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hat but making government smaller will not solve the economic problem the problem lies elsewhere finally i object to the popular view because it does not go back to the beginning it doesn t go back to when our economy was good and try to figure out where things went wrong instead it focuses on one result of the problem the tax burden and hopes to improve things by fixing a result there is no way such a plan can succeed my strongest objection to the popular plan is that it failed we stuck with it all through the 1980s and 1990s and it just did not work people who support the plan keep saying we have not tried it it will work if we do hogwash we tried it it failed now they keep moving the bar now even social security is on the table where does it end the plan was to reduce the size of government ronald reagan said this would restore the economy to health and things would then improve and as perot s graph shows we tried that but things got worse things keep getting worse thus the popular plan is left with no option but to move the bar the goal of reaganomics was to restore economic growth as william a niskanen writes reaganomics was the most serious attempt to change the course of u s economic policy of any administration since the new deal only by reducing the growth of government said ronald reagan can we increase the growth of the economy as late as the mid 1990s growth remained the real objective in to renew america new gingrich writes the power of economic growth was driven home to me by a study that suggested that a 1 percent increase in our economic growth rate would shrink the federal deficit by 640 billion over the next seven years in this world of merely 1 percent higher growth the social security trust fund never runs out of money today we seem to have forgotten that the reason to reduce the growth of government was to increase the growth of the economy the talk today is only of making cuts to government cutting itself has become the goal reagan had the right goal to increase economic growth restoring growth is the only way to solve our economic problems but reagan s strategy reducing the growth of government did not work it didn t work because the growth of government was not the original problem like almost everything else the growth of government was a result of the problem for thirty years or more we have focused on the federal debt we have tried to cut federal spending in order to reduce the growth of that debt but by any practical measure we have failed to improve the economy the reason for this failure is that we have the wrong solution the growth of government debt is not the problem it is not government debt that holds our economy down private debt holds us down private debt is the problem private debt increases the cost of living and the cost of doing business paying the cost of private debt reduces living standards and reduces demand it reduces profits and reduces supply the cost of private debt is the impediment to growth people say we need credit for growth we do but you don t get something for nothing new uses of credit help the economy grow that good effect is eventually offset by the negative effect of accumulated debt which holds the economy down i think the trouble with the popular plan is that we got the details wrong we saw high taxes and big deficits and said we must reduce the government debt the fact that it has not worked is evidence we need to re think the plan our objective must be to reduce private debt not public debt for if we do this the economy will grow again and the government debt will eventually evaporate for the nation it is a matter of life and death update 22 jan 2012 apparently the perotcharts site is gone the link now displays a screen snip of the perot page as it used to look posted by the arthurian at 4 30 am 3 comments monday november 29 2010 counterthoughts qe2 by steve landsburg november 18 2010 some q a about quantitative easing with a somewhat higher ratio of economics to cartoon characters than we had yesterday what is this quantitative easing stuff what exactly is the federal reserve a k a the fed doing they re creating 600 billion new dollars and using those dollars to pay down the government s debt they re paying down the debt i thought they were buying bonds it s the same thing last year huey mcduck lent the government a dollar and received a bond a bond is the same thing as an iou today the fed buys huey s bond now the government owes a dollar to the fed instead of to huey it s the same thing if the federal reserve is part of the government and the u s treasury owes money to the fed then our government owes the money to itself in that case it doesn t owe that money to anybody else so i guess it doesn t even count as money owed makes sense to me kind of by definition the fed is not part of the economy so if the fed has a dollar that dollar is not in the economy when the fed buys something with that dollar the dollar goes into the economy and if the fed sells something and receives that dollar in payment the dollar comes back out of the economy so if the fed buys something the dollar goes into the economy and the something comes out if they buy government debt then that government debt should come out of the economy it should cease to exist in the same way a dollar ceases to exist when the fed receives it that s what makes sense to me but i never saw the story told that way by somebody who really knows somebody like an economist if this is the right story then a lot of things fit together and make sense for me if a government debt ceases to exist the government shouldn t have to pay interest on that debt or to simplify the paperwork say it could continue to pay interest on that debt but then get that money back at the end of the year or whenever makes sense to me of course this all depends on accepting the view that the fed is part of the government i accept that view but some people don t see milton friedman money mischief p 206 click the page 206 link see g thomas woodward on public or private but the government still owes someone a dollar well yes and no unlike huey the fed is subject to a 100 tax on profits so the government can pay its one dollar debt to the fed and then turn right around and swoop that dollar back up again that s just as good as not owing anything in the first place the fed is subject to a 100 tax on profits almost 1 g thomas woodward writes over its history the fed has paid to the treasury approximately 95 of its earnings so it s not 100 percent it s 95 percent but that s close enough for me 2 the blogger landsburg says the fed is subject to a tax i don t think that s right i think it s an oversimplification the kind that leads to important misunderstandings down the road the fed turns it all over to the treasury not to the irs it s sorta like a husband and wife both working and they pool their funds it s not like a tax at all see g thomas woodward on where do the profits go see yahoo answers so in effect the fed is reducing the debt by 600 billion dollars does this mean taxpayers will have to cough up 600 billion fewer dollars in the future yes this is a definitive answer to an ambiguous question i think the question means is this 600b of debt that taxpayers won t have to pay back if that s the question the answer is easily a definitive yes because the federal debt never gets paid back does this come as a surprise to you it really shouldn t oh yeah clinton reduced the federal debt four times and nixon reduced it once but basically the debt never gets paid back it used to be policy these days people get all bent out of shape about it see time magazine of 31 december 1965 next to last paragraph sounds like magic why don t they just do this over and over again until all the debt is gone that s not even a reasonable question i don t think anybody would ask that except maybe somebody writing a q a anyway here is landsburg s answer because there is no such thing as magic you can t make the world a richer place just by creating dollars dollars are claims on wealth but they re not wealth you can t eat them you can t drive them you can t live in them well that s part of landsburg s answer landsburg says you can t make the world a richer place by creating dollars because dollars are not wealth fair enough but as he points out dollars are claims on wealth so there is a relation between wealth and dollars that relation has to do with making claims on wealth or as i would put it it has to do with buying and selling if they print too many dollars it makes prices go up yadda yadda so we can say with some authority that the relation has to do with the quantity of money and that too much money can be a problem now just naively one would expect that not enough money could also be a problem however that is not something one hears people say my collection of statements on money as the problem includes two from the 1600s which warn of problems resulting from a shortage of money and an observation by adam smith that an increase in the quantity of money was beneficial in scotland in the 1700s no other observations on shortage of money until mine of 1977 you cannot make the world a richer place landsburg says just by increasing the quantity of money adam smith said you can smith said when paper is substituted in the room of gold and silver money the quantity of materials tools and maintenance which the whole circulating capital can supply is increased production is increased not because the money is paper but because the use of paper permits an increase of the quantity of money smith continues i have heard it asserted that the trade of the city of glasgow doubled in about fifteen years and that the trade of scotland has more than quadrupled as a result of this increase in the quantity of money it worked because there had been a shortage of money just something to keep in mind the balance of landsburg s answer paying down debt makes the taxpayers richer but in order for taxpayers to get richer someone else has to get poorer unless the fed finds a way to create real wealth and that s not so easy paying down debt makes the taxpayers richer a bold statement could be true or the federal debtor could increase everybody s taxes and try to pay down debt that way i don t know if it would work but i do know it wouldn t make the taxpayers richer okay then who gets poorer when the fed buys huey s bond for a dollar huey goes out to buy a blueberry muffin this ever so slightly bids up the price of muffins and so ever so slightly reduces the value of everyone else s money or maybe huey lends that dollar to his cousin dewey who buys a muffin or maybe the dollar takes a more circuitous route but sooner or later someone tries to spend it drives up a price and drives down the value of existing money we can even figure out the size of that effect since the taxpayers got a dollar richer through the reduction of the national debt and since the world as a whole is neither richer nor poorer the moneyholders must have gotten exactly a dollar poorer do that 600 billion times and the taxpayers will be 600 billion dollars richer and the moneyholders will be 600 billion dollars poorer 600 billion poorer that is quite a calculation by landsburg s measure if huey spends one new dollar it ever so slightly ever so slightly reduces the value of everyone else s money but if 600 billion hueys do it moneyholders end up exactly 600 billion dollars poorer there is no such thing as magic when the fed creates dollars but there seems to be some magic in landsburg s numbers besides the sleight of hand landsburg totally discounts the effect that economic growth would have on his numbers if output has been held below its natural level by a shortage of money as in adam smith s scotland increasing the quantity of money can result in an increase of output rather than prices granted such a state of affairs is alien to our experience but the printing money causes inflation argument makes the most sense in its most complete form which includes the possibility of a shortage of money see milton friedman money mischief money usually more significant aren t the taxpayers and the moneyholders largely the same people largely but not completely bill gates pays a lot of taxes but he might not hold a lot of money odds are most of his wealth is tied up in other assets like microsoft stock the question is a general one covering many people the answer is a specific one considering only one person i cannot analyze this answer further i would point out however that pretty much everybody has their money tied up one way or another in assets or in bills or what have you are there any other downsides to all this yes the taxpayers are relieved of a 600 billion dollar debt burden that s 600 billion dollars worth of good the moneyholders see the value of their money reduced by 600 billion dollars that s 600 billion dollars worth of bad so far at least from the perspective of the world as a whole that washes out but there are additional costs for one thing people will scurry around trying to convert their money into other assets so they re not holding money when it loses value that s a lot of effort that serves no real social purpose for another it s harder to do financial planning when the value of the currency is subject to unpredictable change so on balance the world is actually a poorer place not according to adam smith well that s terrible compared to what in the absence of this fed action we d still have to pay that debt off someday we d do it by raising 600 billion in taxes with all the accompanying disincentive effects that s kind of terrible too it s not clear whether the fed s action is better or worse than the alternative oh there ya go it s not clear whether the fed s action is better or worse than the alternative landsburg must be an economist he cannot reach a conclusion are there any ways in which printing dollars can enrich the world well maybe if people are sufficiently idiosyncratic take huey s uncle scrooge for instance unlike huey who like most of us values money only for what it can buy scrooge values money as a thing in itself he likes to fill his vault and swim in it i said earlier that dollars aren t wealth because you can t eat them drive them or live in them but they re wealth if you like to nuzzle them buying bonds from scrooge increases the world s stock of nuzzlables and that makes the world a richer place where does the extra wealth go well not to scrooge really because he s got to trade away his bonds to get those beloved dollars but consider when the fed buys scrooge s one dollar bond it retires a dollar of debt and makes taxpayers richer just like buying huey s bond but scrooge unlike huey never spends his new dollar so prices never get bid up and our money retains its value that s a gain for the taxpayers at no cost to anyone by creating something of value a dollar for scrooge to cherish th...
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