Beagle wrote:
By eliminating tyrannical government, and allowing peaceful honest people to pursue their own happiness in their own way.
msmith537, well I don’t think we are so far apart anymore but I am still confused by the following:
That corresponds to how I thought things sort of worked. But, then, I don’t then see your argument about putting money in the bank being worse than investing it directly. Au contraire, it looks to me like you get a huge bang for the buck…You throw $1000 into the bank and, as a result of this, the bank can now go out and lend $10,000!!! Not bad, eh?
The creation of money in this way by the banking system increases the economy’s overall liquidity, not it’s wealth. The basics are more are less correct though, in that fractional reserve banking allows for an increase in the supply of money. If say the reserve deposit ratio were 10 percent then a $1000 deposit allows for $900 dollars to be lent out by the bank, not $10,000 as in your example jshore. But what’s more, if you went and deposited that loan in another bank then even more money would then be created. This could, in theory, be repeated ad infinitum until the maxium amount was created, which can be found by ($1000/.1) (.1 is the reserve-deposit ratio) and comes out to, oddly enough, your $10,000.
From the perspective of an individual investor putting your money in the bank is worse because of the low rate of return compared to other forms of investment like a mutual fund or bonds. On the other hand, the bank is safer since you won’t loose any money (not counting inflation).
Taking a macroeconomic view, the banks ability and willingness to lend seems to be more dependent on interest rates (the price of money) and people’s desire to borrow. If everyone just squirled their money away in a savings account, it isn’t really doing anything except earning 2% interest. Yes the bank can now lend out additional money but all that would do is increase the overall supply of money which leads to inflation. So basically, putting money in a savings account simply enables the bank to make more money.
Oh, right, my bad on the $10,000 number. I interpretted msmith537’s “$50,000 in deposits” as meaning that was the total amount of what folks had put in the bank but it clearly makes more sense that it is the amount that the bank has to keep on hand. So, in other words, the example should be that if folks deposit $500,000 in the bank, then the bank can then lend $450,000 out while keeping $50,000 on hand to satisfy its reserve requirement.
Yeah…I guess it ought to have seemed a bit extreme to get an immediate multiplier effect of 10 (as opposed to the eventual mutiplier effect in the whole economy of something like that)! But, still, what we have is that essentially 90% of your money deposited in the bank can go toward investing in stuff.
Even though I find you to be one of the more eminently reasonable posters on this board I find I must point out that Communism is certainly not alone in being forced into a purely reactive posture with regard to the economy.
One of the main reasons I am suspicious of elected government
officials taking action towards a short term end by “kickstarting the economy” or “spurring demand” is not only the recognition lag but the implementation lag. I suppose economic stabilization would be easy if the effects were immeadiate and pervasive but they are most certainly not. We have a cumbersome legislative process that does not lend itself to quick action in the least, never mind that we would still only be reacting to indicators that lag far behind the current situation. Monetary policy has a shorter lag than fiscal policy and for this reason I am glad that the Federal Reserve is not an elected body. This is because misguided attempts to “stabilize” the economy can actually be destabilizing in and of themselves, if the economy’s condition changes before the fiscal policy can have any effect then we cannot be sure what that effect will be. Caution is the keyword; appeals to “humanity” (someone please think of the children!) can distort that basic warning.
Our government already has a wide array of automatic stabilizers that come into effect in different economic situations. without the need for slow, deliberate one-off policy initiatives. Those stabilizers are the main reason why our government is running such huge budget deficits today. In fact the amount our government has for discretionary spending on economic woes is just a drop in the ocean compared to the size of our economic output. Such moves restore confidence (ah, fickle confidence) but accomplish little else.
(My previous post was obviously a response to Azael’s two posts previous.)
As for msmith537, well yes, I don’t doubt that individual investors investing directly can get a higher rate of return on their investment. That is because the bank is acting as a middleman and is absorbing some of the risk.
But, I still don’t see from a macroeconomic point of view how it is somehow much holier and much more wealth-creating to invest directly yourself rather than through a bank.
**
While these might seem like two differing sides of single arguement they are both correct in the sense that corrupt governments impose huge economic costs on societies.
Corruption is a major issue in the developing world with large costs for economic development. Its prevalence can present barriers to entry in markets and is also associated with low spending on public health and education (World Bank 2002, 106). Having to pay a bribe to ten different people every time you want to do anything doesn’t exactly create incentives for foreign investment. Nor does it inspire domestic confidence in the market.
What’s more, these costs are hidden by their very nature.
Strong state or minimalist government, the important thing is being able to trust it. Unfortunately, nothing breeds corruption like poverty.
World Bank. 2002. World Development Report 2002, Building Institutions for Markets. New York: Oxford University Press.
Of course. I didn’t mean to suggest it was. But the amount of jiggering the governments in capitalist countries can do is relatively small. Consider Bush’s plan - 650 billion dollars over ten years, while the economy itself generates over 10 trillion dollars a year. That’s a total ‘stimulus’ amounting to .65% of GDP.
The Democrat’s plan is even smaller, and would amount to .35% of GDP. But the stimulative effect will be even smaller, because of the negative effect of the borrowing.
Politicians have a vested interest in getting us to believe that they are in control of everything. They don’t like to mention that their big ‘stimulus’ plans are little bigger than rounding errors in the grand scheme of things.
That’s why I like Bush’s plan so much better, because it makes structural changes in the economy itself which will make it stronger years down the road. The Democrat’s plan will make almost no difference in growth, but it will distort the price system and increase the deficit, without changing any of the fundamentals in the economy itself. It’ll just be a tiny ripple.
I am in absolute agreement.
make accounting/personal finance mandatory in highschool. of course this is a long term solution not short term.
see:
YOUR MONEY OR YOUR LIFE by Joe Dominguez
RICH DAD, POOR DAD by Robert Kiyosaki
buying a new car that depreciates by 30% in the 1st year stimulates the economy but sabotages my NET WORTH. GREAT IDEA! whose side am i supposed to be on?
Dal Timgar
Azael wrote:
Just to be clear, I’m not advocating minimalist government. I’m advocating ethical government — government that suppresses coercion in the form of initiated force or fraud but, other than that, leaves people alone. Such a government might not necessarily be minimal depending on the ubiquity of coercion. So, you and I agree if we may define a corrupt government as one that usurps rights and claims property.
F. A. Hayek, a Nobel laureat for his pioneering work in capital monetary theory, proved that a corrupt government (as defined here) cannot manage an economy owing to its inability to set meaningful prices. In a capitalist economy that is free of coercion, consumers and producers convey information to one another by way of the pricing system. But in a centrally planned economy, the consumer is precluded from providing information and the economy becomes irrational.
One famous example comes from Nikolai Smelev and Vladimir Popov, two former Soviet economists. Writing in The Turning Point (1990), they tell of a government plan in 1982 to stimulate the production of moleskin gloves by changing its price:
I don’t think they are exactly different sides of the same coin.
Maknig an industrialized nation is a messy bussiness. People in the West treat the emergence of nation states and democracy as if they were simply just great ideas that everyone can now take advantage of: neglecting the war, pure power consolidation, exploitation, destruction, that was required even in the West. A lot of the horrors that we want to fight against turn out to have been crucial to the development path of the West: and perhaps unavoidable for “the rest.”
Take taxation. In most western nations, a major and unavoidable source of government income was taxation. This was burdensome, and bad today in the limited states we want… but look at what it DID, structurally in the West as opposed to, say, African states, which lack such developments.
It forced the government to spread out to the people: to build a network of civil service so that the center could keep in touch with, and track of, the fringes. Futhermore, the center had to CARE about the economy, and about the people’s feelings. It was taking money from them… so they felt that they were owed things in return: obligations. In African nations almost none of the government income comes from taxation: it comes from foriegn aid (which is for the most part simply official international bribery), influence peddling, and exploitation of natural resources. The government has no financial or obligatory incentive to care about the well-being of its people, to feel like it serves them as opposed to the other way around: no need to serve their interests at all, EVEN if the government is ostensibly democratic. It doesn’t really need anything from them, so why does it owe them any respect or power, let alone helping (or at least not hurting) their development efforts? It exploits them when it needs to, steps all over them when it pleases, but if they starve or there’s a depression, it’s not like that is going to hurt government revenues (it could even increase them thanks to foriegn aid)
The problem with developmental countries is that they haven’t solved their political problem, and they CAN’T simply solve it by instituting a democracy all at once. It doesn’t work: a working democracy is so much more than simply holding elections. It’s a national frame of mind, a commitment to broad civic engagement and some degree of pluralism: and structurally very different in terms of local institutions and participation.
I agree with your basic assessment that the government’s role in the recovery is overstated. However, ther reason that I like the Democratic plan better than the Republican plan is that at least the Democratic plan will help those who are hurting and will provide a more immediate impact (however small that impact is) on the economy. The Republican plan seems to me (although I know you feel otherwise) to use the excuse of the recession as a cynical ploy to cut taxes on the wealthy. (Although I am sure that some of them are doing this with the best intentions…i.e., they truly want to believe that cuts to the wealthy help everyone more than any other thing you can do…It is such a convenient theory!)
Well, at least that’s an honest and rational reason. Intelligent people can differ on things like whether it’s more important to help low income people today than provide some extra growth that won’t show up for years down the road. And you’re certainly welcome to distrust the motives of politicians - I do myself.
My main argument is with people who try to pretend that a tax plan will do something it won’t, just to raise support for it. And both Republicans and Democrats do that.
Sorry, when the administration recommends a tax cut for the rich when times are good, and when times are bad – a tax cut for the rich, I’m left with the feeling that they’re pandering to self-interested rich assholes.
But I’m sure there’s plenty of other really, really good reasons to support the Bush tax cut, and I look forward to them being created fresh in this thread.
You make no sense. Go away.
So how does pandering to poor assholes help the economy? As already pointed out by other posters, the poor tend to be penny-wise and pound foolish. They don’t invest and even with tax breaks, they are able to contribute little to the overall economy.
If by removing the dividend tax encourages business growth then you would have less people who are unemployed and poor. Isn’t it better to address the causes than the symptoms?
Yeah…Who needs people to buy stuff! We just need people to make stuff! What, they can’t sell it? Oh well, certainly they’ll make it anyway just for the fun of it!
Please, could we have a cite where it is explained by an economist that the current problem is that businesses don’t have the money to invest and grow? I.e., the demand is out there but they are just not able to meet it?
It’s not that we don’t understand trickle down economics. It is simply that we don’t believe it. And, we don’t believe it because there is really no evidence that it works. It is a religious belief that you throw tons of money at the rich and the poor end up getting a lot wealthier in the bargain…and it goes against how the wealth distribution has actually been changing in this country.
My ass has been roundly whomped for my previous post. I was gone for a few days, during which other posters defended some of my points, but I’d like to add to them, and clarify a few things.
I didn’t say a word about tarrifs. Honestly, I’m not educated enough in the way tarriffs work to comment on them.
Why on earth would you think that I characterized anyone as “deserv[ing] to be poor?” All I was saying is that tax subsidies help keep compainies in the US, and eliminating the subsidies would drive prices up. (The beef industry, for example, is heavily subsidzed. Beef prices, for example, would skyrocket if water subsidies and the like were taken away.)
When I spoke about the conditions that companies take advatage of in third-world nations, I merely noted that poor countries are grateful for any jobs which come their way, and corporations take advantage of this fact, as well as their lax environmental standards. In no way do I approve of these conditions, but I realize that I can’t change them.
In a perfect world, yes, I’d like to see all working people have a wage which would allow them to support themselves and their families. But along with my marijuana proposal, I realize that it’s unrealistic. In order to have cheap tennis shoes, someone has to make them for slave-labor wages.
Perhaps I shouldn’t have just dropped that suggestion without a full explanation.
My hope was that the tax money could be used for programs which would benefit the poor, such as job training programs, extended unemployment benefits, other educational programs for young adults, and perhaps even a public works program which would employ some of those who have lost their jobs. When people have money in their pockets, they can buy more “stuff” which, of course, benefits the economy.
Allowing marijuana cultivation would also employ farmers. Hell, you could even have a little “cash crop” growing in your backyard. Considering the nature of the plant, (they don’t call it “weed” for nothing) it could be grown with very little labor, in relatively poor soil, unsuited for other crops. Taxes would be collected at the store, much like on cigarettes. These taxes could fund programs which could help people in so many different ways . . . the possibilities are endless.
Allowing hemp to be grown would provide jobs in the textile sector. Hemp can also be used to make paper, meaning less trees would be cut for this purpose. (I doubt if the logging industry would be much hurt by this because there are many other uses for lumber.) There are many uses for other hemp by-products, such as hemp seed oil, which would provide many jobs.
Marijuana legalization would also provide jobs in the retail sector. I’m sure there would be a small boom in “head shops.” Like Amsterdam, we could see marijuana cafes.
When it comes to the tax money, remember that when the government has more money, more people can be employed by the government. In my state, they’re planning to close a prison, which will mean a lot of people out of work. Other government agencies have already laid off employees. That’s quite a few people who are no longer consuming as many goods, and over time, and given enough out-of-work citizens, the economy can suffer.