Tag: cause inflation

–What will help the poor? Taxes vs. Spending

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
==========================================================================================================================================================================

Now that the new tax bill has passed, three related issues will remain in the news:

1. Will tax reductions cause inflation? (In the unlikely event they do, the Fed will prevent/cure inflation by raising interest rates)

2. Will tax reductions bankrupt Social Security and Medicare? (No. Because the federal government is Monetarily Sovereign, federal spending is not constrained by taxes. If FICA were reduced to $0, this would not affect by even one penny the federal government’s ability to support Social Security and Medicare. Tax reductions cannot bankrupt the U.S. or any of its agencies.)

3. Should taxes on the rich be increased as soon as the current law expires? That is the question discussed in this post.

Some people favor higher taxes on the rich, because they believe this somehow will help the poor. The concept is that by taxing the rich, we close the “gap” between rich and poor, and this closed gap benefits the poor.

I discuss this “gap” further at Closing the Gap and at A Partial Solution for the Gap.

I strongly empathize with the desire to aid the poor. But bringing down the rich is not the way. Whether Bill Gates has $50 billion or is brought down to “only” $10 billion, does not affect the poor. We have had 90% top tax rates, and that did nothing to help the poor. In fact, increasing taxes on anyone, rich or poor, removes money from the economy, which slows the economy. Slowed economic growth always hurts the poor more than the rich, as witness the most recent recession. Who was hurt most, the rich or the poor?

As I mentioned, the federal government does not spend tax money. Unlike state and local governments, which are not Monetarily Sovereign, the federal government spends money it creates ad hoc. If the wealthy were taxed at the 99.99% rate, this would not increase by even one cent, the federal government’s ability to spend, i.e. to help the poor.

The poor benefit most when the economy is growing fastest, because that increases the availability of jobs and money. So to help the poor, we must stimulate the economy. That is, if we want to help the poor, we very simply should help the poor. The Federal government could:

–Increase Social Security benefits.
–Initiate free universal health care insurance.
–Increase unemployment benefits.
–Pay a salary to all students. ( SALARY)
–Eliminate FICA. (FICA)
–Increase the standard deduction on income taxes.
–Allow home rent to be tax deductible.
–Increase food stamps.
–Pay states and cities to reduce sales taxes

There are many ways to help the poor. We should focus on that, not on punishing the rich, which may provide some emotional satisfactions, but does not provide financial benefits to anyone. Let me see some of your ideas for helping the poor.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–News: China must control inflation, exports and GDP growth. But how?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
======================================================================================================================================================================

On December 17, 2010 Columnist Michael Schuman published an online article saying:

Chinese inflation hit 5.1% in November, the fastest clip since the pre-crisis boom months of 2008. Though much of the increase is in food (up 11.7% from a year earlier), the inflationary pressures are spreading to more aspects of the economy.

By hiking interest rates, the central bank would be increasing the interest burden on borrowers. That, in turn, could intensify a bad loan problem at China’s banks that many economists believe is an inevitable result of the lending boom.

So the Chinese have instead turned to an old favorite, price controls on certain staple foods.

Inflation is the loss in value of money compared to the value of goods and services. The cure for inflation is to increase the value of money and/or to decrease the value of goods and services.

The later is difficult for any government to accomplish, other than with price controls. Sadly, price controls have serious defects. They lead to reduced supply, while allowing demand to increase, which invariably causes pent up demand and black markets.

A second approach is for the government to buy, store then mete out supplies of oil, when prices rise. Because oil is the prime mover of inflation, this can be an effective anti-inflation plan, if the government has the discipline to do it. The plan falls apart when the government becomes reluctant to part with any of its suddenly-more-precious oil.

In all, increasing the value of money seem to be the best prevention/cure for inflation. That can be accomplished by decreasing the supply of money or by increasing the demand for money. Reduced government spending or increased taxation can reduce the supply. However, reducing the money supply not only leads to recessions and depressions, but involves very slow, uncertain and cumbersome processes.

In addition to the difficulty of knowing how much to increase taxes or to reduce spending, the even more difficult question is which taxes to increase and/or which spending to decrease. By the time politicians finish debating and voting on these highly political questions, the situation either may have passed or more likely, worsened appreciably.

Preventing/curing inflation requires agility and incremental response, for which interest rate modification is ideal. Raising interest rates can be done instantly and in tiny increments. It increases the demand for money, which increases the value of money – perfectly anti-inflationary.

China’s reluctance to strengthen its currency probably is tied to its false belief it must continue to build its export business, which relies in part on the weakness of the yuan. The function of exports is to bring money into an economy, but China, being Monetarily Sovereign does not need additional money coming in from outside its borders. It has the unlimited ability to create money.

China also may subscribe to the popular belief that low interest rates stimulate its economy. American history shows this belief to be false. See: Low interest rates do not help the economy. China also may believe high rates increase business costs, and so actually could foster inflation. However, in America at least, high rates have not corresponded with inflation. (See Item 12,) probably because interest is a minuscule part of most companies’ costs..

The Chinese government has the ability to be its nation’s own best customer. It does not need to rely on exports. This is a fact for all Monetarily Sovereign nations. China has the means to prevent/cure its inflation by raising interest rates. It needs only to understand its own powers.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–A personal musing. What is the future of jobs? Do jobs matter?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
==============================================================================================================================================

A personal musing. What is the future of jobs? Are we wrong to focus on job creation? Here is an excerpt from an article that ran last year:

CBS Reports; WALLINGFORD, CT., Jan. 5, 2009
The Future of Jobs in America; Innovation, R&D, and Education are Keys to Job Creation, By Anthony Mason

For 23 straight months now, the U.S. economy has been hemorrhaging jobs. . . One in six Americans, 17 percent, is underemployed. That’s nearly 25 million people who are out of work, have given up looking, or been forced to take a part time job. The recession has wiped out 15 percent of our manufacturing workforce. That’s more than 2 million jobs that will likely never come back.

Here is an excerpt from a recent article:

Jobs in China, By ANDREW JACOBS, The New York Times, 12/12/2010
In 1998 . . . Chinese colleges produced 830,000 graduates. . . . Last May, that number was more than six million and rising. . . The economy, despite its robust growth, does not generate enough good professional jobs to absorb the influx of highly educated young adults. And many of them bear the inflated expectations of their parents, who emptied their bank accounts to buy them the good life that a higher education is presumed to guarantee.

It widely is believed America suffers from a shortage of jobs. I suggest that may not be true. Rather, America suffers from a shortage of money.

It began with the Industrial Revolution. Since then, machines have done more work that people once did. Machines chased people off labor-intensive farms to manufacturing and white collar work. Then, machines run by people, chased people off those jobs. Soon, machines run by computers began to take over. But someone had to build and program the computers, so jobs in electronics industries expanded. Now computers have begun to build and program computers.

So from where will the next jobs come? And does it matter?

Most people really don’t want a job; they want money. Yes, some jobs may offer personal satisfaction, and may occupy otherwise dull hours, but for most people seeking jobs, money is the primary goal.

Wait, Rodger. People do not want money. They want what money will buy. They want more security, better shelter, food, clothing, health care, education. They want admiration. They want envy. They want accomplishment. They want to win.

O.K.., money can’t buy everything, but it can buy much of what people want. A jobs is a means to obtain money, which in turn is a means to obtain the things we want. And that Rube Goldbergian “means-to-a-means-to-a-means” connection is being superseded by machines.

Those who have seen the “Star Trek, The Next Generation” TV series are familiar with the “replicator.” It can synthesize any non-living product, seemingly out of thin air. If such a device existed today, our money and job needs would decline radically. Yes, we might continue to work for satisfaction, for creativity, or to fill otherwise-empty hours – but not so much for money, since there would be little need for money other than perhaps to pay for some services. The replicator could supply our product needs.

Replicators may seem far off, but we are evolving in that direction, where machines supply more and more of our product needs. And as that happens we butt up against what will be increasingly difficult questions: Why must we work to obtain money – and why must people struggle to find jobs to obtain money – especially since money is free?

That’s right. Money is free. The U.S. federal government has the infinite ability to create money out of thin air. In essence, the U.S. government is a “money replicator.” At the touch of a button, the government could supply each of us with unlimited money. Want $1 trillion? No problem. Here, take $2 trillion. There is no physical money; it’s all just data, and data is infinite.

Extreme amounts of money creation would reduce the value of money (aka “inflation”), but the point is this: There is no fundamental reason why anyone in America should lack food, clothing, shelter, education, health care simply for lack of a job. There is no job-related reason for poverty in America. Our “money-replicator” government has the power to lift everyone from poverty and supply all their basic needs.

This brings us to an important difference between why people want to work and why the economy wants people to work. While people work to obtain goods and services, the economy wants people to work to create goods and services. If we all owned replicators, and if no one worked, eventually we would have no progress and no services, and the economy would collapse.

There may be a compromise, between where we are today and an economy with no jobs at all. I’m not sure exactly where that compromise is, and surely it would change over time, but here are a couple of “what-ifs.” What if:

–The government’s “money replicator” gave every man, woman and child enough to pay for food, clothing, home, health care, entertainment and education through college — i.e. ended poverty?
–Those who wanted more than basics could work, but the standard, legal work days were lowered from 8 hours to 6 hours to 4 hours or less, providing more jobs for all who wanted them?
–Federal taxes, being unnecessary, were phased out?

Of course, the devil is in the details. What about Inflation? Motivation? Progress? International relations? I have some thoughts on these, which I plan to provide in later posts. I believe we eventually will loosen the connection between jobs to money to goods and services. It won’t be “if” but “when,” and it will be an improvement over our current situation of too much joblessness, poverty, illiteracy, homelessness, sickness and struggle.

Time and energy devoted to the creation of jobs may take us down the wrong path. Perhaps we should focus on the creation and distribution of money.

What are your thoughts?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Democrats eagerly embrace suicide mentality

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
==========================================================================================================================================

Question: What can save the Democrats in the 2012 elections?
Answer: Economic growth.

Question: What will stimulate economic growth?
Answer: Tax benefits, better unemployment benefits, business benefits.

Question: What will provide tax benefits, more unemployment benefits, business benefits?
Answer: The deal President Obama worked out with GOP leaders. It has lots of tax benefits for everyone. The Bush tax reductions remain. Capital gains and dividend taxes remain at 15%. FICA is reduced. The “death tax” didn’t go as high as people feared. Unemployment benefits were lengthened.

Question: What has the Democrats angry?
Answer: The deal President Obama worked out with GOP leaders.

Question: Why are the Democrats angry at the one bill that can get them re-elected in 2012?
Answer: They campaigned on the pledge to stick it to the wealthy. This bill doesn’t stick it to the wealthy — at least not enough. This bill moderately benefits the entire country. The Democrats now are in the “Cut-my-nose-to-spite-my-face” mode, except they also are willing to spite all of America. There was a time when we all could laugh at ignorant politicians. Today, when they actively aim to harm America, they aren’t quite as funny.

By the way, did you notice how they slid in that reduction in FICA, which we recommended 15 months ago (Ten Reasons to Eliminate FICA ) and which my book, FREE MONEY, recommended 12 years ago. But hey, better late than never. As usual, they did only a partial job, but what can you expect?

Anyway, soon you’ll see all the misguided debt-hawk columnists prattle on about how this FICA reduction will make Social Security go bankrupt sooner. Tell me, who understands economics less, the columnists or the politicians?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”