Tag: Free Money

–Prof. Barro and the cost of federal spending

An alternative to popular faith

The 1/22/10 Wall Street Journal published an opinion piece by Professor Robert Barro (Harvard University), who believes, “Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.”

Mostly, I agree — with one huge exception. That last phrase, ” . . . it is wrong now to think that added government spending is free” is itself, wrong.

If federal government spending is not free, it must have a cost. So what is the cost? Not higher taxes, which have no historical relationship to deficit spending. (See item #9 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/.)
Taxes generally have been based on political, not economic, considerations. From a financial standpoint, taxes no longer (after 1971, the end of the gold standard) affect the federal government’s ability to spend. In fact, all federal taxes could be eliminated tomorrow, and the federal government’s ability to spend would not be reduced by even one penny.

Is the cost of federal government spending increased inflation. No, not that either. There is no historical relationship between federal deficits and inflation. The highest inflation since WWII came with the modest Carter deficits, and was cured during the robust Reagan spending years. A graph of deficit growth vs. inflation shows a zero cause/effect relationship. (See item #8 in https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )

Well then, does deficit spending cause high interest rates? The graph at https://rodgermmitchell.wordpress.com/2009/11/15/deficits-and-interest-rates-another-myth/ indicates no relationship between high deficits and high interest rates.

Even if deficit spending did cause interest rates to rise, there is no historical relationship between low rates and high GDP growth. See item #10 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

In summary, there is no post-1971 cost to federal deficit spending, a strong argument for tax cuts and increased spending and a strong argument against deficit concerns.

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

–Et tu, Wall Street Journal?

An alternative to popular faith

The average person doesn’t understand the difference between federal government finances, state government finances and personal finances. The same could be said of most politicians and most editorial writers.

But one expects more of the Wall Street Journal, whose editors are, after all, immersed in finance all day long. So it was saddening to read WSJ’s March 1, 2010 editorial titled “Back to the ObamaCare Future.”

The editorial begins, “Natural experiments are rare in politics, but few are as instructive for ObamaCare that Massachusetts set in motion in 2006.” Do you detect the problem? The WSJ thinks a state-run, health-care program provides a learning template for a federally run program, despite the crucial differences in ability to fund programs. (States’ access to money is limited; the federal government’s access is unlimited.)

The WSJ properly criticizes Governor Deval Patrick for wanting to set hospital and doctor rates. Why does the governor want to do that? So he can cut the rates. You see, the Massachusetts program is running a deficit (of course), so rather than committing political suicide by raising taxes, the governor wants to assure worse health care by discouraging doctors and hospitals from operating profitably in his fair state.

The editorial continues, “The administered prices of Medicare and Medicaid already shift costs to private patients, while below-cost reimbursement creates balance-sheet havoc among providers.” Yes, that’s right. Medicare pays too little, which forces our most talented doctors into boutique programs, where annual fees run anywhere from $50 to $5,000 (or more?) Eventually all the best doctors will be unaffordable to the very people Medicare is supposed to help. And smaller hospitals will disappear. This because of federal price controls.

The editorial continues, “It doesn’t even count as irony that former Governor Mitt Romney (like President Obama) sold this plan as a way to control spending.” Sure, states need to control costs, but why doesn’t President Obama understand the difference between state spending and federal spending?

Let’s see if we can clarify the difference: Taxpayers pay for state spending. Taxpayers do not pay for federal spending. Can I make it any simpler?

Because states do not have the power to create unlimited amounts of money, they must rely on taxes and borrowing. Eventually, the ability to borrow runs out, and everything falls on the taxpayer. Ultimately, there is a direct relationship between state taxes and state spending.

The federal government does have the power to create unlimited amounts of money, and so does not need to rely on taxes. It does not even need to borrow (See: https://rodgermmitchell.wordpress.com/2009/09/10/it-isnt-taxpayers-money/)

The biggest problem with Medicare (and Social Security, for that matter) is that it’s limited by FICA collections. Medicare is a version of federal price controls, which WSJ properly criticizes. Government price controls always are damaging. As WSJ said, “. . . hospital rate setting in the 1970s and 1980s . . . didn’t control costs . . . and it killed people.”

If government medical rate setting doesn’t work, and in fact kills people, please tell me again how the universal health care plan is designed to save money.

And if the federal government has the unlimited ability to create money, without ever charging the taxpayer, please tell me again why the universal health care plan is designed to save money.

Oh, the unnecessary damage the debt hawks have caused — not just financial damage, but human damage — and all for refusing to acknowledge that federal deficits not only are beneficial, but necessary for a growing economy.

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

–The Greek tragedy

An alternative to popular faith

Observe a Greek tragedy, courtesy of the European Union, which insists that Greece reduce its deficit, i.e. reduce its money supply in the face of a recession, where money already is in short supply. This is akin to applying leeches as a cure for anemia.

Read this quote from an article today (2/27/10):

“ATHENS (Reuters) – Greece must take further measures to reduce the deficit or it will face sanctions, Eurogroup chairman Jean-Claude Juncker (said) . . . Greece has until March 16 to convince EU . . . that proposed measures to cut its budget shortfall this year to 8.7 percent of gross domestic product from 12.7 percent in 2009 are sufficient.

“‘Greece must intensify its efforts and move to further actions to reduce its deficit,’ (said) Juncker, ‘If it doesn’t convince us then it will possibly face sanctions. Greece must understand that the taxpayers in Germany, Belgium or Luxembourg are not ready to fix the mistakes of Greece’s fiscal policy,’ Juncker said.”
(Reporting by Lefteris Papadimas; editing by Ingrid Melander and Philippa Fletcher)

The mistakes were not of Greek policy, but of EU policy. The creation of the euro pegged all nations to the same money, exactly what the failed gold standard did.

In short, the EU expects Greece to tax itself into prosperity. Sadly, this may be a perfect test of the debt-hawk theory that cutting deficits benefits an economy. Heaven help the Greeks.

And don’t think it couldn’t happen in America. The debt-hawks control most of the media, politicians and economists. Congress’s and the President’s stated mission to minimize or even eliminate federal deficits, could make the Greek tragedy resemble a musical comedy compared to what would happen here.

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


–Danger sign?

An alternative to popular faith

Do we see the first hint of another recession?

In other posts, I have called to your attention the coincidence of reduced federal deficit growth and the start of recessions. History shows this repeated coincidence dates back even to the 1800’s, which arguably indicates a cause/effect relationship.

I also have noted that reduced deficit growth can continue for several years before a recession begins. I searched for a factor, that, when added to reduced deficit growth, would trigger the recession. One such factor seems to be rising energy prices, perhaps more specifically, rising oil prices.

Economics, like meteorology, is complex, so perfect correlations seldom are found, but this correlation is striking:

Debt and energy

The graph shows that when reductions in deficit growth are added to oil price increases, there is a strong incidence of recession.

An exception might be in 1981, though this may have more to do with the arbitrary definition of “recessions.” The recessions of 1980 and 1982, may more realistically be considered one long downturn.

I mention this, because today (Feb., 2010) we see the first hints of reduced deficit growth accompanied by increased energy prices, a possible danger signal. If these mini-trends continue, we may find ourselves on the cusp of yet another recession.

The U.S. government may have two options for preventing the next recession: Keep oil prices from rising, or increase deficit growth. The former might temporarily be accomplished by executing a release from the Strategic Petroleum Reserve. The later can be accomplished in myriad ways, though I tend to favor the elimination of the FICA tax as described at http://rodgermitchell.com/reasons-to-eliminate-FICA.html.

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