Tag: Economics

–Ben Bernanke and the popular faith

An alternative to popular faith

According to the April 8, 2010 Wall Street Journal, “Federal Reserve Chairman Ben Bernanke said Wednesday that huge U.S. budget deficits threaten the nation’s long-term economic health and should be addressed soon.” That is the popular faith, with “faith” being defined as belief without scientific evidence.

By using the words “addressed” and “soon” Mr. Bernanke is relieved of the responsibility to provide a specific solution or a timetable.

The Journal said, “In remarks to the Dallas Chamber of Commerce, Mr. Bernanke agreed […] that the economy, while improving is still too weak to bear all the new taxes and spending cuts that would come with an aggressive deficit reduction campaign.” The Journal continued, “Cutting the deficit ultimately will mean choosing between cutting (Social Security and Medicare) entitlements, raising taxes or other spending cuts.”

This is exactly correct. Federal deficits never have been shown to cause inflation (See: item #8. )or to have any other negative effect on people or on the economy in general. In fact, substantial evidence indicates that reducing deficits has caused nearly every recession and depression in our history. (See: Click here, items #3 and #4. )

By contrast, increasing taxes or cutting Medicare and Social Security benefits or cutting other expenses (defense, infrastructure, health care, food stamps, education, research, etc.) absolutely will have a negative effect on people and on the economy in general.

So which does a sane person choose, something not proven to have a negative effect or something proven to have a huge negative effect?

Mr. Bernanke worries large deficits cause high interest rates. He subscribes to the popular faith that low rates stimulate the economy, despite there being no historical relationship between interest rates and economic growth (See Item #10 ), as he should have learned from his, and his predecessor’s twenty futile rate cuts leading into the recession.

Quoting the Journal, “[…] higher rates push up borrowing costs for many businesses and consumers,” ignoring the many businesses and consumers who are lenders, and who benefit from higher rates. For every borrower there is a lender. All of you who own savings accounts, NOW accounts, money market accounts, corporate bonds and T-securities profit when rates are higher. It may surprise you to learn higher rates have been economically stimulative, because they’ve forced the government to pay more interest into the economy. Finally, some economic hypotheses indicate low rates were partly at fault for the housing bubble.

In summary, Mr. Bernanke promotes a goal with no proven benefit, provides neither a plan nor a timetable for achieving his goal, admits it would require tax increases and spending cuts, both of which hurt people and the economy, and he discusses a possible problem (high interest rates) history shows is more a benefit than a problem.

At long last, will someone please stand up and say, “The popular faith doesn’t seem to work. May we try something new?”

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

–Federal deficit spending doesn’t cause inflation; oil does

An alternative to popular faith

Ask a debt hawk why he hates federal deficits and he will give you four main reasons:

1. Federal debt must be paid back by taxpayers. (But, because the federal government has the unlimited power to create the money to pay its bills, taxpayers do not fund federal spending.)

2. Federal debt adds to the government’s interest-paying burden. (Again, interest is no burden to a entity having the unlimited ability to create money.)

3. Federal debt uses up lending funds that otherwise would go to private needs. (But, federal spending adds money to the economy, making more, not less, funds available for private lending.)

4. By increasing the money supply, federal deficits reduce the value of money, thereby causing inflation. Readers of this blog have seen the graph (below) which shows no relationship between federal deficits — even large federal deficits — and inflation.

Note how the peaks and valleys of deficit growth do not match the peaks and valleys of inflation growth:

If deficits don’t cause inflation, what does? In a previous post “Is inflation too much money chasing too few goods”, we answered that question (“No.”), and we presented a graph indicating the real cause of inflation may be energy prices, more specifically, oil prices. See below:

The extreme movements of energy prices corresponding with the more modest movement of overall inflation, seem to indicate that energy costs “pull” inflation in either direction.

We can see this parallelism better by magnifing the CPI movement with a different vertical axis:

Monetary Sovereignty

Now here is another graph that may substantiate the hypothesis that energy prices pull CPI:

monetary sovereignty

It compares inflation movements (red line) with the movement of energy prices less the movement of inflation (blue line). Notice how closely the two lines correspond.

Compare that graph with the graph below. This graph is the same as the one above, except rather than comparing energy price changes with inflation, it compares food price changes. See how there is much less correlation.

monetary sovereignty

Food price changes do not seem to be the key inflation-causing factor. In fact, energy price changes seem to cause food price changes:

monetary sovereignty

Inflations are not caused by too much money. Inflations are caused by shortages.

Energy, and more specifically oil is, aside from food and water, the one universal need. It is the only commodity, the shortage of which, affects the prices of all other goods and services.

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.”

–Cuts to Medicare vs deficit spending

An alternative to popular faith

I just received a note from Mark Kirk, Republican Congressman, listing the cuts to be made in Medicare. I don’t know how factual they all are, because frankly the new program not only is complex, but evolving.

In any event, this is what the Republicans (and Democrats) should work on, rather than the “repeal and replace” political effort that has no chance to succeed. Forget the McCain, “There will be no cooperation for the rest of the year” attitude. Focus on correcting the negatives rather than throwing out the baby with the bathwater.

By the way, every one of these cuts could be eliminated if wrongheaded, deficit paranoia were eliminated. The federal government can and should pay, via deficit spending, to eliminate all these cuts. Consideration of real damages to real people should take precedence over imaginary, unproven damage from federal deficits

Here is what Rep. Kirk wrote:

“2010: Medicare Cuts to Hospitals: The federal government will reduce Medicare reimbursements for hospitals who provide seniors with long-term and inpatient and rehabilitation care.

2011:Medicare Advantage Cuts Begin: Approximately 121,000 Illinois seniors will be dropped from their chosen Medicare Advantage coverage. Drug Discounts for those in Medicare Part D “donut hole” begin: The federal government will impose a new requirement on pharmaceutical companies to provide a 50% discount on “brand name” prescriptions. Increased Medicare Part D Premiums: Seniors with incomes above $85,000 for individuals and $170,000 for couples will be forced to pay higher Medicare Part D premiums. Medicare Imaging Cuts: The federal government will cut Medicare reimbursements for seniors who use MRI and CT scans. Medicare Cuts to Ambulance Services and Durable Medical Equipment: The federal government will begin cutting Medicare reimbursements for seniors who use ambulances or durable medical equipment.

2012: Medicare Cuts for Hospitals with Readmissions: The federal government will cut Medicare reimbursements to any hospital with a high readmission rate. Medicare Cuts for Hospice Care: The federal government will cut Medicare reimbursements for seniors on hospice care. Medicare Cuts for Dialysis Care: The federal government will cut Medicare reimbursements for Americans – both youth and seniors – on dialysis.

2014: Medicare Board Cuts: The federal government will establish an Independent Payment Advisory Board with powers to make further cuts to seniors on Medicare.

2015: Medicare Home Health Cuts: The federal government will cut Medicare reimbursements for seniors who depend on home health care.”

I’d be interested in hearing from those of you who think reducing federal deficits is more important than eliminating these cuts, together with your evidence that deficits are harmful in any way.

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

–Republicans fall into Obama trap

An alternative to popular faith

04/01/10: (AP) “GOP wary of health law repeal push in fall races”

You read it here, “Republicans are on the wrong side of history.” (Sabotaging health care, March 24, 2010).

As I’ve told you, historically I’ve voted for Republicans, because I’ve felt they better understood the economy. Though they never have been leaders for social improvements, whether Social Security, Medicaid, Medicare or human rights, they traditionally have been strong for business, which benefits everyone. Though they always have had to be dragged, kicking and screaming, into anything that smacks of human benefits for the less fortunate, at least a strong minority of Republicans did participate in passing these major intitiatives.

Not this time. An astounding 100% toed the party line. As if that weren’t bad enough, after the vote they all picked up the right-wing mantra, “repeal and replace.” What a horrible, self-destructive plan.

First, repeal isn’t going to happen. As more people see what they receive from the program, they will be less likely to want to give it up. And many of these perks are quite attractive: Millions more people covered, restrictions on dropping people from coverage, no pre-existing health declinations, ability to change jobs without losing your insurance. Even the insurance industry will begin to like it, because they won’t have to spend millions evaluating for pre-existing conditions.

Second, because repeal isn’t going to happen, those voters calling for repeal will become disillusioned with the Republican party for failing to fulfill its pledge. In short, the Republicans will disappoint everyone.

Make no mistake. That 100% vote was an unmitigated disaster, compounded by the failure of Republican leadership to understand what has happened. If each Republican had voted his/her conscience and beliefs, some could have voted for the program “with misgivings,” and the party would have been able to claim it “participated” in one of the great movements in American history.

Instead, for many years and many elections, well into the future, Democrats will be able to throw this in Republican faces — “the party that voted against health care.” The Republican party, by pandering to the extreme right, has positioned itself as a fringe party, left behind in the social march to the future.

And this I regret most. We need the Republican support of business. The Democrats, left to their own whims, will tax, tax, tax, especially business and wealthier Americans, the very ones who supply employment for all and make our economy grow. A one-party Congress will hurt America.

I curse the Republican leaders, who have fallen into Obama’s trap. (As I write this, here arrives yet another “repeal and replace” letter from John McCain.) This Grand Old Party has been McCained, Palined and Fox Newsed into believed and following the strident voices of the religious right.

Remember this Republicans: Those voices may be loud, but they each carry only one vote, just like the more numerous moderate voices. It’s too late to undo that shameful 100% vote, but now is the time to move away from “the party of ‘No.” to the party of progress.

First step: Disavow the McCains, the Palins and the Fox News right-wing panderers. Go to your strength, which is business and jobs. Teach voters that strong business means employment, and employment means wealth. Teach America you know the path to the American dream.

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