U.S. Economy Shrinks in 4th Qtr

[Al B. Sure!]

Cutting government spending would keep more dollars in the private sector. More dollars in the private sector = more growth.

You could make a case for cutting spending being beneficial to economic growth but not in the way you seem to be trying to do. The real argument would have to do with the crowding out effect and wage inflation from public sector wages and transfer payments.

[MichaeltheGreat]

Cutting government spending would keep more dollars in the private sector. More dollars in the private sector = more growth.

Not if it's deficit spending. If you're talking about increasing spending coupled with increasing revenue extraction in a balanced budget scenario, then you're correct. Reagan went about it in the other direction - cutting taxes starting with ERTA in 1981, but no real spending cuts as originally proclaimed, in fact, moderate spending increases. Long term, deficit spending can have destructive effects if it's done excessively, but we're not seeing those now.

[MichaeltheGreat]

The government doesn't produce anything.

That's right, you're in Texas. No roads, no indoor plumbing because you have no sewer systems.

Most of the economy doesn't produce anything either. Government spending buys stuff produced by others. So does real estate, the entire financial sector, the service sector, most utilities. Do you conveniently discount those sectors out of your economic world view?

[Ben Kenobi]

You could make a case for cutting spending being beneficial to economic growth but not in the way you seem to be trying to do. The real argument would have to do with the crowding out effect and wage inflation from public sector wages and transfer payments.

Where does the government get money from - from taxes, fees, duties, whatever. Where does this money come from? It comes from the salaries collected from the people who do work and produce things. If the government spends less of the money that they take from other people, does this money just vanish? No. It stays in the hands of the people who earned it.

If the government were to cut spending, that would mean more dollars in the hands of those who do produce. Where would this money go? Right back into the economy - into the private sector.

[MichaeltheGreat]

We've added 6 trillion in debt over the course of the Obama administration with very little stimulus effect to show for it. When do you foresee it kicking in?

Who says it really hasn't? The only valid comparison is "what would have happened without that spending?" And yes, save yourself the trouble. There are all sorts of links will all sorts of analysis from every conceivable viewpoint. I have yet to see one that made a cogent comparison to what would the results be, if say, TARP hadn't been enacted, or various other bailouts. I'm not convinced of the quantitative benefit of the spending to date, bit it's not like we can go back to 2008 and enact a different set of policies and see those alternative results. So the net result of any economic analysis of the effect of "stimulus" really comes down to which results you cherry pick to make your point, which is a result of who's paying you to do the analysis (or if you're in academia, which audience are you targeting for your future paid work?)

[Ben Kenobi]

Not if it's deficit spending.

Which is why you cut government spending. Yes, I know it's a radical and an alien concept. The problem is that the federal government at least is spending far, far too much. If the Federal government cut stuff back, they would rein in the deficit spending, and the private sector would rebound. Instead, what we are seeing is that the government is borrowing more and more money to fund this spending, which is providing little, if any benefit. It does gradually increase the percent of the public debt spent on interest. Something like 1 third of total revenues are already spent just on the interest. This is like if you made 60k after taxes, you had credit card payments of 20k/year. Or on a per-monthly basis - you are bringing in 5k a month and spending 1.7k a month just on interest.

If you're talking about increasing spending coupled with increasing revenue extraction in a balanced budget scenario, then you're correct. Reagan went about it in the other direction - cutting taxes starting with ERTA in 1981, but no real spending cuts as originally proclaimed, in fact, moderate spending increases. Long term, deficit spending can have destructive effects if it's done excessively, but we're not seeing those now.

I'm talking about actually cutting government spending. Full stop.

[Ben Kenobi]

That's right, you're in Texas. No roads, no indoor plumbing because you have no sewer systems.

At least here, it's toll roads built by the private sector and funded by the government with money taken from taxes.

Most of the economy doesn't produce anything either.

Yes, and? Your point being? Primary industries are the straw that stirs the whole drink. It doesn't matter how many times we trade around the same dollar, if you don't have some measure of primary industries and resource extraction. That you'll find in the private sector. What happens if you took the money that was being taxed and left it in the hands of the same primary resource extractors? Gosh, maybe they would be able to do more things with it.

Government spending buys stuff produced by others. So does real estate, the entire financial sector, the service sector, most utilities. Do you conveniently discount those sectors out of your economic world view?

Government spending takes stuff from people to buy other stuff. Why not cut out the middleman and let the people but stuff produced by others?

[MichaeltheGreat]

Where does the government get money from - from taxes, fees, duties, whatever. Where does this money come from? It comes from the salaries collected from the people who do work and produce things. If the government spends less of the money that they take from other people, does this money just vanish? No. It stays in the hands of the people who earned it.

If the government were to cut spending, that would mean more dollars in the hands of those who do produce. Where would this money go? Right back into the economy - into the private sector.

There are these things called "treasury bonds." People actually voluntarily buy them - in fact, since they're auctioned off, people buy them with enthusiams, given the low rates seen in 10 and 30 year treasuries. That money is not destined for private sector reinvestment. Typical acquisition pre-tax unleveraged hurdle rates are in the 20+% range, due to perceived risk - and that's not venture or risk capital, that's acquisition. The threshhold rates of return for capital spending are much higher than investors are looking for in the T-bond market. If there wasn't an investor appetite to lend to the treasury, we'd see rates on longer bonds go up rapidly. I remember the days of 30 year treasuries at 13%

If that money didn't go into the treasury bond market, would it go into private capital activities? No. It would be sat on, in some other low-interest, hyper safe investment which would do as little or less for the economy. Private capital investment also involves risk, and nobody in their right mind takes all their capital and puts it into risk activities. Particularly institutional investors, foreign central banks and other typical treasury debt purchasers.

At this point, all you do by cutting spending is reduce the size of the treasury debt auctions each week. That money will not find its way into private sector investment - if it was destined for that, it would never be bidding on 2% 10 year treasuries in the first place.

[MichaeltheGreat]

At least here, it's toll roads built by the private sector and funded by the government with money taken from taxes.

Yes, and? Your point being? Primary industries are the straw that stirs the whole drink. It doesn't matter how many times we trade around the same dollar, if you don't have some measure of primary industries and resource extraction. That you'll find in the private sector. What happens if you took the money that was being taxed and left it in the hands of the same primary resource extractors? Gosh, maybe they would be able to do more things with it.

Shaken, not stirred. Primary industry and resource extraction has long stopped being the dominant force in the US economy. Large scale corporate tax rates don't have a huge effect on activity because the "do more things with it" is deductible, and in many cases triggers credits, etc., so that activity is not being taxed.* What is taxed is the profits, not the gross proceeds.

* Yes, there are timing games with depreciation, but this cuts both ways and plays into capital gains and all the various preferences and loophols in the tax code. I get paid to write about that ****.

Government spending takes stuff from people to buy other stuff. Why not cut out the middleman and let the people but stuff produced by others?

So you gonna drive over to Fort Hood and pay a few soldiers and pay part of the bill as part of an "Adopt an Abrams" program?

[MichaeltheGreat]

Which is why you cut government spending. Yes, I know it's a radical and an alien concept. The problem is that the federal government at least is spending far, far too much. If the Federal government cut stuff back, they would rein in the deficit spending, and the private sector would rebound. Instead, what we are seeing is that the government is borrowing more and more money to fund this spending, which is providing little, if any benefit. It does gradually increase the percent of the public debt spent on interest. Something like 1 third of total revenues are already spent just on the interest. This is like if you made 60k after taxes, you had credit card payments of 20k/year. Or on a per-monthly basis - you are bringing in 5k a month and spending 1.7k a month just on interest.

That you compare national macroeconomics and monetary policy with an individual wage earner's budget is very illuminating.

I'm talking about actually cutting government spending. Full stop.

That's a cute concept in the Liberterarium, but in the real economy, the wheels come flying off for years until **** eventually straightens itself out. The benefit from deficit reduction isn't realized for years, while the effect of massive spending cuts will have an immediate contracting effect that will ripple its way into a credit freeze and liquidit crisis. If you ever get elected to Congress, I'll go into bankruptcy law.

[Ben Kenobi]

Shaken, not stirred. Primary industry and resource extraction has long stopped being the dominant force in the US economy.

And the economy has been mostly stagnant since the 60's as a result.

Large scale corporate tax rates don't have a huge effect on activity because the "do more things with it" is deductible, and in many cases triggers credits, etc., so that activity is not being taxed.* What is taxed is the profits, not the gross proceeds.

True, but extraction bans have a tremendous effect. Bans on pipeline construction, draining the Jaoquin, etc. the list goes on. Cutting those areas of the government would not only save them money, but woule permit them to make more.

So you gonna drive over to Fort Hood and pay a few soldiers and pay part of the bill as part of an "Adopt an Abrams" program?

I'd gladly pay for "adopt an Abrams."

[Ben Kenobi]

That you compare national macroeconomics and monetary policy with an individual wage earner's budget is very illuminating.

Hey this is Poly. Write for your audience they say.

That's a cute concept in the Liberterarium

Demonstrated to work. Worked just fine for Coolidge. The economic theory behind it is sound.

If you ever get elected to Congress, I'll go into bankruptcy law.

Worked well for Texas. Texas cut their budget last year and has a quite substantial surplus this year.

[Ben Kenobi]

There are these things called "treasury bonds." People actually voluntarily buy them - in fact, since they're auctioned off, people buy them with enthusiams, given the low rates seen in 10 and 30 year treasuries.

Given that the Treasury is a quite substantial purchaser of their own bonds, I can't see how you can argue that they are being voluntarily purchased. They aren't. If the purchase was truly market based - the Treasury wouldn't have to purchase their own bonds (and by extension, expand the monetary supply) to keep the whole train rolling. The result would be an increase in the interest rate. Something that is inevitable, once the debt ratios get high enough. The US isn't quite there yet, but is well on the way.

That money is not destined for private sector reinvestment.

Disagree. If you look at it narrowly, yes, but broadly - that money held privately is still held privately even if it's sitting in a savings account.

If there wasn't an investor appetite to lend to the treasury, we'd see rates on longer bonds go up rapidly. I remember the days of 30 year treasuries at 13.

I wouldn't mind 13 percent - would be good for me as I have no debts and I could get a decent return. 0 percent just doesn't seem very sexy. But, we are in an age of deflation, so we'll likely never see rates like that again.

If that money didn't go into the treasury bond market, would it go into private capital activities? No. It would be sat on, in some other low-interest, hyper safe investment which would do as little or less for the economy. Private capital investment also involves risk, and nobody in their right mind takes all their capital and puts it into risk activities. Particularly institutional investors, foreign central banks and other typical treasury debt purchasers.

Don't see why increasing the savings ratio and market capitalization of banks would be a bad thing in this economic climate.

At this point, all you do by cutting spending is reduce the size of the treasury debt auctions each week. That money will not find its way into private sector investment - if it was destined for that, it would never be bidding on 2% 10 year treasuries in the first place.

It would remain with the private investors, it would simply be redirected otherwise.

[MichaeltheGreat]

And the economy has been mostly stagnant since the 60's as a result.

Dude, if you believe that, you must be doing some time travelling back to the 60's.

True, but extraction bans have a tremendous effect. Bans on pipeline construction, draining the Jaoquin, etc. the list goes on. Cutting those areas of the government would not only save them money, but woule permit them to make more.

The country is full of pipelines and projects. Environmental regulation exists for a reason, and really isn't an impediment to growth. It's a nice source for propaganda to mislead the uninformed public, though. Case in point - lots of whining about how there hasn't been a major refinery built in California in the last ten million years. It's all the treehuggers, as if a refinery just magically gets plopped down on a site and raw material just happens to show up. Never mind that the construction cost of all the terminal and transfer infrastructure to get raw material into the refinery runs into the billions, would take years and cause massive off-site disruption to traffic and other area busineses. Or that the new refinery, due to higher capital cost, would be at an incremental cost disadvantage, or that for 85% of the time at least, it would contribute to excess capacity and drive profits down. Great capital investment, huh? But when people whine about gas prices, and big oil wants someone to deflect blame to, bring out the environmental regulation bugaboo.

I'd gladly pay for "adopt an Abrams."

You don't get to ride on it or drive it. And the Army would probably suggest you just pay your taxes, since they like things like revenue predictability to keep that puppy in good running order.

[MichaeltheGreat]

Given that the Treasury is a quite substantial purchaser of their own bonds, I can't see how you can argue that they are being voluntarily purchased. They aren't. If the purchase was truly market based - the Treasury wouldn't have to purchase their own bonds (and by extension, expand the monetary supply) to keep the whole train rolling. The result would be an increase in the interest rate. Something that is inevitable, once the debt ratios get high enough. The US isn't quite there yet, but is well on the way.

Ever heard of refinancing? If the treasury and federal reserve actions distorted the market, there's a lot of smart people on Wall St., and in London, Beijing and elsewhere who would respond. Since they (a) know what they're doing as they make their livings off the bond market, and (b) aren't freaking out, I see no reason to get worked up.

Disagree. If you look at it narrowly, yes, but broadly - that money held privately is still held privately even if it's sitting in a savings account.

So what? What is the bank doing with that money in the savings account? Paying 0.5% for your money, then investing it in treasuries at 2%. The majority of treasuries are "held privately"

I wouldn't mind 13 percent - would be good for me as I have no debts and I could get a decent return. 0 percent just doesn't seem very sexy. But, we are in an age of deflation, so we'll likely never see rates like that again.

You'd mind it if you had an inflation rate of 12% And we're hardly in an age of deflation.

It would remain with the private investors, it would simply be redirected otherwise.

It might be redirected into euro bonds. Or the Chinese would sit on theirs.