Basic Econ: To Stimulate One Group, You HAVE to De-Stimulate Some Other Group, Net Effect = 0
Art Laffer in today's WSJ "Unemployment Benefits Aren't Stimulus":
"When it comes to higher unemployment benefits or any other stimulus spending, the resources given to the unemployed have to be taken from someone else. There isn't a "tooth fairy.” The government doesn't create resources, it redistributes them. For everyone who is given something there is someone who has that something taken away.
While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
To see this, imagine an economy that produces 100 apples. If 10 of those apples are given to the unemployed, then people who otherwise would have had those 10 apples now won't. The stimulus of 10 apples for the unemployed is exactly offset by the destimulus of 10 apples for those people from whom the 10 apples were taken.
Given the massive inefficiencies the government creates in securing resources from the private sector, there may also be a large negative income effect over wide ranges of stimulus spending. This is the proverbial "toll for the troll." These massive inefficiencies could lead to lower output.
To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may "buy" more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will "buy" less. There is no stimulus for the economy.
But it doesn't stop there. While the income effects sum to zero, the substitution effects aggregate. The person from whom the unemployment funds are taken will find work less rewarding and will work less. The person who is given the unemployment benefits will also find work relatively less rewarding and will therefore work less. Both people in this two-person economy will be incentivized to work less. There will be less work and more unemployment.
Not only will increased unemployment benefits not stimulate the economy, they will at the same time lower the incentives for people to work by reducing the amount people are paid for working and increasing the amount people are paid for not working. It's pretty basic economics."
60 Comments:
This seems very incorrect to me.
"Consider an economy that produces 10 apples." Well it seems pretty clear that an economy that produces 8 apples with 20% unemployment will produce at least 9 apples with 0% unemployment. Involuntary unemployment occurs because demand for the production in the economy falls off. Unemploying people reduces that demand further. Paying the unemployed increases THEIR demand, partially offsetting the lower demand.
So who do the $ from unemployment payments come from in this zero sum game? In the U.S., they come from the federal reserve system. Which with its infinite capacity of dollars, buys no apples whether it has handed the money out or not.
The point of an economic system is to allow for a fairly complex system of production with fairly efficient choices of mix of production and mix of factors of production. When large involuntary unemployment occurs, it is quite reasonable to realize the system is failing, lowering production (by unemploying people) at the same time as further lowering demand (by not paying unemployed people).
Mark, do you really think Laffer is right in this article?
We're stimulating the present and de-stimulating the future.
Great comment thrill!
"So who do the $ from unemployment payments come from in this zero sum game?"...
From here: BEP
Hence this ugly problem that won't go away it seems...
How the Expiring Bush Tax Cuts Affect You
by Bill Bischoff
Wednesday, July 7, 2010
to amplify what thrill said a bit, there are numerous ways in which this has a negative sum outcome. collecting and redistributing wealth is not costless. some amount will always be lost to government in the process.
this amplifies the effect of taking away from those who invest and giving to those who merely spend.
further, lower after tax returns cause the producers to work less. why bust your hump for less money.
michael-
what you leave out is this:
when you "reduce" unemployment by giving money to those on unemployment, it takes it from those previously in the apple business. now they have less money to pay their employees and invest in their business. that drives unemployment UP. you cannot tax your way to low unemployment.
your notions of how the federal reserve works are also a bit fanciful. when they print money, it has a cost. it costs every other person holding dollars by debasing the currency. it's a tax on savers. this is economically disastrous if done at too high a level. further, such debasement of currency will drive the dollar down and perceived risks associated with holding US government debt up, increasing the cost to borrow for the US.
such inflationary fear drive up private rates of borrowing as well. all these things worsen the downturn.
downswings in the business cycle are inevitable. the best we can do it have them frequently and keep them shallow. attempts to inflate out of them through loose monetary policy are why we are where we are today. another round of the same is only going to make it worse.
Robbing Peter to pay Paul results in an overall negative effect - Paul, historically, is not as efficient as Peter in achieving success - hence his "need" for stimulus. Peter meanwhile has far less confidence that any success he achieves above the survival minimum (and maybe even that) is subject to theft, and so we end up with a historically efficient producer producing even less that he optimally could because of a lack of confidence and a historically inefficient producer gaining control of limited assets that he is less likely to put to work optimally. We also see Peter hiding any excess gain in places that the thieves have difficulty finding, resulting in even less economic positive feedback.
(reposted to correct idiotic typo):
Why does Laffer assume the money is taken from someone else? If we consider the money employers pay into the unemployment fund as compensation that could have went into employees' pockets, employees are paying for their own unemployment benefits. Speaking as someone who has never drawn a penny of UAW/GM Jobs Bank money, or sub pay and unemployment since 1982, given the chance, I would just as soon work and have the money in my pocket. I’ve been lucky in that respect, but a lot of luck is self-induced by making wise choices.
Unemployment is more like insurance than a welfare benefit when used correctly. Most people do not feel too badly about paying insurance and collecting on it when they total their car or their house burns down. I would consider losing a job just as catastrophic; maybe more so. Unemployment benefits are very useful for a temporary condition.
I think the real problem exists when unemployment payments are infinite. The funds must have a cap on their funding, and the length of unemployment benefits must be time limited.
Personally, I know way too many people who will not even consider looking for a job until their unemployment runs out, and then they just scan the newspaper ads while hoping for an unemployment extension. I help people with their resumes, and many people write “Unemployed” in the employment section because they actually consider unemployment a job. Lengthy unemployment benefits are a disincentive cushion that has to end sometime.
The only way I can think to make this work:
Is it possible (in econ-think) that when the economy is "up," perhaps even overheated, that an unemployment rate that is too *low* artificially reduces full economic potential? (Think back to the height of the dot.com boom w/unemployment ~4%.)
So, yes, unemployment insurance (and it *is* insurance; however it is currently exhausted and hence supplemented with gummint money, i.e,. your money, my money) "steals" from future productivity/wealth, but is it possible (and I make no claim that it is) that this could keep the economy closer to maximum potential (a la Bob Barker's "closest price w/o going over!")?
Not in the real world, mind you, but in some econ model?
Putting the question more simply: could reining in future economic growth exert any potential benefit ("smoothing effect," perhaps)?
First of all there are two types of redistribution that are possible: one is the redistribution of current income, the other is the intertemporal redistribution of incomes.
If the government can borrow at 1%, and the fiscal multiplier is 1.02, intertemporal redistribution could be justified.
As for current income redistribution, do rich people spend the same proportion of their money as the unemployed do? No. They save, and saving instead of spending is not something desirable in the current climate. The unemployed person is almost forced to spend their entire income in order to satisfy their basic needs. As such, you subsidize spending by stealing from savings; the effect is not counterbalanced.
Savings is the only path to recovery.
What is the problem with the economy right now? There is not enough savings. There is not good money to lend. There must be a replenishment of savings in order to reinvest in capital.
In your argument nobody should save anything in a recession because it is bad for the recovery. However, how do you get out of a recession if there are no savings? Who will have money to invest in new companies, new jobs, new capital, new ideas if there is no savings?
Banks use savings to lend. Individuals either borrow from banks or invest their own capital (savings) to start and expand business.
Read some Ludvig Von Mises.
anon-
the rich do not just save, they also invest. that is precisely what we need in this climate.
over spending is what got us into this mess. we have lived beyond our means and run up a pile of debt the likes of which has not been seen since 1929.
consumer spending is not the way out of that hole.
Keynesian has never, ever worked. it's a bankrupt economic theory rife with claims not borne out by facts that persists because it is so attractive to politicians.
... if you are real quiet and listen, you will hear the Speaker of the House (the P of team RePO), say: "I like Apples".
James Fraasch said...
"Savings is the only path to recovery."
Spending is the path to recovery. Ultimately, you want people to spend, which will increase employment, and cause more spending, etc.
The Paradox of Thrift:
"The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth."
"Unemployment is more like insurance than a welfare benefit when used correctly"...
No it isn't Walt G since its the government (local, state, or federal, it doesn't matter) is the middle man in this extortion scheme called 'unemployment insurance'...
Ask yourself this question, out of every dollar extorted from your gross pay for this 'unemployment insurance' how much makes it to its final target clientele?
peak-
it depends on "recovery from what".
spending is not the way to recover from too much debt, which is our current problem.
you cannot spend your way out of debt, you have to invest your way out. it takes a long time. the massive excess of expenditure over income of the last couple decades needs to equilibrate out somewhere.
decades of deficit must be offset by decades of surplus. the best way to do this is productive investment, not spending.
the only other option is a massive tax on savings through inflation, a policy whose side effects are both unjust and worse than the problem they solve.
it will only leave us in a hole just like the one we are in, only deeper.
"So who do the $ from unemployment payments come from in this zero sum game? In the U.S., they come from the federal reserve system."
No. Unemployment "insurance" is a tax. You might by taxed at, say, 5% of payroll this year. Then you lay off a couple of employees. Come December, your state will send you a notice that your unemployment tax will rise to say 9% beginning in January.
Then you lay off everyone and call it quits. No more apples!
While I agree entirely with the conclusion and implications, this is an absolutely asinine set of analogies which only weakens the case for it.
The example endows two agents with apples and redistributes them. But there's no labor supply in the model. Nobody is picking apples. The real question is that if you take 20%, 40%, or 60% of the apples from the apple picker to give to the non apple picker, what effect will it have on the picking of apples? Will the apple picker fewer apples (to lose a smaller percentage in a prgressive apple tax system) or will he pick more to offset his losses and maintain a minimum apple consumption. Will the non apple picker EVER start picking 4 apples and get taxed 1 if he can sit on his ass and get two.
The model also doesn't discuss how the unemployed use their apples.
The funds for extended unemployment come from the employed - currently through deficit spending and later through taxation. If it were merely a bridge to better times, that's fine. But if we don't know how long this recession (yes, we're still in recession) is going to last, then you distort the incentives to find work and contribute to skill erosion.
Fairy tales are for fourth graders. We shouldn't be telling them to adults. How about giving them credit for intelligence or at least giving them the opportunity to learn.
Can you tell me how to get to Sesame Street?
So, if we have huge military outlays and rural subsidies, then we are taking away--destimulating--from the rest of the economy?
Why does not the right-wng ever point this out?
Why is de-stimulating only apply to unemployment benefits--not our trillion-dollar military sector?
Walt, I agree that unemployment insurance premiums paid by the employer are an asset to the unemployed, not a form of welfare...
BUT
1. State systems do not maintain funds with adequate reserves and they certainly don't earmark individual accounts. It's a pay as you go system were current workers pay for current beneficiaries, a difficult thing to do when the unemployment rate exceeds 10%. The states squandered their funds and had to be bailed out by Uncle Sugar, er, I mean THE TAXPAYERS.
2. Most of the unemployed are now on EXTENDED federal benefits. Their state benefits (for which they paid premiums) were exhausted long ago. Now they are getting benefits which they did NOT pay premiums for, i.e. They are now on WELFARE, under a different name.
Sure, they paid taxes before but those revenues paid for OTHER government expenditures already; there was no recession fund set up. There is a difference between an actuarially sound insurance plan and a faux insurance plan which is solvent only by the full faith and credit of government to print money or raise taxes.
It's no doubt a hard choice for government between letting families get no income vs. disincentivizing them to work. Leaders get paid to make tough choices. Captains have to pick which crew members must die to save the ship. In a free society we must have faith that people will choose to work (maybe picking lettuce) rather than starve. Some may think a person is entitled to the same job and pay they previously got, but that aint so. Labor must always be the most flexible input. It must take the wages offered, provide the skills needed, and do the jobs requested. If a worker doesn't want to do that anymore, he can start his own business and deal with a whole new set of headaches, risks, and rewards.
Morganovich, the real problem is too much supply or too little demand. Over the past two years, supply exceeded demand.
We've been destroying the excess supply rather than consuming it.
some government spending can really benefit the economy
such as spending on roads
parks
etc. (infrastructure)
some government spending is virtuous and makes us all richer
peak-
you are keying on symptoms, not the disease.
the reason we have overcapacity is that we built for a time in which we spent more than we earned.
when that flips because the debt can no longer be added to, the answer is to reduce capacity. that is the correct response to a future drop in buying power.
you are proposing to borrow more and try to keep the game going in order to prevent capacity that is not needed in service.
that's just price supports and subsidy.
more spending beyond our means will not redress the issues caused by spending beyond our means.
you are essentially advocating curing a hangover by getting drunk again. it will just make the pain worse when it comes unless you plan to drink until your liver fails.
bix-
only if it is more productive that the use to which it otherwise would have been put. the money spent on such projects reduces spending somewhere else.
building the federal highway system may have been such a project, but like any infrastructure, it has diminishing returns to investment. new roads are not valuable now in the way that they were then, because there are already roads. the incremental benefit of the first one is huge, the second possibly meaningful, but the third road from one place to the next doesn't make much difference in most cases.
spending on parks is almost certainly less productive that the alternative use of the capital.
Morganovich, so, it's appropriate to destroy economic growth, cause a high unemployment rate, or create massive idle resources because you believe debt is too high.
U.S. consumers spent beyond their means only because the government spent your money much faster than you earned it, and your money has been squandered at an accelerated rate over the past two years.
One should look at the marginal effect of unemployment payments versus no unemployment payments.
Some unemployed are in two wage earner families, have savings, have retirement funds, can rely on family or friends for help, or can borrow until they get re-employed. In these cases, unemployment payments substitute government unemployment spending and debt for private spending. There is no increase in overall consumer spending but there is an increase in government debt.
For the destitute unemployed, there are other government programs, such as food stamps, Medicaid, Disability benefits, Social security for the older unemployed, etc., which become available. In these cases, overall government debt does not increase by extending unemployment payments. The debt just switches program budget categories.
So, the question is how many people fall into the categories not covered by those with available resources and those eligible for other government programs.
To have no income or liquid savings and be ineligible for a government program generally means one has illiquid assets, such as a house, jewelry, auto, etc. whose value exceeds the eligibility thresholds. These programs require converting the assets into cash and spending down, which unemployment insurance does not require. In these cases, one will substitute government debt of unemployment payments for private spending, but overall consumer spending will not increase.
Unemployment substitutes government money for private funds and may increase government debt, if an unemployed individual without resources is illegible for other government programs.
Good comments.
The problem with spending more is that we are already overspent. Assuming the government does not just "print" the money to hand out in stimulus then they must borrow it.
Given that the "multiplier" effect has been more or less proven to be a fallacy, the truth of the matter is that borrowing money in order to spend it is simply an additional burden on the economy. It is a tax on future production.
Now not only do we have to pay down our existing debt, but we are laden with NEW debt to pay off at interest.
When it comes to the TARP and other bailouts (some classified as stimulus) not only do we owe the original debt, but we manufactured new debt out of thin air to protect us from default of the old debt. We effectively owe the same debt TWICE!
As my mom used to say, you can't spend what you don't save.
morganovich said:
.... collecting and redistributing wealth is not costless. some amount will always be lost to government in the process.
I say:
It's just like a casino where some gamblers win, some gamblers lose, but the casino always makes it's cut.
In the physical world, it could be compared to the frictional loses at each step of a complex process.
"In an economy, the income effects from a transfer payment always sum to zero."
But Art "Off His Curve" Laffer knows Ronold Reagan's dirty little secret: Borrowing money and spending it into the economy gives a new tax revenue source, it is highly stimulative, and tends to create a bunch of very happy campaign donors.
Yes, Art LAUGHER, redistributive transfer payments don't do much but ease a little pain of one group. But you know damn well what the Reagan era started.
peak-
that is simply not so. it was not government spending that drove us citizens into debt, it was easy credit. US personal debt reached levels not seen since 1929. that's a personal issue, not governmental one. our governmental debt disaster is a whole separate matter, but it does make the price of running huge federal deficits higher.
look, i'm not saying this is a great situation, but you have to play the ball where it lies. we played, now we must pay. the sooner we get it over with, the better. trying to manipulate the business cycle as you propose will just make the long term worse.
i know that the drop in spending is bitter medicine, but the sooner we take it, the sooner we can recover. driving deficit spending of both the government and the populace higher now is just a band aid on a wound that's festering.
the "spend you way out of everything" philosophy is what got us here. it cannot get us out.
this is not a normal recession but rather a debt crisis. you cannot prime the pump of an economy with this high a debt load. it's never worked anywhere.
yes, i know it has undesirable effects to let capacity shut down, but they are less undesirable than digging a deeper hole by keeping the excess running, and unlike trying to keep the overspending dream alive, it is the road to recovery, not ruin.
Here is the quote from Hussman regarding doubling down on debt:
n short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security).
One Note Benji,
"So, if we have huge military outlays and rural subsidies, then we are taking away--destimulating--from the rest of the economy?
Why does not the right-wng ever point this out?"
1) We have a strong military for other reasons than stimulating the economy. So why should the right-wing call attention to a case it hasn't made?
2) Your boyfriend Barack is pushing a massive rural broadband initiative as part of his idiotic economic planning. Why don't you ask him about it next time you are cuddling?
Walt G., the WSJ article begins:
"The current debate over extending and increasing federal unemployment benefits..."
This IS money taken from someone else, not state benefits that employees have funded themselves.
Peter Piper picked a peck of pickled peppers. A peck of pickled peppers Peter Piper picked. If Peter Piper picked a peck of pickled peppers, where's the peck of pickled peppers Peter Piper picked?
Anon @ 10:00 said
" ... if you are real quiet and listen, you will hear the Speaker of the House (the P of team RePO), say: "I like Apples"."
Keep listening. The SoH or PoS (or whatever name you prefer) also says:
"we need to buy this bag to see what's in it."
Morganovich, I've explained before how the U.S. created and captured enormous real value in the global economy.
And easy credit didn't cause the recession and financial crisis. The government created them.
Restrictive monetary policy, contractionary fiscal policy, and export-led economies lending their dollars too cheaply, which were ultimately shifted from the private sector to Treasury bonds created the recession and financial crisis.
Without an increase in demand, this "recovery" is toast. Real final sales will need to expand much faster than 1.5% annually.
Living standards will fall anyway, because of massive government inefficiencies placed into system.
Americans will work harder and longer for fewer and smaller assets and goods.
Ron H.,
Who was it taken from? It was either taken from the current taxpayers or the future taxpayers. I agree unemployment is a disincentive to work, but many of the people collecting unemployment are either people who paid into the system through lower wages in the past or will pay back the money in lower wages in the future. Taxes don't stop at state lines. The "someone else" you speak of is us AND them.
Michael siad:
"So who do the $ from unemployment payments come from in this zero sum game? In the U.S., they come from the federal reserve system. Which with its infinite capacity of dollars, buys no apples whether it has handed the money out or not."
Thanks for the concise definition of inflation and its cause.
In your example no more apples are produced, only more dollars, so each apple will necessarily cost more in dollars. Double the money supply, double the price of apples.
peak-
your view is much too simplistic.
we are where we are for a vast confluence of reasons. government certainly played a role, but mostly by encouraging consumers to take on too much debt through loose money, not tight. how can you say that monetary policy in the last decade has been tight? that's ridiculous.
spending needs to be sustainable. no amount of push start is going to get us out of this, it's just prolonging the inevitable and making the crunch worse when it comes.
the increase in demand will only come when debt levels decrease. at this point, incremental debt does more harm than good.
we cannot have a durable recovery without paying down debt. easy credit built up imbalances for which we must now pay.
what is it you think we're supposed to do, flood the market with yet more money and try to inflate a new bubble out of this one? equity bubbles are easy to clean up. debt bubbles take a long time.
the expansion we have enjoyed for the last decade or two was built on an unsustainable foundation. you cannot spend more than you earn indefinitely.
you seem to wish we were in a different situation than we are. i think most of us do. but as the man says, "wish in one hand and crap in the other and see which one fills up first."
"Why is de-stimulating only apply to unemployment benefits--not our trillion-dollar military sector?"
Benji, Laffer knew he didn't need to address that issue, as you are busy making the case for him.
PeakTrader
Do you have a link to that explanation?
Would like to read it.
Thanks.
James
James, this is what I wrote on Feb 2nd, 2009 (a $5,000 tax cut per worker, or $750 billion for the 150 million workers at the time, would've been better):
How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):
1. Obama should change his stimulus plan to a $2,000 tax cut per worker, along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.
2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
Peak
How can you argue tight monetary policy was the problem when inflation was hidden in runaway housing prices? Those prices were unsustainable as the underlying cash flows simply were not there. That's result of loose policy, not tight.
We can quote The Paradox of Thrift all we want, but it ignores the reality of debt and debt service, and how money is created in our system. We must have debt growth, and/or velocity through redistribution or free choices. Otherwise the economy becomes starved for cash from interest liabilities, and the default process sets in as the economy looks for a bottom. Default clears out the marginal debt, where redistribution or debt-growth methods reinforce the debt. All this does is maintain the status quo as it protects and helps concentrate wealth in the hands of the few. This leads to serfdom when the masses owe just about everything to the few. Then what? More debt for the masses?
I'd rather see the defaults liberate the poor and close the wealth divide. Then we'd start fresh and powerful.
"Obviously, monetary policy was restrictive at 5 1/4%,"
how do you figure that to be obvious? that's a pretty neutral stance historically and much lower than the 1980's. you are just flat out wrong about 5.25 being restrictive. that's right where rates were through the 90's boom. it's a pretty normal rate.
http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html
hiking the rate to head of an asset bubble is precisely what the fed ought to do. the problem was that rates were too low for too long post 2000, emptying a stock bubble into a debt bubble.
none of what you are arguing matters if the debt burden is too high. growth is nice, but past a point, debt cannot support it. the relationship flips and the higher costs of debt service swamp the growth.
you are making the precise argument that got us into this mess - drive growth and everything else works. but it's not that simple.
some growth is sustainable, some is not.
you cannot spend your way out of debt. the burden is there now and real. you have slipped into the category of "ponzi borrower" where debt is used to pay off debt.
i understand your arguments about growth, but you are ignoring a constraint that cannot be ignored.
i'd recommend picking up roubini's book "crisis economics" to broaden your understanding of what happened and how complex it was. the desire to oversimplify is always tempting, but you are leaving out too much information and completely misunderstanding the issues around monetary policy.
from 2004 to 2008, m3 growth went from 4% to 17%. measured in dollars, M3 more than doubled in that period, massively exceeding economic growth. that's loose policy, not tight.
debt bubbles do not build in times with overly tight policy, they build in times of loose policy. i presume you will not argue that there was no debt bubble? so where did it come from?
and FWIW, i mostly agree with your prescriptions for recovery, but you left out a key issue which is that governement must also slash spending and balance the budget.
we are getting precariously close to the (05 debt to gdp level that historically heralds a spike in borrowing costs that eats all future growth. time to slash the federal budget and move to a surplus as well as sort out the unfunded liabilities like SS and the medi system.
the hit to GDP will be a great deal less than is commonly feared. government spending crowds out private spending which is almost always more productive.
this is a very interesting piece on the topic:
http://www.people.hbs.edu/cmalloy/pdffiles/envaloy.pdf
Sigli, the short answer is asset prices rise and fall, but there wasn't too much money chasing too few goods.
There was too little money chasing too many goods.
Anyway, the real value of the economy is more important than its nominal value.
"The "someone else" you speak of is us AND them."
"Who was it taken from? It was either taken from the current taxpayers or the future taxpayers."
Right. It IS being taken from "us", current taxpayers, and WILL be taken from future taxpayers.
"I agree unemployment is a disincentive to work, but many of the people collecting unemployment are either people who paid into the system through lower wages in the past..."
No, Walt, no one has paid in the past for federal unemployment benefits. There is no money "in the system" for such benefits. Any taxes paid in the past are long gone, spent for other things. Please say the word DEFICIT. Any federal unemployment benefits at this time are a pure redistribution of income. Welfare. No one has earned them.
"...or will pay back the money in lower wages in the future."
That will be true only when "them" goes back to work. at that time, we will ALL (us AND them)pay back the money in lower wages, as will our grandchildren.
In the meantime "them" has benefited from money taken from someone else - "us" -, while "us" has lost the benefit of that money.
"Taxes don't stop at state lines. "
State lines aren't at issue here, Walt. This is about FEDERAL unemployment benefits.
"Sigli, the short answer is asset prices rise and fall, but there wasn't too much money chasing too few goods.
There was too little money chasing too many goods."
I don't know if you missed the point or are avoiding it, but this is a simplistic answer that answers nothing. Then again, I'm relatively new here and may just be misunderstanding you.
There are obvious holes in your response: Too many goods would have lowered housing prices, not escalated them. Houses are financed. Easy money financed them. Easy money is not equal to "too little money". You don't create bubbles with restrictive money. If your analysis were true then easing monetary policy would pop the bubble. In fact we saw the exact opposite. Your theory doesn't hold up when applied. You're also discounting the cash flows underlying housing assets. And yes, real prices matter. That's why housing cannot outpace wage inflation forever. It did for 50 years until reaching a maximum, from where it fell.
One other point is that your prescription argues for exactly what I'd want to see but an alternative way of achieving it. That is a default on excess debt. Purely printing money and passing it out to citizens is one form of default. The problem with doing that is a lack of rules and leaving the printing machine to the biggest criminals, the politicians. Also, claiming the Federal Reserve simply prints and spends money shows a misunderstanding of our monetary system.
Ron H.,
I'm not sure what point you are trying to make. There are two types of money I earn: 1) What's left after I pay taxes like Social Security, Medicare, and federal, state and local taxes, and 2) What I could have had if my employer did not have to pay for me like unemployment, workman's comp. etc.
What difference does it make if the money comes out of pot #1 or pot #2? It costs me the same whether it comes out my right or left pocket. Are you an accountant who has figured out a trick to make money?
We could argue that government should not be in the business of redistribution of wealth, and I will agree with that when they quit taking taxes out of my check to redistribute. Until then, I want a say, and I will vote to elect folks who I think will benefit my special interest group--me--instead of someone else's special interest group. And, yes, we all have a least one of our own special interest groups.
I've got dollars in this game, and I want to get back what I put in if I can. I just got my "Your Social Security Statement" June 14, if the government wants to give back the $409,610 that my employer and I have paid into Social Security and Medicare I will opt out and let you guys fight about that, too.
Involuntary unemployment occurs because demand for the production in the economy falls off.
Not exactly.
Involuntary unemployment occurs because demand for the production at current prices falls off. If prices of goods -- and of labor -- are allowed to fall, unemployment will ease.
The extension of unemployment benefits keeps the price of labor higher by allowing the unemployed the hope that they can hold out for a better job offer.
It is Keynesian dogma, though, as you point out, that printing money (and thereby causing inflation) will fool labor into believing that wages are rising when no such thing is really happening.
Unemployment is more like insurance than a welfare benefit when used correctly.
Walt G: I agree, but these unemployment extensions are not funded by the insurance payments.
Walt, you are making more out of this than exists. It's really simple.
Let's start over at the beginning:
Walt G. said...
"Why does Laffer assume the money is taken from someone else? If we consider the money employers pay into the unemployment fund as compensation that could have went into employees' pockets, employees are paying for their own unemployment benefits."
I responded with this explanation:
Ron H. said...
"Walt G., the WSJ article begins:
"The current debate over extending and increasing federal unemployment benefits..."
This IS money taken from someone else, not state benefits that employees have funded themselves.
That's basically the whole thing.
I am assuming you read the Laffer article in the WSJ. If not, maybe that's part of the misunderstanding. Please read it. It's short.
In his first sentence, he tells us he is addressing federal unemployment benefit extensions, so yes, this money is coming from someone else, namely all current and future taxpayers including you and me through our federal income taxes. NOT from those who are currently unemployed. We have all paid taxes in the past, and that money is long gone. That hasn't created an entitlement for anyone to receive free money from the US treasury now.
There is a huge budget deficit this year, as I'm sure you're aware, so there isn't any money lying around waiting to be distributed as unemployment benefits. All extended benefits come out of your pocket and my pocket and go into the pocket of people who are not contributing. It's pure welfare.
What the unemployed paid in the past doesn't matter. We have all paid it. What they will pay in the future doesn't matter. We will all be paying it.
Meanwhile, my income and your income is being redistributed to those who are not working.
So, when you ask "Why does Laffer assume the money is taken from someone else?", it's because it IS taken from someone else.
The rest of your last comment kind of wanders away from that original question, and has no bearing on it.
___________________________
Well, I can't resist. I have to respond to a couple of items.
"We could argue that government should not be in the business of redistribution of wealth, and I will agree with that when they quit taking taxes out of my check to redistribute."
You have that backward, Walt, you should agree with that now while it's a problem. When they quit taking it, we won't have a complaint.
Speaking of pockets:
"[Social Security] ...if the government wants to give back the $409,610 that my employer and I have paid into Social Security and Medicare..."
You do understand that that's a cruel joke, right? You're paying all of it, but by keeping half of it out of your view, it seems like less.
Sigli, asset prices are only residuals of economic policies, including monetary policy.
U.S. actual output was roughly equal to potential output in the mid-2000s, although the U.S. consumed much more than produced through current account deficits. So, there were too many goods, particularly given there was diminishing U.S. marginal utility (or the opposite of pent-up demand).
It's not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What's important is maintaining sustainable growth (of goods & services), which is optimal growth. The government was way behind the curve providing liquidity to the masses, which caused the recession.
Ron H.
Who is this someone else you are keep talking about? Isn't it us (or our kids or their kids)? I don't think I am complicating this. You are the one inventing people who do not seem to exist. As far as I know, to collect unemployment, unlike some benefits, you had to be employed and paying taxes at some point in time. And I believe, and this is just my personal opinion, most people on unemployment will have a job in the future. So that means employed people and unemployed people, either in the past or in the future, will pay for the unemployment benefits. Is there some group of people I am leaving out that will have to pay for these benefits?
I don't necessarily agree with deficit spending, but if the U.S. can spend $9 billion a month (Source: CBO) on a war that we don't have, we can spare a few million federal dollars on unemployment that we don't have. We will just have your someone else pay for it.
Redistribution of wealth? It's too late to put that genie back in the bottle. You can either learn how to deal with it or spend the rest of your life crying "it's not fair." And the truth is, it is not. Some people see lemons, and some people see lemonade. Which are you?
PT?
You are right.
In a consumption based economy you need consumption spending. 70% of the US economy is based on consumption.
There is another reason based in government spending that none of you have mentioned that was the cause of the meltdown.
Inflation and savings also need to play a part in recovery but I don't think anybody is ready to swallow that yet.
Walt, this is pointless. I guess I had forgotten that you're the "Might makes right", "End justifies the means" guy.
"When the music stopped there were only 3 chairs, and the powerful got them."
It's damn hard to reason with someone with attitudes like that. I should know better. You have your opinions, and nothing will sway you an inch, no matter how badly your lame arguments are demolished, as they have been in the past.
I know you aren't failing to understand me, you are smarter than that, so I have to conclude you are intentionally being bone-headed.
Perhaps I should say:
"I won't tolerate unemployed people taking money from me with the help of their government goons, so I'm going to start sending my own goons to beat the crap out of those who dare take extended benefits, and take back their checks."
Is that more your kind of talk?
I know you will want to post the last comment, as you always do, no matter how long it takes to get there, so go for it. This is my last one on the subject. I won't waste any more time talking to a post.
peak-
"It's not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What's important is maintaining sustainable growth (of goods & services), which is optimal growth. The government was way behind the curve providing liquidity to the masses, which caused the recession."
this is exactly wrong. it was easy money that caused the problem, not tight money. money supply (M3)in this country doubled in 7 years. rates were much too low, not too high. cash was too free, not too tight.
the recession is the bursting of a debt bubble. debt bubbles cannot be caused by tight money. you have this completely backwards. what was unsustainable was constantly spending more than we earn.
you are advocated concatenated bubbles as sustainable. it was ponzi borrowing, speculative borrowing at best (note, i use these terms in the precise Minsky manner).
how on earth can you call the kind of debt accumulation over the last 20 years sustainable?
you seem to think that was normal when it was, in fact, virtually unprecedented in all of history for a populace as individuals to be that deep in debt.
"Trust Fund Management Program
The Secretary of the U.S. Treasury is designated by law as the managing trustee for eighteen of the approximately two hundred thirty Federal Investment Funds. With over $2.5 Trillion in assets, the Treasury-managed Investment Funds are the majority of the largest Trust Funds in the Federal Government. They receive Social Security, Medicare, excise and employment taxes---all collected by Treasury---as well as premiums, fines, penalties and other designated monies collected by the agencies that administer the programs for which these Trust Funds exist.
The Bureau of the Public Debt is delegated the responsibility for administering these eighteen Funds. For each of these Funds, Public Debt immediately invests all receipts credited to the Fund, and maintains the invested assets in the Trust Fund account until money is needed by the related Federal Program agency to fund program activity, such as Social Security and unemployment benefit payments, as well as highway funding.
When the program agencies determine that monies are needed, Public Debt redeems securities from the Funds' investment balances, and transfers the cash proceeds, including interest earned on the investments, to the program accounts for disbursement by the agency. The Bureau provides monthly and other periodic reporting to each Fund's program agency.
Effective April 13, 2009, the Treasury Account Fund Symbols for the Treasury Managed Trust Funds will be renumbered to change the agency code from 20 to the program agency code. See The Treasury Financial Management Manual Announcement A-2009-04 for more detail on this change." (Source: U.S. Treasury)(Emphasis added)
Federal Unemployment Trust Fund Balance as of June 30, 2010
And here is how the Federal Unemployment Insurance Trust Fund is funded in my state, Michigan:
“Federal Unemployment Insurance Trust Fund. Generally, employers pay an effective federal tax rate of .8 percent on a portion of their payroll (a 6.2 percent tax on the first $7,000 of each employee's pay, offset by a 5.4 percent credit if a state's UI program is in conformity with the federal rules and regulations that govern the program). In addition, employers pay between .06 to 10.3 percent on the first $9,000 of each employee's pay, the exact amount depending upon the size of the employer's company, and the kind of industry (whether agriculture, forestry and fishing; mining; construction; manufacturing; wholesale and retail trade; finance, insurance and real estate; services; or government).
The money is collected nationwide and put into the federal Unemployment Insurance Trust Fund where each state has its own account based on its employers' contributions, known as employer experience accounts. The state's trust fund account is the source of UI benefits for unemployed workers, as states withdraw money from the fund in order to pay those who have lost their jobs during an economic downturn.
When states have very high unemployment rates for many consecutive months, some of their employers become "negative balance employers"--that is, the employers' unemployed workers are drawing more money from the trust fund in the form of unemployment benefits than the amount that has been paid in as state unemployment taxes, on their behalf, when they were working.
The federal Social Security Act allows states to get loans from the federal UI Trust Fund when their state unemployment trust fund accounts run out of money. When states borrow, they must repay their advances with interest. For example, because Michigan has had to request advances from the U.S. Department of Labor during its long economic downturn, the state's total outstanding loan balance is an estimated $1.68 billion as of March 20, 2010.”
[Source:www.michigan.gov/documents/uia/Extended_Benefits_in_Michigan_Fact_Sheet_122_267185_7.pdf]
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Thanks for the backup info PeakTrader.
I still disagree with the stimulus. It would be one thing if the government was flush with cash and did not need to borrow it. Then it could use its reserves to lessen the impact short term recessions- or in other words, to create demand when it has lessened.
However, when we have to borrow that money, the long term implications, in my opinion, outweigh the short term benefits. As I said before, the problem with debt is that it needs to be paid back.
As you have seen with the Automobile stimulus, all it did was accelerate demand but it cannot replace it altogether. Those that were going to purchase a car sometime in 2010 accelerated their purchases to take advantage of a stimulus program. Your suggestion to have the government buy cars as a perk for government workers simply replaces demand that will not be there when the stimulus ends. What happens when all government workers have a taxpayer paid car (well, except for the riots from the private sector)? You cannot indefinitely continue a stimulus plan such as this, can you?
I suppose my negativity towards stimulus is that I believe stimulus and the "multiplier effect" have been disproven. John Mauldin says:
The most credible studies show that government expenditures exert no multiplier effect on the economy. Actually, they show them to be very slightly negative.
I am not a huge follower of Maulin but he is not the only one I have seen say this.
It is easy to see how stimulus might increase GDP in the short term, but when in debt, all that stimulus needs to be paid back at interest. This is a tax on future production.
James
Now that most/all financial enhancement has run out died or in the throes of it, you are looking now at the real economy as stark naked as it actually is and at the point that it will grow from.
The new up at this point is almost dead flat with the only real growth yet to come.
Keynes said anything above zero is the multiplier so I think we are about to find out the validity of his statement.
Go out and do some spending.
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