Deficit financing

[Jerry J. Fortin]

The questio is... how does that increase consumer spending?

Some folks believe that giving money to corporations keeps employment up. That employment represents the employees disposable income, and the concept is that when a person has income they spend money consuming goods and services which in turn employs more people. The problem with this is that tax dollars are subsidizing business efforts and causing our spending to reflect debt servicing payments which also keep taxes high. In addition, in hard time people spend less and at least try to save more.

From my viewpoint giving money to corporate efforts is folly. They either can or cannot succeed in their ventures and that simply is not the business of government. Nor do we want it to be the business of government, such a thing is called communism. What governments around the world are now doing is protecting the corporations and investors at tax payers expense. In other words society is protecting the most affluent at the expense of the least affluent. We are perpetuating a class based society through these efforts.

What really needs to happen is let the free market system stand by itself. The problem with that is simply trade agreements. We are unable to compete due to our higher standards of living. We have allowed corporations to move their operations to locations with lower production costs and that is the root of the problem. Good paying jobs disappear, the tax base shrinks, government expenses go up and so do your taxes. The entire system is a house of cards that is beginning to show all the signs of collapse.

The way to increase consumer spending is through two avenues. The first the government can do, the second it cannot. The first is reducing taxes to provide greater disposable income. The second is to provide the employment that generates the income in the first place. So this is where all the talk of infrastructure programs comes into play. Many advocate a building program to employ citizens. The problem with that is that it is very specific and has few spin offs unless carefully designed.

[Moonbox]

Jerry that's a pretty good and well-thought out argument.

I don't generally agree with you, but in this case I totally do and I'll tip my hat to you.

I'm totally 100% against big stimulus but I'm unforunately part of the minority and there doesn't seem to be anyone right now championing my cause.

[Huston]

Good points, Jerry J. Fortin.

I have found a string of videos on youtube with Lyndon LaRouche, I have heard his name before and can't quite picture who said it, or where I found it, I will soon look into that.

It is all very informative, and well structured arguments.

http://www.youtube.com/watch?v=f3DVFc1fl2M

While it says one of four, there is a whole string of them on countless topics, putting most of the issues together. They all start with "Lyndon LaRouche | 011609"

[Jerry J. Fortin]

The Canadian approach to stimulus seems to be throwing money at a problem instead of finding out what has gone wrong and only then attempting to do something about it. Our government seems to spend our money rather freely without much concern for what impact their actions will have in the long run.

I think it is time to change the direction of legislative effort.

[August1991]

Not for some time. As you well know, the Paradox of Thrift says that when people stop spending and pay off their debts, it makes the economic situation a lot worse before it gets better. In other words, confidence doesn't come back if jobs are still being lost and companies going under. And this occurs when people are not doing as much consumer spending.

The notion of the Paradox of Thrift is based on a liquidity trap.

However, evidence suggest that banks are hoarding cash and not making as many loans. Or when they do make loans, they do it at less favourable terms.

This is the idea of a liquidity trap.

What really needs to happen is let the free market system stand by itself. The problem with that is simply trade agreements. We are unable to compete due to our higher standards of living. We have allowed corporations to move their operations to locations with lower production costs and that is the root of the problem. Good paying jobs disappear, the tax base shrinks, government expenses go up and so do your taxes. The entire system is a house of cards that is beginning to show all the signs of collapse.

That's crazy, Jerry.

By your same logic, the problem with modern life is computers and ATMs. What employee can compete with a computer? Technology eliminates jobs. We are losing many jobs to robots and other changes in technology.

Jerry, should we halt the use of computers to protect cashier jobs?

The way to increase consumer spending is through two avenues. The first the government can do, the second it cannot. The first is reducing taxes to provide greater disposable income. The second is to provide the employment that generates the income in the first place. So this is where all the talk of infrastructure programs comes into play. Many advocate a building program to employ citizens. The problem with that is that it is very specific and has few spin offs unless carefully designed.

Here. I agree more with you, Jerry.

There is a lack of "aggregate" demand. US consumers in particular are afraid. This is coupled with US banks (in particular) fearful to lend. Everyone is hoarding cash.

In such a situation, it makes sense for the US Fed to make enough cash available on favourable terms - and for the US government to buttress "aggregate" demand. I happen to think that cutting taxes makes this possible.

We certainly should not make it difficult to trade in Canada or with foreigners. Indeed, the problem is that people are fearful to deal with others now.

----

I agree however that printing too much money confuses people and in the long run, leads to inflation. I fear inflation will become an issue in 2010 or 2011. In addition, if the purpose of the exercice is to put money in people's hands, why does the government have to hire people or firms to do it? Why not just give them the money and not waste everybody's time?

If I don't want a ditch, please don't dig one. A government contract to dig a deep ditch may increase GDP but it doesn't make anyone better off.

Edited January 20, 2009 by August1991

[punked]

The notion of the Paradox of Thrift is based on a liquidity trap.

This is the idea of a liquidity trap.

That's crazy, Jerry.

By your same logic, the problem with modern life is computers and ATMs. What employee can compete with a computer? Technology eliminates jobs. We are losing many jobs to robots and other changes in technology.

Jerry, should we halt the use of computers to protect cashier jobs?

Here. I agree more with you, Jerry.

There is a lack of "aggregate" demand. US consumers in particular are afraid. This is coupled with US banks (in particular) fearful to lend. Everyone is hoarding cash.

In such a situation, it makes sense for the US Fed to make enough cash available on favourable terms - and for the US government to buttress "aggregate" demand. I happen to think that cutting taxes makes this possible.

We certainly should not make it difficult to trade in Canada or with foreigners. Indeed, the problem is that people are fearful to deal with others now.

----

I agree however that printing too much money confuses people and in the long run, leads to inflation. I fear inflation will become an issue in 2010 or 2011. In addition, if the purpose of the exercice is to put money in people's hands, why does the government have to hire people or firms to do it? Why not just give them the money and not waste everybody's time?

If I don't want a ditch, please don't dig one. A government contract to dig a deep ditch may increase GDP but it doesn't make anyone better off.

We don't need ditches however there are things we could use to make our country more competitive in a global market. How about broadband Internet the only reason why it does not reach many places in Canada is that no one wants to expand the grid. Well the government could do that and it would bring much more business outside the cities. How about expanding our energy corridors to reach markets in the US? Shovels in the ground my mean make work projects but why do they have to be something we don't need there are plenty that we do.

[August1991]

We don't need ditches however there are things we could use to make our country more competitive in a global market. How about broadband Internet the only reason why it does not reach many places in Canada is that no one wants to expand the grid.

Agreed, and I'm even sympathetic to the idea of a government grid.

But these projects were good last year, and the year before. Indeed, all government spending should pass the test of usefulness.

If you really want a broadband network, justify it and pay for it through cuts in government spending elsewhere. Our governments are too big and they spend too much. This "financial crisis" will just provide the bureaucrats for another reason to hire more bureaucrats and hand out more contracts.

Rather, if we need a quick stimulus package, I say that Harper (and Obama) should cut taxes.

[Smallc]

Well the government could do that

Actually, they do. Manitoba has almost 100% of the population covered and Ontario is working on expansion right now. Here, its even counted as part of infrastructure. Not sure about the rest of the provinces though.

[Smallc]

A government contract to dig a deep ditch may increase GDP but it doesn't make anyone better off.

Unless of course the ditch is needed.

[August1991]

Unless of course the ditch is needed.

Why is it suddenly "needed" now? Was it not needed last year?

And if it so important, why not cut government spending elsewhere to pay for it?

----

If we need a fiscal stimulus package, then borrowing money to cut taxes is benign. It changes nothing except in macroeconomic terms of aggregate demand - which appearently is the problem.

Government contracts to dig ditches will just waste alot of time and effort and give us ditches that we don't need. Now, if we do need the ditches, then I'm all in favour. But that's a separate question.

----

Let me add this small point of some relevance. To stimulate the economy in the 1930s, Keynes didn't advocate cutting taxes because taxes were so small. When Keynes advocated fiscal policy, it meant that the government should borrow and hire people.

Nowadays, taxes are much higher and the government spending is much larger. We don't need more government. The obvious way to stimulate the economy is to cut taxes.

[Smallc]

Why is it suddenly "needed" now? Was it not needed last year?

Because before, they would only pay for things that were extremely necessary. That ditch may have been needed all along, but it just wasn't high enough on the priority list.

And if it so important, why not cut government spending elsewhere to pay for it?

Because then other areas lose funding and as a result jobs. Finding efficiencies though, well, I have no problem with that.

[Riverwind]

Nowadays, taxes are much higher and the government spending is much larger. We don't need more government. The obvious way to stimulate the economy is to cut taxes.

The trouble is taxes will eventually need to be raised again as the economy recovers. Ditch digging projects and other one-time expenses would automatically disappear as the projects come to an end.

[Molly]

And cutting taxes only 'stimulates' if taxation is the stopper in the bottle. It isn't.

Jobs, or rather the lack of them, is-- as will become more and more apparent as stats start coming out to describe the here and now.

Paying of taxes is easy where there is income. Where there is no income, it doesn't matter a damn what the tax rate is.

[Riverwind]

And cutting taxes only 'stimulates' if taxation is the stopper in the bottle. It isn't.

This is all about psychological game in the end. The government needs to demonstrate that it is 'doing something' because people are really scared - even if their job is not really at risk. Whatever the government does it needs to tackle that fear and I am not convinced that a few dollars off the weekly paycheck deductions will do that. I am not convinced that digging ditches will work either but it has a better chance.

[Molly]

Again, that assumes that there is a weekly paycheck from which to make deductions. Around here, those weekly paychecks are becoming scarcer, and the ones that exist are becoming smaller.

I was laid off at the end of October, because the company I worked for blinked out of existence. (Not a big deal to me, thanks be. It was what you might call a recreational job.) Consequently, I've been casually following the moment-to-moment employment situation locally, and what I see scares the bejeepers out of me.

No one is getting any overtime. Enterprises are closing shop-- a hundred employees here and 200 there. Job offers in the papers are drying up. Temp agencies take resumes, but don't have anything even for their regulars. The local bastion, Honda, is shutting down a shift, and minimizing the number of layoffs. (A month ago, they swore NO layoffs. The job bank offers have slowed to a dribble of Nanny, and personal-care worker requests....

Folks are scared, and rightly so.

This is the heartland of Ontario manufactuing, and it's creaking to a stop. This province is in deep doodoo, and since this has been the economic engine of the nation, so is the rest of the country, though it may take a little longer to feel it.

[Mr.Canada]

Again, that assumes that there is a weekly paycheck from which to make deductions. Around here, those weekly paychecks are becoming scarcer, and the ones that exist are becoming smaller.

I was laid off at the end of October, because the company I worked for blinked out of existence. (Not a big deal to me, thanks be. It was what you might call a recreational job.) Consequently, I've been casually following the moment-to-moment employment situation locally, and what I see scares the bejeepers out of me.

No one is getting any overtime. Enterprises are closing shop-- a hundred employees here and 200 there. Job offers in the papers are drying up. Temp agencies take resumes, but don't have anything even for their regulars. The local bastion, Honda, is shutting down a shift, and minimizing the number of layoffs. (A month ago, they swore NO layoffs. The job bank offers have slowed to a dribble of Nanny, and personal-care worker requests....

Folks are scared, and rightly so.

This is the heartland of Ontario manufactuing, and it's creaking to a stop. This province is in deep doodoo, and since this has been the economic engine of the nation, so is the rest of the country, though it may take a little longer to feel it.

Knee jerk alarmist ranting Molly. There are tons of jobs out there in all pay grades if one wants to look. Go to jobbank.gc.ca and look for yourself.

[Molly]

"The job bank offers have slowed to a dribble of Nanny and personal care worker requests."

Do you ever actually read before you comment?

[Mr.Canada]

"The job bank offers have slowed to a dribble of Nanny and personal care worker requests."

Do you ever actually read before you comment?

More falsehoods. Punch in "forklift" or "cook" or "data entry" or "manager". The list goes on and on Molly. There are lots of jobs out there so stop trying to fear monger please. The situation in Canada is no where near as bad as it is elsewhere, no matter how much you try to fear monger.

[August1991]

Again, that assumes that there is a weekly paycheck from which to make deductions. Around here, those weekly paychecks are becoming scarcer, and the ones that exist are becoming smaller.

"Around here" won't cut it, Molly. This is a macro problem.

At present (and very much unlike the 1930s), our governments take about half of our income in taxes and then spends roughly half the amount for stuff and teh other half it shuffles back to us in transfers.

To those in favour of more stuff (ditch digging), I argue that teh government is already too big. The way to stimulate the macroeconomy is through tax cuts. In the 1930s, government was much smaller and unemployment was much higher.

This is all about psychological game in the end. The government needs to demonstrate that it is 'doing something' because people are really scared - even if their job is not really at risk. Whatever the government does it needs to tackle that fear and I am not convinced that a few dollars off the weekly paycheck deductions will do that. I am not convinced that digging ditches will work either but it has a better chance.

Riverwind, this is not a psychological game (unless you mean that we ultimately live in an illusional, pyschological world). Real people are making real decisions.

Underneath it though, you have a point. Many Americans thought they were richer than they really were. They saw neighbours selling their house for a high price, selling shares at a high price, and so they assumed that their own house and stock portfolios were worth alot. It turns out that they were wrong.

[Pliny]

Not for some time. As you well know, the Paradox of Thrift says that when people stop spending and pay off their debts, it makes the economic situation a lot worse before it gets better. In other words, confidence doesn't come back if jobs are still being lost and companies going under. And this occurs when people are not doing as much consumer spending.

When people stop spending and pay off their debts it means it is more important to them that they pay off their debts than spend. The reason for making the choice may vary from, too much debt already to saving for retirement or a down payment on a house or, and I think this the more current and primary perception of the general populace, seeing credit being written off and tightened and the monetary supply shrinking. There is perhaps a lack of confidence in their personal economic future but falling prices will encourage them to spend more than government bailing out the economy by further ballooning the monetary supply with infusions of cash or bailouts. Certainly, as prices fall, producers of goods and services with a weak position in the market will probably fail, and this creates uncertainty. I think People generally see a need to save rather than spend under these circumstances. The question they are probably asking themselves is, will their business be one that fails?

We see government attempting to stimulate spending with easy credit, a low prime rate and offers of bailouts and monetary injections of cash into the economy. Banks are not going along with the low interest rates, you will find. Although prime has fallen to between 3 and 4 percent, lending rates have risen to between 6 and 7 percent.

What we have to be worried about in the long run is governments encouragement to spend by creating more money to spend. That of course debases the money supply and increases the rate of inflation, when the rate of inflation becomes too high it nullifies any reason for saving. The period of deflation, (which I will define as the time of writing off bad debt and the tightening of credit resulting in a decrease in prices and a consumer preference to save, perceived by governments as the greatest economic evil and something to be avoided at all costs), will bring government to forecast dire consequences for the economy if they do not take immediate action to save it. People will indeed start spending when they see the purchasing value of their savings being eaten away. The government wants people to spend, it gets it's taxes from the production of the society after all and when people aren't consuming production falls.

The correct course of action for government in my view is to cut taxes, cut spending, let deflation occur, allow marginal and unnecessary businesses to disappear, and things will settle out. The alternative is to inflate the money supply, bailout sectors of industry and corporation and suffer hyper-inflation.

[Pliny]

Many Americans thought they were richer than they really were. They saw neighbours selling their house for a high price, selling shares at a high price, and so they assumed that their own house and stock portfolios were worth alot. It turns out that they were wrong.

Fooled by inflation. They had lots of money but no wealth.

[jdobbin]

When people stop spending and pay off their debts it means it is more important to them that they pay off their debts than spend. The reason for making the choice may vary from, too much debt already to saving for retirement or a down payment on a house or, and I think this the more current and primary perception of the general populace, seeing credit being written off and tightened and the monetary supply shrinking.

I don't question the reasons. I am saying it is what happens when people are unsure. They save rather than spend. Andn in a consumer economy, that make matters worse.

We see government attempting to stimulate spending with easy credit, a low prime rate and offers of bailouts and monetary injections of cash into the economy. Banks are not going along with the low interest rates, you will find. Although prime has fallen to between 3 and 4 percent, lending rates have risen to between 6 and 7 percent.

The banks are hoarding cash as well and paying off debt.

The correct course of action for government in my view is to cut taxes, cut spending, let deflation occur, allow marginal and unnecessary businesses to disappear, and things will settle out. The alternative is to inflate the money supply, bailout sectors of industry and corporation and suffer hyper-inflation.

I'm sure the plan would take many, many businesses down with it.

I don't agree your alternative is the only one. I agree spending in some areas should be cut. And tax cut should be temporary if leads to structural deficits. There is still a lot of stuff that could be trimmed. However, if confidence is to be restored, the government can do a lot on projects that people agree are national, that create jobs and that are not necessary.

[madmax]

Knee jerk alarmist ranting Molly. There are tons of jobs out there in all pay grades if one wants to look. Go to jobbank.gc.ca and look for yourself.

Molly has it nailed.

[madmax]

"The job bank offers have slowed to a dribble of Nanny and personal care worker requests."

Do you ever actually read before you comment?

PSW are about the only thing happening.

[Huston]

More falsehoods. Punch in "forklift" or "cook" or "data entry" or "manager". The list goes on and on Molly. There are lots of jobs out there so stop trying to fear monger please. The situation in Canada is no where near as bad as it is elsewhere, no matter how much you try to fear monger.

Yeah, good luck working in those jobs when you have rent and a student loan to pay off, and other debt from schooling.