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Old 05-18-2009, 08:40 AM   #81
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At least in the abstract, it can be argued that the investments themselves can be expected to increase productivity. The flow of money (into equities or bonds) provides additional capital to industry, which can be used to enhance productivity (new physical plant, new machines, investment in R&D, investments in employee training, etc--all of which should increase productivity). Again, in the abstract, if a company isn't going to be using the funds to increase productivity or efficiency, it has no business issuing bonds or new stock. All real economic growth, wage growth, and ultimately long-term growth in stock prices depends on increased productivity, right? Neither stocks or bonds are a long-term zero-sum game, it is possible for everybody to win. Not so with stock options, which truly are zero-sum.

Or maybe I'm missing something.
I agree with this whole paragraph. This is what can happen when there is a net positive "flow of money" into private firms. The way it normally works is that individuals with money to spend decide to not buy consumer goods, but "save" it and lend/invest so that firms can hire workers who build factories, software, etc.

My comment was in the context of Representative Smith's proposal in post #75. In that proposal, the net flow is zero. The gov't is sucking money out of private investments by selling T bonds at exactly the same rate it is putting money in by buying stocks.

Somewhere, there have to be private investors who had planned to own stocks instead of Treasuries. Something happens if Smith's proposal passes which causes those investors to sell their stocks and buy Treasuries. (The "something" is a change in prices.) But Smith's plan in total simply changes the ownership of existing shares without adding any new capital to the firms.
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Old 05-18-2009, 09:04 AM   #82
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"My comment was in the context of Representative Smith's proposal in post #75. In that proposal, the net flow is zero. The gov't is sucking money out of private investments by selling T bonds at exactly the same rate it is putting money in by buying stocks."
Not quite 0, but again why there is a major difference between Rep Smith's plan and private SS accounts.
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Old 05-18-2009, 10:02 AM   #83
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"The proposal doesnít provide either more workers or higher productivity. The normal route to higher productivity is to consume less today in order to produce capital goods which will make us more productive in the future."
This is not true, statistically investment is the most beneficial to the economy and leads to higher productivity, more growth, and and more goods produced. The assumption you make is that government use of capital is = to private use of capital. This isn't true at all. Its not even a case of where government is just less return on investment than private. Government is a negative return on investment. Advocates of government spending refer to whats called the mulitiplier effect. The notion that if they spend money the receiver will take it and spend it themselves. But this happens everywhere money is spent. The problem with government is that its velocity of money is less than the private sector so the multiplier effect isn't as good as private sector consumption so it has a negative drain. But the multiplier effect in private investment is huge because all of the money is going towards capital improvement not just cost minus expenses(in normal consumption) or profit.

Your next statement somewhat acknowledges what I've posted above. When you allow more money to be allocated privately which is what private accounts does, more wealth is created because its not a zero sum game. If it was the stock market today would be the same value as it was in 1900. When have you ever seen the government give a return on anything? They don't. At best they take out and put back in the same amount of wealth. But traditionally they always take out vastly more value than they put back into the economy. SS is no different. Keep in mind that their ability to get higher tax revenues is based on receiving money from the private sector they don't produce any wealth internally.
I can't see the connection between your paragraph on multplier effects, velocity of money, gov't vs. private investment, etc. and the "proposal" that my sentence references.

Let's review the proposal. You want to have the gov't borrow $100 billion in 2010 so that it can funnel the money into new individual retirement accounts. I'm assuming that individual workers use all the money to purchase stocks.

The gov't borrows by selling $100 billion of bonds at auction, the workers buy stocks via some mutual funds. As I mentioned above, this means that somewhere in the economy there are private investors who are motivated to sell stocks and buy gov't bonds. I don't see any increase or decrease in either private or gov't investment.

(I don't see any increase or decrease in other gov't or private consumption, the money supply, the velocity of money, etc. either.)

I understand that new capital going into private firms can increase productivity. The "zero sum" refers to the fact that this proposal doesn't provide any net new capital to private firms.

I'll expand my second sentence in hopes of making it clearer. Every economy has some workers who produce consumer goods and some who produce capital goods (sure, some do both, but I'm trying to keep it short). One key driver of growth rates is the number of workers producing capital goods. More workers producing capital goods = faster growth in producitivity. The catch is that: More workers producing capital goods = fewer producing consumer goods. So if we want more productivity in the long run we have to consume less in the short run. This normally happens automatically. If a bunch of us decide to "save", we buy less and firms lay off workers who were producing consumer goods. At the same time, we send our savings to firms in terms of new bonds or new stock. The firms now have the money to hire workers to build capital goods. Hopefully, that increases productivity and the firms can use some of that increase to pay us dividends and interest.

I'll apologize for writing out something that I'm sure you already know, it's just that we seem to be mis-communicating somewhere and I'm trying to be as explicit as possible.
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Old 05-18-2009, 10:16 AM   #84
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"The gov't borrows by selling $100 billion of bonds at auction, the workers buy stocks via some mutual funds. As I mentioned above, this means that somewhere in the economy there are private investors who are motivated to sell stocks and buy gov't bonds. I don't see any increase or decrease in either private or gov't investment."
Because this isn't true. Certainly higher treasuries will lead to some more investors if they believe that treasuries will subsequently go down. Even if they believe that more people will be investing in stocks than move to treasuries. If just as many moved into treasuries the yield wouldn't go up to reflect the change in supply.

Quote:
"The catch is that: More workers producing capital goods = fewer producing consumer goods. So if we want more productivity in the long run we have to consume less in the short run."
First, this has absolutely nothing to do with what we are talking about. Second, this tradeoff only exists in a vacuum of time and I have had coversations with plenty of economists about this and other "vacuum of time" concepts such as the philips curve. The fact is that growth produces increases in both capital goods and consumer goods. Total goods aren't a zero sum game, they grow over time. More money in the capital markets is the best way to increase production increasing both categories.
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Old 05-19-2009, 09:18 AM   #85
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Because this isn't true. Certainly higher treasuries will lead to some more investors if they believe that treasuries will subsequently go down. Even if they believe that more people will be investing in stocks than move to treasuries. If just as many moved into treasuries the yield wouldn't go up to reflect the change in supply.

First, this has absolutely nothing to do with what we are talking about. Second, this tradeoff only exists in a vacuum of time and I have had coversations with plenty of economists about this and other "vacuum of time" concepts such as the philips curve. The fact is that growth produces increases in both capital goods and consumer goods. Total goods aren't a zero sum game, they grow over time. More money in the capital markets is the best way to increase production increasing both categories.
The first paragraph leaves me perplexed. The last sentence is particularly odd -- I have no idea what you are trying to say. I think I need a numeric example to see what you are saying. How does the total economy get more new investments in the first year of your plan?

In the second paragraph, I bolded the last three sentences. I agree with all of them. My contention is that neither Smith's plan or your plan puts more money in the capital markets.
I don't know what you mean by the "vacuum of time". Maybe you have an online reference to explain the concept. Your reference to the Phillips curve suggests that you may be saying there are differences between short term and long term macroeconomic effects because prices are "sticky". I understand that, but I don't see the connection here.

Regarding the sentence that begins "First, this has nothing...". I'm making two different arguments. One looks at the mechanics of investment markets and says that your plan doesn't add any new capital, therefore it can't improve productivity. The other looks at the consumption/investment tradeoff, and says that since your plan doesn't involve any near-term reduction in consumption, it can't have any near term increase in investments. Both lines of reasoning come to the same conclusion.
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Old 05-19-2009, 05:22 PM   #86
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Your right about the first paragraph I think that I was a little hungover from to many martinis the night before. So allow me to rephrase it.

I think we can agree that yields will rise if the government issues more bonds, even if not by much. This is because there is a bigger supply and same demand so the yield must rise in order to attract more investors. People are invested in all types of things not just stocks, so you are going to attract investors from different areas. Traditionally you are attracting investors from conservative investments such as municipals, foreign government debt, corporate bonds, and cash. You may attract some people from the equities markets but the amount will not be equal. All of these don't necessarily have equal economic benefit. And most of the investors of things like treasuries are foreign central banks which don't buy equities.

Shifting from the cash and debt markets to treasuries is not the same thing as shifting from the equities markets into treasuries. The increase in production as a result of bigger equities markets would more than offset the loss of production from a higher cost of borrowing in the debt markets. Over time this spread can lead to more wealth for investment/consumption without any change in current consumption. But it gets much more complicated. Yields in treasuries and other debt instruments are largely based on yields falling producing capital gains, if the opposite is true yields sky rocket(like what we are currently experiencing and will continue to do so). Also if you do it to much, the yields will go to high and that will pull investors out of the equities markets, also the level of risk that the government is exposed to is high enough for a complete collapse.

This whole conversation is why people like Milton Friedman used to say that he would take a large debt, a tax cut, and a freeze on spending anyday over PayGo that financed expenditures with increasing taxes or the government printing presses. The fact is that if you had a large amount of debt, but low spending and low taxes you would naturally overtime grow out of the debt by making it a smaller and smaller portion of gdp. The problem is that we keep on adding more spending at a higher rate that our economy grows. This is also why supply siders are willing to take a small temporary increase in debt to lower taxes. That is essentially what the private accounts is. Its a tax cut in which the government stipulates how it is to be used, and agreement to forego future entitlement(reducing future spending).

The issue with your consumption/investment tradeoff is that it is another example of a vacuum of time concept. Essentially it is only true if you look at something as a snapshot in time. Right after the snapshot is taken things start to change. If the equities markets grow, higher employment, higher pay, and higher growth change the situation completely. People can get away with consuming more and investing more than your previous snapshot. The Philips curve is the same way after you take the snapshot more inflation overtime causes the curve to move outward and less causes it to move back towards the origin and this is why stagflation is possible even though the true believers in this curve said it couldn't be possible.

I'm not saying that their isn't loss in increasing gov debt, there is. I am saying that the loss from more debt and the gain from increases in the capital markets are not equal. But it isn't all one way either. It is also possible for increase in gov debt to be more detrimental than the corresponding increase in capital markets. Like if a high inflation, high treasury yield government tried to do it.

But don't forget that we are looking at the longterm success of a country/economy. All of this is nothing in comparison of forgoing future liabilities at less than 33 cents on the dollar.
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Old 05-20-2009, 10:53 AM   #87
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Thanks, I can make more sense out of this.

I agree that I was intentionally over-simplifying when I assumed we only had treasuries/stocks. But I thought the extra details didnít change the result. Suppose I add one class of assets, just corporate bonds. When the treasury supply grows, treasury yields go up. Somewhere, somebody sells corporates and buys the new treasuries. Selling the corporates makes prices go down and yields go up, so someone sells stocks and buys corporates. Maybe the $100 billion that goes into treasuries was funded by $10 billion jumping directly from stocks, and $90 billion going from corps into treasuries, while $90 billion went from stocks into corps. But the net is still the same, if we sell $100 billion of treasuries and use the proceeds to buy stocks, then someone had to sell $100 billion of stocks. I think I would get this result regardless of how many asset classes I add.

Thereís at least one other route, the ďsellerĒ might be a corporate treasurer. He sees that the govít action is going to make debt more expensive and equity cheaper. So, instead of rolling $50 million of bonds that are maturing in 2010 into new bonds, he sells $50 million of new stock. This lowers his leverage ratio and lowers future alphas and betas. But it doesnít give him a dollar more to invest in new equipment. Again, the net additional investment is zero, though the route is different. (Some people think that lower leverage ratios lead to better investment decisions, if thatís where youíre going, Iíll say the gain is minimal.)

I canít figure this sentence out Ė ďYields in treasuries and other debt instruments are largely based on yields falling producing capital gainsĒ. So Iím not trying to respond to it. Your sentence about ďdo too much of thisĒ suggests some sort of critical crossover point. I see a continuum that starts with the first dollar. Note, however, that the SS transition plan involves something above $10 trillion of new public debt.

IIRC, Milton Friedmanís plan for SS was a) make the current hidden liability explicit by issuing bonds to all current participants, in amounts equal to their accrued benefits, b) stop accruing new benefits, c) pay for the bonds in the same way we pay for other govít borrowing. That means we could raise income taxes, continue the payroll tax, institute a new tax, cut other spending, or borrow more and more to cover the bond payments, bearing whatever eventual result that leads to. He didnít claim any magical growth. He specifically rejected the idea of replacing the paygo system with a mandatory saving system. I canít find this online, and I donít have any of his books on my shelf, but itís what I recall. At any rate, this plan is straightforward, honest, and libertarian. But itís not what todayís personal account proponents support.

Now about ďvacuum of timeĒ the issue is ďhow much time?Ē Suppose I add insulation to my attic. I pay $500 today in hopes of saving $100 per year. My savings begin as soon as itís installed. But, my total consumption (for things other than natural gas and insulation) will have to decrease immediately by the whole $500. Even though I start getting it back immediately, if you add up my consumption expenditures over the first four years, they will total less because I bought the insulation. I donít break even until the end of the fifth year, my gains start after that. In our economy, if we shift to more total real investing, we will need to cut consumption over a multi-year period, until the productivity gains pay back our initial investment.

Iím not denying a long term gain if there really is new capital investment, just that there have to be short term losses. If proponents of these plans claim no short term pain, than Iím saying that proves there is no real additional investment.

(I know that as an individual I could levelize my consumption by borrowing for the insulation. But entire economies canít borrow. One one player borrows, another has to lend.)
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Old 05-20-2009, 06:44 PM   #88
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Your ultimately correct about your two points as I have come to understand them. But if you provide private accounts and increase debt there is no extra cost. It still is a wash, as you apparently agree. And a wash to get 33 cents on the dollar later is a good deal.

Milton Friedman helped design the Chilean private social security system. His system stated above would obviously be better, but its also intolerable by many people. And what I was referring to was his belief that deficits aren't the biggest issue in government because you can grow until they are a smaller and smaller percentage of gdp. His biggest issue has always been government spending and figuring out ways to lower future government spending is exactly what is trying to be done with the private account plan.

Yields are largely determined...by **future yields falling. If people think that yields will fall in the future they are more likely to invest in them. Sorry about that.
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Old 05-21-2009, 09:34 AM   #89
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We clearly aren't communicating. The "wash" that I'm talking about goes like this: The program does not give us the opportunity to get $1.00 in the future for a 33 cent investment today. This is because there is no new investment at all. The program merely shifts dollars around without building any new real capital (factories, software, tools, technology, etc.)

Tax rates impact growth rates. The exact tradeoffs vary a lot depending on the type of tax. I don't see the relevance of that to this discussion because you aren't recommnding any tax decreases (until, maybe, 50 years from now).
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Old 05-21-2009, 11:37 AM   #90
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Okay, you get a drop of $1 for 33 cents today because future beneficiaries of SS forgo there rights to the entitlement. Regardless of anything else this is still true.

Private accounts are essentially tax cuts where the government stipulates how you can use them. It may not seem like it, but if you think about it they actually are.
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Old 05-22-2009, 10:43 AM   #91
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I suppose the question is "Who is the 'you' that comes out ahead? Everyone, or just selected people?" I've been trying to say the when we talk about good public policy we need to consider all the players. A gov't action that simply slices the pie into different sized pieces is different from one that grows the pie. I see this as just re-slicing the pieces, you see it as growing the whole pie. (I think that if someone gets the opportunity to trade 33 cents for a dollar, then someone else loses an equivalent opportunity.)

I can see private accounts as somewhat similar to a law establishing IRAs - if that's what you mean by "a tax cut where the gov't stipulates how you use it". The fact that they can be characterized this way doesn't automatically make them a good idea. I don't think that every tax cut is always good just because it's a tax cut. I expect more analysis than that.
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Old 05-23-2009, 02:34 AM   #92
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You ultimately are correct that there is winners and losers in this. Currently, we are giving people 100 cents on the dollar in a crap system and letting the liabilities continue to grow. This is obviously the older generation screwing the younger generation. By allowing the the younger generation to take a current 33%(of SS money) controlled tax cut that the older generation doesn't get you are screwing the older generation. You do this because the loss in revenue(if everything else stayed constant) means more treasury debt deluting future returns of current investors(the older generation). Essentially you are forcing them to actually pay for the liabilities that they are accruing. But this screws them for only a certain period of time. If they are still alive with invested money 30 years down the road the lowered cost in SS and subsequent shrinking of federal spending(again holding everything else constant) will mean that they start to return more. Then and only then does the true benefit in the switch actually get realized.

A tax cut that also lowers future government liabilities is a no brainer.
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Old 05-23-2009, 09:27 AM   #93
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You ultimately are correct that there is winners and losers in this. Currently, we are giving people 100 cents on the dollar in a crap system and letting the liabilities continue to grow. This is obviously the older generation screwing the younger generation. By allowing the the younger generation to take a current 33%(of SS money) controlled tax cut that the older generation doesn't get you are screwing the older generation. You do this because the loss in revenue(if everything else stayed constant) means more treasury debt deluting future returns of current investors(the older generation). Essentially you are forcing them to actually pay for the liabilities that they are accruing. But this screws them for only a certain period of time. If they are still alive with invested money 30 years down the road the lowered cost in SS and subsequent shrinking of federal spending(again holding everything else constant) will mean that they start to return more. Then and only then does the true benefit in the switch actually get realized.

A tax cut that also lowers future government liabilities is a no brainer.
I like your first paragraph because it looks at winners and losers. This is the list that comes to my mind, considering only two asset classes.
Iím just going as far as recognizing that this program increases the supply of treasuries and the demand for stocks.

Winners:
People who currently own stocks. Higher prices mean more revenue when they sell.
People who were planning to buy treasuries in the future. Higher coupon rates mean better returns to new buyers.

Losers:
People who are responsible for the General Fund debt (e.g. FIT payers). Higher coupon rates when that debt rolls over.
People who own treasuries today and were planning to sell before maturity. Lower prices when they sell.
People who were planning to buy stocks in the future. Higher prices mean lower dividend yields.

In addition, there are the impacts on SS participants that youíve noted.

Iím claiming, of course, that if we could put numbers on all the winners and losers, including SS participants, the net would be zero. In fact, it will be zero in each future year. I could repeat my ďno free lunchĒ reasoning, but that seems pointless.

I'm not convinced about the inter-generational transfer in your analysis. Consider item 1 in my list of winners and item 3 in my list of losers.

I appreciate your view that current SS beneficiaries are getting a better deal than future beneficiaries. IF this is ďunfairĒ, then we could correct it by cutting both current benefits and current taxes directly.

A tax cut funded by borrowing introduces a new liability that hadn't existed before.
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