Don’t “Deal” me, Bro!

So all over the news today is the status of “The Deal”. Will we have “A Deal”? Has Obama got the strong hand for “The Deal”? Will the Democrats refuse “A Deal” with a Social Security CPI change in it? Can Harry Reid get “The Deal” done? Can the GOP do “The Deal” without a “Dance Partner”. Only 2 days (or 36 hours or…) to “Get A Deal Done”.

Dear Congress and Da Pres:

I am not “a deal”. I don’t want to be “dealt”. I am not a bargaining chip in a game, and I don’t want you to be playing games nor doing pawn shop “deals” with me, my life, my income, or the economy.

I want you to see reality in front of you, recognize it, smell it. Then do what is best, moral, and sound for the country. In short, do your job, and without a “deal”.

OK, the Democrats are playing a much better “Scare Game” than the Republicans. I don’t know if the Republicans are just stupid, or complicit. (Don’t you throw me in that there Briar Patch…) What are “the scares”?

1) There will be a recession if we go off the cliff!!!

2) Voters will despise you if you don’t “fix it now”!!!

3) We (democrats) won, so you better do what we want or…

4) The Cliff will damage the Military (and your constituency)!!

5) It’s what the Economists say will work, don’t screw it up!!!

6) You can have a tax hike for everyone, or only the 1% (who’s vote doesn’t matter…)

And more…

The #5 is a variation on #1, as an ‘appeal to authority’ enhancement. So it might not justify a line of its own, but I think the implications of it matter enough to put it in.

So lets look at a few of these.

I’ll be taking them in semi-random order, but with a ‘small issues first’ bias. So first up, is #2.

Number 2 is just a variation on the “Bums Rush”. It’s no different from what the used car salesman says or what is seen in bad commercials on TV. “So pick up that phone and order now! Time is running out!”. I have a general principle that has served me very well: NEVER EVER under any circumstance accept the “Bums Rush”. If pushed too much ( if they don’t accept the tossing of the Bums Rush into the trash can) Walk away. Just walk away. THE only thing you can do that matters with the Bums Rush is to chuck it in the trash can. There will not be a damn bit of real difference if this is “fixed” now (in a rushed bad way) or a month from now. Some markets (stocks / bonds) might have a couple of up or down days, but they will do that anyway, no matter what you do, or don’t do.

Number 3 is just “The Threat”. It is no different from what any bully does. “Do what I want (because I’m bigger, prettier, the winner, meaner, whatever) Or Else. There are two things can work here. One poorly, one a bit better. First off, you just walk away from The Bully. They are nothing without someone to bully. Make them follow, never ever let them dictate terms. Now, best is to just walk away and never come back, if you can. But usually The Bully hates the idea that their Shmooo is getting away and comes after you, usually with an escalated threat. At that point, fear is your only enemy. If you just “take it”, it is over. You lose. Doesn’t matter if it’s a school yard bully or a thug on the street. You are going down. The only thing you can do is a full on, all out, Berserker Class counter attack. You are no longer “playing to win” this round (especially if The Bully actually does hold the stronger hand and is going to beat you to a pulp in the end). You are simply making sure that everyone calls him “One Eyed Fool” from then on out. No holds barred, you want to rip off body parts and stomp on them. Most delicate, sensitive, and vulnerable first. Often, at the point where they realize you are about to take them down or die trying, The Bully suddenly decides on a different target. ( I speak from personal experience here.) You can ‘grade into it’ by ‘tipping your hand’ at various stages. So saying “I’m leaving now” before leaving can be helpful. As can be “If you push me, you will regret it.” But that must be delivered in such a way that they understand this is “two tigers fighting”, even if one of them is smaller.

(From Shotokan: “When two Tigers fight, one of them dies; and the other is seriously wounded…”)

Also, do not forget that Republicans won in The House.

Number 4 is, in some ways, a variation on number 3. It’s still The Threat, but now it’s delivered as “Friendly Adviser” not “The Bully”. The fundamentals don’t change. A threat is a threat is a threat. You either neutralize it, defeat it, avoid it, or accept it. In this case, though, I think there is a deeper point. WHO gets hurt, and why. First off, the Military. Look, they have been run ragged fighting wars of choice all over this planet for a decade plus now. ( Or is it two decades now?) We spend more on the military than the rest of the world combined. The “cut” they face is about 10% NOT including the extra-budget expenses for gratuitous wars. So first thing to realize is that the ‘hurt’ isn’t very much. Mostly it means we stop being so world dominating everywhere all the time and being in a constant state of war making. Frankly, that sounds more like a feature to me. The soldiers can have some added “home time”. The world can decide if it wants to stop poking at us, especially if we are not in their face. The defense industries and the Generals can think just a bit more about what new toys they really need. And all of us can take a well needed breather. As for the rest of the ‘middle class’ and ‘poor’ who will be ‘hurt’ by sequestration and reduction of spending: Almost 1/2 of them are Republicans and Independents who want you to cut spending. That is WHY Republicans hold the House. We know and want the spending cuts. Why? Because what the spending giveth, the taxes and borrowing / interest payments taketh away. So the “Big Scare” here is that those constituencies will be angry about their money bowl being taken away. That’s a bogus scare story. For every one worried about their money bowl, there’s another worried about their taxes and the debt burden. Don’t be afraid of a Scare Story. Ever. Even one with specifics in it.

Number 6 is “The False Choice”. This is a generational problem. We will be dealing with the Demographic Bomb as the Baby Boomers retire and there are not enough productive workers to support them for the next 20 years (or more…). We will be dealing with the $16 Trillion (or is it more than that now?…) Debt Bomb for the rest of our lives. There is nothing about the next week, month, or even year, that makes those go away. You will have a law expire. You will have a budget out of control. You will have entitlement spending that can not be covered, in any way, from taxes, growth, or borrowing. You will not get more revenues from a hike in tax rates. (You are on the wrong side of the Laffer curve for that to work). Not one of those things can be changed in the next day, month, or even year. There simply is no pressure at all to ‘do something now’ nor to “chose poison or the axe”. It does not matter what you do now, those problems will not be going away. So just set that whole question aside. Ask instead “What is the right thing to do?”. At most, tax rates go back to what they were pre-Bush (and perhaps even for only a little while). Folks who want things really fixed will not be holding that against you. They may not like it, but they will understand if it is due to you sticking to reality based principles. Do a “Dumb Deal” in a bums rush way? Vote FOR an Obama Win on More Taxes? Sorry, it’s flushing time… So feel free to let the present “deal” expire (tax rate rises and all) AND leave the debt ceiling in place (so the Democrats understand they have ‘skin in the game’ too…) At most, you are recognizing the reality that we just don’t have the money. So someone gives you a ‘false choice’, just respond with “That is a false choice. We are here to fix our massive deficit and debt and we don’t have the money for more taxes.” (Any money taken from the “rich” just means less investment, less economic growth, fewer jobs, and lower net tax revenue. Say hello to the “Marginal propensity to invest”.)

Number 1 and Number 5 are interwoven. One is an assertion of what will happen, the other is the appeal to authority to back up that appeal. I’m going to mix the two in the following discussion. First “The Assertion”. It just says that the economy is so ‘fragile’ that if you don’t prevent tax rises and spending cuts, it will break. A recession will surely follow. But will it? And will having a tax rate well below expenditures and spending like a drunken sailor on steroids make anything better? (And if it does, isn’t that just trading ‘roids and credit maxed out’ today for “aw shit” tomorrow in debtors prison?) That’s where the “appeal to authority” comes in…

Now realize that the “appeal to authority” is a logical fallacy. It is just a broken form of argument. But, with that in mind, what can we say about that authority? It is based on a Keynesian philosophy that “government stimulus” can hold off a recession and cause economic growth. That you can ‘borrow your way to prosperity’. The Austrian School of economics thinks that’s bogus, so your first thing to realize is that there isn’t just one authority here. So in reality this choice involved the implicit endorsement of one particular school of thought. Even that, though, is not the whole story. The model presented is just “more government spending is good”. But is that what Keynes said? Sadly, no.

What Keynes really is about is the “velocity of money” and that during short term downturns, the government can keep the velocity of money up (when the public pulls back) and prevent the sequelae from ramping down the economy. It does not say that the government can keep this up forever or that it does not come at a longer term cost. It does. Longer term, during times of excessively high growth, Keynes said to then spend LESS than tax receipts. The whole system depends on having the government behave “counter cyclically” on BOTH sides of the business cycle. We have not done that. Instead, we’ve simply headed down the path of Debtors Prison. Now we are at a stage where to get more government money to spend, we must either do it via taxes (which reduce the velocity of money in the private sector, so can not cause it to go higher) or via borrowing. As a ‘short term’ thing, borrowing can work. As a long term one, it can not. Why? Simply because in the longer term the cost of the borrowing shows up in the government costs. We are already at the point where “debt service” is a significant part of the budget. Once that happens, you are not spending ‘saved excess’ from good time counter cyclically, nor are you increasing the velocity of money via that borrowing. Instead, you are borrowing that stimulus money, and spending it on debt service. Worse, as folks in the private sector see the irresponsible debt level, they stop investing and spending. Simply put, when public debt is too high, it causes a reduction of the velocity of money in the private sector (or worse, money leaves the economy entirely and heads overseas or simply into ‘hard assets’ that are even less liquid and of even lower velocity).

In essence, the “appeal to authority” is based on a “crib notes” version of Keynesian Economics and is not correct. (Though widely repeated, and even taught in schools, it is not what Keynes said in full. He very much said that borrowing to spend was only a short term tactic and that long term fiscal responsibility and lack of debt was important.)

But at this point, what will happen in the economy?

There are two paths. More borrowing and spending to “stimulate the economy”, or “fiscally responsible government”. We know where the first one leads. We’ve seen this movie a dozen times. Greece is the present example. Italy close behind. Japan has had a generation of stagnation from “easy money” and high debt levels. At MOST, you can “go Japanese” and stagnate. At worst, you end up at Greece. There is no ‘good times are here again’ down that road from our present status. The idea that another few $Trillion of “stimulus” on the Chinese Credit Card is going to “fix the economy” is just a triumph of hope over experience. “But hope is not a strategy. -E.M.Smith”

The “Fiscal responsible government” will hurt. No doubt about it. Keynsian money acts exactly like any addictive drug. Take a little bit of speed, for a very short period of time, to survive a dog fight as a fighter pilot, well, that actually works well (which is why we put speed in the cockpit starting in W.W.II). Do it every day for years? You slowly burn out and end up a wreck. More will just kill you. Drying out is not a ‘feel good’ time. So once already in debt to the sky (what limit?…) and already economically emaciated and wasted, taking a ‘hit’ for ‘withdrawal’ will not feel good. Yet it is the only thing that works, longer term. (And since we’ve run out of ‘short term’, only the ‘longer term’ matters.)

In a very real sense, “going off the cliff” (a broken metaphor, BTW) is nothing more than doing the right thing (though perhaps in a lousy way). We’re long past the point where more borrowing and spending will fix anything. We are well into the range where the debt burden is damaging. We’ve driven the economy into a ditch, shipped production to China and India, and there simply isn’t the money in private hands to have any increase in the ‘velocity of money’ from the private sector. We’re tapped out. Broke. Busted. Pockets empty. Selling Chinese goods to each other does NOT put net new wealth into the system. So raise tax rates, you will not get more revenue (as we’re already broke and any more in taxes means less in spending, so less in taxes from the commercial side). Borrow more money from China to have the government spend it (or put it in our pockets for us to spend … on Chinese stuff…) will do nothing to create more wealth or jobs here. (It will make more in China. I’m sure they will thank you with your next bill for interest payments…)

So that’s the problem in a nutshell. Keynesian spending now is going to stimulate China. Borrowing now is going to benefit China. Borrowing now and government deficit spending now will damage the US economy and reduce the money available to spend for every future year. We’re already strung out on the drug and more will just make us more strung out, not make us well. So yes, you need to take some pain and do the withdrawal process. That starts with LESS borrowing, not more. LESS deficit spending, not more. As soon as folks know that you will not be “buggering the money” nor stacking up more debt than God can pay, they will start to think maybe it’s OK to invest a bit, and spend some. Yes, it’s a pain in the ass to cut up the credit cards and live on beans and rice for year or two while looking for a second job. But that’s what works.

Get off the throat of the private economy. Let it breath. It will grow. Keep taxing it to the point of bleeding it dry and spending the money on non-productive things? It dies and you die. Wealth “redistribution” and most “entitlements” are non-productive. Sorry, they just are. Sucking more out of a moribund productive sector to feed more wealth consumption, while borrowing 40% of it is just being on a Meth Bender. It ends in the grave. The only question is “How fast?”. So it’s time to cut up the credit card, pay the bills, shut off the cable TV and take 1/2 the light bulbs out of the sockets; forget ‘dinner out’ and embrace home made chili beans and corn bread. Anything else is just Economic Reality Denial. Even Keynes knew that.

There will be pain. There will be screaming, sweating, and hollering. Maybe even some head banging and some folks will even pass out or become violent and break things. That’s the way drug withdrawal goes. Just “Don’t deal me, bro!”. We don’t need another good drug deal. We need some reality based responsibility.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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41 Responses to Don’t “Deal” me, Bro!

  1. omanuel says:

    Thanks, E.M. Smith, for your posting.

    I agree. The fiscal cliff is re-establishing contact with economic reality.

    That will be an indeed painful shock to those who thought they controlled reality.

    Like the founders of physical sciences who “beheld God and nature face to face . . . through their eyes”, in the New Year may “we also enjoy an original relation to the universe [1].

    Consensus science, fueled by our own tax funds going to ego-driven scientists who valued recognition and awards over basic scientific principles, denied us that basic right after the destruction of Hiroshima on 6 Aug 1945 revealed a force that frightened world leaders into establishing the United Nations on 24 Oct 1945 in an effort to hide a force they couldn’t control – the force of creation, preservation and destruction [2].

    1. Ralph Waldo Emerson, Nature (1938), Introduction
    http://oregonstate.edu/instruct/phl302/texts/emerson/nature-contents.html

    2. Oliver K. Manuel, “Neutron repulsion,” The Apeiron Journal 19, 123-150 (2012) http://tinyurl.com/7t5ojrn

  2. John Robertson says:

    Are you, the USA, not already free falling? It seems to me the debt incurred is more than citizens can pay.
    I like the comparison to a crackhead, the same logic keeps recurring, “Just another fix and then I’ll get off this stuff, man.”
    You already covered the best defence a couple of posts back, of private citizens to govt insanity, which is happening all over, stop buying and do more at home or in barter.
    If producing more means getting less, do not produce. Course you have to be productive to understand that logic. Your economy will contract abruptly when taxes and fees go up,because the experts from government and academia have never been productive members of society, never had to meet a payroll or waste their time dealing with the roadblocks that they create.

    Cycles again, when govt expanded in the 1930s it sort of worked, then came the theory that if a little was good, more must be better 1960s and now nothing is working.
    Once people suffer a bit they will remember(for a short while) that govt is a poor servant and a tyrannical master and our only hope in a society with rule of law, is limited government which we watch ruthlessly. Bureaucracy resembles cancer, its always ready to consume the host regardless of consequence.Maybe a cull every 5 years would work?
    As the takers out number the makers the crash is coming soon. Running out of other peoples money might return the populace to reality.
    And finally we returned to reality, because there was nowhere else left to go?
    Happy New Year, may all your days be interesting.

  3. jim2 says:

    I vote for letting the sequester take place. It’s the only way spending cuts will happen. The cuts to the military aren’t all that bad compared to its budget. You know that even if that happens, Congress won’t be able to let it be. JMO.

  4. John F. Hultquist says:

    Y’all are a barrel of laughs. Happy New Year, indeed!

  5. E.M.Smith says:

    @John Robertson:

    Well, “free falling” is not yet “hit the bottom”. We’ve got a $1.5 Trillion / year or so credit card outlay. We’re just asking the bankers to keep raising our debt limit that much each year and we’ll keep making the minimum payment in return…. As long as that holds up, we can keep on putting our Crack on the credit card…

    Everyone can see it is self destructive and that the end is near / in sight; except the folks getting the Crack fix….

    So yes, we are in freefall. Yes, there is no way we can pay it back (at least not in my lifetime and not without inflating it away). But hey, that’s not a problem NOW. I’m sure we can get one more round of Tequila Shooters and another line of coke on the mirror …. the credit card payment isn’t due until January, and that’s next year….

    @Jim2:

    I agree. Never ever going to be any real reduction in spending without it being forced. THIS is an opportunity to force it. And didn’t someone give the ‘advice’ to “Never let a disaster go to waste”?… Hey, it’s their petard, I’m just hoisting…

    @John F. Hultquist:

    Hey, it’s still only the 30th here! I’ve got 24 hours before I have to put up the Happy New Year posting! We’re going for contrast here. Today the Dismal Swamp, then tomorrow the Happy Times!!! will look at that much better! ;-)

  6. DirkH says:

    I have accidentally found a few links that highlight, let’s say, the nature of the kind of defense some economists have for Obama’s a trillion a year deficit. It’s not exactly Keynesianism; it calls itself Modern Monetary Theory (MMT) and can best be described as “Weimar in chronic denial”.

    Here’s an interview with an econ prof who explains it. She’s pro MMT.
    Stephanie Kelton on Modern Monetary Theory’s Goals for Full Employment – DEC12

    (Putin TV)

    Wikipedia has something about it as well:
    https://en.wikipedia.org/wiki/Chartalism#Criticisms
    “MMTers argue though that generally inflation is caused by supply-side pressures, rather than demand side.” (see? Weimar In Denial)
    INTERESTINGLY this means that we print ourselves rich yet avoid inflation because stuff just gets produced as money supply and demand grows. O-K – but there’s ONE THING we can’t print – PRECIOUS METALS. (I planned to switch to Gold and Silver ETFs over the summer months anyway)

    Both Prof Kelton as well as the wikipedia do not discuss the destruction of the price signal by the ever-spending state behemoth; not even in the criticism section at wiki. MMT should lead to massive misallocation of capital IMHO – Kelton a few times mentions “it’s the role of politics to make the right decisions what to spend for” – yeah, good luck with that.

  7. omanuel says:

    Information to contemplate as society (glides happily or abruptly crashes) into the (crack or cliff) of economic reality:

    The Nobel Prize Committee has been promoting misinformation as scientifically valid economics and physics since about the same time Richard Milhous Nixon became the 37th President of the United States: http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences

    Henry Kissinger became Richard Nixon’s National Security Advisor on 20 Jan 1969 and secretly flew to China in July of 1971 to negotiate away the Apollo Program that the 35th President, John F. Kennedy, had established during his brief tenure (1000 days) before assassination in office in Nov 1963.

    Two years before Climategate exposed fraudulent global temperature data in Nov 2009, the New York Times reported on 13 Oct 2007 that Al Gore, the UN’s IPCC, and an unspecified number in the “United Nations network of scientists” shared a Nobel Prize on for actively promoting (mis-)information as evidence of “man-made climate change.”

    http://www.nytimes.com/2007/10/13/world/13nobel.html?_r=0

  8. Tim Clark says:

    Well, since i was probably going to get soused tonight anyway, I guess I can cry in my beer (metaphorically – two bottles of vino!) instead of whooping it up. :<(

    AS always, I can only say that demographically and politically all of us ~10%'s (or less) are just plain screwed……………………….

  9. hillbilly33 says:

    Long time no post Chiefio but I keep my nearly 80yr.old eyes on you,and your articles still delight me. You’ll be pleased to know that in Tasmania my Scarlet Runner Beans are setting and bearing on their first flowering so it looks like CAGW is postponed again down under! A happy and prosperous New Year to you and yours and all posters in about five minutes Eastern Australian Daylight Saving Time! I’ll raise a glass now! Cheers from hillbllly33 .

  10. adolfogiurfa says:

    Going far ahead than both of your “parties”, the best it could happen to you ( as for our south american experience) is to jump the highest economic cliff possible, as the higher and harder it is, the sooner and better you will see your economy problems solved. In any case, buy food for three months: In about three months things would be better enough again to survive, and, in a two years period you´ll be again on your feet; but stop meddling in other people´s affairs and causing them either “collateral damages” or “casualties”, just because, following the sacred law of cause and effect, you should be prepared to suffer the corresponding consequences.
    Anyhow, have a Happy New Year, and buy more popcorn, just in case,….and open a champagne bottle and make a toast for 2013…(Ya know that 13th number….).

  11. John Robertson says:

    Notice our media never mentions Zimbabwe any more? Yet they are the future if we keep printing money without producing goods.

  12. H.R. says:

    “Geronimo!”
    (If you get my drift)

    I’d settle for a 3-yerar spending freeze at 2011 spending levels, but that will never happen. The D.C. definition of spending cuts is when a program requests a 40% increase in their budget and they only get a 20% increase, then our congresscritters trumpet “we’ve cut spending in HALF!”

  13. tckev says:

    I prefer the graphic way this site shows the reality -
    http://usdebt.kleptocracy.us/

  14. p.g.sharrow says:

    After getting a 40% increase in spending with a mandated yearly cost increase and no changes due to no budget, I am sure that Reid and the Democrats would be delighted with a freeze in the status quo. And now they have a mandated giant tax increase with a major defense cut. A no lose position for them, and they can blame the Republicans for any bad out come. Any relief for the citizens will be credited to the Democrats.
    For 60 years I have watched the Progressives ride the good times and blame the hard times on the Republicans because the Republicans, as responsible people, fix things and when the economy starts to work well the Progressives take over and spend us into the hole that Responsible people have to clean up. This time the Democrats took over at the fall and will make things so bad that they will lose all credibility. This time they must not excape full credit for their efforts. pg

  15. adolfogiurfa says:

    @P.G. It´s time to see your flying saucer flying over the Andes…

  16. Gail Combs says:

    As far as I am concerned the only way out for the USA is to get the government’s big Boot off the neck of small business. Big Businesses like GE left the country for India, Mexico, China and Brazil several years ago. Most of new job grow is in small businesses but you can forget that growth starting in 2013 thanks to Obummercare and the thousands of ever changing regulations.

    If Congress and the state and local governments would spend the next four years going through and repealing useless laws and trimming back the bureaucracy we would be in much better shape. Unfortunately as far as I can tell the actual goal of US politicians is to INTENTIONALLY wipe out the USA as a sovereign nation. Only by bring the USA to her knees can citizens be convinced that we ‘need ‘ global governance or so leaders like Pascal Lamy and his buddies Bill Clinton and Tony Blair think. (Check out the Fabians/London School of Economics ‘Third Way’)

    Pascal Lamy, the Director General of the World Trade Organization is very blunt about the drive for the WTO/UN to become like the EU only more so.
    I go into detail about Lamy’s articles in this WUWT comment

    There will be no “solution” when the destruction of the USA has been the goal of Congress since President Woodrow Wilson signed the Federal Reserve Act into law –December 23, 1913 and FDR introduced the ‘New Deal’

  17. sabretoothed says:

    http://www.clivemaund.com/article.php?art_id=68

    http://www.clivemaund.com/charts/spx15year231212.gif

    Could be a mega triple top coming up on the S&P and other indexes. So Jan and maybe Feb it could run now with the agreement, then it’s game over like 2009 again. Just like in the 1930s?

  18. P.G. Sharrow says:

    @Adolfo, Yes my friend, I must return to that project.
    It is the dead of winter here, so I do indoors things and work in the greenhouse. Time to start plants for the spring.
    The Project is safe from the weather in its’ shed area. I am way behind on the needed paperwork and drawings for others to examine. I do like your new pdf on force vectors of energy. It is difficult to represent vectors in three dimensions in a 2 dimensional medium. I have been trying to represent electrical schematics and EMF fields in 3 dimensions, to no avail. Need to spend less time on the internet and more time on the computer in drawing programs. A flying device over the Andes may take some time. pg

  19. J Martin says:

    We are here to fix our massive deficit and debt

    Really ??

    They won’t.

    They will look at Europe and think there is still room to carry on as usual, they will discount future liabilities, they will make small cuts as a gesture which will be sold to the press and public as meaningful. The underlying situation will remain.

    Meanwhile, is the EU showing signs of understanding that they need to address this problem ? as they have now agreed to undergo some banking unification / reform. Perhaps the peripheral crises of the Southern European states has been enough to set a few small alarm bells ringing and force some progress without bringing the whole pack of cards down.

    Perhaps Russia will be the last one left standing,a bit of an irony, they seem to have a Laffer curve tax regime and reducing government debt year in year out. But will that last ? Since the arrival of fracking, Russia may find less buyers for her oil and gas.

    What will bring reality to the World, perhaps only the big crash, brought on by what ? will a repeat of the Dalton or Maunder be enough, or will it be irrelevant and have no effect ? Interesting times ahead for the next generation. But perhaps fracking will save the USA.

    But I wonder about the Laffer curve. Does it only work when an economy is behind others and has some catching up to do ? Once an economy has advanced to a certain point perhaps other measures need to be applied in addition, to stop cartels, monopolies, etc. ie. a wealth tax as espoused by Chiefio and others. Perhaps you do have to tax the rich, to force investment.

    So my choice would be a flat rate of tax 21% from a set level, the level should start quite low, you don’t want too great a number of people paying no tax, otherwise people get the wrong idea and think they should never pay tax, and others think they also should not pay tax. So I think tax should start say at $10,000 or whatever figure covers the very basics, food, heat, a contribution to minimal accommodation. Then some sort of reasonable escalator tax on big earnings, I would lean towards the high end on this, it didn’t hurt Clinton’s economy. And a small wealth tax with measures designed to reward investment not hoarding money in a bank account.

    Re-focus the military more on defence and less on offence, but slowly. Re-focus the US health service on prevention not cure. if someone develops medical problems because they became obese due to overeating, and not due to a medical problem, let them pay for their own care with their own $ or let mother nature take it’s course. If a smoker gets lung cancer, the same. Life can be tough and in the end we all die. There is much that can be done with prevention, trouble is the pay back for that is very long term.

    Get rid of unnecessary internal bureaucracies, does the US really benefit from having so many people invested in getting their kids diagnosed and doling out Ritalin etc. Reduce, halve the size of Congress and the Senate. Get rid of overlap, there are many agencies all doing the same thing, repeating work done by other agencies. Tell NASA to focus on space, not co2, focus on getting a man on Mars, a society has to have some chocolate to help ease the hardships being endured.

    Look at other countries mini success stories, education in where was it ? Norway ? Health in France.

    Apologies for the length of that it was only ever meant to be the first 3 lines. Oh well.

  20. J Martin says:

    From the BBC.
    President Barack Obama welcomed the Senate vote.

    “Leaders from both parties in the Senate came together to reach an agreement that passed with overwhelming bipartisan support today that protects 98% of Americans and 97% of small business owners from a middle class tax hike,” he said in a statement.

    Senate Minority Leader Mitch McConnell, a Republican, said: “It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort.”

    Sounds like a fail to me.

  21. adolfogiurfa says:

    @P.G.: Hope so….watching the sky!. About that theory it was forcefully “infused” in me; It´s quite simple: the wider the phase angle the less gravity (force). You see, gravity on earth it is almost 1 + 0, 0.981 or 9.81. Flying saucers combine, in order to save power, gyroscopic and charge effects.

  22. adolfogiurfa says:

    In the last times there has been a growing interest in Dinosaurs. It has become almost a symptom of our times or , as the late C.G.Jung should have stated it:
    There is a sub-conscious content being constellated.
    We are subconsciously thinking that big monsters are doomed to death.
    When the Berlin’s wall fell down it was because this monster had died: The Soviet Union, but not properly the Soviet Union but its monstrous government, that was not socialism but “corporationism”. Work should be the sanctuary of a man’s life. A man should work on the things he loves, with his hands, with his intellect, with his emotion. This is the only way his work will not harm others or the environment.
    Because of the lack of proportion found in big -dinosaurial- organizations both are affected: man and his environment.
    Big corporations should be regarded as evil as the Soviet of the former soviet union, they replace the individual work through which man is dignified.
    So there is no such opposition between official communism and occidental corporative capitalism ( in the cases where these do not develop a kind of personal relation to work- a craftman like relation to, maintaining a high respect to individual values and limiting themselves in order not to crash under its own weight), both are aging and decaying dinosaurs that will inevitably die.
    Small businesses are the choice, and it is a well and demonstrated fact that the highest revenues are found among these ( not only cash but moral also ).

  23. DirkH says:

    J Martin says:
    1 January 2013 at 11:46 am
    “Meanwhile, is the EU showing signs of understanding that they need to address this problem ? as they have now agreed to undergo some banking unification / reform. Perhaps the peripheral crises of the Southern European states has been enough to set a few small alarm bells ringing and force some progress without bringing the whole pack of cards down.”

    There are two factions:
    The PIGS + France – They want a trans-European sharing of debt and especially France wants to use the crisis to centralize control. France believes in central planning for centuries now. They also want to bask in the glory of endless printed money as justified by MMT. (And before MMT, endless money printing and devaluation was actually practiced for several decades in Italy and to a lesser degree in Spain and Greece)

    Germany – Germany believes in thrift, austerity and low inflation – still remembering Weimar.

    This conflict goes on, resulting in an overall SLOWER speed of going down the MMT / Keynesian endpoint drain for the thing as a whole when compared to the US.

    The German plan doesn’t work either – the “austerity” in the PIGS SHOULD comprise actual cuts, but as the PIGS don’t reduce their public sector spending but only do tax hikes the private sectors implode and go underground (the bits that manage to survive), while the bureaucracies keep living off “rescue package” money.

    Overall, it’s a dysfunctional twitching mess that will from time to time start to convulse violently as shocks to the systems materialize; we will see more series of allnighter “emergency meetings” in Brussels followed by invariable declarations of success.

  24. Winston Churchill famously said “You can always depend on the Americans to do the right thing, after they have exhausted every other option”, but in looking at current crop in Congress, I’m afraid that they will not. So over the cliff the US will go and it will drag the rest of the world with it.

    There are three and only three ways of dealing with debt, pay it, repudiate it or inflate it away. Bernanke has already decided on the third option (despite his lies to congress) and is just hoping nobody notices before he can scamper back to academia and a very well paid retirement.

  25. my friend’s response to your blog (i posted it on Facebook because I like it so much). I figured you could answer his criticisms better than me, although I see some rather obvious problems with his critique as it stands. At any rate, here it is:

    “He writes: ‘In short, do your job, and without a “deal”.’

    When two sides disagree, in order to move forward they must “make a deal”. That’s the way it works.

    W.r.t. his critique of #2: Voters *will* despise you if they *perceive* that an acceptable long-term fix was in the cards but *you* were the party that kept it from happening.

    W.r.t. his critique of #3: He notes that *he* wouldn’t mind some cuts to defense. But *he* is not the average GOP voter, for whom a 10% across-the-board cut to defense spending is a much bigger concern.

    W.r.t. his critique of #6: Who says we’re on the “wrong side” of the Laffer curve? Is this his conclusion from careful econometric analysis? Nope. It’s just asserted. Also: raising rates isn’t the only way to increase revenue.

    He writes: “Any money taken from the “rich” just means less investment, less economic growth, fewer jobs, and lower net tax revenue.” Not necessarily. It depends on what happens to that money. If it makes its way into the hands of the the not-so-rich, who then turn around and spend it and increase domestic demand, maybe then businesses start to expand and hire more workers. Businesses need investment but they also need consumers.

    He seems to suggest that Austrians don’t believe significant spending cuts to spending coupled with simultaneous significant tax increases won’t harm the economy. Not so sure that’s true. Pretty much everyone agrees if you suddenly yank a bunch of money out of the economy it will have deleterious effects. Austrians disagree with “most economists” on a lot of things, but that’s not one of them. In fact, he even argues this earlier in the post when he charges that higher taxes on the wealthy will hurt the economy.

    In discussing point #5 he seems to question whether the full fiscal cliff scenario would actually cause a recession. Yet, later, he writes, “The ‘Fiscal responsible government’ will hurt. No doubt about it,” which seems to suggest he believes the fiscal cliff policies *would* cause a recession. Unless I’m just misreading him.

    He writes: “We’re long past the point where more borrowing and spending will fix anything.”

    Why? Another assertion. Revenue is still depressed relative to historical levels (mainly because of the state of the economy, but also because the tax system has changed). Why is he so sure we can’t raise more revenue? Likewise, why is he sure that spending can’t fix anything? We have elevated unemployment. Potentially structural unemployment (i.e. the really bad kind). It’s not inconceivable the govt. might do something to mitigate the situation.

    He writes: “We are well into the range where the debt burden is damaging.”

    Why? Interest rates on the debt are near all-time lows. My personal feeling is that our debt level *is* too high, simply because the credit rating agencies are starting to crow about it, and they exert outsized influence on the interest rates we pay. (Downgrade = higher rates).

    Some random facts about the $16T debt number:

    1. $5T of is money the government owes itself. Most of that was “borrowed” from the SS trust fund. This is only “real” debt insofar as you consider the govt. obligated to repay what its left hand took from its right hand. It isn’t so obligated since laws can always be changed. Not doing so would necessitate an approximate 25% cut to SS benefits.

    2. Of the remaining $11T only $5.5T is held by foreign creditors; the rest is held by individuals and institutions in the U.S. Approximately $2.2T is held by the federal reserve and state and local governments. We’re on the hook to pay ourselves. This essentially this means we’re *already* poorer than we think we are, but it doesn’t mean we’re beholden to “someone else”.

    See:
    http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm

    3. Of the $5.5T that’s foreign held China is indeed the largest single creditor at $1.15T, but the second largest creditor, Japan, is right behind China at $1.13T. China’s share of total foreign debt is only about 20%. So how come we never hear about Japan? Those two are by far the largest creditors; the next largest is Brazil at $250B.

    See:
    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

    4. U.S. investors and institutions are loaning money to foreign governments too. This amount ($1.7T) is smaller than the amount of U.S. debt held by foreign creditors, but it’s not nothing.”

  26. Gail Combs says:

    adolfogiurfa says:
    1 January 2013 at 1:01 pm
    …..Small businesses are the choice, and it is a well and demonstrated fact that the highest revenues are found among these ( not only cash but moral also ).
    >>>>>>>>>>>>>>>>>>>>>>>
    You are so correct. The USA has monopoly laws that have been completely ignored. When four companies privately owned by seven families control ~90% of the grain market it is time to ask congress hard questions.

  27. E.M.Smith says:

    @DirkH:

    There’s a point to remember about Economics: It spans from free market capitalism (extinct on the planet today…) to full on communism and all stops in between. So you can find theories that support all of those POV. That also leads to my favorite Economist joke:

    “If you laid all the Economists in the world end to end, you still could not reach a conclusion!”

    From that chartalist wiki:

    The theory was presented by German statistician and economist G. F. Knapp in 1895, with important contributions also by Alfred Mitchell-Innes. It was referenced in the 1930 Treatise on Money of John Maynard Keynes, which cited Knapp and “Chartalism” in its opening pages.[6] Chartalism experienced a revival under Keynes and Abba P. Lerner, and has a number of modern proponents.

    “Modern” in Economic time scale isn’t quite as bad as geologic time scale, but it still means “late 1800s to 1900s”…

    And yes, the wikis on Economics are heavily biased by Socialist Zeal just like the AGW wikis are corrupted… So “Modern” is put in the renaming of Chartalism to make it sound better and more marketable to the current crop of ‘useful idiots’…

    FWIW, I suspect metals are nearing a ‘buy’ point (copper was up more than gold or silver, though… so don’t get stuck on ‘precious’ metals only…)

    Need to do a full on analysis now that the year is over; but had hoped congress would have done something first… Oh Well…

    @Omanuel:

    I don’t know exactly when it was, but some long time ago it sunk into my understanding that the Nobel was just a political bad joke. I think the time scale roughly matches your timeline, but it was clearly bogus by about 1970. Too bad, really.

    I think I’ve noticed a structured assault on various endowments, funds, and commissions to pack the boards with collectivist sympathizers. It’s clearly the case at the UN and most US NGOs. It’s an infiltrate and corrupt / consume process, near as I can tell. The Nobel Committee was one of the early ones to be turned. ( Especially the Econ and Peace prizes.)

    @Tim Clark:

    As long as you can make bread and have some vino with it, you are not screwed. Money is nice to have. Things are nice to have. But frankly, you don’t get out of life with them anyway. So it’s experiences that matter. Some decade or three back I realized that I was better off managing my life for ‘preferred experiences’ than swapping 1/2 of every waking hour in unpleasantness to buy things that didn’t make me happier. About then I stopped “wanting” at the world. ( I think it was about 1/2 decade after my toe dip into Buddhism that it sunk in that letting go of ‘wanting’ made happiness…)

    So sometimes folks ask me ‘what kind of car do you want?”… and I just think “one that moves”…

    So I’d assert that we are not ‘screwed’. Those folks who lust after power and glory are the ones who are ‘screwed’. They will have less power and less glory. Me? I’ll still have home made bread, a nice (even though cheap) jug wine to wash it down, and some thoughts to think about the nature of life and the universe… and that’s what makes me happy.

    (Then again, my biggest ‘fault’ is that I’m low on the ‘ego need strength’ scale. So I don’t get bothered when folks think ill of me, but I also don’t feel driven to glory… which means things like ‘that novel I could write’ tend to be very slow projects that may never get done. Don’t have that ‘need for praise’ nor the hunger for loads of money. “Just enough” is all it takes. Can’t say if that’s better or worse, though. It’s just me. I’m happy with a bit of string, a stick from the nearest tree, a hook and a river. Worm optional ;-) Since the river will be there no mater what “they” do, I’m happy in any case. )

    @Hillbilly33:

    Well, I hoisted a few glasses in return! But was a bit, um, ‘busy’ to post a comment during the process ;-)

    I’ll try to stay interesting and informative in the coming year, too. My Runner Beans kept flowering up until about a week ago. Then the first frost got them. They do like it cool, but don’t like it frozen. They are a nice ‘no AGW’ indicator, though, as they stop bearing in the highest heat.

    @Adolfo:

    I’d rather that our political class learn how to “learn from the experience of others” rather than do it as OJT On the Job Training, and at my expense…

    FWIW, I always have about 3 months food in storage. Not very interesting food, but enough to get through a bad “aw shit” whatever it might be.

    As California is a large net food exporter, I’m not really worried about that, here. More that a large rock fall from space could take out a lot of shipping with a global tidal wave, then anyone who’s a food importer is going to have ‘issues’ until new ships are built.

    The biggest problem is that Academia has been infected with a set of beliefs that are not ‘reality anchored’ and so our “leaders” are not only driving in the wrong direction, their ‘authority’ councilors are telling them it’s the right thing to do. So even if the politicians get changed, the advice doesn’t…

    @John Robertson:

    “Greece is the new Zimbabwe”? In the financial news was that one of the rating agencies had upgraded Greece based on the latest bailout funding.

    No mention of what had been fixed in the real economy….

    It’s that kind of thing that “ratifies” in the minds of the political class that “bailouts” are the right way to fix things. It isn’t. It’s just postponement…

    @H.R.:

    Yup. That is also, BTW, part of why I’m so adamant about folks fooling around with the definitions and so frustrated when one side (or all of us) let them get away with it. Frankly, every single time a politician calls a ‘reduction of future fantasy’ a ‘spending cut’, they ought to be vilified and laughed out of government. But since the press corps is largely simpering sycophants these days, they are not doing that job either.

    ANY time a politician tells that kind of lie, it ought to be shoved right back down their throat.

    @P.G.Sharrow:

    FWIW, there’s a couple of year lag time in changes of monetary policy to point of effect, and there’s about a 10 year ‘business cycle’ time. It is an unfortunate thing that the election cycle is a harmonic of those. So we end up with just the alternation process you described.

    But worse, IMHO, is that both education and the press have been turned into collectivist propaganda machines, stamping out good little useful idiots for the future. At this point, I doubt you can find anyone under 30 who even knows how badly FDR screwed things up, or that he stole every private citizens wealth (literally via gold confiscation, less literally via the way the economy stayed moribund until W.W.II).

    So while I’d like to think you are right, and everyone will wake up and smell the coffee… historically the cycle runs based on lifetimes. People don’t change their minds. They die and are replaced by those who grew up pissed at what they did…

    @Gail Combs:

    Looks like you have a good handle on things.

    It is a goal to ‘wipe out’ the small business and small farm competition to the ‘big companies’. That is a fundamental part of the “Third Way Socialism” called Fascism since the inception. It is that “corporatist” angle that differentiates it from the first way (capitalism) and the second way (international communism). They have just found a new set of tools to do it with. (Regulatory burden, taxation, etc.)

    The goal remains the same: A world collective with central planning.

    But it’s hard to ‘centrally plan’ a half billion individual small businesses. Much easier to do with a half dozen mega-unions and mega-corporations….

    @Sabertoothed:

    Yeah… I need to do that financial posting revisit…

    Stocks generally looking toppy, there will be some kind of bounce up on ‘a deal’, then the euphoria will wear off. Longer term, markets are driven by mechanic / productive realities… and we’re not getting many.

    Oddly, Africa and some parts of Asia look to be doing better.

    @J. Martin:

    That was an ‘aspirational’ what they ought to do; not what I expect will happen…

    Be wary of the desire to “fix it” via your flavor of how the central control “ought” to work… what works best is decentralized ‘emergent systems’. Simply shut off the central control, don’t “fix it” to your ‘better’ view of central control…

    So why on God’s Earth do we need health care decisions made in Washington DC? When I was a kid I had better medical care than now. It involved ONE doctor, and me. We had a great local hospital. A small one, yes. Very ‘fancy’ procedures involved a ‘long trip’ to the ‘big hospital’… a half hour away in Chico… Now you can’t even get to a hospital in under 1/2 hour and then you wait for 4 or 5 more. This is an improvement how?

    Or local hospital was all locally funded too, BTW. In a “poor little farm town” of about 4000 people. We now have high schools with a larger population than that…

    THE basic problem, IMHO, is that folks are taught about “Economies of Scale” and that a large steel mill is more efficient than a little one; but not taught about “DISEconomies of Scale” and that there is a size beyond which things get worse, not better. That applies to countries and governments too. So take a ‘hotdog cart’. Beyond about 2 folks staffing it, it becomes less effective not more so. (People have to approach / leave and the crowd becomes a barrier, as just one of the problems). You can make a ‘hotdog cart chain’, but even then, at a not very large point, the overhead of ‘central staff’ starts to outweight the economies of scale in purchasing materials.

    Making “Big Medicine” and having “central control” is way past the Minimum Economic Scale and rapidly leaving the Maximum Economic Scale in the rear view mirror…

    per the news:

    Guess I need to watch the news today. It sounds like what I expected. They will go for a bit more ‘tax the rich’ but with a “don’t tax the 90%” (or whatever). Kick the can on spending reform. Rinse and repeat…

    We need to have whole agencies put out of business (and removed from dinking with the economy). Until we get that, it’s just shoveling fertilizer on the compost heap…

    @Adolfo:

    See the above about DISeconomies of scale. Some Monsters are the right size ( steel mills are the classic example… huge economies of scale). Most Monsters are way too large. (“Too big to fail” anyone?…. ) I can think of no reason why any bank needs to be bigger than what fits inside a state boundary. At one time, interstate banking was prohibited. I think we are now seeing why…

    (Not that long ago, either. I was in Hawaii and wanted to deposit a check at my (then) bank and was informed that it would not credit very fast as it had to be shipped to California to the bank that was legal for me to use… The Hawaiian bank was a different legal entity (though the same ‘brand’) to comply with that law…)

    At any rate, it doesn’t matter if you are a capitalist, communist, socialist, Third Way fascist. It is the economy of scale “issue” that they all get wrong only thinking ‘bigger is better’. Capitalism grows large monopolies that become very sub-optimal. Communism is just one giant monopoly so very wrongly scaled. Socialisms, market socialisms, and fascist socialisms all try to get SOME amount of capitalism and smaller scale enterprises by making the ‘natural monopolies’ State Run Enterprises and leaving the others as markets, but they fail too (largely for the same reasons – that ‘natural monopoly’ is still a too-large dinosaur, but now has the political clout and problems of The State too…)

    It really does all come down to trying to find a way to limit firms / countries / state run enterprises from exceeding the optimal scale of enterprise and running to monopoly excesses.

    @DirkH:

    Looks to me like you have the EU pretty well worked out. IMHO the tip of France at the last election was the death knell for the EU. It will take a long time (big things die slowly), but die it will.

    The least responsible and most socialist elements will continue pushing for more blood letting from the healthy parts to keep funding the party, until eventually the host dies.

    Just hope we don’t end up with a ‘reprise’ of last time. A W.W.III would not be helpful… What will be most interesting to watch is how the Eastern Block handles things and how the UK behaves. Keeping the UK out of the continental mess is an important step.

    @Dry End Of The Titanic:

    The USA isn’t leading this particular parade, the EU is. We’re following about 5 years back (IMHO). “The Cliff” actually represents our reluctance to embrace the “just keep taxing and spending” model, while the EU is loving it…

    @Mister from Tucson:

    I’ll be back after more coffee to work down that list. Generally, though, I don’t really like being asked to “defend” things. They are what they are. Someone can find truth in it, or not. If they can’t find the truth in something, I can’t force it into them. “You can lead a whore to culture but you can’t make her think!” ;-)

    So yes, you will find thousands of folks with thousands of books supporting Modern Monetary Theory. They will be incredibly steeped in it, trusting of it, and vocal defending it. It’s still wrong.

  28. E.M.Smith says:

    @R. de Haan:

    Bloomberg TV has a crawler that the Senate Bill will raise the deficits by $4 Trillion over 10 years… Yup, keep throwing more money in the furnace until we’re all rich….

    Steven Goddard has it right. That’s how Soros “makes his bones”… destruction of currencies. I personally remember when he ‘broke the bank of England’. Then he complained about their stupid insistence on unfundable “social programs”. Now he has decided to call it a feature an fund / push for more lefty handouts “for effect”…

    @Mister from Tucson:

    First off, “your friend” – YF from here on out – didn’t pick up on the dual meaning of “deal”. He is using it only to mean “an agreed contract”, and then asserting that there must be an ‘agreed contract’ for anything to happen. That ignores the subtext meaning of ‘deal’: to trade off something and NOT care about the consequences. The used car salesman wants a ‘deal’ too, but only one where you lose…

    Yes, there must be some agreed ‘fix’, but the ‘fix’, need not be a ‘deal’. It can be a responsible engineered repair to a broken system, and not a ‘horse trading’ away of liberties, rights, futures, etc.

    YF #2 presumes that the “deal” is in some way a “fix”. It isn’t and it can not be. Yet more trillions into the furnace (or spread among Friends of Obama and NGOs) will not fix anything. We need to stop and drastically reduce spending by government. It has reached the stage where it is consuming the productive sectors. Anything that continues government at the present size (or worse, has it get bigger) can not “fix” anything. As any “deal” will involve added spending, it can not be a fix.

    YF#3 seems orthogonal to my #3. My number 3 is about democrats saying “we won so our way”. My position is “just say no,. republicans won the house”. But to the specific issue of Military funding levels: Yes, some military related voters and politicians will not like it. So? The Military is still way over funded both compared to the recent past and compared to any real need for self defense. BTW, the folks feeding at the Military Funding Trough are both republicans and democrats, Amierican-Social-Liberals and Conservatives (Classical-Liberals).

    https://chiefio.wordpress.com/2011/01/19/i-am-a-liberal/

    YF#6: It is observed. Regan cut tax rates, revenues went up. We have historic data (in a posting here somewhere) showing that The Feds get about 18-20% whatever the tax rate. That puts 20% as pretty much the limit, and says that any tax rate above 20% is on “the other side of the Laffer curve” peak.

    https://chiefio.wordpress.com/2012/02/25/cameron-meets-smith-keynes-and-laffer/

    I lived through the JFK years and had my eyes open. His (Democratic, btw) policy worked:

    “It is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to cut the tax rates… An economy constrained by high tax rates will never produce enough revenue to balance the budget, just as it will never create enough jobs or enough profits.” John F. Kennedy

    In fact, I’ve seen this movie a few times now. Rates get raised, revenues are not enough, things get worse, eventually – after way too long – rates get dropped. The economy booms and the Feds have excess revenues, so the Federal Govt grows, and then wants more money so raises rates… and gets ‘not enough revenue’… rinse and repeat. It’s been 3? times now just in the USA that I personally have observed it.

    In some other posting I can’t find right now is a chart of tax revenues. It hangs at about 18% through most of our history with one brief rise to 22% or so IIRC as folks adjusted to some change of the tax code. So no, it isn’t just an assertion. It’s an ‘observable’.

    Video at the top of here per Hong Kong:
    https://chiefio.wordpress.com/2012/03/25/enough-tax-is-how-much-plus-grab-bag/
    as an existence proof.

    The Problem: https://chiefio.wordpress.com/2011/07/14/well-theres-your-problem-fed-spending-299-home-income-27/

    What the Warmistas really want is a return to what The Crown once lost:
    https://chiefio.wordpress.com/2011/06/26/coal-tax-post-redux/
    but on a global scale.

    On the notion that “raising rates isn’t the only way to increase revenue” he is correct, but will leap to the wrong conclusion. CUTTING rates will increase revenue. He will believe that you can just multiply the taxes on things. That can work briefly, but once over about 20% taxes, the economy increasingly stagnates and wastes away, then you get less revenue. It does take time, so you can get more for a short period of time by constantly multiplying the taxes applied. That just accelerates the decline and the flood of productivity out of the economy. It is stomping on the gas pedal toward the cliff… Over 50% total taxes and the country collapses. (No, not instantly, so folks think they can do this with impunity as it can take a decade for things to die and there are many things that make up an economy… but swallow a slow poison you are still poisoned).

    On YF “redistributive urge”: He does not understand “Marginal propensity to invest”. This is common among folks with a left leaning socialist economic bent. It is a known topic in economics. “Short Form” is that a poor person spends 100% of what they have just to stay alive (in some cases, over 100% as they load up the credit card). A very rich person can not consume all their wealth even if they try. In between it is a curve. You can argue over the exact shape (somewhat convex, or concave, or straight line) but not the slope. So you WILL get less investment if you take money from the rich. Period. Full stop.

    Where one can ague the point is in two areas. 1) WHERE are those rich investing? In our modern global economy, a lot of that investing is going into China… and related. So you want to direct that investment more domestically. To do THAT, requires lower tax rates, not higher, and lower taxes overall. But yes, the rich might well not invest in the USA (so why not take their money – is the argument. See France for how well that worked out…) 2) Can ‘the poor” afford to buy? (YF “need consumers” argument). Unfortunately, taxing the rich does not increase the money in the pockets of the poor or of consumers. It increases the money in the pocket of government. So government buys more, which crowds out ‘the consumer’ even more. Washing the money through government and returning 30% or so on the dollar to the “public” to “consume” doesn’t change the way the curve points, only the slope.

    Yes, it is a problem that “the rich get richer and the poor get poorer”, but the times when that has not been true were the times of lowest government size, intervention, regulation etc. etc. etc. The Rich and giant corporations can buy the laws (and law makers…) they want. The Little Guy can’t. So the only way to ‘fix that’ is take government OUT of business. (That does leave the monopoly problem, so some legal anti-trust function is needed. Rather like we had in the ’50s … ) The “rich richer” is a fundamental consequence of their higher investment rates, BTW. That same “marginal propensity to invest”. It is a fundamental fact that the nation gets richer (even the poor) when the rich get richer, and the two are fundamentally coupled.

    Realize: I don’t LIKE that. but “Reality just is. -E.M.Smith”. I’ve generally found that folks who take ‘the other side’ do so because they don’t LIKE these conclusions. As though the Laws Of Economics can be changed by fiat or law or acclamation. They can’t. Not liking it doesn’t change it.

    The “He” in your discussion of Austrians is ambiguous as to whom “He” is. Me? YF? Austrians? At any rate, addressing the Austrian Issue and the notion that suddenly ‘yanking a lot of money’ will cause a recession: We have an existence proof of a dramatic reduction of the size of government payrolls and the economy booming. (Several, in fact. Not the least of which is that Hong Kong video). Post W.W.II there was a cutting of the Federal budget of a scale that would make an Austrian blush and a Free Market Loon swoon in joy. The economy boomed. Post war was the largest sustained growth boom ever. There are many other cases internationally. Cutting the part of the pie going through government lets the private sector grow. Every single time. So there is no “bad thing” that comes from lopping spending “out of the economy” by cutting government spending. (At least not on a macro scale. Any given slop sucker at the trough, like a shipbuilder, might take a hit; but the yacht makers increase more…)

    FWIW, the Russians did this too as the USSR augered in. It worked. Chile did it. It worked. Etc. etc. etc… It’s just not a problem to cut the size of government spending. The economy does better, not worse. It’s washing the money through political hands that makes things worse.

    Per the “taxes hurt” and not understanding the point on ‘wanting more taxes via the cliff’: In an ideal world, less taxes is always better. I’d love to cut government AND taxes at the same time. Double good. Unfortunately, we’re already $1.6 Trillion PER YEAR in the hole. Now it doesn’t really matter if that is taxed, or borrowed. It’s still an economic drag. It crowds out proper borrowing for investment and distorts markets, along with taking more tax money for ‘debt service’ payments. So yes, higher NET taxes hurts the economic growth. Yet NOT taxiing and just spending anyway ALSO hurts things. (See Greece, California, and increasingly the EU and USA as examples). So one simply must long term balance the budget or it is a tax increase via the mechanism of inflation (that is a tax on on money denominate assets and deposits). To the extent that tax revenues pay down debt, they are essentially neutral. (See post W.W.II and the paying off of the war debt as an existence proof).

    Yes, I’d rather hold taxes where they are and cut spending by $2 Trillion per year. That would be an even better result than cutting spending by $1 Trillion and trying to raise $0.6 Trillion in tax revenues. But it just isn’t going to happen that the Federal Government gets cut by about 2/5 in one go, so I’m not holding out for it. In that context, as the best worst compromise, going ‘over the cliff’ and getting SOME cut in spending and SOME closing of the gap between taxes and spending is an improvement.

    A fiscally responsible government will hurt because being forcibly removed from the teat will cause some folks to immediately be unhappy. It will take a bit of time for the private sector to pick up and ‘get good again’. So short term pain, longer term gain. Again, not a hypothetical…. we’ve lived through this cycle a few times now. See Chile for a stellar example.

    See most of the PIIGs for stellar counter examples. Greece is now largely a government dependent welfare state in riot due to atrophied productive sectors on ever greater government spending. See the USSR and Maoist China as stellar counter examples (limit cases of 100% government spending) and see post-Maoist China as a stellar example of reducing percentage of government and getting more productivity. Frankly, pick darned near any country that has played with “public industries” and you can demonstrate this. It takes constant infusions of external cash to keep them going. (See Venezuela as an example where it works, but only due to the massive oil reveues to prop it up.)

    There is NO ‘no recession’ choice. We have a choice as to size and timing, that is all. Now, and very small, then much better later; vs HUGE and damaging later. (See Wiemar Germany as example, or Chile prior to reform, or the UK prior to Maggy Thacher, or…. ?Am I the only one who remembers economic history?…) So I’d rather take ‘small and now’ followed by prosperity over “huge and only a bit later” followed by abject poverty. There is a small potential to “go Japanese” and have 30 years of stagnation…. not exactly “good” in my book…

    Per government spending fixing unemployment: Did YF not see the $Trillion flushed with no effect? (Or are we up to $2 Trillion now?….) Government spending on ‘stimulus’ does not grow an economy. Period. Full. stop. It can, at most, shift WHO gets the money. The government can get money from three places. It can print it ( and that is a tax via inflation on money denominated assets – see Wiemar, Zimbabwe, USA from Johnson to Carter, etc.) it can tax it (see Laffer Curve and economic stagnation / recession), it can borrow it (see the astounding history of Sovereign Debt defaults after too much borrowing – Greece, Argentina, Brazil, Argentina again, …) They all end in higher unemployement. On the other side, getting government out of the way results in private sector growth and employment. (Hong Kong, Singapore, UK under Maggy Thacher, USA under Ronald Regan, etc. etc. long list.)

    It is a common belief, but a fallacy, that governments can ‘spend to economic health’. It just doesn’t work. Even under FDR it failed. It was only W.W.II that got things moving (and even then via rationing and worse) and only post W.W.II that actual prosperity arrived with the removal of government direction of the economy. Something that is whitewashed then observed through rose colored glasses by The Left…

    In short: If we could ‘spend our selves rich’ would would not have a problem right now as we ARE doing deficit spending to an astounding level. The existence proof that it doesn’t work is right here, right now, in the EU and the USA and Japan At best you can stagnate, and then only just barely as long as the world loans you a lot of money cheaply.

    Yes, the Baby Bush “Stop taxing and still spend” was a mistake / error. But the fix is not to tax more, it is to spend less. YF also ignores WHY we have a recession. It isn’t because of the financial industry and the (Democrat lead and caused) overspending on subsidized / CRA promoted housing. (Yes, that was a “bad thing”, but the problems are more than that, it is a symptom of too much government intervention – in housing in that case – not the root cause.)

    So trying to fix “too much government” with “more government” is just not a good idea. It will not bring manufacturing back from China, will not increase coal mining in Virginia, and will not increase folks building cars in Detroit.

    Why the debt burden is damaging: First off, the rate will not STAY low. Take that debt service. Think about it. You can pay back $16 Trillion (from what revenues?…) in the next 10 to 20 years, or you can inflate it away. (Those bills and bonds WILL mature and range from months to 30 years with an average maturity way below the high end). OR, you can ‘roll it over’. As we continue to spend to excess, the lenders will raise the rate. Debt service skyrockets. Recognizing this AFTER it has happened is too late. (See a long history here. From Greece and Italy most recently, and just about every currency collapse in history prior.)

    BY DEFINITION: if we are borrowing $1.6 Trillion / year to pay operating expenses we can’t pay back the existing debt without even MORE taxes than that and even MORE inflation than now, or both. It’s a classical “Debt Trap”. Has YF never had a credit card go to higher rates?…

    Frankly, I find it beyond comprehension how anyone could think $16 Trillion debt and $1.6 Trillion annual deficit was not ‘too large’.

    Per abrogation of Social Security: Yes, you can do that. It is called “repudiation of debt”. So the Democrats want to “Throw Granny off the cliff”? That is what increased deficit spending ends with if repudiation of Social Security is ‘the fix’. Yes, borrowing the Social Security money was a fraud on the American worker. I’ve posted on this at some length. There simply are not enough workers to pay / provide the promised benefits. BTW it is a REAL debt. That a debt is not an ‘external debt’ doesn’t make it any less real. We have to find that $5 Trillion, and starting NOW, or admit Social Security was a scam from day one of FDR. Your choice….

    The Social Security “trust fund” was net surplus when we had 4 kids / parent. Now we have the ‘boomers’ retiring and not enough workers / retiree. It is now in deficit (more money goes out each year than comes in). So we WILL redeem that $5 Trillion and have started doing so now. That means either yet MORE taxes NOW (which further reduces investment, labor / employment / etc.), or MORE borrowing NOW (which puts us further into debtors prison) or LESS spending on non-entitlements NOW. (which means shrinking other parts of the Federal Government). Or throw granny off the cliff. Yes, it’s a horrible choice. We’ve (I’ve) known this was coming since before Regan (it was being ‘admired’ then).

    So calling that $5T ‘not real’ debt is just flat out wrong.

    YV 2b: “Owe ourselves”. No, we don’t. I’m sorry, but I’m not The Fed, and I’m not AIG or Citibank. WE, the tax payers, owe THEM, the institutions. THEY are owned by people from all over the world (Citibank in large part by an Arab Sheik). WE owe a global community through vehicles that are in some cases domestically headquartered. The Fed, BTW, is owned by a consortium of large banks.

    Again, we can repudiate, inflate, or tax to death. Your choice. Personally, I’d stop digging the hole deeper first (cut spending by at least 1/3, but maybe only 1/4 in the first traunch) and start climbing out ( adopt regulatory policies and tax rates that encourage business growth) as that has been shown, repeatedly, to work.

    Per China vs Japan: I usually mention both when getting into details on the debt. We mention “the Chinese Credit Card” on new borrowing due to the simple facts of demographics. Japan is old and retiring. THEY expect to use their surplus to pay for their retirment. China has been the one growing their holdings (until very recently). So NEW debt is being funded by China. BTW, don’t expect that to continue…. And DO expect China to ‘ask for some accommodation’ on various political issues…

    But frankly, other than Japan retiring starting now, who holds the debt doesn’t matter much to the effect of the debt on the economy.

    Finally, on YF 4b: (b for bottom as the numbers are reused) That US investors hold foreign assets. So? I’m sure Bill Gates, George Soros, Warren Buffet, The Rockefellers, The Clintons, Cher, Oprah, Citibank, etc. will all be happy to sell their investments and hand it out as Social Security payments…. /sarcoff:>

    That’s just classic muddle headed thinking. All money is fungible is just a rephrase of “Socialism is fine until you run out of other peoples money to spend”. So Citibank loans some money to the UK Department of Sewers (or whatever…); they also have bonds let to a Saudi Sheik who expects to get that money back. You just can’t equate the NATIONAL debt to PRIVATE capital holdings and call it square. Ask your friend to go to the best restaurant in town, and oh, he will be buying… after all, he has equity in his house and you want a dinner out… so it all balances…

    Frankly, YF has very broken financial cognition. Though it falls into the typical Left Leaning patterns. All money is public money. All debt is fine if any debt is fine. You can spend your way to prosperity and The Central Planners can adjust the knobs and have everyone working and paid above average wages too….

    With that, YF has stolen about 3 hours of my life. I can only hope that this ‘stroll’ through their muddy waters is ‘worth it’…

  29. thank you so much for your response. I find it very helpful as I have only superficially explored these issues (well, perhaps a bit more than that) and wouldn’t have been able to answer nearly as completely as you have. He will no doubt have responses, but you have proven a solid foundation for your original points.

  30. E.M.Smith says:

    @Mister from Tucson:

    Some more here:
    http://chiefio.wordpress.com/2012/09/14/demographic-bomb-and-us-debt-explosion/

    and if you put ‘federal tax rate’ in the search box on the right margin you will get more related pages from the past. The graph at the top of th ‘demographic bomb’ link above graphically illustrates the problem with interest rates and entitlements. YF is basically advocating that (somehow) taxes and borrowing can follow that exponential growth line of expenditures. Also note that on that graph the historical ‘tax take’ is just about 20% +/- a point or two, despite tax RATES being all over the board in those past years.

    This one is a bit radical, but gives the context to things like “Mandatory” spending (that clearly isn’t…)

    http://chiefio.wordpress.com/2011/11/16/the-federal-budget-mess/

    Oh, and on the question of “getting more taxes with higher rates”, we can ‘run an experiment’ on that inside the USA. Just compare a State with 9% or 10% income tax to those without or to the national average. That is, effectively, adding a 10% tax rate onto the Federal rate and ‘sharing it back’ to the State. Basically, your total tax rate is all that matters to the individual, not who takes it. California has a nice 10+% and very progressive tax rate, so it’s only ‘taxing the rich’….

    http://chiefio.wordpress.com/2012/03/27/a-tiny-bit-of-justice/

    we are tanked, not recovering, and have both cities and counties filing for bankruptcy. The State raised taxes, and got LESS revenue, so it’s now looking to raise rates again… but only on the ‘rich’ maybe kinda sorta… Ask France how that worked out (they just did it, millionaires fled, and are now repealing…)

    Texas, OTOH, is doing much better with a ZERO income tax rate.

    Oh, and California lost its industry not just to other States. We used to fab semiconductors here and physically build computers here. That stuff ran off to overseas…

  31. E.M.Smith says:

    House just passed the Senate bill. $400,000 / $450,000 cut off, but below that the tax rates don’t go up. AMT gets a fix. Spending cap moved out a couple of months. Probably a decent first step, but watch your wallet…

  32. Pingback: Half full « Finding Ponies…

  33. E.M.Smith says:

    @Mister from Tucson:

    There was a guy who’s title / name I didn’t catch on some Fox news show who has stated that “Under the Bush tax cuts Federal revenues are up 25%”. So that, too, is an existence proof that we’re on the wrong side of the Laffer Curve. We cut taxes under Baby Bush and revenues went up (spending just went up faster…)

    Yeah, I’d rather get a GAO graph showing the same thing….

  34. Really excellent, of course I agree with most of it which helps, not to mention the time and energy it takes to make your points…3 hours plus…

    I will throw something out there with which you are almost certain to disagree, which is inflation is possibly the best chance to avoid complete disaster. Please don’t feel the necessity for a long post, I understand the arguments against and actually am for a gold standard and zero inflation. That being said, when they “saved the banks” instead of “main street” they almost certainly screwed the pooch. My real suggestion is to support the value of real estate…thus the inflation. If they had done that in the first place the asset “value” would have gone a long way in avoiding our problems.

    Seriously, no basics, if you choose to respond at all, just think about it, and it might grow on you.

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