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industry i couldn t begin to guess what the perfect balance point would be but i know we have too much finance per unit of production so i say set a target shoot for cutting debt by half shoot for cutting finance in half simon johnson of the baseline scenario says the same he thinks finance should be about 4 of gdp not 8 as it is today posted by the arthurian at 12 37 pm 7 comments labels sequence 2 tuesday january 26 2010 the laffer limit i woke up at 4 30 this morning with the phrase laffer limit in my head so i googled it google turned up 38 hits but only listed 14 the rest were very similar of the 14 9 had the word tax or taxes or taxation in the text displayed along with the search results one of the others had the phrase the top rate on earned income and one contained not a moral license for government to take as much as it can so eleven of 14 hits 78 6 are immediately identifiable as related to tax issues of the remaining three one is a url with no text one concerns the passing of robert novak and one links to a google book i m betting these three also associate the phrase laffer limit with taxes that would make all of the results tax related the laffer curve was all about taxes it was a sort of shared experience a simple profound analysis that we intuitively understood and it held out the promise of lower taxes the laffer curve was all about taxes but the laffer limit is a practical maximum in one of those google hits j h cochrane refers to the laffer limit of taxation that suggests there can be laffer limits on things other than taxes if you are a government trying to raise revenue increasing the tax rate brings in more revenue up to a point beyond the laffer limit it brings in less revenue if you are a gardener fertilizing your flowers adding more fertilizer improves the garden up to a point beyond the laffer limit it starts ruining the garden if you watch an economy using credit for growth using more credit increases growth up to a point beyond the laffer limit it starts ruining the economy the laffer limit refers to the notion of a practical maximum laffer limit the point at which continuing to do the same thing begins to have the opposite effect updated 30 jan 2010 posted by the arthurian at 8 34 pm 2 comments labels artish def laffer limit laffer curve sequence 2 saturday january 23 2010 simon says allow me to repeat part of simon johnson s statement from thursday s post the issue is not finance per se i e the process of intermediation between savings and investment this we obviously need to some degree but do we need a financial sector that now accounts 7 or 8 percent of gdp in other words we need finance but we don t need it to be such a big part of our economy as it is today i agree here from a year old post by contrahour on seeking alpha is a glance at how big finance has become the topmost trend line shows the accumulation of total debt at the right hand side the next one down from the top is domestic financial equivalent to simon johnson s modern finance at the right hand side the most recent numbers show domestic financial debt is the biggest component of the debt at the left hand side the oldest information shows domestic financial debt as the smallest component clearly domestic financial debt has been the fastest growing component of debt finance is the cancer posted by the arthurian at 2 02 pm 2 comments labels debt sequence 2 thursday january 21 2010 the larger problem this is a follow up to yesterday s post which took brief excerpts from a post by simon johnson of the baseline scenario here s the complete post by simon johnson and my thoughts along the way the nature of modern finance is modern finance more like electricity or junk food this is of course the big question of the day if most of finance as currently organized is a form of electricity then we obviously cannot run our globalized economy without it we may worry about adverse consequences and potential network disruptions from operating this technology but this is the cost of living in the modern world on the other hand there is growing evidence that the vast majority of what happens in and around modern financial markets is much more like junk food little nutritional value bad for your health and a hard habit to kick really we re talking about the roots of most serious economic problem in eight decades here and we re comparing finance to electricity and junk food simon johnson s big question of the day what a disappointment not to be rude but it s no wonder we can t solve our economic problems we can t even discuss those problems intelligently you would never never find adam smith or alexis de tocqueville or john maynard keynes using such dumbed down comparisons electricity is a necessity junk food is a problem neither necessity nor problem is a technical term neither requires that readers be coddled i don t mean to criticize mr johnson s writing style but ideas are expressed in words the better the words the better the expression is modern finance a necessity or a problem that s a better question but still not a good one unfortunately modern finance is both a necessity and a problem that is the larger problem the issue is not finance per se i e the process of intermediation between savings and investment this we obviously need to some degree but do we need a financial sector that now accounts 7 or 8 percent of gdp for numbers over time see slide 19 in my june presentation we obviously need some finance in our economy johnson says he is concerned about excessive finance as i am concerned about the excessive reliance on credit it s the same concern we should see eye to eye on this as far as we know finance was about 1 or at most 2 percent of gdp during the heyday of american economic innovation and expansion say from 1850 the financial system of the nineteenth century worked well in terms of mobilizing capital for new enterprises ah but modern finance does not exist solely for the purpose of mobilizing capital for new enterprises as i said on the 15th used to be we d use credit for growth and for special circumstances now we use credit for everything modern finance the mature economy excessive reliance on credit we use credit for everything and that creates problems for some reason mr johnson can only almost see this larger problem those banks had much higher capital asset ratios than we have today even the dominant players were smaller in absolute terms and relative to the economy jp morgan at his peak employed less than 100 people no one is suggesting we go back to the nineteenth century although abolishing our central bank would certainly have undesirable consequences in that direction but is it really healthy or even sustainable to have a finance sector as large as what we face today it is surely not a good idea for finance to account for 40 percent of total corporate profits see slide 16 such performance in an intermediate input sector suggests someone else in the economy is being severely squeezed someone else is being squeezed this is such an important point it ought to be emphasized not buried at the bottom of a paragraph that spans centuries with three dashes two sets of parentheses an unanswered question and one technical drizzle of syllables an intermediate input sector someone else is being squeezed in other words the profit flowing into finance is flowing out from somewhere profit is income by definition income elsewhere in the economy is less because profits are so great in the financial sector in the twelve pages i wrote the growing cost of interest in the economy as a whole left less to divide up as wages and profits wages and profits both suffered as a result simon johnson speaks of profit where i write of cost he speaks of the financial sector where i write of interest as a factor cost our words differ but we describe the same phenomenon we see the same problem excessive reliance on credit there is a great deal of research that finds finance is positively correlated with growth but this work has a couple of serious limitations if you want to derive any robust implications for policy first it is about the amount of financial aggregates e g money or credit relative to gdp rather than the share of financial sector gdp in total gdp i know of no evidence that says you are better off with a financial sector at 8 rather than say 4 of gdp johnson objects to research that looks at not quite the right numbers he objects to evaluating money or credit relative to gdp he prefers to look at financial sector gdp but as credit use grows so grows the financial sector i think the objection here is minor it matters to me because my oft repeated excessive reliance on credit is probably a financial aggregates thing second the research shows correlations not causation so all we really know is that richer countries have more financial flows relative to gdp not that more finance raises gdp in any linear fashion attempts to dig into causation tend to show that financial development is not the bonanza that it is cracked up to be third we know finance can become too big relative to an economy ask iceland ask iceland i guess i do object to simon johnson s writing style after all the work in this area is still at any early stage given what we ve seen over the past 12 months which way should we lean towards believing in the positive power of finance until the opposite is proven or towards being skeptical of finance in its modern form until we see evidence that this actually makes sense i can t believe he says the work in this area is still at an y early stage i can t believe he s only looking back over the past 12 months and i can t believe he offers only the two absurd extremes believing in the positive power of finance until the opposite is proven or disbelieving in the positive power of finance until the opposite is proven the extremes are the problem after all too much is too much yes finance is good but too much finance is not good people know this people have been up in arms about debt since the 1980s people know when it is too much but simon johnson the authority on financial crises is considering only the past twelve months and he s saying the work is still at an early stage surely out skepticism should extend to financial innovation show me the evidence that this kind of innovation really adds value socially speaking rather than providing a very modern way to extract amazing rents by simon johnson i m just disappointed that s all i finally find a guy who has been nose to nose with the economic problem but it turns out he doesn t know what the stink is posted by the arthurian at 9 50 pm 0 comments labels sequence 2 wednesday january 20 2010 yeah idunno i read somethin the other day online somewhere somethin like this finance accounts for 8 of gdp but 40 of the profits it s not new news but it finally clicked for me so i spent an hour trying to track down the source to no avail but along those same lines i did find this profits from the financial sector comprise an even larger percentage of our gdp since the crisis erupted johnson thinks their share of corporate profits which was an astonishing 40 in 2003 may actually be higher now given that the rest of the economy is in bad shape banks have doubled their share of gdp to 8 from 4 he said from an article by jennifer schonberger october 8 2009 at the motley fool the johnson noted therein is simon johnson johnson is an authority on financial crises like this one he s the former chief economist of the international monetary fund a professor at mit s sloan school of management a senior fellow at the peterson institute for international economics and co founder of the baseline scenario and then there is the nature of modern finance at the baseline scenario written by simon johnson september 1 2009 but is it really healthy or even sustainable to have a finance sector as large as what we face today it is surely not a good idea for finance to account for 40 percent of total corporate profits such performance in an intermediate input sector suggests someone else in the economy is being severely squeezed and this i know of no evidence that says you are better off with a financial sector at 8 rather than say 4 of gdp so yeah finance accounts for 8 of the gdp and 40 of the profits the evidence comes from simon johnson from the baseline scenario and the motley fool but the organizing of the evidence in a striking way waited for the blogger whose work i could not find a second time i would have thought finance was more than 8 of gdp still it s twice what it was that s significant and if you figure none of the lending counts in gdp only the wages and salaries of people in the finance business count then yeah that s one healthy chunk of gdp an unhealthy chunk rather i d call it excessive reliance on credit oh yeah i do call it that posted by the arthurian at 9 44 pm 1 comments labels sequence 2 tuesday january 19 2010 pahl uh see economic pahl uh see the purpose of policy is to change the economy economic changes are often the result of policy not always but often policy is the cause of change is the economy different today policy may be the cause consider the changes not only the changes we like not only the changes we want all of the changes any of the changes may be a result of policy consider this things we don t like about our economy may be unintended consequences of economic policy nuff said posted by the arthurian at 6 58 pm 0 comments labels policy monday january 18 2010 apropos of interesting from false economy by alan beattie chapter 7 the telegraph and railroad developed together the lines running alongside one another in 1849 the new york and erie rail road pioneered the use of the telegraph to control running operations five years later it was standard practice among the railroad companies these twin technologies incidentally helped establish their own standardization including one of the most fundamental of all measurements time in the mid nineteenth century there were more than two hundred different local times in the united states towns might be only a few minutes ahead or behind the time in the next town along even the american railroad companies used a total of some eighty different times since journeys took so long that there was plenty of opportunity for people to change their watches as railroad travel quickened and expanded the potential for confusion multiplied and in 1883 the railroads imposed a uniform system of time with the four time zones that persist today eastern central mountain and pacific the railroads imposed it posted by the arthurian at 5 58 am 0 comments sunday january 17 2010 the business income tax the business income tax is a tax on profit suppose we run a business with sales of a million dollars a year say our profit is ten percent of that or 100 000 and say that our tax rate is ten percent applied to our profit so the tax we owe is 10 000 but if we take ...
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