Need help answering this guy: Rich taxes & deficits

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    This is my friend’s response to me when I said the budget needed to be balanced and spending needed to be cut without tax increases….

    “>”so if it’s bad to raise taxes on the middle class, why isn’t it counterproductive to raise taxes on the 40% of the nation’s income?” [he’s quoting me]

    Because the middle class is what fuels the economy, not the upper class. Trickle down economics just doesn’t work. It’s been shown time and again.

    As for deficit spending I’ll say again, (and we can get into this further if anyone is interested) A DEFICIT IS NOT A BAD THING for a government. Unlike a household economy, it is desirable for a government with a fiat currency (like the US) to operate in the red. When there is a deficit, it means money is being pumped into the country’s infrastructure, jobs are being created, etc. A surplus would effectively be a waste – money left on the table. The media is scaremongering to make a story, politicians are using it as a bludgeon to beat the other party, and none of them really understand what the deficit really is.”


    [Here a couple more statements by this guy:]

    ” First, consider what US government debt becomes. Private sector income. Public surplus (taxes too high) are a private sector net loss. That money should have been used in infrastructure, but instead was saved – essentially wasted. Why was it wasted? Because this money could have been used to fund projects, add jobs, raise wages – all of which stimulate the economy. This is why it is important to have deficit spending – that money is pumped directly into the private sector, where the means of production (middle class) spend it, growing the economy.

    The first step in understanding this is recognizing that a household economy operates differently than a government’s economy.

    The second is to know the difference between deficit and debt.

    Next, let’s think about US debt. The majority of US debt is owed to… the US. That’s right. The US will “borrow” from programs like Social Security. This is money that they could essentially write off with little to no repercussions.”

    “So the government debt that isn’t intragovernmental. Most of this debt is owned by China. We haven’t given dollars to them or borrowed dollars from them. China has acquired them by running a trade surplus with the US. In other words, they send us stuff, we send them a unit of account. These dollars are placed in an account at the Treasury, which they can use (mainly to buy Treasury bonds which accrue them interest). It facilitates trade and is a win-win for both countries involved.”

    someone else jumps in and says “Only around 30% of our debt is foreign owned . . . of that 30% only about 25% of it is owned by china (around 7% of the total). If anything this helps to link our economy and our currency to the global economy and keep our prosperity in the global public interest. That 7% ownership of debt doesn’t create them as a threat to our prosperity or give them incentive to “come collect their debt” as I hear so many people misleadingly proclaim.”

    [To which someone asks] “So why not stack more foreign debt if its no big deal?” [which brings a response of] “It isn’t that simple. You need to play the game of finding that sweet spot of too much or too little debt. It also ebbs and flows with global and local economies, current events (disasters, wars, peacetime etc). It’s kind of like playing the stock market . . . you try to manipulate it based on all of these factors in order to achieve maximum benefit . . . but there is not a simplistic formula for success.”

    [And the first guy adds] “Because there is no need. The government can literally create currency out of thin air.”

    I can tell these guys’ arguments for state intervention and deficits are full of holes, but I just don’t know where and what to say…


    First, he seems to suffer from a mercantilist fallacy, that money is wealth or spending equals prosperity, which is the Keynesian version of the fallacy. Prosperity depends on our physical productivity (which depends on our resources, technology, capital capacity, labor skills) and not at all on our aggregate spending.

    He gives no account to how the market adjusts to changes in people’s demands. If people’s time preferences fall and they reduce their consumption spending (save) in order to increase their investment spending, then resources would shift out of producing consumer goods and into producing capital goods with no ill effect on the overall economy. If people increase their demand to hold money and therefore reduce both their consumption and investment spending, then prices of all goods, both of outputs and inputs, will decline. The smaller amount of aggregate spending will still be sufficient to buy all the goods produced. The profit of production processes will be unaffected.

    Second, he denies scarcity. He claims that government spending creates more total employment (and presumably, more materials and more machines and more factories for the workers to work with). In reality, resources shift away from other alternatives and so there is no net increase. Even in depressions, there are reasons why owners of producers goods are holding them back from immediate employment in order to put them to other employment in the future. Robert Higgs has a famous paper on this point:

    Total spending on infrastructure is a fraction of the government’s budget. In 2011, the federal government’s spending was $3,600 billion. It ran a budget deficit of $1,300 billion. Spending on infrastructure (highways, streets, transportation, power, water, and sewer) was around $130 billion.

    Moreover, infrastructure projects are notoriously wasteful. If half the money government spends on infrastructure is wasted (paid to workers to stand around watching) how does it make us more prosperous? Private entrepreneurs could have produced goods twice as valuable with the same money expenditures.

    Third, he denies the economic theory demonstrating the efficiency of entrepreneurs making production decisions and the inefficiency of government bureaucrats making production decisions.

    He misdirects attention from the primary to the secondary effects of debt. The primary effect of debt financing of its expenditures by the government is that command over resources is transferred from private hands to the government right now in the present when the debt is sold by the government. Decisions over the use of resources are no longer made by private entrepreneurs but by government bureaucrats. Prosperity suffers. The secondary effects of who winds up holding the debt and what happens when the debt is paid back are less important.


    Thanks for the response! The conversation became quite lengthy and I think I hit most of those points (much less concisely). He’s still convinced that money creation does not cause increased prices (and he calls the rise in prices ‘inflation’ rather than the money creation). I’ve gone round and round with him using all the logic and examples I could think of. He finally said Austrian economics was wrong because most the vast majority of economists reject it… Which I took as a victory. But one thing he said that I don’t know what to respond to is that “the data just doesn’t support it.” He produced this Krugman article that contains a graph showing the growth of the monetary base since 2008 and a relatively flat CPI as evidence that money creation does not cause an increase in CPI.

    My assumption is that CPI has not gone up because the banks are sitting on the new money rather than lending it into circulation, but even then, are we to expect prices to go up with exact proportion to the money creation? I would expect there to be a plethora of data showing money creation reaping high prices considering our history.


    He’s still convinced that money creation does not cause increased prices

    Why does the government need to tax at all, then? They can just give us free money, which is equivalent to giving us free stuff, amirite?

    Dittoes if deficits aren’t a problem at all – hold him to his exact words on both of these things (btw, he was simply wrong when he said that the government owed most of the money to itself – noting that even, technically, the bonds held by the Federal Reserve are not held by the USG, because the Federal Reserve is technically a private organization; it’s a Quango, as the Brits would say). But be that as it may, if deficits aren’t a problem at all (his words), why tax at all? Just to sock it to hated richers, it seems, because stuff that comes from the government is basically magic – it’s free from all constraints.

    that contains a graph showing the growth of the monetary base since 2008 and a relatively flat CPI as evidence that money creation does not cause an increase in CPI.

    My assumption is that CPI has not gone up because the banks are sitting on the new money rather than lending it into circulation, but even then, are we to expect prices to go up with exact proportion to the money creation?

    Professor Herbner will certainly be much better positioned to answer this than I am; but basically the banks aren’t lending the money because 1) the Fed is, effectively, paying them a small sum to not hold them and thus sum outweighs any benefit the banks can see from lending it because 2) the obvious bad result, since this method of “fixing” the economy (massive bogus stimulus programs and QE) has nothing whatsoever to do with producing a real economy where it seems that there are investments (loans) worth making.

    Also, one reason the CPI hasn’t spiked much is that the velocity of money is still well below previous levels – again because this method of “fixing” the economy has left it enervated.

    So your friend’s answer to this is, evidently, “more of the same,” because doing the same thing over and over again, just BIGGER, is obviously going to have a different outcome!


    Btw, looking at this guy’s arguments, it seems not only has he been influenced by Keynsianism, but MMT, and stuff like Elaine Brown’s “Web of Debt.”

    (He might not have read “Web of Debt,” but it hardly matters; one thing Keynes was right about is people are often influenced by economists without even being overtly aware of the origins of their economic thinking. So it doesn’t matter if he knows the names involved, the line of reasoning has a line of decent).

    Anyhow, cutting that story short, I should repost this lecture by Gary North on Social Credit et al, which influenced not just Keynes (as he goes into), but people like Elaine Brown, and other people who think the solution is just for the government to print a lot of money and distribute it to The People.

    Edit, Sunday Dec 9: Speak of the rob’t debil again, Bob Murphy found a wonderful article embodying this type of thinking at the near-highest levels. ““I like it,” said Joseph Gagnon of the Peterson Institute for International Economics. “There’s nothing that’s obviously economically problematic about it.”

    But really Gagnon is being a piker. Why not mint two platinum coins with a really pro denomination. Unfunded future liabilities? No problem!

    The only reason I can think of for the austerian thinking that Gagnon is displaying there is he must truly hate the poor & elderly or something.


    Anyone who thinks that data can verify or falsify economic theory doesn’t understand what economic theory is (as Austrians conceive of it).

    Economic theory demonstrates that if the money supply is larger with money demand the same, then the purchasing power of money would be lower. So there are two possibilities in the current situation. First, the monetary base is only part of the money stock and the relationship between the monetary base and the overall money stock is not mechanical, but depends on the actions taken by bankers. Since the crisis, they have been selling assets to the Fed in exchange for reserves (which are part of the monetary base) and holding the reserves in excess of what the Fed requires. As a result the money stock has not dramatically increased. Second, money demand has risen. People tend to hold more money during a depression to bolster both their liquidity and solvency.

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