How our economy works.

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  • 07-08-2011, 10:51 AM
    markw
    How our economy works.
    This just makes it perfectly clear for those of us who never quite understand how the economy works. This doesn't mean I approve of it.

    It's a slow day in a little East Texas town. The sun is beating down. And the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit.

    On this particular day a rich tourist from back east is driving through. He stops at the motel and lays a $100 bill on the desk and says he wants to inspect the rooms upstairs in order to pick one to spend the night.

    As soon as the man walks upstairs, the owner grabs the bill and runs next door to pay his debt to the butcher.

    The butcher then takes the $100 and runs down the street to retire his debt to the pig farmer.

    The pig farmer now takes the $100 and heads off to pay his bill at the supplier of feed and fuel.

    The guy at the Farmer's Co-op immediately takes the $100 and pays his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.

    The hooker rushes to the hotel and pays off her room bill with the hotel owner.

    The hotel proprietor then places the $100 back on the counter so the rich traveler will not suspect anything.

    At that moment the traveler comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.

    No one produced anything. No one earned anything.

    However, the whole town is now out of debt and now looks to the future with a lot more optimism.

    And that, ladies and gentlemen, is how the United States Government is conducting business today.
  • 07-08-2011, 01:13 PM
    bobsticks
    At least on the surface this is totally true---though I would have included a gas station attendant and a banker--but it gave me laugh.

    Gracias...
  • 07-08-2011, 02:32 PM
    Feanor
    Quote:

    Originally Posted by markw View Post
    ....

    No one produced anything. No one earned anything.

    However, the whole town is now out of debt and now looks to the future with a lot more optimism.
    ...

    This is a lesson in macroeconomics -- the multiplier effect. Gotta love Keynes, eh?
  • 07-08-2011, 03:04 PM
    markw
    Quote:

    Originally Posted by Feanor View Post
    This is a lesson in macroeconomics -- the multiplier effect. Gotta love Keynes, eh?

    Well, yes and no. The fallacy of this "joke" is that that $100 was never the hotel owners to begin with. This whole exercise left hin $100 in the hole.

    But, looking at the banking/housing fiasco, it's actually not that too far removed from reality.
  • 07-09-2011, 03:57 PM
    Smokey
    Quote:

    Originally Posted by markw View Post
    The fallacy of this "joke" is that that $100 was never the hotel owners to begin with. This whole exercise left hin $100 in the hole.

    Hotel owner was $100 in the hole to begin with, so really nothing changed. And nothing changed for everybody else in town either although money did get exchanged.

    For example, if money that is owed to somebody is marked as (-$100) and money that somebody owed you as (+$100), then the networth is $00. Now if the guy pay you $100 he owed to you, (+$100) get cancelled. And if you turn around and pay the guy that you owe to, then (-$100) get cancelld, so the networth is still $00.

    Same thing with the Hotel owner. Although he was $100 in hole with butcher, now he is in the hole with the hooker. So nothing changed for Hotel owner either.
  • 07-09-2011, 04:41 PM
    Feanor
    Quote:

    Originally Posted by Smokey View Post
    Hotel owner was $100 in the hole to begin with, so really nothing changed. And nothing changed for everybody else in town either although money did get exchanged.
    ...

    Same thing with the Hotel owner. Although he was $100 in hole with butcher, now he is in the hole with the hooker. So nothing changed for Hotel owner either.

    On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

    This story has substance and a moral to it: circulation of money helps everyone. Like I said, Keynesian economicss. The problem today in the US is that some much money is going to the wealthiest corporations and people who are not investing it or even spending it, but instead mainly saving it as cash or securities.

    Keeping the rich guys' taxes low merely gives them more money to save. The thing would getting them investing is middle class demand for goods & services. But we poor saps haven't had a raise in a decade and in debt up to our eyeballs so we aren't spending either. Kiss goodbye to the economy.
  • 07-09-2011, 07:40 PM
    markw
    Quote:

    Originally Posted by Feanor View Post
    On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

    Almost Everybody. The hotel owner was not in the hole until he counted that C-note as revenue and paid debts against it when it was not, in fact, revenue.

    If this whole trail was done by checks, when the checks "clear" and the bounce trail returns full circle to the writer of the bad insturment, the hotel owner is in the hole for that $100, plus any associated fees the other incurred. In fact, the only ones who would come out ahead would be the banks who would rake in the return check fees from each participant in this whole trail..

    Quote:

    Originally Posted by Feanor View Post
    This story has substance and a moral to it: circulation of money helps everyone. Like I said, Keynesian economicss. The problem today in the US is that some much money is going to the wealthiest corporations and people who are not investing it or even spending it, but instead mainly saving it as cash or securities.

    Keynesian economics worked out quite well in the 30's when FDR instituted it and created tons of opportunities which trivkled down to the real people. The TVA, for example, had several good results. By sponsering the building of hydroelectric dams it not only created jobs for many people it also brought electricity to areas that never had it before. Likewise, a lot of towns were grown and expanded, which brought about more consumers for those local stores. This was true "trickle down" economics.

    Today, all it seems is that money is given to banks and businesses to bail them out of bad investments while banks, in turn, tighten the screws on those who owe them money abdnd business, who realized that they can make the same or greater profit without the workers they laid off and are in no hurry to restore the jobs they cut. Not to mention that some take those taxpayer provided funds and invest them in overseas markets and manufacturing. I won't even get into the government "buying out" auto manufacturers from the bondholdes and giving them to the unions. I don't think this is what Keynes had in mind.
  • 07-09-2011, 09:03 PM
    Smokey
    Quote:

    Originally Posted by Feanor View Post
    On the contrary, the only person for whom there was no change was the out-of-towner who inspected the rooms. Everybody else got to pay off their debts.

    It is true everybody paid off their depts, but at same time the money that somebody owe you (which is rightfully yours) is also wiped out too. Which mean nothing is gained and nothing is lost.
  • 07-10-2011, 03:11 AM
    thekid
    The flaws of the argument have been stated though it does illustrate several issues with the economy.

    As was pointed one of the important aspects of this scenario was that money was circulating through the economy. For whatever reasons you want to attribute it most of the people in that town were recieving money for their labor.

    That was the scary part of the credit crunch a few years ago. If credit stopped flowing then money would stop circulating and the economy collapses. One of the things that helped turn the recession of the 20's to the depression of the 30's was that the government policies put into place tightened the money supply and the economy collapsed. FDR's efforts to put money into the economy were marginally successful but when the money stops circulating at such a large level it is almost impossible for the government to infuse enough cash into the system. It really was not until WWII that the government was able to put enough money into the economy to get things circulating. The wars we are fighting today are being done at a higher tech level than previous wars. Some of the manufacturing that is going towards the war is not even being done in this country. As a result even going to war as a traditional method of re-starting an economy is not working. As a matter of fact think what the unemployment rate will be as we shrink the military down as these wars draw to a close.

    The June employment numbers should be instructive to both parties now negotiating the budget deal. Unfortunately from the rhetoric I have heard it did not.

    The Republicans think the anemic job numbers supports their position that revenue cannot be touched because of the fragile economy. What is being ignored is that the private sector actually produced 150,000 jobs. Not enough by any means but enough to show the private sector is producing jobs despite the "burdensome taxes and regulation". The job losses that offset the private sector growth came from the public sector as states and to some degree the federal goverment cut spending by cutting workers. So trying to stimulate the economy by only reducing debt will increase unemployment especially over the short term.

    The Dems on the other hand are failing to see that the public sector has become too large a part of the economy. You could increase the tax rates back to the Clinton years and while it would soften the blow, the cuts in government spending would still need to be made. Holding onto a few seats in the House or Senate because the public is on your side in not reducing the larger entitlement programs shows a lack of leadership and a lack of vision. In the long term too large a government creates a lopsided economy that cannot be supported by a smaller private sector. The looming crisis in Social Security is an example of that situation.

    We need a comprimise in the short term to keep this economy lurching along. In the long term both sides need to come up with policies that will transform our economy away from being such a service based economy to one that produces goods in a competitive global based economy. That is not going to be easy while the country remains so polarized on issues that have nothing to do with economic policies. Listening to the talk this week I have little confidence we have leaders that can rise above the polarization or a Congress that do so either. If you saw the movie the "War of the Roses" then you know what I mean when I say that right now both sides are hanging onto the chandilier.

    My two cents....
  • 07-10-2011, 03:40 AM
    Feanor
    Quote:

    Originally Posted by Smokey View Post
    It is true everybody paid off their depts, but at same time the money that somebody owe you (which is rightfully yours) is also wiped out too. Which mean nothing is gained and nothing is lost.

    It's true that there was no net new creation of wealth. Yet everyone benefited.
  • 07-10-2011, 04:02 AM
    Feanor
    Quote:

    Originally Posted by markw View Post
    ...
    Today, all it seems is that money is given to banks and businesses to bail them out of bad investments while banks, in turn, tighten the screws on those who owe them money abdnd business, who realized that they can make the same or greater profit without the workers they laid off and are in no hurry to restore the jobs they cut. Not to mention that some take those taxpayer provided funds and invest them in overseas markets and manufacturing. I won't even get into the government "buying out" auto manufacturers from the bondholdes and giving them to the unions. I don't think this is what Keynes had in mind.

    I think you're quite right about this. And I agree it's not what Keynes had in mind at all, i.e. bail outs.

    Well, Keynes would have said that recessions are a failure of demand. In the current situation ordinary people have no money and/or aren't willing because they are out of work and likely heavilty in debt. In response, business, large and small, are reluctant to invest. The solution is to restore the purchasing power of ordinary people. How?

    Cutting taxes to ordinary people who will spend money -- not the rich who will only save it -- would help. The Fed and state governments might spend on necessary things like infrastructure renewal, green energy programs, health & education facilties, providing job to workers, (the majority of whom will be employed by private contractors, not the government). From Keynes' perspective, all spending is demand: it really doesn't matter whether it's government or private business that's creating it.

    How shall government spending be funded? No doubt spending cuts are appropriate in many areas, but ruthless cutting of government -- such as demaned by libertarian Republicans -- will seriously depress the economy at the worst possible time. I say tax the rich and upper middle class who aren't presently investing their tax savings.
  • 07-10-2011, 06:37 AM
    markw
    Quote:

    Originally Posted by Feanor View Post
    ...I say tax the rich and upper middle class who aren't presently investing their tax savings.

    I think that's not necessarily incorrect, but more of an oversimplification. Who, exactly, are the rich? Can we just put a limit on it? Is is some poor schmuck, perhaps self-employed, like a doctor, that honestly works his butt off to make over 200k a year?

    Some in this country got "greedy". It's can't be laid at the feet of either party (It's a good cop/bad cop thing. People in both parties benefited, not just one), but those who pull their strings. Banks and financial institutions make money hand over fist (always did) and, as shown by they their actions since the repeal of the regulatory provisions of the Glass-Stegall Act have merely removed their government enforced "moral code" and made it possible for then to run unbridled to the point that the parasite almost killed it's host. And, when their government created and protected (through corporate status treated as a personal entity) house of cards grew and grew, through bonus' and stock options, so did their executives and individual employees personal wealth.. When that house cards fell (seriously, which everybody could see coming), the government bailed them out.

    So, they used a capitalistic society to make their fortune but turned to a government (taxpayer) sponsored bailout to pull their asses out of the fire. So, when they make money, they are capitalists but then they lose money, they want the benefits of socialism. What's wrong with this picture?

    Corporations that contribute to society, like those that create jobs in this country, should be treated differently than those that see this country as merely a tax shelter and see it's people as mere fodder to their own growth and produce nothing except wealth for it's members, such as banks and financial institutions.

    George Baily is a fictional character. The way BofA (and others) are still trying to pull off illegal forclosures is prrf of this. ..and the Government is in no rush to stop it.

    Didja see the animated movie "Despicable me": where, in one scene they shoe the protagonist entering an institution labelled "The Bank of Evil, formerly Lehman Brothers"? I loved it. ..gotta love young kids. They force me to watch stuff I'd otherwise never see.

    As for the demand, it's there but the slowly disappearing middle class is afraid to spend because they are waiting for the other shoe to drop. I do see a lot of new Mercedes, BMW and other high-end vehicles on the road, more than one would expect for a country that is equally sharing ina depressed economy. But,my part of Jersey is a "bedroom community" for the big-wigs on Wall street. There's a srange mix of wealthy neighborhoods and, only a few miles away, inner-city blight. The middle class neighborhoods are slowly being eaten away from the inner-city lifestyle slowly expanding I wonder if this is the way this place is heading?

    As for unions, they need to be responsive to the demands of the economy overall. They cannot continually demand more and more when it's not there to be given. That's what got the auto makers in such a bind. Promises made yeas ago during a booming economy cannot be met when their sales are down. Pension plans are inestments and are subject to the whims of the investments themselves, but their funds should not be raided for anything except pension needs. Even George Meany, who is not exactly anti-union, was against public workers unionizing because they see themselves as immune to the real-world economy. Their solution to the problem is to raise taxes to meet rheir demands.

    As for Social Security, it's use over the years has expanded far beyone what it's intended goals were and offered to many who were not the intended benefoiciaries to begin with. This is more and more an issue with the jobs not being creaed to replace the ones that are lost and done by "under the table" workers. And, it's SS/MED cap at $106k should be removed. Pay on every dollar one made. Having done taxes the past few years, I can see that most people won't be affected by this at all. That's one way to "tax the rich" that everyone ignores.
  • 07-10-2011, 09:07 AM
    bobsticks
    Feanor,

    What makes you think that those individuals are taxable?

    I'm not trying to be combative but a tremendouse amount of money is currently bein made in this country by offshore shells, foreign conglomerates and ex-pats.

    It's not like there's a small but staggeringly powerful group of people in this country that are sitting around with hard currency on there property, licking stamps and sending it to Asia and Mexico.

    We saw recently at the end of Q1 and Q2 as the price of oil soared and was evidenced at the gas pumps that billions of dollars were being made in speculation and spread betting much of which was accomplished through investment houses based in London. Holes in the Dodd-Steagall Act have allowed an almost complete lack of transparency in international finance to stripmine this nation's economy through hit-and-run tactics.

    Combined with the complete refusal of the American public to hold it's elected officials accountable or recognize the unacceptable expectations of portions of the populace, this creates a situation with dramatic and significant repercussions.
  • 07-10-2011, 11:26 AM
    Feanor
    Quote:

    Originally Posted by bobsticks View Post
    Feanor,

    What makes you think that those individuals are taxable?

    I'm not trying to be combative but a tremendouse amount of money is currently bein made in this country by offshore shells, foreign conglomerates and ex-pats.

    It's not like there's a small but staggeringly powerful group of people in this country that are sitting around with hard currency on there property, licking stamps and sending it to Asia and Mexico.

    We saw recently at the end of Q1 and Q2 as the price of oil soared and was evidenced at the gas pumps that billions of dollars were being made in speculation and spread betting much of which was accomplished through investment houses based in London. Holes in the Dodd-Steagall Act have allowed an almost complete lack of transparency in international finance to stripmine this nation's economy through hit-and-run tactics.

    Combined with the complete refusal of the American public to hold it's elected officials accountable or recognize the unacceptable expectations of portions of the populace, this creates a situation with dramatic and significant repercussions.

    In response to Markw and yourself, I'd say that taxation decisions are not easy. There ought to be minimum loopholes and exemptions. And be sure, anybody earning money in the US should be taxable including offshore shells, etc., that you allude to; (transfer pricing and other gambits that shift profits to the country with the lowest taxes notwithstanding).

    Do we have to get into the "ethical" aspects of rich vs. poor? Maybe so: those who worship the free market on the one hand and should not the other claim that the hard working medical specialist deserves a better tax break vs. the hard working Wal Mart cashier whose earning 1/12 his money. This is aside from the fact that lots of rich people haven't done a lick of work in their lives besides clipping coupons.

    I have said before and will say again that nobody gets rich on the proverbial desert island: people get rich because they serve/exploit (choose your verb) other people. Those who earn more ought in fairness contribute more to the common good.

    Speculation is a huge problem and contributed tremendously to the 2007-09 crisis. CDS, for example, created trillions of dollars risk out of literally nothing. Powerful restrictions and regulations ought to be in place -- but have be slow coming for some reason -- damn! what could that be?

    Consider, however, that speculation is a symptom more than a cause of wealth disparities. When rich people aren't making productive investments they do things like bit up the price of existing real estate, corporate securities, and myriad other resources -- this is all speculation more or less.



    To move on, favorite fallacies of the Right-wing are:
    • There is insufficient incentive for the rich to work hard or invest in the country
    • There is insufficient savings because too much is going to the less well-off who don't save
    • The rich aren't investing because they are afraid of higher taxes and regulations.
    These assertions are all untrue and not born out by economic history or statistics. The real reason the rich aren't investing in the US economy is because they afraid no one will buy their output. And the reason for that is that people are underpaid and/or out of work and/or have large consumer debt that they need to get of their backs. It is pointless to keep on "bribing the rich" (which term yours truly) with tax saving, etc., when they refuse to invest and instead hoard it or invest it offshore. Direct fiscal stimulus is need, e.g. infrastructure renewal, green energy development -- or may just another war, (the Bush solution).

    Read a few books. I recommend Plenty of Nothing by Thomas I. Palley, and Supercapitalism and Aftershock by Robert B. Reich.

    BTW, no argument that the US political system is buggered.