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Old 09-25-2010, 02:38 AM   #41
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Hello Emeritus - please could you kindly provide references to your assertion below which seems to contradict the "trickle down effect" theory ? Thank you.

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3)The drag on the economy is low consumption. The problem with all stimulation is getting people to spend the money. The rich don't spend windfalls, they save them
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Old 09-25-2010, 06:57 AM   #42
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I follow you, a reasonable progression, but I guess I just don't agree that we can 'spend our way' to prosperity. I think we need to 'earn our way' to prosperity. Create value - people will spend on things of value, and the value creation pumps money into the economy. Rinse, repeat.

It seems we tried the 'spend our way' to prosperity by pushing easy credit and easy mortgages. It just isn't sustainable. If you are talking about a short term bump, than I agree to get it into the hands that will spend it. But then what?
This is what bothers me the most about both the Dem and GOP extension proposals -- they are permanent. I buy the stimulus argument in the face of a stagnant economy and high unemployment and agree with Emeritus that we don't need more capital invested today (the tax breaks for the rich). That is why I prefer extending only the lower income tax cuts. But we have to structurally orient ourselves to pay the piper when things get better and permanent tax cuts don't do it. As for the promises to cut spending someday soon, implement those cuts in law and then cut taxes!
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Old 09-25-2010, 07:17 AM   #43
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Hello Emeritus - please could you kindly provide references to your assertion below which seems to contradict the "trickle down effect" theory ? Thank you.
Im not sure what level of this debate you are coming from but here is a starter piece
Economic Stimulus Act: Hard to Kill Two Birds with One Stone - Brookings Institution
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Old 09-25-2010, 07:37 AM   #44
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This is what bothers me the most about both the Dem and GOP extension proposals -- they are permanent. I buy the stimulus argument in the face of a stagnant economy and high unemployment and agree with Emeritus that we don't need more capital invested today (the tax breaks for the rich). That is why I prefer extending only the lower income tax cuts. But we have to structurally orient ourselves to pay the piper when things get better and permanent tax cuts don't do it. As for the promises to cut spending someday soon, implement those cuts in law and then cut taxes!
The argument for stable tax policy is well founded. But clearly the Bush tax cuts were made with borrowed money and are thus unsustainable. As stimulation they were inefficient. As a reward to powerful political interests they were wonderful. The rich are pouring tons of "stealth money " into the tea party and 501 c 6 organizations to keep the tax cuts for the wealthy.

The rhetoric is endless. In fact we have the smallest government sector and the highest percentage of taxes spent on the military of any fully developed OECD country.

Unless you cut military spending, you are not cutting the size of the government
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Old 09-25-2010, 08:21 AM   #45
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Sorry I am not sure I understand here. Are you saying too much education for future generations is a bad thing ?
I think the point was that to the extent most people look at college as little more than a way to get a "better" job, there aren't nearly enough of these "better" jobs compared to the increasing number of students pursuing that magical piece of paper. We are producing way more college grads than we are producing job openings for college grads.

More education is not a bad thing, but the days of expecting it being a punched ticket to the good life economically (and in their chosen field of study) are coming to a close.

What it really means is that more people need to really consider their motivations for college. If it's just to make more money or find a more secure career, it's entirely possible (depending on their aptitudes) that college might not be the best choice, especially if it's not heavily subsidized by scholarships and/or parents who can afford it.
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Old 09-25-2010, 08:54 AM   #46
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Sorry I am not sure I understand here. Are you saying too much education for future generations is a bad thing ?
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Old 09-25-2010, 08:56 AM   #47
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Thank you for clarifying Ziggy.

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I think the point was that to the extent most people look at college as little more than a way to get a "better" job, there aren't nearly enough of these "better" jobs compared to the increasing number of students pursuing that magical piece of paper. We are producing way more college grads than we are producing job openings for college grads.

More education is not a bad thing, but the days of expecting it being a punched ticket to the good life economically (and in their chosen field of study) are coming to a close.

What it really means is that more people need to really consider their motivations for college. If it's just to make more money or find a more secure career, it's entirely possible (depending on their aptitudes) that college might not be the best choice, especially if it's not heavily subsidized by scholarships and/or parents who can afford it.
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Old 09-25-2010, 09:00 AM   #48
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Thank you Emeritus. I am neither a lawyer nor an economist. Quite new to this site but willing and happy to learn as I am considering early retirement. I appreciate your answer.

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Im not sure what level of this debate you are coming from but here is a starter piece
Economic Stimulus Act: Hard to Kill Two Birds with One Stone - Brookings Institution
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Old 09-25-2010, 09:05 AM   #49
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The rhetoric is endless. In fact we have the smallest government sector and the highest percentage of taxes spent on the military of any fully developed OECD country.

Unless you cut military spending, you are not cutting the size of the government
Yes, military spending needs to be cut drastically. We have hundreds of military bases around the world and many of them just aren't needed anymore. And many have expensive golf courses, tennis courts, gyms, etc.

But spending really needs to be cut pretty much across the board in order for us to back away from the brink of bankruptcy. The Energy Dept was started in the 70's to reduce our dependence on foreign oil and has been a total failure. The Dept of Education is basically just a bunch fact gatherers and checkers. Dept of Agriculture seems to specialize in securing handouts for big agribusiness.

We all need to be pushing our Congresscritters to truly cut spending and start reducing our national debt otherwise we'll all be trying to figure out which dry dog food tastes best. The canned stuff will be too pricey for our budgets!
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Old 09-25-2010, 10:24 AM   #50
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Sorry I am not sure I understand here. Are you saying too much education for future generations is a bad thing ?
I can always argue that learning art history, if that's something you enjoy, isn't a bad thing. So, if I'm the type of person who enjoys education for personal enjoyment, I can't get too much.

I was viewing this from an economic perspective. There is no economic value in sending lots of kids to college to get degrees in art history if the number of grads vastly outnumbers the number of jobs that really require the specialized knowledge in art history.

Unfortunately, I believe that it isn't only art history degrees that are in oversupply.

Some people will say that college grads, even with non-attractive majors, still do better economically. I'd say much of that is just college as a signalling mechanism. A degree shows you've got some minimum level of brains and self discipline, but you had them before you started college.

Some people will say that kids grow up a lot in college. I'd say 18-22 year olds will grow up a lot in the military or in unskilled jobs at a much lower cost.

From a pure economic perspective, I'm pretty sure we could develop a better system.
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Old 09-25-2010, 10:34 AM   #51
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You are conflating long term and short term issues.
I thought I addressed the short term separately, perhaps I wasn't clear.

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You can create any product you want, but unless people have the money to buy it IT HAS NO VALUE. You can't create value if buyers have no money.

We have a vast number of unemployed people who, if properly employed would create products. Similarly if those people had money they would buy other peoples products. You can't start a car without a battery.
True, and I don't think this is contrary to what I posted. But part of what I'm saying is we can't just create products for consumption - there has to be some real value-added there to be sustainable.

So let's say we give everyone a $500 debit card each month for a period of time. They can buy 'stuff', and some of that stuff will need to be replaced and that will create jobs. But take away the $500/month and doesn't it all go 'poof'? I don't see how you create more than $500 worth of jobs on $500 of sales of consumables. Using your battery/car analogy, where does the gasoline come from once the car is started? Sounds to me like you are saying you can charge the battery from turning the engine with the starting motor - perpetual motion machines don't work.

OTOH, if you are producing product that creates value (say tools that allow a business to make something of greater value out of lesser value base commodities), that seems like sustainable growth to me.

Hypothetical example for illustration: Say I develop a $20 widget that can save $50 on this seasons heating bill. Great payback, real value-added there. Sure, some people are living so paycheck-to-paycheck that they can't even afford the $20 to save $50. But (judging by the packed higher-end restaurants I've been to recently), many people can. That will create jobs for the widget makers. Maybe then they can afford the $20 to save $50? It seems to me that those are the kinds of products we need to be producing for sustainable growth.


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This is what bothers me the most about both the Dem and GOP extension proposals -- they are permanent.
...
One thing that troubles me in the various discussion of 'tax those who can afford it' is it just seems so backwards to me. It's like going to the grocery store and having the checkout person decide your bill based on how much money you have in your wallet.

I don't think we should take more just because one group decides another group can afford it, we should have to justify the expenditures and then figure out a reasonably fair was to collect what we need. I won't comment beyond that, as I don't really know where we are on the Laffer curve - are taxes on the 'rich' hurting investment more than than they collect? I have no idea - it's an effect at any level of taxation, but I don't know where the inflection point is. If we knew that, we could decide if a flatter or steeper curve was in order. But the stats I've seen already seem very tilted to a small % of the upper levels paying a very high % of FIT already. Maybe that's how it should be, but maybe not?

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Old 09-25-2010, 10:49 AM   #52
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Yes, military spending needs to be cut drastically. We have hundreds of military bases around the world and many of them just aren't needed anymore. And many have expensive golf courses, tennis courts, gyms, etc.

But spending really needs to be cut pretty much across the board in order for us to back away from the brink of bankruptcy. The Energy Dept was started in the 70's to reduce our dependence on foreign oil and has been a total failure. The Dept of Education is basically just a bunch fact gatherers and checkers. Dept of Agriculture seems to specialize in securing handouts for big agribusiness.

We all need to be pushing our Congresscritters to truly cut spending and start reducing our national debt otherwise we'll all be trying to figure out which dry dog food tastes best. The canned stuff will be too pricey for our budgets!
Other than Defense (including VA) the operational costs of the US government are relatively trivial.

The pledge did not describe a single government program it it suggests eliminating
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Old 09-25-2010, 10:55 AM   #53
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So let's say we give everyone a $500 debit card each month for a period of time. They can buy 'stuff', and some of that stuff will need to be replaced and that will create jobs. But take away the $500/month and doesn't it all go 'poof'?
-ERD50
That is the question of the multiplier effect. If there is excess productive capacity in the economy, the stimulation works because the same $500 is spent over and over again

"To start out, we turned to testimony by Mark Zandi before the Senate Finance Committee on April 14, 2010. Zandi is the chief economist for Moody's Economy.com and a former adviser to Republican Sen. John McCain during his 2008 presidential campaign. Page 5 of the testimony contains a table that summarizes Zandi's calculated "bang for the buck" for various fiscal stimulus programs. Spending $1 on unemployment insurance benefits, for example, increases the GDP -- the value of goods and services that the economy produces -- by $1.61 a year later, according to Zandi. (We found some counter-arguments in a previous Truth-O-Meter item checking New Hampshire Sen. Jeanne Shaheen's use of Zandi's data.) A temporary increase in food stamps has the biggest stimulative effect. For each dollar spent, GDP grows by $1.74 one year later. For spending increases as a whole, the "bang for the buck" ranges from $1.13 for the Low-Income Home Energy Assistance Program to $1.74 for food stamps."
PolitiFact | Maddow claims spending is more stimulative than tax cuts
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Old 09-25-2010, 11:06 AM   #54
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Discussion in the context of issues affecting retirement is fine. Partisan bashing is not.
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I agree. This is the standard that should be applied by all moderators.
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Old 09-25-2010, 11:07 AM   #55
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That is the question of the multiplier effect. If there is excess productive capacity in the economy, the stimulation works because the same $500 is spent over and over again

...

For each dollar spent, GDP grows by $1.74 one year later.
I gotta run, I'll read the link later, but I gotta say that on the face of it, I'm having as much trouble with this concept as I am with perpetual motion. If true, it seems the solution to all our woes is staring us right in the face, to the tune of 74% growth. Color me skeptical.

Maybe the key is that GDP might not be a good measure? I dunno, but if I pay my neighbor $10,000 to cut my lawn, and then he pays me $10,000 to cut his lawn and we do that for 26 weeks, did we just create $520,000 of economic activity? But zero wealth.

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Old 09-25-2010, 11:18 AM   #56
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A couple of points.

  • The $200k/$250k (single/married) threshold in 2010 is roughly equivalent in constant dollars of $162k/$202k in 2000 dollars. Do people really consider such levels as "rich"?
  • I've heard, though of course nothing is final until any legislation is final, that the $200k/$250k threshold being talked about is not taxable income, but adjusted gross income. Big difference.
  • While I in general agree with the theory that the wealthy may not consume as much as the middle class, the issue arises when determining who is wealthy (see first two points). At "low levels" of the definition of "rich", I suspect many will reduce consumption as they have savings goals.
  • One must remember that, as tax rates increase, the incentive to avoid taxes increases. This is especially true if one class of individuals feels that the result is not equitable.
  • It's my belief that a tax system that has ~50% of households not paying income taxes is severely problematic. People need to have skin in the game.
  • There are ways to immunize yourself from the effects of tax increases without reducing your consumer consumption.
  • I find it interesting that the Democrats, who voted for the higher Clinton rates, and who voted against the Bush tax cuts, are now championing the Bush tax cuts, at least as far as the "middle class".
  • I'm not sure which I believe more: that the decision to not have a vote on the tax cuts prior to the election are the result of a) believing that if both options are presented, the full Bush cuts will be maintained, and the Democrats can't stand the idea of the "rich" not having their taxes increased or b) they actually don't want to extend any tax cuts, but would rather 1) raise everyone's taxes but 2) be able to blame the Republicans for that happening.
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Old 09-25-2010, 11:53 AM   #57
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What was that I was just saying about the appearance of Porky?

Discussion in the context of issues affecting retirement is fine. Partisan bashing is not.

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I agree. This is the standard that should be applied by all moderators.

Hello again, Tex; its' been awhile but as usual you posted today and went offline. May I remind you, from the CRs:

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Self-policing = we are all responsible and the success of the forum depends on its members, IMO.
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Old 09-25-2010, 02:39 PM   #58
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I gotta run, I'll read the link later, but I gotta say that on the face of it, I'm having as much trouble with this concept as I am with perpetual motion. If true, it seems the solution to all our woes is staring us right in the face, to the tune of 74% growth. Color me skeptical.
Well, yeah, that is the big gotcha. That high multiplier effect is seen on things like local grocery purchases, where there is competitive pricing on goods, a large labor component to do the multiplying, and the economic activity from any spending propagates through several earning/spending cycles. (e.g., the grocer buys from farmers and pays his workers, who buy supplies in town and visit the pub, and the supply store workers and pub owner shop for groceries...)

The multiplier effect is a nice way to describe how an economy grows.

Now, if one spends money in a way that doesn't stimulate multiple earning/spending cycles then the multiplier is small, and can be less than 1.0. Stuffing money in a mattress, for example, doesn't produce much economic activity, and so has a low multiplier. It is also possible for some economic activity to 'crowd out' other activity and prevent a net increase in economic activity from occurring. (Consider a bank making a huge nonperforming loan, and then being unable to lend to local businesses to finance growth.)

The multiplier effect comes from work done by Alfred De Lissa, an Australian economist, along with Julius Wolff and Nicholas Johannsen. Keynes picked up on this and incorporated it in his general macroeconomic theory. Richard Kahn tried to expand this to model net national product as part of his "Principle of the Multiplier".
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Old 09-25-2010, 04:30 PM   #59
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A different look at the multiplier effect.

Debt headache to keep throbbing | News for Dallas, Texas | Dallas Morning News | Scott Burns | Personal Finance | Business Columnist | Dallas Morning News


"Most of the modern period, Hunt explains, has been based on Keynesian economics the idea that government could stimulate demand with deficit spending.

That spending, funded through larger government debt, was supposed to have a multiplier effect. For every dollar of deficit spending, according to the theory, there would be several dollars of new economic activity. The multiplier effect is an idea politicians love because it makes government the hero-spender of economic recoveries.

There's just one problem, Hunt says. "It's wrong."

"Deficit spending, rather than energizing the economy, is debilitating," he said. "Worse, after the spending is
done, the private sector has to service the new debt."

"Taxes have a negative multiplier," he said."

If Hunt is correct; we in for a long slog of P poor stock returns.
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Old 09-25-2010, 08:04 PM   #60
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"Deficit spending, rather than energizing the economy, is debilitating," he said. "Worse, after the spending is
done, the private sector has to service the new debt."

"Taxes have a negative multiplier," he said."

If Hunt is correct; we in for a long slog of P poor stock returns.
Paying down debt, personal or otherwise, and taxes tend to move money out of the hands of people who would otherwise spend it in ways that produce economic activity. We're now going through what pundits are calling the Great Deleveraging, paying off personal debt instead of spending on goods, or at the very least not borrowing so much to spend on goods.

Of course, the gotcha here is that the Great Deleveraging isn't really so great. Consumer spending as a percentage of GDP is still above 70%, well above the 64% that was consistently run from 1950 to 1980. Still, I'm sure there are some really dark clouds out there somewhere that we can stay under.

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