Thoughts on the economy

[Lazarus]

It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.

 

[LakeTravis]

On the doctor thing - we DO have a huge influx of foreign doctors from foreign medical schools due to the AMA restricting the number of doctors graduating form US medical schools. These doctors fill open residency positions and go on to become board certified in their specialty in the US. Where I live only a tiny percentage of doctors went to US medical schools.

At the risk of straying off topic, I'm curious how exactly the AMA restricts the number of doctors graduating from US medical schools, and where they got that ability from?

 

[rbmrtn]

It's been going on at least since the 80's. Basically convinced congress there was an over supply of physicians, who then cut back funding for residencies.

article from '86

CURBING THE SUPPLY OF PHYSICIANS - WHO SAID WE HAVE TOO MANY DOCTORS? - NYTimes.com

article from '05

USATODAY.com - Medical miscalculation creates doctor shortage

 

[Hamlet]

Rates are so low right now that the real cost of capital for the government is currently negative, if you assume an inflation rate of 2%. If you assume that we'll eventually see an uptick in inflation, it looks even better.

There really has never been a better time for the government to borrow money for long-term infrastructure projects.

It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.

 

[travelover]

We could sure use a Solomon like figure to lead us out of these trying times...........

Sounds appealing, but can go badly wrong. Think Stalin, Mao, Jim Jones....

 

[HFWR]

Generally, I think government "borrowing" should be limited to "investments", such as highways, airports, schools, etc.

These could provide an immediate stimulus while having something to show for it down the road.

For the most part, I find the whole "tax the rich" thing distasteful and misguided. I am "okay" with progressive rates, I suppose. And one has to wonder just how many mansions, jets, and yachts one person needs. On the other hand, someone has to build and maintain the aforementioned amenities. But, perhaps, if someone has multiple mansions, jets, and yachts, a bit higher tax rate would not necessarily reduce their willingness to invest.

I am willing, as if I have a choice, to accept either version of government, as long as it's paid for, which includes pretty much everyone, rich and poor. To paraphrase, the best way to get rid of government excess is to have to pay for it...

 

[BTravlin]

Rates are so low right now that the real cost of capital for the government is currently negative, if you assume an inflation rate of 2%. If you assume that we'll eventually see an uptick in inflation, it looks even better.

There really has never been a better time for the government to borrow money for long-term infrastructure projects.

That is quite true but at the rate the Fed is buying U.S. treasuries and now mortgages, Bernanke will be the true ruler of the country before long.

 

[Fermion]

A massive energy policy maybe would get us out of the jobs slump? We are now producing so much natural gas that it is getting hard to even store it. If we built a vast amount of infrastructure to utilize this, and also started building some coal gasification plants (would probably take a decade but would make jobs now), we could put an insane amount of people to work and become net exporters of oil to places like Asia and Europe.

The USA has a lot of resources

 

[Khufu]

It has never been clear to me how borrowing money will improve the economy. The borrowed (or created) money must produce a return that is greater than the cost of borrowing it for this to work.

The Government is not a business and does not operate on a profit motive. Not the best entity to get a return from investments.

Borrow and spend plans can only stimulate the economy for a short time. Then the bills come due. Eventually the cost of servicing the debt will exceed the economies ability to support it.

At the end of WWII the US national debt was about 120% of GDP. Twenty years later it had dropped to 40%. How did the US manage to pay off so much of the cost of the war in twenty years? It never did. The economy grew. The stimulus from the war spending lasted a very long time.

When the govt borrows money and spends it, the effect on the economy is the same as when a company does. The "profit" to the govt comes from higher tax collections on an economy that grows.

Japan's spending during their two lost decades has produced a national debt greater than their GDP, either 120% or 200% depending on how you count. The interest rate on 10 year Japanese Treasury bonds is currently less than 1%. If their is a level of debt that the Japanese economy cannot support, they haven't found it yet.

 

[Khufu]

You want to eliminate the risk premium? Why would those who start up/invest in businesses wherein there's a possibility of losing some/most/all of their money choose to take this route if they're going to be taxed at the same rate as someone who, say, puts their money in fixed income CDs?

I can envision at least two outcomes:

- Investors will demand higher returns to offset the increased taxation rates, which will impact the cost of doing business, and result in a price upswing that will disproportionately affect lower wage earners.

and/or

- There will be fewer people starting/investing in companies, which will result in lower employment opportunities......or increased offshoring to areas with better tax rates.

Historically capital gains tax rates have varied significantly without a noticeable effect on the willingness of entrepeneurs to start businesses.

 

[Khufu]

On the doctor thing - we DO have a huge influx of foreign doctors from foreign medical schools due to the AMA restricting the number of doctors graduating form US medical schools. These doctors fill open residency positions and go on to become board certified in their specialty in the US. Where I live only a tiny percentage of doctors went to US medical schools.

But not enough to reduce the shortage in primary care doctors, in rural areas generally, or to put a dent in the high cost of doctor time in the US:

 

[teejayevans]

At the end of WWII the US national debt was about 120% of GDP. Twenty years later it had dropped to 40%. How did the US manage to pay off so much of the cost of the war in twenty years? It never did. The economy grew. The stimulus from the war spending lasted a very long time.

When the govt borrows money and spends it, the effect on the economy is the same as when a company does. The "profit" to the govt comes from higher tax collections on an economy that grows.

At the end of WWII, we had the advantage that our country wasn't destroyed and we were a manufacturing leader.

Affect on the economy is not the same, when govt spends tax dollars, it's not a profit that we only get a percentage of it back.
TJ

 

[pb4uski]

Historically capital gains tax rates have varied significantly without a noticeable effect on the willingness of entrepeneurs to start businesses.

While the first part of your statement is factual the second part is pure speculation though I would concede that capital gains tax rates are not likely a significant factor in the minds of entrepreneurs. However, capital gains are a significant factor to investors who provide capital that businesses need to grow and prosper.

My interest in equities would be much lower if maximum capital gains tax rate was 40%. Why take on such risk if the rewards are subject to up to 40% tax (plus state taxes on top of that where applicable)?

 

[Hamlet]

What is an investor going to do with their money instead?

If regular interest is taxed at the same rate, it really doesn't change the equation much.

You either invest or you will have to go back to work (which will get taxed as well).

My interest in equities would be much lower if maximum capital gains tax rate was 40%. Why take on such risk if the rewards are subject to up to 40% tax (plus state taxes on top of that where applicable)?

 

[ziggy29]

You cannot just 'make jobs up', regardless of the need for them; there has to be a demand, and there has to be a profit...other than pork barreling with taxpayer's money who's going to knowingly invest in losing propositions?

Perhaps, but on the flip side there will be no demand as long as economic forces and technology displacing labor with machines continue to cause jobs to shrivel up. In order to keep an economy and an industry strong, you have to have a broad base of consumers who can afford to buy your products. That means they need decent jobs with decent pay. This isn't new stuff. Henry Ford got that 100 years ago.

 

[Midpack]

Perhaps, but on the flip side there will be no demand as long as economic forces and technology displacing labor with machines continue to cause jobs to shrivel up. In order to keep an economy and an industry strong, you have to have a broad base of consumers who can afford to buy your products. That means they need decent jobs with decent pay. This isn't new stuff. Henry Ford got that 100 years ago.

Interesting, I've been wondering about Henry Ford's "bold move" lately. In that vein DEAR AMERICAN COMPANIES: Here's How To Fix The Economy - Business Insider. It was an interesting read, though IMO it will NEVER happen in today's world.

Henry Ford's story is highly relevant today. Because we are facing a very similar economic problem as the country did in the early 20th century. A glut of labor was allowing companies to pay a pittance for a day's work, leaving most of their dedicated employees destitute. Business owners and executives (the equivalent of today's 1%) did fine, but most rank-and-file workers did not. And this lack of spending power in the middle class crimped overall economic growth.

Interesting thread...

 

[pb4uski]

What is an investor going to do with their money instead?

If tax rates were that high, muni bonds would be attractive again.

 

[Nemo2]

Henry Ford also had a product for which he envisioned 'local' production and the strong potential for high demand, for both personal and business usage.

I was talking with my neighbor recently, (a guy in his early 70s, German born, came to Canada some 50 odd years ago; like me he was born during WWII), he suggested that we were fortunate enough to be born during the 'best of times' (in a non Dickensian context), and it struck me that the post-war boom and its corresponding, multi decade long follow through, was an anomaly that morphed into an unsustainable 'standard'.......it looks as if we might be heading back to the 'norm'.

 

[EvrClrx311]

how much longer until machines are capable of improving (evolving) themselves without any human interaction? Then we'll have nothing to worry about...

or will we?

The technological singularity is the hypothetical future emergence of greater-than-human superintelligence through technological means.[1] Since the capabilities of such intelligence would be difficult for an unaided human mind to comprehend, the occurrence of a technological singularity is seen as an intellectual event horizon, beyond which events cannot be predicted or understood.

Proponents of the singularity typically state that an "intelligence explosion",[2][3] where superintelligences design successive generations of increasingly powerful minds, might occur very quickly and might not stop until the agent's cognitive abilities greatly surpass that of any human.

 

[ziggy29]

I was talking with my neighbor recently, (a guy in his early 70s, German born, came to Canada some 50 odd years ago; like me he was born during WWII), he suggested that we were fortunate enough to be born during the 'best of times' (in a non Dickensian context), and it struck me that the post-war boom and its corresponding, multi decade long follow through, was an anomaly that morphed into an unsustainable 'standard'.......it looks as if we might be heading back to the 'norm'.

*Strictly* in terms of the economic deal they got, I consider my parents' generation (born 1935) as among the most fortunate the world has ever produced -- and probably the most fortunate we'll ever see in my lifetime (particularly in the US economy). It does seem like the planets all aligned in a way that shone brightly on them as a whole. By the time they entered the work force, the postwar economy was booming and middle class opportunity seemed almost limitless (at least for white folks). They came to work in an era of job security, pensions and secure health insurance. By the time that was starting to unravel badly, they were able to retire and were old enough to be exempted from any takeaways, both from corporate employers and government.

I have been saying for years that the first 25-30 years of the post WW2 economy were an almost magical confluence of factors that could not possibly be sustained, and we've seen increasing evidence in the last few years of this. In reality we started losing it by the late 1970s but kept the illusion alive for 2-3 decades with debt. But now we've racked up so much debt that we can't keep the house of cards from tumbling down on the next generation.

Compare the public attitude about prosperity today as compared to, say, 50-60 years ago. Back then we felt so strong after WW2, that hope, prosperity and upward mobility were so abundant, that society (with some struggles) nevertheless made a value judgment to expand that opportunity to minorities (especially blacks) and allowed more career options for women not much later. Today, IMO, the feeling is that prosperity is contracting, not expanding, and we have a tendency to be more protective of what we have. When we felt like there would be more and more pie over the years, we were more willing to share it. When we feel like the pie is shrinking, there is less willingness to give others a slice and we become much more protective of the pie we *do* have.

Am I saying they lived in the best time to ever live? No; there are plenty of reasons why living today is preferable even if the economic prospects are much tougher. I'm just speaking of the economic aspects.

 

[FinanceDude]

At the end of WWII the US national debt was about 120% of GDP. Twenty years later it had dropped to 40%. How did the US manage to pay off so much of the cost of the war in twenty years? It never did. The economy grew. The stimulus from the war spending lasted a very long time.

Not to mention the 3% VA loans the vets got to buy those $5,000 homes being built.........

When the govt borrows money and spends it, the effect on the economy is the same as when a company does. The "profit" to the govt comes from higher tax collections on an economy that grows.

Really? Then explain how the trillion dollar stimulus stimulated the economy as you suggest?

 

[Nemo2]

Am I saying they lived in the best time to ever live? No; there are plenty of reasons why living today is preferable even if the economic prospects are much tougher. I'm just speaking of the economic aspects.

Yes, I should have clarified, we were talking solely from an economic perspective.

 

[HFWR]

Not to mention the 3% VA loans the vets got to buy those $5,000 homes being built.........

Really? Then explain how the trillion dollar stimulus stimulated the economy as you suggest?

Not necessarily disagreeing, but we don't really know what the economy would be like without the stimulus.

 

[Independent]

If tax rates were that high, muni bonds would be attractive again.

I'm in favor of setting the dividend and capital gains tax rates equal to the rates on labor income. I'd also eliminate the tax exemption for munis.

Saved money has to go somewhere. I think we should let the market will sort out the risk/reward mix without gov't interference.

 

[pb4uski]

I'm in favor of setting the dividend and capital gains tax rates equal to the rates on labor income.

The problem that I have with applying ordinary rates to dividends and capital gains is that it results in double taxation - once at the corporate level (say 35%) and then again when the shareholder receives dividends or sells and gets a gain because of retained profits (say at 15%). So if a company has $100 of profit and pays $35 in tax then dividends the remaining $65 and that dividend gets taxed again at 28% the government gets $53 of the $100 of pre-tax profit. ($35 from the company + $18 from the shareholder). It seems excessive to me that the feds might get over half of the profit.

Taxation on labor seems to me to be a bit of a ruse in that the recipient pays taxes and the company gets a tax deduction so depending on the relative marginal tax rates it could actually be a net loss to the government if the corporate tax benefit exceeds the individual tax incurred. So if the employee pays 28% and the company gets a 35% benefit then the net effect is -7%.