The General Economics Thread

Maybe works like Hamilton and Designated Survivor will help out there? It would be nice, it would be niiiice...

Darkness cannot drive out darkness; only light can do that. Hate cannot drive out hate; only love can do that.

It looks like for most ppl there is little to no change after the subsidized tax credit.

"We learn from history that we do not learn from history."

And yet Trump and the Fox propaganda machine will get a lot of mileage out of protesting that "Obamacare is broken". Fuck our blindly ignorant media...

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Following on the from the US Politics Thread, how might a zero-tax, maximum-spend economy act^note While a Populist wet-dream, I am somehow assuming it would end in disaster?

Keep Rolling On

It can't. There's no way to maintain price stability and thus the whole thing would fall apart, like the parable of the economy that tries to run on leaves.

A currency issuer collects taxes to make sure that there is a steady stream of money exiting the economy to balance out the money going into it, and thus things continue to cost more or less the same from day to day.

It also collects taxes to fund its own operations, since the people employed by "the government" are still private citizens and expect to participate in the economy.

edited 25th Oct '16 1:13:44 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

That, and you tax so that people and potential creditors don't get scared about a default.

"For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled." - Richard Feynman

Thus, it also means a situation such as Total War, Taxes would have to rise (and prices would have to be directly controlled?) to ensure money gets taken out the economy (and that firms don't indulge in profiteering)?

edited 25th Oct '16 1:23:42 PM by Greenmantle

Keep Rolling On

Yes, hence rationing and other price controls during World War II. Money has to circulate in an economy: flow through it, get recycled, and used again. If money is getting pooled in certain areas, it causes distortions that can lead to a collapse (example: in the run-up to the 2008 crash, money was pooled in the real-estate investment market). Government should seek to find areas where money is being hoarded without productive use and try to drain them off.

"Total war" scenarios are inherently a distortion because the production apparatus of an economy becomes dedicated to building stuff that is intended to get consumed or blown up. Your bottlenecks become (a) the ability of your work force to produce the materiél to feed the war machine; (b) the supply of raw materials which which to produce stuff; (c) your ability to keep the labor force in question fed and happy.

If done right, you exit the war scenario with no consumer debt, large piles of consumer savings, and production facilities that are eager to stop producing bombs and planes and start producing cars and dishwashers, keeping the labor force employed and absorbing all the new labor from returning soldiers. Thus the shock when government spending is cut off is minimized and you enter a domestic economic boom. (Notably, it took the United States about 30 years after World War II to use up the momentum from its post-war Golden Age.)

If done poorly, you have huge shortages of domestic goods, piles of debt owed to other countries, and nothing for your soldiers to come home to. Economies that do that enter revolutionary crisis shortly thereafter.

edited 25th Oct '16 2:17:31 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Actually, we know what a "total spend, no taxes" economy looks like, it looks like a hunter-gatherer tribe.

"We learn from history that we do not learn from history."

That's a barter economy, or even more primitive: a hand-to-mouth economy that resembles a form of idealized Communism, where all are equal according to their ability to contribute. Taxation is whatever tribute the chief takes in exchange for his leadership (or for not hitting you over the head with his "leadership axe"). It's only meaningful to have a discussion of macroeconomic principles once you move past subsistence into large-scale commerce.

I've been reading about economic history, and until roughly the seventeenth century, economies evolved so slowly and most people were so unaffected by them in their daily lives that there was no need for a synthesized body of study about it. It was literally irrelevant to 99% of the human population until the Industrial Revolution was well under way. The idea of economics as a formalized study applicable to more than kings and their personal exchequers is as recent as Adam Smith's The Wealth of Nations.

edited 25th Oct '16 2:25:12 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Barter economies have macro-economics. There were global trade routes before the Agricultural Revolution. They aren't more primitive than us, just smaller scale.

edited 25th Oct '16 2:26:22 PM by DeMarquis

"We learn from history that we do not learn from history."

Yes, but as there was no centralized source of money, the idea of adjusting "spend" to the needs of an economy was as alien as computers to cattle. And I'm not using "primitive" as a pejorative, just as a fact. Use whatever label fits your prejudices.

edited 25th Oct '16 2:27:43 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

I'm a bit lost. I thought the primary purpose of a tax was to fund government services. Like, okay, let's say I'm the government and I want to fund something. Let's say I'm building a giant statue of Abraham Lincoln's face.

I could just print the money for Lincoln's face, but that would be money I'm adding into the economy. For every dollar I print, every existing dollar becomes lower in value. Too much money added to the economy and inflation becomes inevitable.

So in order to avoid inflating the economy, I rely on taxes from the citizens to get the money I need to pay my contractors and build Lincoln's face.

Where I'm lost is the debt. If I can't raise enough money by taxes then the national debt increases to pay for Lincoln's face. But how does that work? Am I borrowing money from China to pay for the face? How does that not constitute adding money into the economy, but printing it does?

My Tumblr. Currently liveblogging Haruhi Suzumiya and revisiting Danganronpa V3.

Good question. I've got to head home from work and do "useful" things, so will take some time to answer that in detail later. In a very brief summary, savings and investment are flip sides of the same coin. When you save money, you provide investment capital, and it doesn't matter (to you) whether that savings is with a central bank or a private firm, save for the three variables of interest, liquidity, and security.

When the government borrows money, it acts as an investor just like the private market, and in doing so helps to stabilize the value of saved money, just as taxing and spending directly helps stabilize general prices. What gives the government an advantage is the sheer scale of its borrowing (and thus, investing) power.

edited 25th Oct '16 2:31:15 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

Borrowing does contribute value to the economy. In fact it's a far more flexible method than taxation, which is roughly the same from year to year. That's why the federal interest rate (the rate at which the treasury charges commercial banks to borrow money) is considered a primary method of adjusting the economy.

"We learn from history that we do not learn from history."

Wait, is the debt money borrowed from our own banks? I thought it was borrowed from foreign countries.

My Tumblr. Currently liveblogging Haruhi Suzumiya and revisiting Danganronpa V3.

When you go into debt you're borrowing money from the people, so you're borrowing from Private Bank Mc Money Pants (well actually issuing them a bond), which gets its money from the saving stored there by Stonemason Joe, who gets his income from the goverment paying him to work on the Lincon statue, which is funded by the debt. So with this hat circle no new money is added.

If you print money you're just adding more to the circle, likewise if you take on debts from abroad you're adding money to the economy or if you pay for it with money produced by a profitable goverment business (like a state run oil well).

It's generally borrowed from (or order of liklyhood) within the goverment itself (so department A owes department B X dollars), from banks within the country or from foreign govemrents. I'll look up the percentage for you in just a sec.

Edit: Business insider says that in 2009 30% of the gross US public debt was external.

edited 25th Oct '16 3:03:37 PM by Silasw

"And the Bunny nails it!" ~ Gabrael "If the UN can get through a day without everyone strangling everyone else so can we." ~ Cyran

In the US, and most countries worldwide, currency is introduced into circulation when the central bank lends it to commercial banks, who then lend it out to their customers (classically businesses who seek to expand production, although that trend has been changing of late). So when you borrow money from your local neighborhood bank, chances are they are providing you with funds they themselves borrowed from the government. In certain financial services firms, deposits from private individuals form a minority, or even zero percent of their assets (depending upon what kind of financial services they offer). Of course, since the banks have to pay the gov't back at a certain percent interest, they in turn charge their customers (you) a slightly higher percent interest. Since the higher the interest rate becomes the fewer people borrow money, the higher the interest the less currency enters circulation that quarter (that's why it's more flexible than taxes). The lower the federal interest rate, the more currency enters circulation. Thus, the federal interest rate is really a method the government uses to control spending and growth in the larger economy.

"We learn from history that we do not learn from history."

As far as I know, the Fed requires that all bond purchases be executed in dollars. Certainly, they are redeemed in dollars. That we borrow and spend in our own currency is an inherent check on the possibility that some large foreign lender could suddenly call in the debt. We also hold a lot of foreign currency reserves, and the net income/expense of foreign currency exchange is very slightly in our favor due to the different interest rates.

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

"...As of September 2014, foreigners owned $6.06 trillion of U.S. debt, or approximately 47% of the debt held by the public of $12.8 trillion and 34% of the total debt of $17.8 trillion."

It doesn't say what ''currency" can be used to purchase the debt. If China (for example) has to purchase US treasury bonds using US currency, then presumably they pay for that out of their positive trade balance (ie, some portion of the profit they make from exporting goods to the US can be used to purchase US bonds).

In figure 1, on page 6, of this document, approx one third of foreign investors are private individuals and companies, and two thirds are foreign governments. This means that approx 2/6's or about 33% of US public debt is held by foreign governments. The largest is China, with about 7% of the total.

edited 25th Oct '16 4:31:41 PM by DeMarquis

"We learn from history that we do not learn from history."

Basically, yes. The important thing is that while taxes are income for the government, they're not analogous to a salary a company pays an employee. The wage paid to an employee for their labor is the only money that person has — if they don't get paid, they don't have any money to spend. But the government can literally print as much money as it wants, since they control the currency. This is important because it means that taxes aren't what allows a government to afford spending on programs, the way a wage allows a worker to buy goods and services — what taxes accomplish is preventing runaway inflation by expanding the money supply to infinity. If the government just printed more money every time it needed to spend money, eventually the currency would be worthless.

The reason this is important is that when outside pressure (like an economic recession, for instance) is keeping inflation low anyway, then the government can effectively get free money by spending more than it's taking in in taxes. This would normally cause inflation by expending the money supply (ie, more dollars in circulation means each dollars is worth less), but since inflation is being kept down by the outside factors, that's not a problem.

That's Keynesian economics in a nutshell. (Keynes goes on to say that the government should use this free money to get the economy out of its recession, and then when the economy is booming, it should reduce spending and deliberately slow down the economy in order to prevent an unsustainable boom that will lead to a bust.)

Government debt isn't like any other debt. When a person or a company goes into debt, they're generally taking out a loan from a financial institution like a bank. The government doesn't do that, because they can just create money from thin air. So what governments do is issue bonds. A bond basically says "pay me X dollars now, and I'll pay you Y dollars in Z years", with the amount paid off varying depending on the interest rate at the time the bond is issued. Government bonds are a literally risk-free investment (the government will cover its bonds, since it can just print more money to do so if it has to), so interest rates (and thus return on investment) tend to be very low compared to other possible investments (like the stock market), but when economic times are bad, they're very attractive because they're very safe.

But unlike other investments, bonds have no inherent value. You invest in stock or commodities or whatever because you expect that thing to become more valuable in the future (and if they become less valuable instead, you lose money). But bonds are just "some money now for more money later". There's nothing of value changing hands here, it's literally just the government promising you more money in the future. What this means is that the government has to print more money — expanding the money supply and causing inflation — in the future, in order to cover those bonds.

That's where government debt comes in. The government debt is, generally speaking, how much it owes in outstanding bonds. This is money largely owed to its own citizens (through financial organizations, like banks and investment firms), through foreign governments can also buy bonds. Unlike loans, however, there's no collateral. When people talk about China "owning" a certain amount of US government debt, that just means they've bought a bunch of bonds and the government has promised them a certain amount of dollars in return, like any other bond holder. China isn't like a bank that can repossess the US government's house if the US government fails to pay its mortgage. China doesn't have any leverage over the US government due to owning US government debt. It doesn't matter who owns the debt. It's all the same to the government.

Anyway, eventually all these bonds that the government has been selling will come due, and the government will have to pay out the money it owes. Since it promised to pay back more money than it sold the bond for, it loses money on the deal, and has to print more currency to make up the difference. This causes inflation. However, a certain amount of inflation is actually good for the economy — it encourages people to invest their money rather than simply stuffing it in a mattress somewhere (where it does no good to anyone), because your money now is worth more than your money later. ie, you need to use your money to make more money, or else after a certain period of time (and a certain level of inflation), you'll have less purchasing power than you had before. This is a good thing because money is only useful when it's changing hands, so you don't want money to sit around in mattresses (or savings accounts). A reasonable amount of inflation also has positive effects by making privately-held debt easier to repay, thus encouraging yet more economic activity instead of burdening people with large debts that mean they can't spend that money on other things.

Anyway, that explanation sort of went off into the weeds, but hopefully I answered the question of where government debt comes from and who we're actually borrowing money from.

Really from Jupiter, but not an alien.

Bear in mind that there is a time delay involved in US treasury securities. When you buy a bond from the US gov't, you are giving the gov't some money, which actually takes currency out of circulation. It only gets added in sometime in the future (depending one what the term of the security is). When foreign gov'ts buy US treasury securities, we are taking money out of their circulation, and adding it back in later, so we are helping stabilize global economic growth and prices.

"We learn from history that we do not learn from history."

Clear as mud to me, honestly, but I can't spend the time on a deep dive on the subject right now. One of these days I should pick up a macro 101 book/course.

That's actually a neat perspective that I hadn't quite appreciated before. Government bonds are, in essence, a promise to expand the money supply in the future, and thus a hedge (by the buyer) against inflation.

The money doesn't really leave circulation; the government will spend it almost immediately on direct expenditures and/or debt service. The buyer has less liquid money, to be sure, but that's where savings preference comes into play. In times of weak demand, when interest rates for investments are low across the board, there's more demand for bonds as a safe place to park savings. This raises bond prices and, correspondingly, drives down interest rates. These are the best times for the government to assume additional debt.

Correspondingly, when times are good, there's lots of competition for investment capital and so bond prices drop, increasing interest rates. This is a good time for the government to reduce its debt load, which helps soak up excess cash from the economy and ease off on the accelerator so the boom doesn't get out of hand.

I'm not trying to sound snarky here, but if you're going to make statements about U.S. debt, it helps to understand the mechanisms at play. Otherwise you help contribute to the general ignorance that feeds into the debt phobia pushed mainly by the right, and by people with a centrism fetish.

edited 25th Oct '16 4:50:10 PM by Fighteer

"It's Occam's Shuriken! If the answer is elusive, never rule out ninjas!"

My question in the other thread was an honest one; I'm less trying to argue and more trying (and mostly failing) to understand your position. What you're saying runs counter to what little macro I think I understand which is "you can't fix stuff by printing more money" and that the Fed exists to control the money supply so there's not disasterous inflation or deflation. And I get the basics of fiat currency (especially given Extra History is doing a sequence on the history of paper money right now). I have a vague notion of the amount of total currency the economy can hold being corelated with the GDP but I'm not sure how accurate that is.