I no longer believe in capitalism. At all.

[Jon Miller]

Sixteen of my thirty-seven courses at Yale counted in the Econ department.

Nice, I didn't know. I thought you had done computer science.

There is still my impression that those who study economics in college do not read Keynes though.

For that matter, people who study physics in college do not read Newton either. However, we are not taught countering schools of thought about Newton.

I agree that tax codes are more long term things, but they should be designed to not encourage liquidity traps? Also, wouldn't it be very important to not have so many distortions entered in?

Consumption tax is the least distortionary tax, and what encourages liquidity traps is having a low long-term inflation target and consistently undershooting it, not tax codes.

I know why it is theoretically the least distortionary tax. However, there should be plenty of tests since it is a common tax (among others). Do you have any data that backs this theory up?

My doubts about it are due to the observations I have that in europe markets go underground so as to not pay the VAT. There are data for it too, as VAT rises this shadow economy rises. I don't think it would be possible to do efficient taxation at the level that most nations desire using only a VAT (or some other sort of consumption tax).

An example from quick googling just now: http://www.nber.org/papers/w5527

Maybe we need to take the power of taxation away from politicians, and make it like a faucet. The politicians determine how much tax is required (as a function of GDP/etc), and the civil servants determine how that tax is applied? The only problem with that is then the efforts of those with power will be in distorting the civil servants actions and not the politicians actions.

It just seems that whatever the tax is (income, consumption, investment, etc), it is always distorted by those who can wield power. And this means that it will not be neutral.

JM

Not sure how you plan to move taxes away from democratic scrutiny without people flipping out.

Yeah, that is the problem.

JM

[Jaguar]

But the problem is that the people who would consume (or maybe even invest) don't have any money.

So you are paying market prices for things that people hoard, so it is just furthering the hoarding market instead of the investment market or consuming market.

Would people hoard cash if I bought $1 trillion worth of US bonds? What if I bought $1 trillion worth of US bonds and struck them from my balance sheet? What if I bought $16 trillion worth of US bonds and struck them from my balance sheet, eliminating the national debt in one fell swoop? Would you be eager to hold on to cash then?

What if I continued buying up the entire world with money that I printed from my printing press?

This isn't a made-up Jaguar thought experiment. This is Ben Bernanke's own devastating argument against some (very smart) people who have mistakenly believed what you just said.

[Kidlicious]

Monetarism isn't about targeting the money supply anymore.

So every economist is a monetarist, but monetarism isn't monetarism anymore?

[Jaguar]

Liquidity traps have nothing to do with either. JM hit it on the head. Liquidity traps are caused by a change in expectations and behavior. There is nothing that can be done about them by the central bank except not doing anything stupid like dumping a bunch of money in the economy which causes devaluation of the currency.

You mean, inflation? I agree that it would cause inflation. (And this puts you at odds with what JM just said. You happen to be right, and he happens to be wrong.) This is a good thing if you want to get out of a liquidity trap.

What you're missing is Fisher parity, among other things. Increasing inflation increases the natural nominal rate of interest simply by virtue of the fact that nominal interest rates have inflation baked into them. With a higher natural nominal rate of interest, it becomes less likely for it to go below zero.

[Jon Miller]

Would people hoard cash if I bought $1 trillion worth of US bonds? What if I bought $1 trillion worth of US bonds and struck them from my balance sheet? What if I bought $16 trillion worth of US bonds and struck them from my balance sheet, eliminating the national debt in one fell swoop? Would you be eager to hold on to cash then?

What if I continued buying up the entire world with money that I printed from my printing press?

This isn't a made-up Jaguar thought experiment. This is Ben Bernanke's own devastating argument against some (very smart) people who have mistakenly believed what you just said.

But there are other things people could hoard. UK debt, Swiss Francs, and so on.

A concerted effort, I could agree. But I think this is impossible?

JM

[Jaguar]

But there are other things people could hoard. UK debt, Swiss Francs, and so on.

What if I offer to buy all of those, at market prices, again with my printing press dollars?

A concerted effort, I could agree. But I think this is impossible?

Ben Bernanke does have this power. In terms of the powers vested in him by Congress, nothing stops him from doing that, if he thinks it would be a good idea.

In practice, he has been unwilling to threaten to buy up the whole world - as his thought experiment suggested - to stop hoarding. In part this is because he has to get votes on the Fed's governing board, and in part it might be because he's gunshy when he actually has the ability to create infinite money. There's political pressure on him, etc.

And it's precisely because everyone knows he's unwilling to threaten to buy up the whole world that we have hoarding. That's pretty much where macroeconomics is at right now.

[Jaguar]

So every economist is a monetarist, but monetarism isn't monetarism anymore?

Monetarists these days care about the money supply and the velocity thereof. M*V. Which is just another definition of GDP - but one that, in their view, is most instructive for determining optimal policy. They're also much more interested in expectations now.

If M*V is too low, you threaten to increase M until V increases. If M*V is too high, you threaten to keep decreasing M until V decreases. That's the basic monetarist story.

[Kidlicious]

You mean, inflation? I agree that it would cause inflation. (And this puts you at odds with what JM just said. You happen to be right, and he happens to be wrong.) This is a good thing if you want to get out of a liquidity trap.

What you're missing is Fisher parity, among other things. Increasing inflation increases the natural nominal rate of interest simply by virtue of the fact that nominal interest rates have inflation baked into them. With a higher natural nominal rate of interest, it becomes less likely for it to go below zero.

Eh, the thing is you don't really know what inflation will do to the economy and how people will react to it. This is why central bankers are so conservative. Their job really is to not do anything stupid. True they do have to react to a crisis, but only when they really have to.

[Jon Miller]

Actually, at least for the US buying $16 trillion, I think it would just encourage the hoarding behavior.

People would fear inflation/etc and would not want to make investments (would even want to limit their investments/move them) and in such a major part of the global economy this would cause a worse market crash.

If the $1 trillion would help or hurt things, I am not sure, I am suspicious it would not be enough to raise confidence enough for people (I mean capitalists) to feel like taking risks again. I could be wrong though.

JM

[Jaguar]

We do know what inflation does to an economy. That's why we study economics. We know all sorts of stuff about it.

[Jaguar]

Actually, at least for the US buying $16 trillion, I think it would just encourage the hoarding behavior.

People would fear inflation/etc and would not want to make investments (would even want to limit their investments/move them) and in such a major part of the global economy this would cause a worse market crash.

Backwards. If you fear inflation, what sort of assets would you want to hold? Anything but cash. You gladly put your money into Walmart stock or whatever. That gives you partial ownership of stuff that distributes real goods and services - safe from inflation. If you hoarded cash, you would be 100% exposed to inflation.

[Jon Miller]

How about this. It is tax policy, but it would definitely aid capitalists so you should be happy?

A policy that new businesses started in the next 2 years will not have to pay payroll taxes on their first ~20 employees until 2022?

Or a policy that all businesses which have 0 net profit from Dec 5 2009 until Dec 5 2014 do not have to pay payroll tax from 2015-2020.

JM

[Jon Miller]

Backwards. If you fear inflation, what sort of assets would you want to hold? Anything but cash. You gladly put your money into Walmart stock or whatever. That gives you partial ownership of stuff that distributes real goods and services - safe from inflation. If you hoarded cash, you would be 100% exposed to inflation.

Cash isn't the only thing you can hoard.

JM

[Jaguar]

This is why central bankers are so conservative. Their job really is to not do anything stupid. True they do have to react to a crisis, but only when they really have to.

I thought this deserved a longer reply, actually. It's completely legitimate to worry that new policies come with unforeseen risks. But economic downturns like this one are crises. For every year we're underemployed to the tune of ~15 million jobs, that's another trillion dollars or so we lose. Not to mention that this comes with all sorts of nasty side effects, including an uptick in suicides by the unemployed.

There are very few things that are worth this sort of human cost, and maintaining a generally-conservative demeanor is not one of them.

[Jaguar]

Cash isn't the only thing you can hoard.

JM

It's the only "hoarding" that matters in the Keynesian story. Everything else is consumption or investment.