Links for 11-04-10

It's TV time: "Money as Debt"

http://www.youtube.com/watch?v=e6LWqgohO4E


If you only ever follow one link, follow this one.
Here's another copy:

http://www.youtube.com/watch?v=4It8bMdqs0M

The YouTube version has more and better followups.

Links for 10-29-10

Well, now that I've acquired a following, I feel obligated to keep you entertained and informed. Since I'm too much of a klutzy writer to do it all myself, at least at a regular and reasonably rapid rate, I will instead provide you, pretty regularly, with pointers to what I consider informative and formative.

Some will be for fun. It won't be a complete record of where I've been, but it will feature a few of the highlights. I hope you enjoy.

"The Stealth Coup D'Etat: U.S.A. 2008-2010"
http://www.oftwominds.com/blogoct10/stealth-coup10-10.html

"Capitalism Uber Alles: How the American Working Class Got Brainwashed"
http://xrl.in/6kv6


"What Does Greece Mean to You? - John Mauldin's Weekly E-Letter"
http://stocktrendsreporter.blogspot.com/
This article is really about complexity and catastrophe, especially as it has to do with economics. One important sentence: "In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes."


"The Normalization of Sociopathology in America"
http://www.oftwominds.com/blogoct10/normalized-pathologies10-10.html: Yeah, This guy is really good. His blog isn't that easy to navigate, but it's worth the time.

So, I hope you keep coming back for more. Also, feel free to provide links of your own, in the comments. If you can't make the link active, I'll copy it to the blog.

What the income of the top 1% means to the rest of us

The top 1% of the population now get 24% of the personal income of the nation. They used to get, in the 1970’s, 9% or so. Let’s say the difference is 15%.

What is that 15%? Well, that 15% is 15% of all personal income. (All personal income is about $10 Trillion.) So it is $1.5 Trillion. Now if this $1.5 Trillion was distributed to the other 99% of the population, they would be 15% better off. That is, on the average, they would each be 15% better off. That works out to $7500 for somebody earning $50,000. $1500 for someone making $10,000, etc.

Most of the money would be spent, since most of the rest of the people are living closer to the edge. Figure $1 Trillion spent. That makes for 10 million or so jobs. (Well, figure less. The rich do spend some of their excess money.) And figure $50 Billion or so per year to social security.

Millions would be lifted above the poverty line. It would reduce the need for government expenditures on the poor, and other social programs, by $60 billion or so. ($10K x .15 x 40 Mil people.)

Over $300 Billion per year would go to people who owed mortgages. Millions of these would be able to pay their mortgages. Not all would need it. But for millions it would make a difference. It would put a boost to housing prices, and put a big dent in the bubble collapse.

Now let's compare the income of the top 1% to that of the Federal government. 24% of the personal income of the nation works out to about $2.4 Trillion. The income of the Federal government for 2010 is $2.4 Trillion. The income of the top 1% is equal to the income of the entire Federal government. Federal government expenditures are going to be$3.6 Trillion dollars. The deficit is $1.2 Trillion, or half the income of the top 1%.

Of course we already have that the top 1% pay over 40% of all income taxes. Thanks FOX. All income taxes are $1.06 Trillion. So the top 1% pay $410 Billion or so, or just over 1/6th of their income, or 17%. This tells us where FOX is coming from. Since the government’s share of the GDP consumption is 25% or so, we would expect that percent, 25%, of income paid as tax, even under a flat tax. We may conclude that the top 1% pay a smaller share of their income than the rest of society. (Well, to be accurate, the tax end of the government share of GDP is only 17%. But since almost half of the poplulation pays little or no income tax, the tax paying half, minus the top 1%, pay a higher percentage of their incomes.) Now if the wealthy paid 25% of their income, that extra 8% works out to $200 Billion, or 1/6th of the current deficit. If they paid 40% of their income, as they easily can afford to do, (they would still be far better off than they were in the 70's,) the additional amount would pay about 1/2 the deficit.

But, as we have pointed out before, or elsewhere, they are largely the ones the government borrows from. Clearly it pays them not to pay taxes. And since they are largely in control of government....

See:

http://www.philstockworld.com/2010/08/21/who-rules-america/

Now to say they rule America is somewhat of a misstatement. A proper ruler rules for the benefit of all, if only out of enlightened self-interest. The more correct title is: “Who exploits America.” That they act according to unenlightened self-interest is to all our sorrow. For they have made themselves enemies of the rest of us. In fact, they have made themselves enemies to each other, and to themselves.

They wealthy have the power to save the government. But not the..inclination.
Justice Oliver Wendell Holmes Jr. observed that, "taxes are what we pay for civilized society." (See the link.) Evidently, the wealthy do not want a civilized society.

Do the rest of us?

Who we are governed by

We are governed by incompetents. They are so incompetent they do not even know what competency looks like.

Suppose the economy grows at 3%. Then just by controlling where that 3% is spent, the government can control the direction of the growth of the economy.

Of course, that is just the first approximation. The economy also undergoes change, which does not show up as growth, but investment compensating for depreciation and other asset consumption. This percentage must also be controlled. Further, what is destroyed must also be controlled. It can tax what it wants to destroy, and it can then spend the money to direct investment. This will cause the money to be spent in the direction the government deems desirable. The economy will then grow in the direction the government desires.

And it does this already. A government which is 20% GDP can’t help but direct the economy. That it does so inefficiently, and without much direction, merely means both it doesn’t understand what it is doing, and that some, or a lot, of the ‘growth’ is directed to waste.

What we are talking about is Gross private domestic investment, nonresidential. (Although the government could control the residential as well. It can tax larger mortgages, a graduated mortgage tax. It can tax the building of some houses, and subsidize the building of others.) Nonresidential gross private investment works out to be just under 10 percent of GDP. So by directing that 10 percent of the economy, the government can make it grow any way it desired, and provide any services desired. Well, any way desired that was sustainable. It could do this simply by subsidizing desired services, and taxing the crap out of any other investment.

Of course, it wouldn’t have to be so crude. It could be more measured, taxing according to degree of undesirability, subsidizing according to degree of desirability. If they wanted more health care, they would subsidize its production. Pay for more doctors, more nurses, more hospitals. If they wanted less concentration of wealth, they could tax it. More windmills, subsidize; fewer automobiles, tax. Less financial, tax. More manufacturing, subsudize.

Think this is heavy handed? Look at the ham handed government we have now. Look at the effects of its policy. It is 20% of the GDP, controls more, and what direction do we get from it? Instead of planning, we have special interests, pulling government investment this way and that. Financial has increased to 6%, with more profits than manufacturing. Manufacturing gets little support, and has been in decline for decades. Just 1% of our GDP goes to industrial equipment. That’s the stuff that goes into factories. In agriculture, unsustainable factory farms are subsidized, while family farmers are not. Health care has increased to 17% GDP. (This is not in contradiction to what was said above. This is demand (subsidized) driven inflation as a result of inadequate supply (taxed). The government should do the opposite. Subsidize production, and tax demand.) Infrastructure deteriorates, at the same time demand for it is subsidized. Unemployment is subsidized, employment is taxed.

All this and more is the result of government policy, of its spending, taxation and subsidy, Either that, or the government, spending 20% of GDP, and controlling more, has no effect on the economy. That is, it is essentially impotent. Of course, the government can still be essentially impotent, spending 20% of GDP, if it is locked into its commitments, the captive of special interests, and cannot change the way it spends its money. Like the government we have now.

A Brief Keynesian Digression

This will help with the next posting. Its not necessary, but if you don’t understand it you will have to take some things on faith.

Over the long run, Consumption and Income (or production) are equal, for economies of all sizes. Everything that is consumed must first be produced. Everything that is produced is pretty quickly consumed. Yes, there are inventories, but they are seldom for more than a few months, and they usually stay more or less stay the same. (Every economy, especially modern ones, is at most, only a few months from disaster) Let’s draw a picture, Diagram 1, with Consumption on the vertical axis and Income on the horizontal axis. Then the line where they are equal, for economies of all sizes, is the 45 degree diagonal. If we draw a point above this 45 degree diagonal, the economy it represents will have Consumption greater than Income. Below this line, Income is greater than Consumption. So any economy we talk about, is in the long run, going to be a point on this 45 degree diagonal. If we talk about a 100 billion economy a, it will lie on this line, where its Income and its Consumption are equal. The same for a 200 billion economy b, or a 500 billion economy c.

Now think about Consumption. If our economy is really little, we are going to want to consume more than we produce. If our economy is bigger, we are going to produce more than we want to consume. (Then we are also going to want to save, or more properly accumulate.) We represent what we want to consume by a line C. Diagram 2. This line is called a curve, by economists, lest they forget, as they sometimes do, that it really doesn’t have to be straight. The distance between this line, and the bottom of the graph, is how much we want to consume, at each level of income y. It slopes upward because the greater people’s income (y), the more they want to

Consume. Now this line C, this curve, crosses our 45 degree diagonal, at point e. Below, to the left of this at point e’’ for instance, our economy is little, and people are going to want to consume more than they produce. (In this simple model they can’t, of course. They have to starve) So the Consumption line is above the 45 degree diagonal, more desire to consume than income. To the right of e, at e’ say, our economy is larger, and people are going to have leftovers from what they want to consume, which they will want to save. As our economy grows bigger, and moves further to the right of e, people will want to save more and more. This is shown by the vertical distance between the 45 degree line, and the Consumption line C. Note they are also consuming more and more.

Now this Consumption line is sort of a matter of attitude. (And other things. In fact, this whole argument, is a matter of attitude. As is the diagram, except for the fact that the economy is on the 45 degree diagonal. Notice we’re also ignoring little things like taxes and government and exports and imports.) If people feel like consuming a greater proportion of their income, for a given size of their income, the Consumption line would be higher. This is shown by curve C’ in Diagram 3. At the size of income marked by y, though people are neither saving or dissaving at C, at C’ they want to consume so much they would be dissaving.

Back to the C curve, and Diagram 4. At income y, C is below the 45 degree diagonal, and the difference is how much the people in the economy want to save. (Want to consume + want to save = what is produced.) Now, where can this savings go? It has to go somewhere, because in the long run, economies cannot accumulate stuff. Economies do not save. (This is particularly true of market economies. A company that ‘saves’ too much of its product ends up going under. Well, maybe except for banks. But saving money is not saving stuff.) Nobody is going to make 50 million dishwashers, or 50 million cars, so that 5 or 10 years down the road, they will have them to sell. (Inventories that are accumulated are for at most a few months, and we’re talking about longer than that. Also, note that services cannot be saved.) No. They’re going to want to build a factory to make these things. They’re going to want to invest in a factory. That’s where all the savings goes, investment, and so savings is equal to Investment. (Remember, we’re talking about real savings. Right now, people are money savings like crazy, or trying to. But it is not being invested. So really, they are not saving anything. THey are redistributing demand, both in the present, and the future.)

Now Investment uses resources and is therefore like Consumption. Desired Investment also depends on the Income of the economy, so it can also be represented by a curve, and if we take this curve for desired Investment and add it to the (desired) Consumption curve, we end up with a total, the sum of Consumption and Investment, which economists call Aggregate Expenditures, or AE curve. Actually, what we have here is Aggregate desired Expenditures. Now where wishes, that is the AE curve, meet with reality, that is with income, or production,(y) on the 45 degree line, at e, we have the size of the real economy. This is also where desired savings is equal to desired investment. (We cheated and used a different argument, that real investment and real savings really have to be the same. The Keynesian argument with desired savings and desired investment is more complicated: Suppose the economy produced more than at e, at e’ say. Then the economy would be really producing more than people wanted to expend (at the AE curve.) So with all this extra production, inventories will expand, producers will want to cut back, they will invest less, and the economy will fall back to e. Suppose instead, the economy produced less than at e, at e’’, say. Then the economy will really be producing less than what people want to expend. Inventories will shrink, producers will see this and want to produce more, so they will invest more, and the economy will grow, back to e.)

Now this diagram doesn’t explain very well how economies grow, and move up the 45 degree line as both income, that is production, and consumption grow. Apparently, the AE curve has to keep shifting upward, which means either desire to Consume, or desire to Investment, or both must also keep shifting upward.

In the diagram, though, the economy is kind of stuck at e, because we can’t save more than we invest, and we can’t invest more than we save.

From this diagram, we can draw a simpler diagram of just the relationship between desired Savings and desired Investment. We do this by simply subtracting the Consumption curve in the diagram. If we subtract the C curve, that is shift the C curve down to the horizontal axis (down the orange arrow) and keep the other lines in the same relationship to each other, we have a diagram of the relation between desired savings and desired investment. Diagram 5.

As in Diagram 4, the economy we are talking about is really where the lines cross, at e, where desired Savings equals desired Investment. This is the diagram we will be discussing in the next posting.

Who do you owe - An answer.

Well, look what we came across:

http://www.oftwominds.com/blogjuly10/con-of-decade07-10.html

Not easy to navigate to Part II: Go to bottom of page, click on 'blog,'
then down that page to the list of entries for July.

The Producer-Consumer Problem, Again

In a earlier post we talked about how a net-producer (Germany) ended up with all the money, and the net consumer (Greece) ended up with lots of debt. Apparently the same thing is happening in the US. US corporations seem to have an extra $1.84 Trillion in cash lying around. And consumers…well.

You will remember the producer-consumer problem: No matter how much cash the consumer starts with, the consumer has to keep spending it, and eventually the producer ends up with all the money. Then the system crashes. The problem is more general, since any difference in relative gains results in one party ending up with all the money. For instance, if we imagine a system of company and labor in balance, and then, say, labor is given a slight cut in pay, eventually the company is going to end up with all the money. And then it’s the company store. 16 tons. That’s because the equilibrium between company and labor is an unstable one: The slightest disturbance and it heads, one way or another, for a crash. (It could head the other way, labor ending up with all the money, the company in bankruptcy. But it hasn’t.)

Now an enlightened government, (we don’t have one,) would either take steps before things got out of hand, (like say around 1990,) or arrange things so that the equilibrium between company and labor was, locally, a stable one. Graduated asset, or property taxes might by one way. Graduated income taxes, one for the corporation, one for labor, though trickier, would be more efficient.

The idea is actually tax and subsidy: Suppose the system of company and labor in balance. Then there would be no net transfer of money, and no taxation or subsidy by the government.. Suppose the company got a little ahead. Then there would be a slightly greater tax on its earnings than this increase, which would, directly or indirectly, go to labor, to bring it back down to equilibrium. If labor got ahead, there would be a tax on labor, which would go to subsidize the company, to bring the system back to equilibrium.

This oversimplifies things. Of course, you want the system to grow. That means business has to make a profit. It has to have the extra money to invest in itself. But this profit would have to be shared, since you want labor, (demand) to grow apace. One way to do this would be to induce inflation. Suppose with a 3% inflation rate, the company has a nominal 6% profit. The government spends the extra, inflation inducing deficit on labor, effectively sharing the profits. Hmm. Interesting. Another motive for moderate inflation. In fact, the whole thing could be managed through the rate of inflation: Set inflation to over half the nominal profit rate of business to transfer resources to labor, so demand would grow faster, or to under half, to transfer resources from labor to business, so supply would grow faster.

Another Hmm. We’ve been at very low inflation for along time now. We should not be surprised, then, that corporations have a lot of extra cash. There’s been a lot of transference of money from labor to business in recent years. So not only do we have grounds for policy, but we have an explanation, in part, anyway, for what is now happening.

As grounds for policy, though, it has problems, most noticeably the delay between the time the money is actually pumped into the system and the inflationary effect. Perhaps business profits could be anticipated…

But what is to be done with the current corporate cash glut. Well things are way ($6000 per capita) out of balance. The problem, of course, is that the corporations have no motive to spend the money on increased production: Consumers (labor) don’t have any money to spend! So corporations have to be induced to give it up, or it has to be taken from them, or government can print more money to give to labor, to compensate.

So we have a financial asset tax on corporations. And a tax holiday for labor.
But, our government has neither the guts, nor the sense. And, of course, there’s all those bonds.

By the way, if corporations have been taking money out of the system in equal amounts over the last 10 years, about $184 Billion per year, then that contributes about 1.3% per year deflationary pressure, that is inflation would be 1.3% more without their hoarding all that money.