.gov/scb/pdf/2006/08august/0806_gdp_nipas.pdf

Ron H: He said so himself. They are not linked.

"Not linked in any simple way." In other words, there are a variety factors beyond delayed consumption. Furthermore, this still doesn't salvage Hazlitt's quote-mine. He clearly misrepresented Keynes.

Ron H: An increase of $17.908 billion. A deficit, not a surplus.

Which in a $2 trillion budget is essentially balanced, as we stated above. However, the publicly held debt, the money the government owed to entities outside the government, decreased by $236 billion.
http://www.cbo.gov/budget/data/historical.pdf

 
At 1/04/2012 8:37 AM, Blogger Larry G said...

FYI - ALL govt trust funds are done the same way as SS..including the highway trust fund, the civil service pension fund, even Medicare Part B premiums and the military Tricare premiums.

most, if not all of the dedicated revenue streams are converted to treasury notes that cannot be marketed but do receive interest and they DO show up in the debt numbers as govt debt to itself.

the 2.1 billion SS trust fund is shown as debt in the total debt numbers.

as far as unfunded liabilities go...

FICA and SS, by law cannot pay more in benefits than FICA generates in revenues and the benefits automatically reduce if FICA revenues fall below what is necessary for scheduled benefits.

In this situation - how can it be said that there are future "unfunded liabilities" if by law, the expenditures cannot exceed revenues?

On the non-FICA side of the budget - there are way more "unfunded liabilities" than just the social entitlements.

There are VA hospitals, military pensions, military health care, etc.

If we want to talk about unfunded liabilities - all of them ought to be included - not just the entitlements that are opposed by some while they support others and don't count them as unfunded liabilities.

there are significant unfunded liabilities associated with DOD military and civilian activities.

 
At 1/04/2012 9:32 AM, Blogger Zachriel said...

Larry G: In this situation - how can it be said that there are future "unfunded liabilities" if by law, the expenditures cannot exceed revenues?

The U.S. government, when calculating future liabilities, uses both an extended baseline scenario which adheres to current law, and an alternative baseline scenario which makes reasonable assumptions about Congressional action, such as extending the Bush tax cuts, and continuing current social insurance benefits.
http://www.cbo.gov/ftpdocs/102xx/doc10297/06-25-ltbo.pdf

 
At 1/04/2012 10:35 AM, Blogger Larry G said...

thanks for the link.

my point is that a program that is by law limited to pay out no more than it takes in - without making changes has, by definition, no future liabilities.

the future liabilities for SS are basically what some depict as shortfalls but those shortfalls don't exist as a real liability unless Congress decides to accept them and agree to pay the shortfall.

alternatively -if the benefits of SS and/or the FICA tax is also changed..again there would be no shortfall.

so the "shortfall" is conceptual in that it is right now the gap in scheduled benefits if nothing is done but as I point out - the current law mandates cutting benefits to what FICA will actually generate.

there are no unfunded liabilities in FICA/SS if we follow the law as currently made.

the actual entitlements that are truly subject to unfunded liabilities are the "appropriated" entitlements like Medicare Part B or Military Pensions and health care where the gov has agreed to "appropriate" whatever is necessary to "level fund" the benefits.

this is the opposite of SS where benefits are capped by law to FICA revenues.

it's a small but important point - the difference between dedicated tax-funded entitlements such as SS and entitlements that come from annual appropriations.

the appropriated entitlements ARE legitimately involved in the annual deficit as are all other appropriated funds.

but FICA and SS are not appropriated funds.

 
At 1/04/2012 11:03 AM, Blogger Zachriel said...

Larry G: the future liabilities for SS are basically what some depict as shortfalls but those shortfalls don't exist as a real liability unless Congress decides to accept them and agree to pay the shortfall.

The general fund is responsible under current law for the special securities in the Trust Fund. Other than that, benefits will be automatically cut to match revenues.

On the other hand, as very few Americans want to cut Social Security benefits, it would behoove them to make the necessary adjustments now.

 
At 1/04/2012 11:22 AM, Blogger Larry G said...

not only do most Americans NOT want to cut SS - it really makes no sense if the idea is that by cutting SS, we reduce the deficit and debt.

not even sure if people know what they mean when they say "cut" SS.

do they mean CUT FICA or do they mean CUT SS?

cutting SS is automatic if no changes are made.

cutting FICA won't help reduce the deficit at all and all it will really do is accelerate the date that SS benefits have to reduce to available FICA revenues.

the problem is that we have a narrative that entitlements INCLUDING SS are the reason why we have a deficit and cutting them will reduce the deficit.

that's TRUE for APPROPRIATED entitlements like Medicare Part B, C,D but not FICA entitlements - SS and Medicare Part A.

How these things actually work is not entirely clear to most folks but what some organizations and think tanks do instead of clarifying is to use the lack of understanding to promote misinformation and disinformation about entitlements.

NOT UNDERSTANDING the basic facts gets us nowhere toward potential agreements and compromises about what might be done - it just further divides and polarizes.

 
At 1/04/2012 11:25 AM, Blogger VangelV said...

Z: "Seriously? Your argument is that Keynes was unaware of the role of interest rates in his seminal work "The General Theory of Employment, Interest and Money?"


Keynes: ""They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with the decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former."

Ron: "He said so himself. They are not linked.

What do you think is the decider between current consumption and future consumption?

Time preference is measured in interest rate."


Z fancies himself as an intelligent individual who understands far more than he actually does. He does not want to know the facts because if he did he would have to work quite hard to educate himself and would have to shed most of the ideology that he clings to. His are not principled based positions; they are based on faith. And we both know how hard it is to give up one's faith and stand apart for the herd.

 
At 1/04/2012 12:06 PM, Blogger VangelV said...

That's right. The U.S. lowered its publicly held debt by $236 billion, and provided special securities, i.e. IOUs. to the Social Security Fund.

The process of taking contributions from SS and using them for general purposes is correct. Some of those contributions can be used to reduce the debt. But as Ron has pointed out, the debt was not reduced.

To quote him, "And, at the end of FY1999, ending 09/30/1999, total national debt was $5.656270 trillion. At the end of FY2000, ending 09/29/2000, total national debt was $5.674178 trillion. An increase of $17.908 billion. A deficit, not a surplus."

Let me note again that I am not interested in these numbers because they are based on cash accounting and do not reflect the large increase in future obligations for the US taxpayer. When you use a deception to make something look better than it is we should not be arguing about how much better things look. Instead we need to pull back the curtain and look at the real picture. The fact that you refuse to do so tells a lot about your faith and your character.

 
At 1/04/2012 12:06 PM, Blogger VangelV said...

continued...

Treasury: "The accrual-based consolidated financial statements for the fiscal years ended September 30, 2010 and 2009, consist of the (1) Statements of Net Cost, (2) Statements of Operations and Changes in Net Position, (3) Reconciliations of Net Operating Cost and Unified Budget Deficit, (4) Statements of Changes in Cash Balance from Unified Budget and Other Activities, and (5) Balance Sheets, including the related notes to these financial statements. Most revenues are recorded on a modified cash basis."

Citation please.

I already cited the, Fiscal Year 2010 Financial Report of the United States Government. In footnote 5 on page 28 of that report the Acting Comptroller General of the United States wrote, "Most revenues are recorded on a modified cash basis. The 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, including the related notes, are also included in the consolidated financial statements. The Statements of Social Insurance do not interrelate with the accrual-based consolidated financial statements." This means that the deficit report counts the contributions as revenues for the year but does not count the liabilities because they will be paid out in the future.

Great! Let's look at the description of Table 1: "Table 1 presents the data: real GNP, real consumption of nondurables and services (C), real investment (I), including consumer durables, total factor productivity, (TFP), the real wage in manufacturing, and total private hours worked. All quantities are divided by the adult (16 and over) population, and all variables are measured relative to their trend-adjusted 1929 level."

As for real GDP, we cited the BEA.


OK. Real GNP per adult was higher in 1929 than in 1936. If we set the GNP per adult as 100 for 1929 it falls to 75 by 1936. That is not a recovery. And as C&O point out, the picture is actually worse because GNP is inflated by paying above market rates for many items that were purchased by the government. It is clear that there was no recovery in the US and that employment and consumer goods production remained depressed until after FDR's death.

"Not linked in any simple way." In other words, there are a variety factors beyond delayed consumption. Furthermore, this still doesn't salvage Hazlitt's quote-mine. He clearly misrepresented Keynes.

If anyone misrepresents Keynes it is Keynes and his followers. What seems to be lost on all of them was the fact that while Keynes may have been a brilliant man he was a terrible economist. He left no original work that was valid and none of the work by his followers that was meant to fix his errors has held up over the test of time. Keynesianism is not an economic movement as much as it is a political one. The only reason it gets any attention is because it gives progressives and political elites cover as they rob workers and savers to fund their own goals. The problem is that Keynesianism stifles productivity and wealth creation and there comes a time when the accrued liabilities cannot be honoured. At that time the game will be over and a new regime will take over as voters turf out the old parties and look for solutions.

Ron H: An increase of $17.908 billion. A deficit, not a surplus.

L: Which in a $2 trillion budget is essentially balanced, as we stated above....


Those pants must be getting very warm. When are you going to learn to step back and look at the forest instead of the stoma on the grass?

 
At 1/04/2012 12:11 PM, Blogger VangelV said...

FICA and SS, by law cannot pay more in benefits than FICA generates in revenues and the benefits automatically reduce if FICA revenues fall below what is necessary for scheduled benefits.

In this situation - how can it be said that there are future "unfunded liabilities" if by law, the expenditures cannot exceed revenues?


First of all, in the near term the treasury has to repay the IOUs to the non-"trust fund". Second, if you wish to argue for default go ahead. Ron and I have pointed out that the SS and Medicare math does not work and that the programs will have to be ended in their current form. While I can't speak for Ron, I have always believed that the government will not default in nominal terms. If it begins to print a lot of money and devalues the currency by enough it can pay off everyone with future revenues because the real purchasing power of those payouts will be insignificant. Think of retiring in 1970 and having a good pension that paid you 250% of the median income in the country. By 1980 inflation has destroyed your purchasing power and you are resorting to eating dog food and using food banks.

 
At 1/04/2012 2:40 PM, Blogger Ron H. said...

Z: ""Not linked in any simple way." In other words, there are a variety factors beyond delayed consumption. Furthermore, this still doesn't salvage Hazlitt's quote-mine. He clearly misrepresented Keynes. "

More word play, you sly thing.

1. The ultimate goal of all production is consumption.

2. The natural inclination, or time preference, is for current consumption.

3. To cause an individual to change their natural time preference and instead defer consumption, requires that they will have more to consume in the future than they have now. That "more" is called interest.

The *rate* of interest required may vary, based on individual needs and perceptions, including uncertainties, but it really is that simple.

When Keynes says:

"...whereas the motives which determine the latter [plan for future consumption] are not linked in any simple way with the motives which determine the former[abstain from present consumption]."

- he is clearly wrong.

As for Hazlitt quote, in the interest of quoting in context, let's look at the entire paragraph from Keynes:

"Those who think in this way are deceived, nevertheless, by an optical illusion, which makes two essentially different activities appear to be the same. They are fallaciously supposing that there is a nexus which unites decisions to abstain from present consumption with decisions to provide for future consumption; whereas the motives which determine the latter are not linked in any simple way with the motives which determine the former. "

Two different activities he says. Got it?

 
At 1/04/2012 4:24 PM, Blogger Larry G said...

" To cause an individual to change their natural time preference and instead defer consumption, requires that they will have more to consume in the future than they have now. That "more" is called interest. "

no.

what do you think saving for a 401(k) is?

it's deferred consumption so you can level-fund consumption in your retirement years.

for more than a few...saving for retirement means putting aside enough so that you have 1/2 the resources you have while working - but enough to live on.

some people set aside money to accumulate wealth... it's what they do...

then they give it away... and don't consume it...

what happens when someone spends 100K on an antique and then puts it in their parlor for decades?

 
At 1/04/2012 4:31 PM, Blogger VangelV said...

what happens when someone spends 100K on an antique and then puts it in their parlor for decades?

The money goes to the seller who uses it for consumption or investment. The antique goes to the buyer who wanted it. What exactly is your point?

 
At 1/04/2012 4:33 PM, Blogger Larry G said...

" First of all, in the near term the treasury has to repay the IOUs to the non-"trust fund".

yes.. for ALL of the trust funds...the highway trust fund, Medicare Part B... the Fed employees pension fund...


"Second, if you wish to argue for default go ahead. Ron and I have pointed out that the SS and Medicare math does not work and that the programs will have to be ended in their current form."

you've asserted that but you cannot undo the law that says that FICA cannot pay out more than it takes in - unless that law is changed and right now it has not been changed and benefits will automatically reduce to 75%.

that's not a default.

"While I can't speak for Ron, I have always believed that the government will not default in nominal terms. If it begins to print a lot of money and devalues the currency by enough it can pay off everyone with future revenues because the real purchasing power of those payouts will be insignificant. Think of retiring in 1970 and having a good pension that paid you 250% of the median income in the country. By 1980 inflation has destroyed your purchasing power and you are resorting to eating dog food and using food banks."

but none of this has anything to do with FICA and SS and the current structural deficit right now.

the appropriated income and other non-FICA tax revenues are what is at issue with the deficit and debt.

it's not only appropriated social insurance entitlements..it's other entitlements like the VA and military pensions and health care, etc as well as appropriated moneys for DOD and national defense in general.

This part of the budget could turn into a smoldering default but as long as FICA payroll tax is deducted, benefits will be paid - at reduced levels.

if benefits automatically adjust down if revenues fall. how can you say there is a future unfunded liability?

 
At 1/04/2012 7:13 PM, Blogger Zachriel said...

VangelV: Citation please.

As we noted above, along with providing the URL, it's from your own source.
http://www.fms.treas.gov/finrep10/stmt_comp_general/fr_stmt_general.html

VangelV: I already cited the, Fiscal Year 2010 Financial Report of the United States Government.

Yup. That's it. We also cited the International Federation of Accountants, who state that the U.S. does "apply full accrual accounting standards."
http://www.ifac.org/sites/default/files/downloads/IPSASB_Adoption_Governments.pdf

VangelV: This means that the deficit report counts the contributions as revenues for the year but does not count the liabilities because they will be paid out in the future.

Debt held in the Social Security Trust Fund is an asset to the Fund but a liability to the Treasury; they offset each other. That's what we mean by a consolidated financial statement. As for long term liabilities, Social Security is a pay as you go system. If the money is not there, benefits are automatically cut.

VangelV: Real GNP per adult was higher in 1929 than in 1936.

That is probably true. The per capita GDP was $8016 and $7629 respectively. Per capita GDP didn't exceed that of 1929 until 1939, then went through the roof during the Great Stimulus of WWII.

VangelV: If we set the GNP per adult as 100 for 1929 it falls to 75 by 1936.

It was 75% of the trend, in other words, 75% of where it "should have been," given normal growth due to technical progress, which Cole & Ohanian peg at 1.9% per year.

Cole & Ohanian, The Great Depression in the United States From A Neoclassical Perspective, Federal Reserve Bank of Minneapolis Quarterly Review 1999: "Since neoclassical growth theory indicates that these variables can be expected to grow, on average, at the trend rate of technology, they are also detrended, that is, adjusted for trend growth."

Zachriel: Which in a $2 trillion budget is essentially balanced, as we stated above....

VangelV: Those pants must be getting very warm.

Zachriel: If you want to exclude all trust funds, then the Clinton Administration took a budget with large deficits and essentially brought it into balance.

Zachriel: The Clinton Administration left structural surpluses in the unified budget, and essentially balanced on-budget.

Zachriel: We stated the facts, both ways, several times. The unified budget was in surplus. On-budget was near balance.

Zachriel: As for total obligations, on-budget was essentially balanced.

VangelV: Second, if you wish to argue for default go ahead.

Cutting benefits according to law is not a default.

 
At 1/04/2012 7:14 PM, Blogger Zachriel said...

Ron H: - he is clearly wrong.

That's irrelevant to whether or not Hazlitt took Keynes's words out of context as regards to Keynes's discussion of various definitions of savings and investments.

In any case, the classical theory is that if more people save, it increases the supply of money, which lowers interest rates. People then invest, creating more goods, and people spend again. A simple counterexample is a bank run, when people hoard their cash. (Keynes was well-aware of this, of course, and based his argument as a counterpoint.)

Money, or rather liquidity, has its own value. Go to any bank. Interest rates price liquidity, not simply money.

 
At 1/04/2012 7:16 PM, Blogger Zachriel said...

Zachriel: The per capita GDP was $8016 and $7629 respectively. *

* 2005 dollars

 
At 1/04/2012 7:37 PM, Blogger VangelV said...

yes.. for ALL of the trust funds...the highway trust fund, Medicare Part B... the Fed employees pension fund...

That has been my point. Congress has raided all of the trust funds and spent their excess contributions for general operations. Things are a lot worse than are being reported.

you've asserted that but you cannot undo the law that says that FICA cannot pay out more than it takes in - unless that law is changed and right now it has not been changed and benefits will automatically reduce to 75%.

that's not a default.


Yes it is. People have been sent documents telling them what they are supposed to receive. When they get a lot less that is a default no matter what you decide to call it. The government can pass a law to redefine a pound as 1000 grams. That won't make me weigh any less.

if benefits automatically adjust down if revenues fall. how can you say there is a future unfunded liability?

Because the promises exceed the money set aside to meet them. If you look at the GAAP based reports you will find unfunded liabilities.

 
At 1/04/2012 7:39 PM, Blogger Larry G said...

"VangelV: Second, if you wish to argue for default go ahead.

Cutting benefits according to law is not a default. "

that's right. if the rest of the budget operated the way that FICA/SS does.. each category could not spend more than it was originally appropriated.

FICA and SS, by law cannot spend more than FICA generates in revenue.

If absolutely nothing is done and no action taken - the worst that can happen to SS is that benefits will reduce to 75%.

that's not a default - on purpose ...designed that way on purpose.

the rest of the entitlements (as well as DOD) are annual appropriations and each year they go up and each year Congress votes to increase the funding to them even though the funding is obtained through selling treasury notes.

No treasury notes are sold to fund Social Security as it's funds come from payroll taxes not annual appropriations.

cutting SS will have zero impact on the deficit and debt.

 
At 1/04/2012 7:46 PM, Blogger Larry G said...

"yes.. for ALL of the trust funds...the highway trust fund, Medicare Part B... the Fed employees pension fund...

That has been my point. Congress has raided all of the trust funds and spent their excess contributions for general operations. Things are a lot worse than are being reported."

what would you do with gasoline taxes, health care premiums for Medicare and Tricare, etc if put them in interest bearing treasury notes?

all of these trust funds are represented as public debt in the total debt.

"that's not a default.

Yes it is. People have been sent documents telling them what they are supposed to receive. When they get a lot less that is a default no matter what you decide to call it. The government can pass a law to redefine a pound as 1000 grams. That won't make me weigh any less."

they have been told all along how FICA and SS "work"...it's not been a secret.

would you say a cut in DOD funds is a "default"?

or a cut in Medicare Part B subsidies? what are people who are on Medicare Part B "supposed" to get? What were they "promised"?


"if benefits automatically adjust down if revenues fall. how can you say there is a future unfunded liability?

Because the promises exceed the money set aside to meet them. If you look at the GAAP based reports you will find unfunded liabilities."

there were no promises other than the promise that SS would spend no more than FICA revenues available.

it's not a default if you tell people ahead of time that benefits cannot exceed what FICA generates.

ergo - no unfunded liabilities.

SS benefits are not contractually promised to be a certain amount anyhow as the program can change and the benefits you thought you were going to get - changed.

one example. changing the retirement age or the inflation index or means-testing, etc.

 
At 1/04/2012 8:21 PM, Blogger VangelV said...

Yup. That's it. We also cited the International Federation of Accountants, who state that the U.S. does "apply full accrual accounting standards."
http://www.ifac.org/sites/default/files/downloads/IPSASB_Adoption_Governments.pdf


As I wrote above, footnote 5 on page 28 of that report reads, "Most revenues are recorded on a modified cash basis. The 2010, 2009, 2008, 2007, and 2006 Statements of Social Insurance, including the related notes, are also included in the consolidated financial statements. The Statements of Social Insurance do not interrelate with the accrual-based consolidated financial statements." The reported deficit counts the contributions but ignores the liabilities.

Debt held in the Social Security Trust Fund is an asset to the Fund but a liability to the Treasury; they offset each other.

But it is not an asset in any real sense because it has no market value. The IOUs are promises to raise taxes in the future to pay off the contributions that were used to fund current operations.

As for long term liabilities, Social Security is a pay as you go system. If the money is not there, benefits are automatically cut.

That would require a default. And that won't happen until the crisis has taken down the currency. But by that time there would be no need to default because the benefits can be paid with worthless fiat currency that has very little purchasing power.

That is probably true. The per capita GDP was $8016 and $7629 respectively. Per capita GDP didn't exceed that of 1929 until 1939, then went through the roof during the Great Stimulus of WWII.

Actually, if you look at the Table on page 67 of the C&O paper you find that per capita GNP was around the same level in 1939 as it was in 1936. A lot of the people who you cite are missing the much bigger picture. The Great Depression was a period of riding prices for manufacturing products and labour even though unemployment was high. FDR cartelized the system to keep prices high because he, just like Hoover, thought that the problem was falling prices. By not allowing the market to clear Hoover and FDR ensured that there would be no sustainable recovery. The production of consumer and intermediate goods collapsed and government stepped in to make up for the shortfall of final demand.

It was 75% of the trend, in other words, 75% of where it "should have been," given normal growth due to technical progress, which Cole & Ohanian peg at 1.9% per year.

That is fine. Set GNP in 1929 at 100. A growth of 1.9% per year should have had it get to 114. That means that 75% of trend is 86 and the last time I looked 86 was less than 100.

And keep in mind the larger critique. If many of the inputs that go into calculating GNP have no market price because the government is meddling the number is inflated and looks better than it actually was. The example given in the paper was the decision to pay 50% more for domestic steel. GNP went up by more because of the higher price but less infrastructure was actually built with the same resources. All of the data is suspect and paints a picture that favours the government's story. As rational individuals we need to pull back the veil and see things as they are.

 
At 1/04/2012 8:30 PM, Blogger Zachriel said...

VangelV: People have been sent documents telling them what they are supposed to receive. When they get a lot less that is a default no matter what you decide to call it.

Those statements are called estimated benefits, and the future of Social Security is subject to public debate. It's not a default if it's not a contract, and would not be seen as a default in the markets.

Your concern about shoring up America's social insurance programs is admirable. The problem is not insurmountable. If Congress does nothing, publicly held debt will level off at about 75% of GDP.
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf

Of course, Congress is expected to do things, such as extend the AMT fix, the Medicare compensation fix, and the tax cuts. This is called the alternative policy assumptions, and they are not so rosy.

 
At 1/04/2012 8:36 PM, Blogger Zachriel said...

VangelV: That is fine. Set GNP in 1929 at 100. A growth of 1.9% per year should have had it get to 114. That means that 75% of trend is 86 and the last time I looked 86 was less than 100.

Okay. So, as we said, 1936 real GDP surpassed 1929 real GDP. But not per capita GDP, and certainly not to trend. Then again, Keynesians never said it did. Everyone agrees the Great Depression lasted until the start of the war.

VangelV: If many of the inputs that go into calculating GNP have no market price because the government is meddling the number is inflated and looks better than it actually was.

That would be compensated for by the deflator index.

 
At 1/04/2012 8:41 PM, Blogger Larry G said...

"Debt held in the Social Security Trust Fund is an asset to the Fund but a liability to the Treasury; they offset each other.

But it is not an asset in any real sense because it has no market value. The IOUs are promises to raise taxes in the future to pay off the contributions that were used to fund current operations."

the trust fund is the surplus that FICA generated in the past from FICA taxes - real money taken from people's paychecks and set aside to pay their future benefits.

"As for long term liabilities, Social Security is a pay as you go system. If the money is not there, benefits are automatically cut.

That would require a default."

it's only a default if the beneficiary has a contract promising a specific amount of benefit. He/she is only promised the defined benefits in effect at the time he/she receives them.

The program is legally structured to not pay out more than it takes in - from the get go.

By virtue of that fact there is no unfunded liability in the typical way that that term is used.

If a corporation made the same promise to it's employees - that it would pay them "their share" of whatever the total fund generated - there also would be no unfunded liabilities because the benefits are not defined as specific dollar amounts.

"And that won't happen until the crisis has taken down the currency."

whether that actually happens or not will not be due to social security but rather other factors.

"But by that time there would be no need to default because the benefits can be paid with worthless fiat currency that has very little purchasing power."

but you are presuming that SS benefits will be paid from the general fund and that would require a change in the current law.

before that ever happens the rest of the non-FICA budget - the appropriated entitlements and DOD would face much worse outcomes.

as long as the payroll tax stays in place, benefits will be paid.

 
At 1/04/2012 8:49 PM, Blogger Larry G said...

the unfunded liabilities of Medicare Part B, MedicAid, DOD, etc are real because their funded is appropriated annually and unless they change programs - it goes up so if you total up the increase each year and add it up over a 75 year horizon.. you do have significant unfunded liabilities.

But I'd point out that only entitlements use 75-year horizons for future anticipated costs.

For instance, what is the unfunded liability for DOD ? VA hospitals... Military health care, pensions, etc?

the focus is usually on entitlements but it includes all other spending funded from income taxes...

 
At 1/04/2012 8:59 PM, Blogger Zachriel said...

This comment has been removed by the author.

 
At 1/04/2012 9:01 PM, Blogger Zachriel said...

VangelV: The Great Depression was a period of riding prices for manufacturing products and labour even though unemployment was high.

According to BLS data, inflation was negative from 1929 to 1933, then moderate until the onset of WWII. (Note also the sustained hyperinflation preceding the 1921 recession.)
http://tinyurl.com/InflationDepression

Furthermore, the country was awash in cheap labor, people willing to work far below the prevailing wage, yet there were still no jobs.

Larry G: For instance, what is the unfunded liability for DOD ?

Should the government set aside money every time a child is born to account for their public education?

 
At 1/04/2012 9:10 PM, Blogger Larry G said...

"Larry G: For instance, what is the unfunded liability for DOD ?

Should the government set aside money every time a child is born to account for their public education? "

the "solution" to unfunded liabilities for pensions for many corporations and more and more states is to switch from defined benefits to defined contributions.

The Feds did this almost 20 years ago for govt pensions.

the result is - no promises on specific payouts.

the payouts are whatever they happen to be.

To a certain extent - that's what will happen to SS.

just as in defined contribution pension plans - there is no guarantee of benefits and indeed we have found out that there are indeed no guarantees as many pension plans seriously underperformed.

So.. I'm not sure what the deal is with SS not paying "full" benefits either since they never promised specific payouts either.

Isn't that the standard with most pension plans now days anyhow?

Did the companies and the Feds..when they changed from define benefits to defined contributions.. "default" on their "promises" to employees?

 
At 1/04/2012 9:56 PM, Blogger Larry G said...

I'll contribute this FWIW:

The True Federal Debt

http://economix.blogs.nytimes.com/2012/01/03/the-true-federal-debt/

 
At 1/04/2012 11:21 PM, Blogger VangelV said...

Zachriel: If you want to exclude all trust funds, then the Clinton Administration took a budget with large deficits and essentially brought it into balance.

But you can't exclude the accrued liabilities. When Clinton left office the national debt was 40% higher than when he came in. This was during a period when there were massive injections of liquidity by Alan Greenspan and when those injections created a great capital gains boom that filled the coffers of states and the federal government. While not as bad as Bush, Clinton's performance was terrible. During the same period as he was in office Canada's socialist Prime Minister and his Finance Minister manged to enact real cuts that significantly improved the debt picture for their government.

Zachriel: The Clinton Administration left structural surpluses in the unified budget, and essentially balanced on-budget.

No. The assumptions that were made were not valid. There was no way for the federal government and states to continue getting a massive influx of capital gains. When the bubble burst in Clinton's last year in office there were massive capital losses and the revenues dried up. And while not as big a spender as many other presidents, Clinton still did little to curb spending growth.

Zachriel: We stated the facts, both ways, several times. The unified budget was in surplus. On-budget was near balance.

When you don't count the liabilities you can report a surplus. But it does not mean that there was a surplus. And if you check the numbers you will still find a deficit because the debt went up.

Cutting benefits according to law is not a default.

When you tell people that they will get $1,000 a month and wind up giving them $600 that is a default.

Zachriel: As for total obligations, on-budget was essentially balanced.

Essentially? The debt went up even though the liabilities were not being counted. Unfunded liabilities went up by a few hundred billion. That is not a surplus.

 
At 1/05/2012 8:36 AM, Blogger Zachriel said...

Zachriel: If you want to exclude all trust funds, then the Clinton Administration took a budget with large deficits and essentially brought it into balance.

VangelV: But you can't exclude the accrued liabilities.

We only included on-budget. The Trust Fund surplus was used to pay down the publicly held debt. The increased debt of the Treasury to the Trust Fund was offset by the decrease in publicly held debt.

VangelV: When Clinton left office the national debt was 40% higher than when he came in.

Yes, the first few years included substantial deficits. It took time to turn it around. By 2000, the U.S. was looking at structural cash surpluses.

VangelV: When the bubble burst in Clinton's last year in office there were massive capital losses and the revenues dried up.

The recession was mild and short-lived. There were real gains in productivity during the 1990s. Real annual growth in GDP never even dropped below zero (BEA.gov):

1997 4.5
1998 4.4
1999 4.8
2000 4.1
2001 1.1
2002 1.8
2003 2.5

Face it. The U.S. had a choice to make, and they chose wrong. It's not all lost, though. Americans are very inventive and productive people. They just have to make a few good decisions going forward. However, it does seem that their political system is dysfunctional. They can't even pass what they call the debt-ceiling to pay for things they are already legally committed to without a huge amount of political brinkmanship.

VangelV: When you don't count the liabilities you can report a surplus. But it does not mean that there was a surplus. And if you check the numbers you will still find a deficit because the debt went up.

The total deficit, including money owed to the Trust Fund, went up $18 billion in 2000. In a $2 trillion budget, that's essentially balanced. That means the U.S. paid for all its expenses, and still had the Social Security surplus, which was used to pay down the publicly held debt.

VangelV: When you tell people that they will get $1,000 a month and wind up giving them $600 that is a default.

No. There is no legal liability. Nor will the markets consider it a default. The amount of benefits can be changed, either through existing law, or through new laws passed in the interim. That's how it works.

 
At 1/05/2012 1:30 PM, Blogger Ron H. said...

Ron H: " To cause an individual to change their natural time preference and instead defer consumption, requires that they will have more to consume in the future than they have now. That "more" is called interest." "

Larry: "no.

what do you think saving for a 401(k) is?
"

Q.E.D.

Keynes and his followers don't understand interest.

 
At 1/05/2012 4:57 PM, Blogger Larry G said...

where does the "interest" come from?

 
At 1/05/2012 7:50 PM, Blogger Ron H. said...

"where does the "interest" come from?"

Larry, I cannot teach you economics. You have demonstrated by your many comments, especially those involving government programs, that you have no aptitude for it, and understand none of the basic concepts.

 
At 1/05/2012 8:09 PM, Blogger Larry G said...

it's a serious question.

it has to do with what happens to savings... especially when there is a down economy....

so humor me and tell me where interest comes from....how does it get generated?

 
At 1/05/2012 8:16 PM, Blogger Larry G said...

think of this as your opportunity to "teach"....and help me relieve some ignorance. It think you can do this without being mean spirited about it.

sometimes...going back and looking at the basics can help confirm/validate what we thought we knew about economics...

and of course.. we are ALL ignorant - just on different things.

As you get older, you realize that you know a whole lot less than you thought you did.... and you have to go back and retrace some steps sometimes to make sure you still understand.

know what I mean jellybean?

 
At 1/05/2012 8:18 PM, Blogger Zachriel said...

Ron H: I cannot teach you economics.

Larry G: where does the "interest" come from?

It's the cost of borrowing money. A typical transaction would be to borrow money to invest, then use the profits of that investment to repay the lender, plus interest.

The classical theory is that if more people begin to save than consume, it increases the supply of money, which lowers interest rates. With low interest rates, people borrow to invest, creating more and cheaper goods. With more and cheaper goods, people begin to save less and consume more. It's a simple, self-regulating system—only it doesn't always work that way.

A simple counterexample is a bank run, when people hoard their cash. Money, or rather liquidity, has its own value. Go to any bank. Interest rates price liquidity, not simply money.

 
At 1/05/2012 8:23 PM, Blogger Larry G said...

Thanks Z..

but I'm asking how the interest is generated...

where does your savings go to to earn interest in a down economy?

why does interest rates drop extremely low in a down economy?

 
At 1/05/2012 8:31 PM, Blogger Larry G said...

I know a fella that get 75K from the proceeds of a deceased parents home and he said the bank would barely give him 1% even in a CD.

why is that?

a few years back.. I sort of remember even as much as 10% for a CD.

my question relates back to the idea of time-preference and Keynes ideas.

 
At 1/05/2012 8:37 PM, Blogger Zachriel said...

Larry G: It's the cost of borrowing money.

Breaking it down some more. Popeye has in his pocket the price of a hamburger, say $1. Wimpy says, "I'll gladly pay you Tuesday for a hamburger today." Popeye has no incentive to lend Wimpy the money, as what Wimpy offers is to take Popeye's $1 and return it on Tuesday. While you could say that Popeye will break even, there's a risk that Wimpy won't repay him. Or Popeye might need the money himself before Tuesday. He can't spend Wimpy's promise! There's an opportunity cost. Now, if Wimpy says he will repay Popeye the dollar, plus the price of a soda, then Popeye might realize a profit. The soda is the interest, the cost of inducing Popeye to part with his money.

Generally, the more reliable someone is, the lower their interest rate. It also depends more generally on the availability of money. If that's the last dollar in the world, then Popeye will want a lot to lend it. If there's lots of dollars in the world, then Popeye will probably lend it cheaply. This is standard supply and demand. It also depends on demand. If people are bidding for Popeye's dollar, then the price will be higher.

Classical economists consider money as simply the mechanism of trading goods. You sell your hamburger for dollars and trade those dollars for ketchup. The money is just a conduit.

But Keynes realized that this is not necessarily the case. Money, or more specifically, liquidity has its own intrinsic value.

Consider again classical theory. Money you don't spend is savings. Savings are then lent for investments. There is a symmetry. But investments are "sticky." That is, once you invest, you may not see your money for a while. Your money is no longer liquid. If there is a financial shock, you could be caught short, that is, not have the ready cash to meet your obligations, even though you have plenty of assets. You could be forced to sell at a loss, or worse.

If there is a financial shock, people may stop spending. Perhaps they are worried about their income or meeting their financial obligations. According to classical theory, these "savings" then become available for investments. But this is not always the case. People may also withdraw their money from long term investment vehicles in order to find safety in liquidity. When this happens, demand and investment drop, and it can cause a recession.

 
At 1/05/2012 8:42 PM, Blogger Zachriel said...

This comment has been removed by the author.

 
At 1/05/2012 8:44 PM, Blogger Zachriel said...

In a deep recession, people avoid long term investments. Why should they invest when prices may drop, when there is lowered rates of return, and higher risks? People want liquidity, so there is little demand for long term investments and rates drop. As everyone is making the same decision, rates race to the bottom.

 
At 1/05/2012 8:45 PM, Blogger Larry G said...

but even short term investments pay far lower interest...right?

right now.. some banks don't even want your money.. at all...

 
At 1/05/2012 8:48 PM, Blogger Larry G said...

so you're talking about opportunity costs and liquidity...

and I appreciate your analogy...brings back that Econ 101 class... :-)

but what happens to short term and long term "interest" when the economy has tanked?

we have this dichotomy where banks are paying very low interest rates while commercial businesses cannot get loans...

 
At 1/05/2012 8:55 PM, Blogger Zachriel said...

Larry G: right now.. some banks don't even want your money.. at all...

In a deflationary economy, cash is king. The U.S. went through deflation in 2009, and the threat of deflation through 2010. Now that inflation is back up to about 3%, you can expect cash to start moving again. Why? Because it loses value standing still.

 
At 1/05/2012 8:59 PM, Blogger Larry G said...

okay.. but in terms of time-preference...if the banks are still not paying interest that at least stay with inflation...

see my point?

the banks don't want the savings...they don't want to loan money nor pay interest.

companies on sitting on cash reserves and will not invest it either... because the returns are low and the risk is high.

people are not deferring immediate consumption for deferred consumption... they're holding on to their money for fear they'll need it later...

this is not deferred consumption...

right?

 
At 1/06/2012 2:28 AM, Blogger Ron H. said...

Larry: "where does the "interest" come from?"

Z: "It's the cost of borrowing money. A typical transaction..."

Z: "The classical theory is that if more people begin to save than consume... "

Z: "A simple counterexample is a bank run..."

Z: "Breaking it down some more. Popeye..."

Z: "Generally, the more reliable someone is, the lower..."

Z: "Classical economists consider money as simply the mechanism..."

Z: "But Keynes realized that this is not necessarily the case..."

Z: "Consider again classical theory. Money you don't spend is savings..."

Z: "If there is a financial shock, people may stop spending..."

Z: "In a deep recession, people avoid long term investments..."

Z: "In a deflationary economy, cash is king..."

Larry: "where does the "interest" come from?"

 
At 1/06/2012 7:11 AM, Blogger Larry G said...

the interest comes from people who pay to use the money.

what happens to time preference when demand to borrow money is so low that interest is near zero?

what happens to money for investments when the money being saved is long term 20, 30 years (i.e. for retirement)?

if you think in terms of the theories about money earned but not spent but instead "saved" time preference is affected by 2 things:

1. - the relatively long time that retirement money sits and is not spent for consumption

2. - what "kinds" of investments, retirement money seeks when interest rates are cratered and the stock market is full of risk.

what happens to this money?

if people are concerned that their 401Ks are not earning enough "interest" for them to retire on schedule -how does this affect savings and time preference?

I am familiar with the theories guys. I'm asking for practical explanations of these things and how the theory explains or does not explain them.

Money earned - in theory - is money that is spent for consumption but money not spent, saved, for long periods of time - how does it get back to the economy when the economy has little or no demand for capital?

 
At 1/06/2012 8:41 AM, Blogger Zachriel said...

Larry G: what happens to time preference when demand to borrow money is so low that interest is near zero?

Or less than zero. Again, consider the case of a deflationary economy. In those circumstances, why should the bank pay you interest? They should charge you to hold your money! Of course, as long as there is physical currency, interest rates can't drop below zero, because people can opt to put their money in the sock drawer.

Assume, for whatever reason, inflation is negative and demand is down. Consider a widget manufacturer. If she invests a dollar into manufacturing widgets, by the time she gets them made and marketed, they are only worth 97¢. Plus if demand dropped precipitously, she may already have a warehouse full of widgets that she can't sell fast enough to avoid the drop in price. Why would she borrow to invest in an expansion of capacity? She won't.

In the classical analysis, as prices drop, demand should increase. And that is true in an ideal 'frictionless' economy. But that is not necessarily true in the real world.

Consider the more pertinent case, the housing market. When prices are rising, people build more and more houses. If prices drop, precipitously, such as after a market bubble, homeowners have long term financial commitments, and short term cash flow problems. People are stuck with houses that they can't easily sell, but can't keep either. The housing market is sticky.

Furthermore, this affects the labor market. If someone can't sell their house, they can't move to where their labor would be most productive. So not only is there stickiness in the housing market, but this causes stickiness in the labor market.

Under classical theory, there can't be a general glut, Say's Law. But in the real world, friction means it takes time for the economy to adjust, and a sector, such as housing, can be so large as to overwhelm an economy.

And so with interest rates. It takes time for people to liquidate their monetary assets when held in long term investments. This also creates friction, and a financial shock can cause a rush to the bottom. Furthermore, rates can't drop below zero, so once they do hit zero, the market signal between consumption, savings and investment (mentioned by Ron H above) is rendered mute.

There is even a bottom to the cost of labor. A free marketer in 1845 England might say of the Irish, that maybe next year they will plant a different crop that doesn't fail like the potato. But as the economist said, "In the long run, we're all dead." By next year, the starving Irish will have died or left for distant lands. You have lost the very seed of future productivity. An Irishman offered another market solution, "A Modest Proposal for Preventing the Children of Poor People in Ireland From Being a Burden on Their Parents or Country, and for Making Them Beneficial to the Publick."

 
At 1/06/2012 9:00 AM, Blogger Larry G said...

I appreciate the thoughts, seriously.

so if someone has money in a bank and the bank promises to pay them interest on that money - and they've loaned that money to a homeowner who is currently underwater and he abandons the mortgage..what happens to the guy's money the bank is holding and promised to pay interest??

or if the bank sold the mortgage and got money for it... where is that money right now if new houses are not being sold and there is little demand for mortgages?

I'm looking at this from the perspective of time preference.

in theory - the local bank operates by taking deposits..issuing a "promise to pay" to the depositor then loaning that money to a person buying a house.

what would the bank do with the depositors money if there is little or no demand for it for mortgages? How would they earn interest on that money to pay interest to the depositor ?

you'd think they still have the depositors money "invested"...."somewhere" right?

what is the bank investing that money in - in a down economy?

in a down economy - it appears to me that there is more money not in circulation but instead sitting in bank vaults... because no one wants that money much less is willing to pay interest to use it.

 
At 1/06/2012 9:45 AM, Blogger Zachriel said...

Larry G: so if someone has money in a bank and the bank promises to pay them interest on that money - and they've loaned that money to a homeowner who is currently underwater and he abandons the mortgage..what happens to the guy's money the bank is holding and promised to pay interest??

Assuming the classical situation, the bank loses money, but is still obligated to make good on the deposit. If bank has too many losses, it folds, and the depositers lose their money. Too many banks fail, and there could be a run on the banks.
http://www.youtube.com/watch?v=_Er69b4HMl8

Of course, in many cases, the bank doesn't actually hold the mortgage, and many deposit accounts are insured by FDIC.

Larry G: or if the bank sold the mortgage and got money for it... where is that money right now if new houses are not being sold and there is little demand for mortgages?

The seller of the home got the principal. The bank got the security interest. If they sold the security interest, they would have been repaid the principal they initially laid out, along with a small profit.

Banks have money. They don't have sufficient qualified borrowers. The widget maker doesn't want to expand. And those that want and need to borrow are just those people who are having the most trouble making their payments, and are at the highest risk of default.

A banker will lend you an umbrella when the sun shines, but will demand it back when it rains.

Banks are putting their money into low yield, but safe bonds, especially U.S. government securities. (The U.S. is still borrowing, and has a AAA/AAA/AA+ raiting.) Some of the money is actually being deposited with the Federal Reserve itself (at 0.25%)! (This results in destruction of the money in a manner parallel to creation of money.) In other words, the money is essentially idled. The velocity of money has dropped due to friction.

We could discuss banking debt-multiplication, but we'll leave that aside for now.

Larry G: in a down economy - it appears to me that there is more money not in circulation but instead sitting in bank vaults...

How quaint.

;-)

 
At 1/06/2012 10:05 AM, Blogger Larry G said...

Banks are putting their money into low yield, but safe bonds, especially

...

In other words, the money is essentially idled.

Larry G: in a down economy - it appears to me that there is more money not in circulation but instead sitting in bank vaults...

How quaint. "

or is it sitting in US govt vaults or please explain what you mean that the money is "idled".

so how does this get explained by time preference?

 
At 1/06/2012 11:05 AM, Blogger VangelV said...

We only included on-budget. The Trust Fund surplus was used to pay down the publicly held debt. The increased debt of the Treasury to the Trust Fund was offset by the decrease in publicly held debt.

But that is the problem for you liars. You can't exclude the accrued liabilities and pretend that there are real surpluses.

Yes, the first few years included substantial deficits. It took time to turn it around. By 2000, the U.S. was looking at structural cash surpluses.

False. The US was dependent on capital gains revenues that were created by a massive equity bubble. There is nothing structurally sound about a bubble.

 
At 1/06/2012 11:21 AM, Blogger Zachriel said...

VangelV: You can't exclude the accrued liabilities and pretend that there are real surpluses.

It's called a cash-surplus, or what most people mean when they say "surplus." As for on-budget, it was essentially balanced, and the Social Security surpluses were used to retire publicly held debt.

VangelV: The US was dependent on capital gains revenues that were created by a massive equity bubble.

We have pointed this out to you several times. Capital gains revenues never exceeded $119 billion in a $2000 billion budget, and only accounted for a small portion of the cash surplus in 2000.

VangelV: There is nothing structurally sound about a bubble.

While some stocks were overvalued, there were real gains in productivity during the 1990s, the recession was mild and short-lived, and year-to-year growth never went negative.

 
At 1/06/2012 11:31 AM, Blogger VangelV said...

The recession was mild and short-lived. There were real gains in productivity during the 1990s. Real annual growth in GDP never even dropped below zero (BEA.gov):

1997 4.5
1998 4.4
1999 4.8
2000 4.1
2001 1.1
2002 1.8
2003 2.5


I think that you need to read your Kurt Richebacher.

http://www.gold-eagle.com/gold_digest_03/richebacher031003.html

Face it. The U.S. had a choice to make, and they chose wrong.

Yes, the government and the Fed meddled with the economy.

It's not all lost, though.

Correct. The US can still default on its obligations, cut the size of government, and cut taxes. But that is not what the economic illiterates are proposing. Instead, they call for more of the same.

Americans are very inventive and productive people. They just have to make a few good decisions going forward.

Each individual should make decisions for himself. But that is not what the progressives are calling for.

However, it does seem that their political system is dysfunctional.

While not as bad as Europe's the US is not far behind.

They can't even pass what they call the debt-ceiling to pay for things they are already legally committed to without a huge amount of political brinkmanship.

Why not just cut spending? Unfunded liabilities are more than $100 trillion and you call for more debt?

The total deficit, including money owed to the Trust Fund, went up $18 billion in 2000. In a $2 trillion budget, that's essentially balanced. That means the U.S. paid for all its expenses, and still had the Social Security surplus, which was used to pay down the publicly held debt.

None of this is true. First, the accrued liabilities were ignored. Second, the increased revenues were driven by a massive bubble in the NASDAQ.

No. There is no legal liability. Nor will the markets consider it a default. The amount of benefits can be changed, either through existing law, or through new laws passed in the interim. That's how it works.

Sure there is. If you tell people that you are going to take 15% of their income split between them and their employer and promise a certain amount later that is a legal liability. If you reduce it by 50% you have defaulted.

 
At 1/06/2012 11:52 AM, Blogger VangelV said...

It's called a cash-surplus, or what most people mean when they say "surplus." As for on-budget, it was essentially balanced, and the Social Security surpluses were used to retire publicly held debt.

No it isn't what most people mean. Most people own equities. They understand that it is not legal for companies to ignore liabilities. They are members of pension plans and don't like it when there are shortfalls that have to be made up.

We have pointed this out to you several times. Capital gains revenues never exceeded $119 billion in a $2000 billion budget, and only accounted for a small portion of the cash surplus in 2000.

But $119 billion is a big number that can't be ignored as you would have us do. It was part of the massive increase in revenues that were created by the bubble. The new jobs in high paying tech jobs helped increase revenues. They helped cut outflows to social programs. Companies paid more in taxes to all levels of government. Once the bubble burst that ended. Tax revenues dropped well below trend and outflows increased. The debt fuelled activity in the 1990s created a false picture of the economy and when the inevitable slowdown in the rate of monetary expansion came after 2000 the economy was hit hard and entered into a recession. You can't ignore this because you have a political agenda that you wish to support.

While some stocks were overvalued, there were real gains in productivity during the 1990s, the recession was mild and short-lived, and year-to-year growth never went negative.

No, there wasn't much of a real increase in productivity. Many of the reported gains were from the expansion of money losing companies that were funded by an expansion of credit and the issuance of equity. These companies generated very little in revenues and had little in the way of marketable output. When the bubble broke in 2000 their value collapsed and by doing so exposed the productivity illusion spun by the Fed and the BLS.

 
At 1/06/2012 12:18 PM, Blogger Zachriel said...

VangelV: The US can still default on its obligations, cut the size of government, and cut taxes.

The U.S. defaulting on its debt for the first time in its history would wreak carnage to the U.S. and global economies.

It's hard to take such a position seriously.

 
At 1/06/2012 7:07 PM, Blogger VangelV said...

The U.S. defaulting on its debt for the first time in its history would wreak carnage to the U.S. and global economies.

It's hard to take such a position seriously.


It is hard to take anyone seriously when he claims that a default would be the first in history.

Just off the top of my head, the US defaulted on the Continental. It defaulted on the Greenback. It defaulted on the Liberty Bond when it refused to honour the promised gold conversion rate. It defaulted in 1933 and 1971 when it failed to keep its gold conversion promises.

 
At 1/06/2012 10:20 PM, Blogger VangelV said...

Those statements are called estimated benefits, and the future of Social Security is subject to public debate. It's not a default if it's not a contract, and would not be seen as a default in the markets.

Sure it would. Just as Europe's repudiation of benefits was seen as a default.

Your concern about shoring up America's social insurance programs is admirable.

I am not at all concerned because the math tells us that default is inevitable. In fact, I have made bets that there will be a default through the devaluation route.

The problem is not insurmountable. If Congress does nothing, publicly held debt will level off at about 75% of GDP.
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf


Debt is already at more than 100% of GDP. The GAAP deficit is more than 30% of GDP. That is a problem even if you choose to ignore it. As I have written before, it is easy to ignore reality. What is not so easy is to ignore the consequences of that reality.

Of course, Congress is expected to do things, such as extend the AMT fix, the Medicare compensation fix, and the tax cuts. This is called the alternative policy assumptions, and they are not so rosy.

Congress is incompetent. So is the executive. The voters still want free lunches. In the end, everyone will get what they deserve.

 
At 1/06/2012 10:30 PM, Blogger VangelV said...

the trust fund is the surplus that FICA generated in the past from FICA taxes - real money taken from people's paychecks and set aside to pay their future benefits.

It was taken from individuals and their employers but was spent right away by Congress. Congress gave the 'trust funds' IOUs that have no market value. These IOUs are just promises to raise future taxes to pay back the money stolen from contributors. The fact that you can't figure out should be disturbing to you.

it's only a default if the beneficiary has a contract promising a specific amount of benefit. He/she is only promised the defined benefits in effect at the time he/she receives them.

But the contributors do have a promise from the government. They are told that their benefits are determined by their earnings and contributions and on the age at which the individual retiree chooses to begin receiving payments. There are specific formulas that do not say that benefits would be reduced if Congress can't raise enough in new taxes to return to the 'trust funds' what it stole.

The program is legally structured to not pay out more than it takes in - from the get go.

This is totally false. The program was structured to build up a surplus that would go into a trust fund. Once benefits exceeded contributions the trustees would wind down the surplus. The problem is that there is nothing in the trust fund that can be used to sell in order to pay contributions. The IOUs are just promises to increase taxes to replace the stolen funds.

You boys really should do some reading because nobody is making the ridiculous claims that you are.

 
At 1/06/2012 10:36 PM, Blogger VangelV said...

According to BLS data, inflation was negative from 1929 to 1933, then moderate until the onset of WWII. (Note also the sustained hyperinflation preceding the 1921 recession.)

Read the Cole and Ohanian paper again. The price of skilled labour and commodities went up sharply after 1933. Take a look at Table 6, Table 6=7, Table 8, and Table 9. Yes, prices of stocks, automobiles, farm land, equities, and corporate bonds went sharply lower. But both Hoover and FDR worked hard to keep other prices from falling and were very successful. So while skilled workers had a huge jump in their purchasing power marginal workers and the unemployed got wiped out.

 
At 1/06/2012 10:47 PM, Blogger Larry G said...

"the trust fund is the surplus that FICA generated in the past from FICA taxes - real money taken from people's paychecks and set aside to pay their future benefits.

It was taken from individuals and their employers but was spent right away by Congress. Congress gave the 'trust funds' IOUs that have no market value. These IOUs are just promises to raise future taxes to pay back the money stolen from contributors. The fact that you can't figure out should be disturbing to you."

it works the same that all Federal Trust Funds work. I can "figure it out" but can you? The surplus is a gnat on a dogs butt that you fixate on. The real money comes from FICA - every year - and gets spent every year. The trust fund is about 2 years worth of SS benefits.

It's true that it's gone but the primary funding for SS is the FICA payroll tax as it is a pay-as-you-go system.

You know this but you refuse to admit it.

"it's only a default if the beneficiary has a contract promising a specific amount of benefit. He/she is only promised the defined benefits in effect at the time he/she receives them.

But the contributors do have a promise from the government. They are told that their benefits are determined by their earnings and contributions and on the age at which the individual retiree chooses to begin receiving payments. There are specific formulas that do not say that benefits would be reduced if Congress can't raise enough in new taxes to return to the 'trust funds' what it stole."

these benefits are paid primarily from FICA taxes not the "trust fund" and those benefits have ALWAYS been subject to change.

The trust fund does nothing except delay the eventual outcome by 2 or 3 years when SS will, by law, have to reduce in accordance with what FICA generates.

No other program works this way - i.e. automatic reductions to not exceed revenues.


"The program is legally structured to not pay out more than it takes in - from the get go.

This is totally false. The program was structured to build up a surplus that would go into a trust fund."

The basic program works EXACTLY that way.

The trust fund buildup was an initial attempt to build up a TEMPORARY surplus when the boomers started retiring.

The surplus was only designed to be a "bridge" to an ultimate restructuring and reform of SS to deal with the demographic changes of fewer workers and more retirees.
....continue

 
At 1/06/2012 10:47 PM, Blogger Larry G said...

....continue

The trust fund is NOT the primary revenue source for paying SS benefits and never was designed to be either.

"Once benefits exceeded contributions the trustees would wind down the surplus. The problem is that there is nothing in the trust fund that can be used to sell in order to pay contributions. The IOUs are just promises to increase taxes to replace the stolen funds."

that may be true but again - the trust fund is not what you think it is.

it is not the primary revenue source for SS benefits. FICA is that source.

The trust fund is the result of higher FICA taxes since 1983 to build up a bubble while SS was gradually reformed over the years.

"You boys really should do some reading because nobody is making the ridiculous claims that you are."

You have been given many, many links explaining the trust funds and how they work but you refuse to believe.

Every day - FICA payroll taxes are traded for new Treasury Securities and every day older Treasury notes are redeemed for cash plus interest.

Thousands of transactions occur every week.

Since 1983 - FICA payroll taxes exceeded what was redeemed and the surplus gradually built up.

It was never designed to be a primary source of revenue for SS.

At 2.1 trillion, it has at best 2-3 years worth of benefits because it is exhausted.

After than - all benefits come from FICA.

you simple did not understand how it worked and now even though you've been given dozens of links showing you how it works - you continue to spout the propaganda that you originally believed.

you're just flat wrong. you know it. but you continue to spout this foolishness.

 
At 1/07/2012 10:03 AM, Blogger VangelV said...

it works the same that all Federal Trust Funds work.

Correct. All of the excess contributions have been looted by Congress and replaced by IOUs.

I can "figure it out" but can you?

No, you have not figured it out. You think that just because Congress steals from all so-called 'trust funds' it must be all right that it steals from SS and Medicare. But it isn't. All that does is hide the problem.

The surplus is a gnat on a dogs butt that you fixate on.

Not at all. I want to see the government runs a real surplus. The problem is that it doesn't.

The real money comes from FICA - every year - and gets spent every year. The trust fund is about 2 years worth of SS benefits.

No, it does not have "about 2 years worth of SS benefits". There is nothing in the funds but IOUs. That means that if the debt ceiling does not go up the President can choose not to pay out 100% of the promised benefits.

It's true that it's gone but the primary funding for SS is the FICA payroll tax as it is a pay-as-you-go system.

You know this but you refuse to admit it.


You have not been paying attention. My complaint is that it is a pay as you go system but that it pretends that it is not. That is why you have this charade about 'trust funds' and 'special purpose treasuries' that have no real market value and are just a promise to tax more in the future.

What you seem to be justifying is robbing young worker to give money to old retirees who are richer. Sorry but I am happy to say that I do not share your fondness for the morality of lying and looting.

 
At 1/07/2012 10:14 AM, Blogger Larry G said...

it works the same that all Federal Trust Funds work.

Correct. All of the excess contributions have been looted by Congress and replaced by IOUs."

we agree on this.


"I can "figure it out" but can you?

No, you have not figured it out. You think that just because Congress steals from all so-called 'trust funds' it must be all right that it steals from SS and Medicare. But it isn't. All that does is hide the problem."

nope. I just point out that this is not a "SS program problem".

"The surplus is a gnat on a dogs butt that you fixate on.

Not at all. I want to see the government runs a real surplus. The problem is that it doesn't."

I would to but in the bigger scheme of FICA/SS - this is little more than a side issue over a 75 year horizon.

"The real money comes from FICA - every year - and gets spent every year. The trust fund is about 2 years worth of SS benefits.

No, it does not have "about 2 years worth of SS benefits". There is nothing in the funds but IOUs. That means that if the debt ceiling does not go up the President can choose not to pay out 100% of the promised benefits."

it's lost "benefit" using your parlance is about 2-3 years worth of benefits.

He can - and he can do it for ALL trust funds so affected - again this is not just a SS "problem".

"You have not been paying attention. My complaint is that it is a pay as you go system but that it pretends that it is not."

no.. the program has always been defined as a pay-as-you-go.

Your problem here is that you believed some of the propaganda and misinformation then when the actual data was presented to you - you still insist on the illicit propaganda narrative.

" That is why you have this charade about 'trust funds' and 'special purpose treasuries' that have no real market value and are just a promise to tax more in the future."

The 'charade' was that those who propagandized led those willing to believe it that the Trust fund was the primary revenue source of SS and it's not - it's basically a conduit through wish FICA revenues go in - and come out - and what remains is the "trust fund" balance.

"What you seem to be justifying is robbing young worker to give money to old retirees who are richer. Sorry but I am happy to say that I do not share your fondness for the morality of lying and looting."

no. what I'm saying is that in a pay-as-you-go system where the demographics go upside down that the program has to be restructured to reflect that reality.

the good news that you fail to acknowledge here is that out of all the Federal programs - this is about the only one that is restricted by law to not paying out more than it has revenues for - unless action by Congress is taken.

We should be so lucky to have other govt programs like Medicare Part B and DOD operated under such rules. Both of them allow deficit spending but FICA/SS does not.

 
At 1/07/2012 10:28 AM, Blogger Zachriel said...

This comment has been removed by the author.

 
At 1/07/2012 10:35 AM, Blogger Zachriel said...

VangelV: Debt is already at more than 100% of GDP.

Yes. Leave aside the relatively small issue of the Trust Fund, which as the CBO data shows can be fixed under current law (such as allowing the tax cuts to expire).

Let's look at the big picture. What is the total unfunded liability, assuming there are no changes to basic benefits? Over what period? And what is the expected U.S. GDP over the same period?

VangelV: The IOUs are just promises to increase taxes to replace the stolen funds.

Or borrow. Generally, if the U.S. reduces its public debt, then it will have at least some of the necessary resources.

VangelV: Read the Cole and Ohanian paper again. The price of skilled labour and commodities went up sharply after 1933.

Cole and Ohanian seem to be setting date ranges to support their theory rather than letting the data speak, such when they chose 1934-1939, which included a recession and excluded the severe contraction preceding the period.

Let's look at a single data-set, oil prices (in then-current and in 2010 dollars):

1929, 1.27, 16.15
1930, 1.19, 15.53
1931, 0.65, 9.30
1932, 0.87, 13.88
1933, 0.67, 11.27
1934, 1.00, 16.28
1935, 0.97, 15.40
1936, 1.09, 17.14
1937, 1.18, 17.91
1938, 1.13, 17.48
1939, 1.02, 16.00

Here's the graph.
http://tinyurl.com/HistoryofOilPrices

Yes, there was a spike in real prices from 1933 to 1934. That's because GDP spiked—but only to return prices to pre-Depression levels. Notice the severe drop in 1931, as the economy contracted. Similarly with other commodities from the period. But looking at the overall graph and taking it from 1929, there is nothing anomalous about the trend, other than the severe dip in 1931 at the nadir of the contraction.

Now, look at the wage data. Well, there is severe deflation. So if you receive the same nominal wage, then your real wage increases. Under classical theory, wages should drop and employment rebound; but even when the Supreme Court overturned many of the NRA controls, wages remained sticky. That's just a fact of the labor market. And not all jobs were in manufacturing. As we said, the U.S. was awash in people willing to work for next to nothing, but there simply weren't any jobs.

 
At 1/07/2012 2:38 PM, Blogger Ron H. said...

Ron H: - he [Keynes] is clearly wrong.

Z: "That's irrelevant to whether or not Hazlitt took Keynes's words out of context as regards to Keynes's discussion of various definitions of savings and investments."

Keynes being wrong is irrelevant? Hazlitt correctly pointing out Keynes' error, but not quoting full context is the real problem?

You will need a better argument than that.

 
At 1/07/2012 3:06 PM, Blogger Zachriel said...

Ron H: Keynes being wrong is irrelevant? Hazlitt correctly pointing out Keynes' error, but not quoting full context is the real problem?

Is it really necessary to repeat the entire conservation so you can remember your own stated position? This is your claim, using Hazlitt as your support:

Ron H: Here's Hazlitt on Keynes on savings and investment

"As we shall see, Keynes himself alternates constantly between two mutually contradictory contentions: (1) that saving and investment are “necessarily equal,” and “merely different aspects of the same thing” (p. 74), and (2) that saving and investment are “two essentially different activities” without even a “nexus” (p. 21), so that saving not only can exceed investment but chronically tends to do so."

Throughout his "General Theory", Keynes alternates between these two mutually exclusive contentions. It's no wonder that his followers are confused.


You made a claim, that Keynes confuses two contentions concerning savings and investment. That is *your* claim. However, Keynes was explicitly comparing definitions. The evidence you provided took Keynes out of context. Your claim was false.

 
At 1/07/2012 3:10 PM, Blogger Zachriel said...

Repeating from above;

As for "saving and investment are 'necessarily equal,' and 'merely different aspects of the same thing'," well, that is in a examination of the various definitions whereby sometimes that is true and other times it is not.

Keynes: "IN the previous chapter Saving and Investment have been so defined that they are necessarily equal in amount, being, for the community as a whole, merely different aspects of the same thing. Several contemporary writers (including myself in my Treatise on Money) have, however, given special definitions of these terms on which they are not necessarily equal. Others have written on the assumption that they may be unequal without prefacing their discussion with any definitions at all. It will be useful, therefore, with a view to relating the foregoing to other discussions of these terms, to classify some of the various uses of them which appear to be current."

It's hard to credit an argument that relies on out of context quotes.

 
At 1/07/2012 4:02 PM, Blogger Ron H. said...

Z: " Assume, for whatever reason, inflation is negative..."

No, let's not. Why don't you explain to Larry what negative inflation means to you and what might cause such a condition.

"...and demand is down. Consider a widget manufacturer. If she invests a dollar into manufacturing widgets, by the time she gets them made and marketed, they are only worth 97¢..."

Compared to what? Perhaps "worth" isn't a good word to use here.

"Plus if demand dropped precipitously..."

And, what might cause that?

" ...she may already have a warehouse full of widgets that she can't sell fast enough to avoid the drop in price. Why would she borrow to invest in an expansion of capacity? She won't."

"In the classical analysis, as prices drop, demand should increase. And that is true in an ideal 'frictionless' economy. But that is not necessarily true in the real world."

...unless prices are dropping due to decreased demand.

"Consider the more pertinent case, the housing market. When prices are rising, people build more and more houses. If prices drop, precipitously, such as after a market bubble..."

And, what would cause such a bubble?

"...homeowners have long term financial commitments, and short term cash flow problems...

What caused their cash flow problems? Don't they know what they can afford? Should they have refrained from buying over-priced houses when credit was easy and initial interest rates were low due to disastrous Fed monetary policies?

"People are stuck with houses that they can't easily sell, but can't keep either. The housing market is sticky."

Do you mean that people can't easily sell their houses at prices they would like?

You write about economic conditions and events as if they were acts of nature, occurring without warning or explanation. Not at all uncommon for Keynesians, who like Keynes himself, didn't really understand them.

We're not sure such a large number of unconnected, and perhaps irrelevant explanations, using undefined terms and unexplained concepts, is all that helpful to your eager student, when all he really wanted was a definition of "interest".

So far, the most valuable lesson you have given is the Popeye analogy. Maybe more along that line would be helpful.

Perhaps you could add something about marginal utility to explain that drop in demand.

 
At 1/07/2012 4:47 PM, Blogger Larry G said...

one of my interests in this is the differences between what the competing theories predict and what actually happens and the reasons why.

time preference does not seem to explain money that is not spent but not deferred consumption and taken out of circulation and there is no demand for it for capital - in a down economy.

retirement savings is money that will ultimately be used for consumption - but it's deferred consumption when the saver will no longer have a working income and will rely on savings.

We say that people need to save more ...defer more spending... but when we do that for long periods of time regardless of what the economy is doing - the demand for that money as investment capital varies - a lot - and right now - the demand for investment capital is very low and evidenced by exceptionally low interest so the "deferred consumption" would actually be better spent on a fixed asset that appreciates - like art or antiques etc or even land... not liquid and not available for production.

 
At 1/07/2012 5:06 PM, Blogger Zachriel said...

Zachriel: Assume, for whatever reason, inflation is negative...

Ron H: No, let's not.

As we know that deflation can occur, it is reasonable to consider the consequences of such as situation.

Zachriel: ...and demand is down. Consider a widget manufacturer. If she invests a dollar into manufacturing widgets, by the time she gets them made and marketed, they are only worth 97¢...

Ron H: Compared to what? Perhaps "worth" isn't a good word to use here.

It's pretty clear we were referring to the market price of the finished product. A current example is in real estate. Due to the current glut, it is more expensive to build a home than to buy one from existing inventory.

Zachriel: Plus if demand dropped precipitously...

Ron H: And, what might cause that?

Several factors can bring about a precipitous drop in demand. For instance, a bubble in a large or important sector that suddenly collapses. However, once demand drops, then it can precipitate a downward spiral. As prices fall, people postpone purchases, which causes prices and demand to fall further.

Ron H: And, what would cause such a bubble?

Market pricing sometimes becomes detached from intrinsic value, and there is a rush to the top. Once the last sucker is in, then the bubble collapses of its own weight. If in a limited sector, the economy can usually adjust, but when in an important sector, such as real estate, it can dislocate the entire economy. There was a bubble in the largely unregulated shadow market that fueled the growth of toxic securities.

Ron H: What caused their cash flow problems? Don't they know what they can afford?

Certainly people should avoid being caught up in the frenzy, but others are making money, so they think they can to. Even people who see the bubble are enticed to get then out before it collapses. It works until the last sucker is in.

But even the most careful buyer can be caught when the bubble bursts. For instance, they may lose their job due to the downturn. The responsible person would then liquidate their assets, but in this case, they may be under water even if they made a substantial down payment, so they may not be able to do so. Each default leads to an increase in inventory, which further depresses prices.

Ron H: Not at all uncommon for Keynesians, who like Keynes himself, didn't really understand them.

When you wave your hands like that, it's hard to consider your arguments seriously. Whether Keynes was finally right or not, whether right or wrong in part, most economists recognize his major contributions to economics.

 
At 1/07/2012 6:40 PM, Blogger Ron H. said...

"When you wave your hands like that, it's hard to consider your arguments seriously. Whether Keynes was finally right or not, whether right or wrong in part, most economists recognize his major contributions to economics.When you wave your hands like that, it's hard to consider your arguments seriously. Whether Keynes was finally right or not, whether right or wrong in part, most economists recognize his major contributions to economics."

We aren't so concerned about Keynes, as we are with his followers, such as yourself, who struggle to explain economics in terms of magical occurrences that can't be predicted but can somehow be managed by really smart people in government who rely on mathematical formulas in their disastrous attempts to repeal economic laws that can't be repealed.

Your attempts to educate Larry on the nature of interest are good examples of this confusion. I doubt that he feels enlightened by your extensive comments.

 
At 1/07/2012 6:55 PM, Blogger Larry G said...

I don't think any of the various theories is "elegant' in the sense that they offer well-accepted explanations of how economies "work".

and all of them tread into philosophical waters as to what extent govt should or should not play in free market economies.

I do not look for theories that I am comfortable with.. I look for contradictions to theories ... I need to see how the various theories explain things that don't conform to the basic thesis they assert.

Finally, I look for theories that do a good job of explaining how things are actually working - even if I'm philosophically opposed to that kind of a system - as opposed to insisting that the reality is "wrong".

I'm a pragmatist at heart. I accept the things as they are and try to understand why - fully acknowledging that I'm not a genius and that I am indeed ignorant but my caveat is that most others are also ignorant but that self recognition is an important part to learning and understanding.

 
At 1/07/2012 9:40 PM, Blogger Zachriel said...

Ron H: We aren't so concerned about Keynes, as we are with his followers, such as yourself, who struggle to explain economics in terms of magical occurrences that can't be predicted but can somehow be managed by really smart people in government who rely on mathematical formulas in their disastrous attempts to repeal economic laws that can't be repealed.

Keynesianism is a theory of markets. You've apparently given up on making a coherent argument.

 
At 1/07/2012 9:41 PM, Blogger Ron H. said...

"I don't think any of the various theories is "elegant' in the sense that they offer well-accepted explanations of how economies "work"."

Reading this book will change your mind. Notice that all electronic formats are free.

There's even a free study guide available.

What have you got to loose, except some of that ignorance you keep bragging about?

 
At 1/07/2012 10:08 PM, Blogger Larry G said...

I don't brag on my ignorance, I acknowledge it but you are worse because you think you know and the truth is you don't know that you don't know which is far worse.

you shop theories for the ones that suit your person philosophy and then defend it no matter what and attack those you disagree with no matter what and you "like" books that support the theories you like but you refuse to think critically about why your pet theories don't jive with the realities.

the first step to dealing with that problem is to admit that you are indeed ignorant..and in your case,hopelessly wedded to what you like and want rather than what is real.

 
At 1/07/2012 10:15 PM, Blogger Larry G said...

I've read some of your "Ludwig" guy and they are whacked out IMHO of course.

they are not dealing with realities which sort of explains your philosophies I guess.

notice the criticisms:

http://en.wikipedia.org/wiki/Austrian_school

 
At 1/07/2012 10:30 PM, Blogger Larry G said...

can you list which countries best meet the policies of the http://en.wikipedia.org/wiki/Ludwig_von_Mises_Institute?

 
At 1/08/2012 1:20 AM, Blogger Ron H. said...

"can you list which countries best meet the policies of the http://en.wikipedia.org/wiki/Ludwig_von_Mises_Institute?"

Suit yourself. Your ignorance isn't my problem.

 
At 1/08/2012 7:02 AM, Blogger Larry G said...

or is it the there are no countries that meet their philosophical beliefs because they are opposed to government in the first place?

How can you argue for any economic theory if that theory says govt cannot exist for their theory to work properly?

I think this is what I mean when I say that a theory for me has to be practical.. I have to see how it works in real circumstances.

just want to verify - is this the institute you are referring to whose philosophies you subscribe to?

http://en.wikipedia.org/wiki/Ludwig_von_Mises_Institute

 
At 1/08/2012 10:16 AM, Blogger VangelV said...

nope. I just point out that this is not a "SS program problem".

Even though logic is not your strong suit you have to figure out that if you agree that the contributions have been looted then you can't reach this conclusion.

it's lost "benefit" using your parlance is about 2-3 years worth of benefits.

You are missing the point. The contributions would allow SS to work for more than a decade because there would still be contributions coming in. The shortfall was still small enough to be able to come up with some kind of solution. But since there is no trust fund in the true sense that option is not available.

no.. the program has always been defined as a pay-as-you-go.

Your problem here is that you believed some of the propaganda and misinformation then when the actual data was presented to you - you still insist on the illicit propaganda narrative.


When people are given a schedule that explains how much they will receive in benefits I expect the government not to claim, "we were just kidding." Why is it that all of you progressives are so pro big government yet keep saying the government is not to be trusted because it just spins, "propaganda narrative(s)?"

The 'charade' was that those who propagandized led those willing to believe it that the Trust fund was the primary revenue source of SS and it's not - it's basically a conduit through wish FICA revenues go in - and come out - and what remains is the "trust fund" balance.

First of all, nobody ever said that the so-called 'trust fund' was a primary source of revenue. The sources are contributions from employees and employers. The so-called 'trust fund' was just a place where the surplus was kept so that it could be used when there was a shortfall. If you go back to the SS debate in the 1980s you will find that the idea was to have surpluses to fund shortfalls in the future. That is how the 'we saved SS' was sold by both Democrats and Republicans. So before you try to revise history I suggest that you look at the actual facts. You might want to start with The National Commission on Social Security Reform, the Greenspan Commission

no. what I'm saying is that in a pay-as-you-go system where the demographics go upside down that the program has to be restructured to reflect that reality.

But that is not true. Ever since the Greenspan Commission both parties claimed to have 'saved' SS by ensuring that there was a sufficient amount in the 'trust funds' to make up for shortfalls. SS was supposedly 'safe' until 2050 or so.

It seems that your ignorance on this topic is still with you. After months of debating you are still to learn anything useful and still persist in spinning narratives that are not supported by any of the facts.

 
At 1/08/2012 10:34 AM, Blogger VangelV said...

Z: "The problem is not insurmountable. If Congress does nothing, publicly held debt will level off at about 75% of GDP.
http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf"

V: Debt is already at more than 100% of GDP.

Z: Yes.


Let get this clear so that there is no backtracking and diversion later. You admit that debt is already at more than 100% of GDP.

Z: ...Leave aside the relatively small issue of the Trust Fund, which as the CBO data shows can be fixed with under current law (including allowing the tax cuts to expire).

I know that English is not my first language and that I may have trouble understanding a few things but this seems to be a ridiculous statement. The last time I looked the various 'trust funds' had been looted to the tune of around $4.7 trillion. That is around a third of GDP. Since when is that a, "small issue?"

Let's look at the big picture. What is the total unfunded liability, assuming there are no changes to basic benefits? Over what period? And what is the expected U.S. GDP over the same period?

Even a statist like David Walker, former head of the GAO, the unfunded liabilities stand at more than $100 trillion today with a GDP of around $15 trillion today. The GAAP deficit runs to between $2 trillion and $3 trillion today. You can't grow your way out of this.

Let me make this also very clear. Your questions show that you have no idea what you are talking about and do not understand the words that we are using. While you claim to want to look at the big picture you are ignoring it. You can't add $1 trillion to the debt this year (using cash basis accounting) and $3 trillion to the debt (using GAAP accounting).

 
At 1/08/2012 10:41 AM, Blogger Larry G said...

nope. I just point out that this is not a "SS program problem".

Even though logic is not your strong suit you have to figure out that if you agree that the contributions have been looted then you can't reach this conclusion. "

I guess it depends on what you mean by "looted", eh? If it was set up that way on purpose and enacted as a law...then it works as designed even if you think otherwise. I might add that your "logic" on this matter is lacking.

"You are missing the point. The contributions would allow SS to work for more than a decade because there would still be contributions coming in. The shortfall was still small enough to be able to come up with some kind of solution. But since there is no trust fund in the true sense that option is not available."

sure it is. it's working exactly as intended from the initial laws.

:When people are given a schedule that explains how much they will receive in benefits I expect the government not to claim, "we were just kidding." Why is it that all of you progressives are so pro big government yet keep saying the government is not to be trusted because it just spins, "propaganda narrative(s)?" "

that "schedule also says "subject to changes in law" - which is the same language that we use for things like Medicare Part B and MedicAid, right?

"First of all, nobody ever said that the so-called 'trust fund' was a primary source of revenue. The sources are contributions from employees and employers. The so-called 'trust fund' was just a place where the surplus was kept so that it could be used when there was a shortfall."

we agree on this but I swear the initial discussion we had here you thought the trust fund for the primary source of funds for SS.

" If you go back to the SS debate in the 1980s you will find that the idea was to have surpluses to fund shortfalls in the future."

not in perpetuity.. it was intended to build up enough of a surplus to allow gradual phased restructuring.

"That is how the 'we saved SS' was sold by both Democrats and Republicans. So before you try to revise history I suggest that you look at the actual facts. You might want to start with The National Commission on Social Security Reform, the Greenspan Commission"

if you believe that pre-funding future SS shortfalls in perpetuity was THE plan for increasing FICA - the FINAL solution with no future changes.. I disagree and would as you to back that assertion up ..and not with propaganda from Heritage and similar but from actual govt sources.

pre-funding a surplus without making structural reforms would not be sustainable ...sooner or later structural reforms would have to be made.

but you still ignore one of the most important aspects of FICA/SS and that it was planned on purpose to not never run a deficit.

and you continue to ignore the reality that no govt program whether financed from FICA or general revenues is "guanranteed" never to change it's benefits.

why do you hold SS to that "no changes" standard but not general-revenue funded Medicare Part B?

All these programs "schedules" are subject to change.

 
At 1/08/2012 10:45 AM, Blogger VangelV said...

Or borrow. Generally, if the U.S. reduces its public debt, then it will have at least some of the necessary resources.

But the US is not reducing its public debt. It hasn't done so since Ike was in office and that was done only in his final year.

Cole and Ohanian seem to be setting date ranges to support their theory rather than letting the data speak, such as choosing 1934-1939, which included a recession and excluded the severe contraction preceding the period.

No, they are not. C&O believed pretty much the same narrative that you did because that is the story told by the court historians and court economists. But the data did not support the narrative that they believed in.

And let me point out the problem AGAIN. If FDR goes out and buys steel at a price that is 50% higher than what the market can provide the GNP numbers look better even though less infrastructure was built. The numbers are not reflective of true economic activity. To figure out what really happened you need to look at capital formation, the employment picture, and the production of consumer goods.

Yes, there was a spike in 1933-1934. That's because GDP spiked, but only to return it to pre-Depression levels. Notice the severe drop in 1931, as the economy contracted. Similarly with other commodities from the period. But looking at the overall graph and taking it from 1929, there is nothing anomalous about the trend, other than the the severe dip in 1931 at the nadir of the contraction.

There was a spike because activity shrank very quickly and there was a natural bounce. There was a spike because FDR sharply devalued the USD. There was a spike because of a flood of liquidity and public works spending. But none of these reasons could get real economic activity back to the pre-recession period. In fact, because they prevented liquidation of malinvestments, the FDR (and Hoover) actions ensured that the recession turned into a Great Depression.

Contrast this to Hardin's actions during his own crisis. He helped the liquidation by getting government out of the way as he cut federal spending. And by reducing taxes he ensured that people would step in and invest their savings into productive capital that became the basis of a sound recovery.

 

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