14 replies on “Large Changes in Fiscal Policy: Taxes versus Spending”
Wel – just looking at the absract – sorry didn’t have time yet to read the paper it has always seemed like common sense to me. If you try to use tax increases you are voting against citizens’ collective wisdom to spend their money productively – more investment and consumption. You then take the money and either you try to pick winners with it -based on some politically driven idea – or you reward some powerful constituency with your largess (this may be the same thing).
At the same time if you cut taxes and spending you vote or citizens wisdom.
Many economists treat the economy as if it’s a machine and they are engineers. Pull a lever here and push a button there. The fashionable fixation with the ‘European’ or ‘Nordic’ model ignores the fact that Sweden (for example) built its social democratic experiment on top of a 19th century industrial base that had grown very strong on the basis of aggressive laissez-faire economics. It is a highly capitalised society in every sense.
I mean forget the theory and consider the simple and easily gathered empirical evidence.
1) Local business wants to invest in productivity and staff.
2) Local authority has to pay benchmarking and fund pensions to levels beyond those paid in other countries.
3) Local authority raises business rates to pay these.
4) Business has less to invest.
This is just plain common sense and, in a nutshell, it explains why arguments for increased taxes are (almost) always and everywhere wrong.
Further, the ‘moral’ argument for raising taxes is simply bogus. The completely unchallenged notion that government spending must be good whilst private spending must be greedy allows for poor policy in this area.
I believe that most of our taxes have nothing to do with ‘provision of essential’ services and more to do with the power of organised labour to entrench a neo-feudal exploitative class whose main function is to suck the blood out of the productive sectors.
In this respect ‘public / private conflict’ political conflict is to be welcomed. They are taking your money (you earned it) and they are adding insult to injury by pretending to represent the weak.
There is no division lf labour between a ‘virtuous’ public sector that defends the poor and the weak and a ‘greedy’ private sector whom we tolerate as a ‘necessary evil’ to generate taxes so that we in the public sector can get on with the real business of ‘helping’ the poor.
Once you see the fake moral posturing of the public sector unions, front-line alliance etc..for what it is you are left with a parasitic, exploitative neo-aristocracy.
The public sector unions are right about one thing. It IS a moral issue. The answer, however, is that they are the moral problem.
Sorry, Philip – not a technical response but…I’m sure others will oblige.
Yeah, Paul, I noticed that leaving the market to its own devices worked wonders these last few years. All those rational actors acting rationally about how best to rationally apportion resources obviously led to the best of all possible worlds.
Real compelling case you’ve got there…
No, wait, I know: the problem wasn’t all those rational actors buying supremely rational Range Rovers and 15 apartments with borrowed cash. The market by definition is never wrong, right? So it can only be that there was still too much socialist viscosity in the system. Yeah, that’s the ticket. The trade unions are to blame for the situation in which we find ourselves….
@Ernie Listen. the role played by lenders in the crisis is as follows. They were the financially innovative and mis-incentivized taps through which credit poured via miles and miles of government-designed plumbing from vast reservoirs of government-created money given all the greater momentum by government-set interest rates. Now this is important because the history of the crisis has been written and the banks have been blamed. But what if I told you that by 1950 50% of all US mortgages were government-backed and that it had been US government policy to aggressively promote home ownership since before the Wall Street Crash of 1929?
This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.
You are right. The market, by definition, cannot ever be wrong.
The public sector unions were, along with farmers getting windfall money for land (government-driven planning dysfunctionalities) and top bankers, the biggest winners in this.
Social partnership was the clearing house for dividing the spoils.
If you are Irish and are like most Irish people then you wouldn’t know the free-market if it got up and said ‘hello’ to you.
Government policies of easy credit, deficit financing and dangerous incentives are at the root of this crisis.
@ Ernie In fact let me qualify that a bit. It’s not quite true to say it was government-designed plumbing (after all private capital markets are key) but the government creates the money, the government sets the interest rates, the government designs the regulation, the government skews the incentives and the government borrows and spends more than anyone else.
Even if you were right – and this were a ‘failure of the market’ – that wouldn’t be a argument for borrowing 400m per week to employ vast numbers of unneeded people in the public sector and paying them too much now would it?
@Ernie. Finally. Why is anything you said an argument for taxing small traders out of business to pay local authority benchmarking / pension obligations?
This thread appears to contradict the Denny ‘more than 25 comments’ rule.
@ Paul MacDonell
I general, what separates a discussion from a saloon bar rant is that the the former contains more fact than bluster and prejudice, the latter the opposite.
Given:
a. The government did not design the banks, the bankers did. The government purported to regulate the banks, and clearly failed.
b. The government did not ‘create’ the money. The ECB controls the money supply, or attempts to, badly, while banks leveraged that liquidity n times over.
c. Mortgages are not government backed in the US. Fannie Mac and Freddie Mac provide guarantees to mortgage lenders, not borrowers, as they have no security (remember, the bank owns the house when you mortgage it)
d. No Irish mortgages are government guaranteed. If the Irish banks were stupid enough to buy toxic assets in overvalued US Dollars, it should have been their look-out. Instead it is now ours.
e. The government is very culpable but not as setters of interest rates. That is the responsibility of the ECB
f. “Government policies of easy credit, deficit financing….” The Irish government ran surpluses from 1997-2007 inclusive
I will leave it to others to decide which category your contribution falls into.
@Mark
You say: [Given: a. The government did not design the banks, the bankers did. The government purported to regulate the banks, and clearly failed.]
I didn’t claim the former. The latter is government failure. Though not a failure to regulate specific banks. More a systemic failure in not understanding the role of the shadow banking economy.
You say: [b. The government did not ‘create’ the money. The ECB controls the money supply, or attempts to, badly, while banks leveraged that liquidity n times over.]
These days – ALL money is created by government – unless you’re printing it in your basement and not telling us. As for banks leveraging the money see your a. above.
You say: [c. Mortgages are not government backed in the US. Fannie Mac and Freddie Mac provide guarantees to mortgage lenders, not borrowers, as they have no security (remember, the bank owns the house when you mortgage it)]
Which reflects what I said exactly how? The mortgage is not only government backed it is purchased by Fannae Mae or Freddie Mac and securitized – hence the originating institution can create more loans at infinitum – virtually printing money. If the loan is defaulted upon the gov’t is holding the tab. That’s a government backed mortgage. It allows Fannie and Freddie supported loans to be lent at lower interest rates and, more important, for loans to be made to vast numbers of people – you are aware of the market share of these kinds of loans, right?
You say [d. No Irish mortgages are government guaranteed. If the Irish banks were stupid enough to buy toxic assets in overvalued US Dollars, it should have been their look-out. Instead it is now ours.]
I agree with all of this and did not even imply anything to contradict it.
You say [e. The government is very culpable but not as setters of interest rates. That is the responsibility of the ECB]
Well I’m referring to ‘Government’ generally. The ECB is a creation of European governments.
You say [f. “Government policies of easy credit, deficit financing….” The Irish government ran surpluses from 1997-2007 inclusive]
I’m not referring to the Irish government but to the US government – I am are talking about the origin of the financial crisis.
You say [I will leave it to others to decide which category your contribution falls into.]
Other than misreading and misunderstanding the subject under discussion you leave me with nothing to fear and no sense that you have any point to make. In view of c. above alone you’ve got some nerve accusing me of penning a rant.
@ Paul MacDonell
All of the words quoted below are yours, not mine:
“miles and miles of government-designed plumbing from vast reservoirs of government-created money given all the greater momentum by government-set interest rates. Now this is important because the history of the crisis has been written and the banks have been blamed. But what if I told you that by 1950 50% of all US mortgages were government-backed”.
“This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.”
“You are right. The market, by definition, cannot ever be wrong. ” !!!!
And then we find the real villains of the piece,
“The public sector unions were, along with farmers getting windfall money for land (government-driven planning dysfunctionalities) and top bankers, the biggest winners in this. ”
Apart from the throwaway aside on “top bankers”, I cannot fnd a single accurate statement.
Really? The ECB is part of government, government sets interest rates, governments create money, governments guarantee mortgage borrowers, all for the benefit of……………public sector unions.
The one I liked best, though, was, of course, “the market by definition cannot be wrong”. If it valued an asset as worth billions yesterday and nothing today, it was of course right both times.
Mine’s a large one, what are ye having yerself?
Interesting paper. What they’re saying – if I’m interpreting it correctly – is that cuts in public sector pay will likely drive reductions in pay in the private sector thus boosting investment, profit margins and competitiveness for employers, whereas tax and social security increases have the opposite effect since they increase employers’ pre-tax wage costs. I don’t recall coming across the idea of public sector pay cuts driving down private sector wage demands in the discussion of our national crisis so far? Further, it implies that our government is on the right track in relying on cuts, rahter than taxation, to make the bulk of the fiscal adjustment required in the Budget for next year.
Also, despite the mess that is our current taxation base, where almost half of income earners pay no income tax, it would seem that the solutions to our problems – general pay cuts to restore competitiveness and spending reductions, plus development of a new non-labour fixated taxation model for implementation in subsequent years – are more straightforward than we like to think and than may be the case in major economies running up huge deficits on stimulus programmes and with massive military budgets that cannot be tampered with in the near term anyway. This paper would also tend to lend some support to the FG proposal to cut employers’ PRSI as reiterated by that party’s Finance spokesman in yesterday’s Dail debate; though not for the reasons that FG want to see this policy pursued since its impact on job retention in the short term is questionable.
@mark I think things are a bit confused. My point is that the origins of the current economic crisis lie ultimately in government policies in the US / UK – possibly ECB – at least in so far as it impacts here – and in lax regulatory policies increasing money supply further via M3 and M3.
Inflation has only really been a serious and persistent phenomenon since the the government used money supply as a way to partially default on its obligations and rob tomorrow’s people to placate today.
The financial system was an incentivised actor.
As I said above ‘This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.”
This statement is not only true I don’t even think it’s controversial.
Don’t misunderstand me. I’m not making any excuses for banks or anyone in the private sector who messed up.
Now having quoted me as saying that the public sector unions were big winners from the boom you then say that this is not accurate!!!
The ECB is an organisation created by governments. It is a government organisation. An example of a non-government organisation is Google Inc.
What are you trying to tell me? That the ECB, because it is independent, is, therefore, non-governmental??
You then ‘quote’ me as saying in effect ‘he ECB is part of government, government sets interest rates, governments create money, governments guarantee mortgage borrowers, all for the benefit of……………public sector unions.’
– which I didn’t say and then you say it’s not accurate……well I didn’t say it so I agree.
I still don’t know what your point is.
It would be helpful if you spelled out what it is you think I’m saying clearly and ask me if that is what, in fact, I am saying.
For example I don’t believe that government fiscal policy was run with the intention of benefiting public sector unions. Nowhere do I suggest this.
let me modify my claim that the market by definition cannot be wrong. We cannot BE CERTAIN when or whether the market is wrong’.
A market that is operating with out bubbles is – probably – the best approximation to the truth about an economy that can be got because it represents the wisdom of all its participants about what should be produced and sold and at what price. Governments cannot know this – by definition – they comprise too few people and are not participants in the market but instead use dogma, political favouritism and cronyism to determine what economic decisions should be made.
@ Paul MacDonell
“let me modify my claim that the market by definition cannot be wrong. We cannot BE CERTAIN when or whether the market is wrong’.”
So, unlike an omniscient God, the market might be right sometimes, or not.
Slainte, Is this one on you?
@Mark Bubbles are a form of mass delusion. South Sea Bubble, Tulip Craze in Holland….recent property bubble. The market comprises people and, of course, people can be wrong. So therefore markets can be wrong. So this one’s on me. BUT the key truth about governments’ attempt to regulate and interfere in markets is that governments are more often wrong – in fact nearly always wrong. So it’s like what Churchill said about Democracy. Markets are the worst system – apart from all the others.
14 replies on “Large Changes in Fiscal Policy: Taxes versus Spending”
Wel – just looking at the absract – sorry didn’t have time yet to read the paper it has always seemed like common sense to me. If you try to use tax increases you are voting against citizens’ collective wisdom to spend their money productively – more investment and consumption. You then take the money and either you try to pick winners with it -based on some politically driven idea – or you reward some powerful constituency with your largess (this may be the same thing).
At the same time if you cut taxes and spending you vote or citizens wisdom.
Many economists treat the economy as if it’s a machine and they are engineers. Pull a lever here and push a button there. The fashionable fixation with the ‘European’ or ‘Nordic’ model ignores the fact that Sweden (for example) built its social democratic experiment on top of a 19th century industrial base that had grown very strong on the basis of aggressive laissez-faire economics. It is a highly capitalised society in every sense.
I mean forget the theory and consider the simple and easily gathered empirical evidence.
1) Local business wants to invest in productivity and staff.
2) Local authority has to pay benchmarking and fund pensions to levels beyond those paid in other countries.
3) Local authority raises business rates to pay these.
4) Business has less to invest.
This is just plain common sense and, in a nutshell, it explains why arguments for increased taxes are (almost) always and everywhere wrong.
Further, the ‘moral’ argument for raising taxes is simply bogus. The completely unchallenged notion that government spending must be good whilst private spending must be greedy allows for poor policy in this area.
I believe that most of our taxes have nothing to do with ‘provision of essential’ services and more to do with the power of organised labour to entrench a neo-feudal exploitative class whose main function is to suck the blood out of the productive sectors.
In this respect ‘public / private conflict’ political conflict is to be welcomed. They are taking your money (you earned it) and they are adding insult to injury by pretending to represent the weak.
There is no division lf labour between a ‘virtuous’ public sector that defends the poor and the weak and a ‘greedy’ private sector whom we tolerate as a ‘necessary evil’ to generate taxes so that we in the public sector can get on with the real business of ‘helping’ the poor.
Once you see the fake moral posturing of the public sector unions, front-line alliance etc..for what it is you are left with a parasitic, exploitative neo-aristocracy.
The public sector unions are right about one thing. It IS a moral issue. The answer, however, is that they are the moral problem.
Sorry, Philip – not a technical response but…I’m sure others will oblige.
Yeah, Paul, I noticed that leaving the market to its own devices worked wonders these last few years. All those rational actors acting rationally about how best to rationally apportion resources obviously led to the best of all possible worlds.
Real compelling case you’ve got there…
No, wait, I know: the problem wasn’t all those rational actors buying supremely rational Range Rovers and 15 apartments with borrowed cash. The market by definition is never wrong, right? So it can only be that there was still too much socialist viscosity in the system. Yeah, that’s the ticket. The trade unions are to blame for the situation in which we find ourselves….
@Ernie Listen. the role played by lenders in the crisis is as follows. They were the financially innovative and mis-incentivized taps through which credit poured via miles and miles of government-designed plumbing from vast reservoirs of government-created money given all the greater momentum by government-set interest rates. Now this is important because the history of the crisis has been written and the banks have been blamed. But what if I told you that by 1950 50% of all US mortgages were government-backed and that it had been US government policy to aggressively promote home ownership since before the Wall Street Crash of 1929?
This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.
You are right. The market, by definition, cannot ever be wrong.
The public sector unions were, along with farmers getting windfall money for land (government-driven planning dysfunctionalities) and top bankers, the biggest winners in this.
Social partnership was the clearing house for dividing the spoils.
If you are Irish and are like most Irish people then you wouldn’t know the free-market if it got up and said ‘hello’ to you.
Government policies of easy credit, deficit financing and dangerous incentives are at the root of this crisis.
@ Ernie In fact let me qualify that a bit. It’s not quite true to say it was government-designed plumbing (after all private capital markets are key) but the government creates the money, the government sets the interest rates, the government designs the regulation, the government skews the incentives and the government borrows and spends more than anyone else.
Even if you were right – and this were a ‘failure of the market’ – that wouldn’t be a argument for borrowing 400m per week to employ vast numbers of unneeded people in the public sector and paying them too much now would it?
@Ernie. Finally. Why is anything you said an argument for taxing small traders out of business to pay local authority benchmarking / pension obligations?
This thread appears to contradict the Denny ‘more than 25 comments’ rule.
@ Paul MacDonell
I general, what separates a discussion from a saloon bar rant is that the the former contains more fact than bluster and prejudice, the latter the opposite.
Given:
a. The government did not design the banks, the bankers did. The government purported to regulate the banks, and clearly failed.
b. The government did not ‘create’ the money. The ECB controls the money supply, or attempts to, badly, while banks leveraged that liquidity n times over.
c. Mortgages are not government backed in the US. Fannie Mac and Freddie Mac provide guarantees to mortgage lenders, not borrowers, as they have no security (remember, the bank owns the house when you mortgage it)
d. No Irish mortgages are government guaranteed. If the Irish banks were stupid enough to buy toxic assets in overvalued US Dollars, it should have been their look-out. Instead it is now ours.
e. The government is very culpable but not as setters of interest rates. That is the responsibility of the ECB
f. “Government policies of easy credit, deficit financing….” The Irish government ran surpluses from 1997-2007 inclusive
I will leave it to others to decide which category your contribution falls into.
@Mark
You say: [Given: a. The government did not design the banks, the bankers did. The government purported to regulate the banks, and clearly failed.]
I didn’t claim the former. The latter is government failure. Though not a failure to regulate specific banks. More a systemic failure in not understanding the role of the shadow banking economy.
You say: [b. The government did not ‘create’ the money. The ECB controls the money supply, or attempts to, badly, while banks leveraged that liquidity n times over.]
These days – ALL money is created by government – unless you’re printing it in your basement and not telling us. As for banks leveraging the money see your a. above.
You say: [c. Mortgages are not government backed in the US. Fannie Mac and Freddie Mac provide guarantees to mortgage lenders, not borrowers, as they have no security (remember, the bank owns the house when you mortgage it)]
Which reflects what I said exactly how? The mortgage is not only government backed it is purchased by Fannae Mae or Freddie Mac and securitized – hence the originating institution can create more loans at infinitum – virtually printing money. If the loan is defaulted upon the gov’t is holding the tab. That’s a government backed mortgage. It allows Fannie and Freddie supported loans to be lent at lower interest rates and, more important, for loans to be made to vast numbers of people – you are aware of the market share of these kinds of loans, right?
You say [d. No Irish mortgages are government guaranteed. If the Irish banks were stupid enough to buy toxic assets in overvalued US Dollars, it should have been their look-out. Instead it is now ours.]
I agree with all of this and did not even imply anything to contradict it.
You say [e. The government is very culpable but not as setters of interest rates. That is the responsibility of the ECB]
Well I’m referring to ‘Government’ generally. The ECB is a creation of European governments.
You say [f. “Government policies of easy credit, deficit financing….” The Irish government ran surpluses from 1997-2007 inclusive]
I’m not referring to the Irish government but to the US government – I am are talking about the origin of the financial crisis.
You say [I will leave it to others to decide which category your contribution falls into.]
Other than misreading and misunderstanding the subject under discussion you leave me with nothing to fear and no sense that you have any point to make. In view of c. above alone you’ve got some nerve accusing me of penning a rant.
@ Paul MacDonell
All of the words quoted below are yours, not mine:
“miles and miles of government-designed plumbing from vast reservoirs of government-created money given all the greater momentum by government-set interest rates. Now this is important because the history of the crisis has been written and the banks have been blamed. But what if I told you that by 1950 50% of all US mortgages were government-backed”.
“This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.”
“You are right. The market, by definition, cannot ever be wrong. ” !!!!
And then we find the real villains of the piece,
“The public sector unions were, along with farmers getting windfall money for land (government-driven planning dysfunctionalities) and top bankers, the biggest winners in this. ”
Apart from the throwaway aside on “top bankers”, I cannot fnd a single accurate statement.
Really? The ECB is part of government, government sets interest rates, governments create money, governments guarantee mortgage borrowers, all for the benefit of……………public sector unions.
The one I liked best, though, was, of course, “the market by definition cannot be wrong”. If it valued an asset as worth billions yesterday and nothing today, it was of course right both times.
Mine’s a large one, what are ye having yerself?
Interesting paper. What they’re saying – if I’m interpreting it correctly – is that cuts in public sector pay will likely drive reductions in pay in the private sector thus boosting investment, profit margins and competitiveness for employers, whereas tax and social security increases have the opposite effect since they increase employers’ pre-tax wage costs. I don’t recall coming across the idea of public sector pay cuts driving down private sector wage demands in the discussion of our national crisis so far? Further, it implies that our government is on the right track in relying on cuts, rahter than taxation, to make the bulk of the fiscal adjustment required in the Budget for next year.
Also, despite the mess that is our current taxation base, where almost half of income earners pay no income tax, it would seem that the solutions to our problems – general pay cuts to restore competitiveness and spending reductions, plus development of a new non-labour fixated taxation model for implementation in subsequent years – are more straightforward than we like to think and than may be the case in major economies running up huge deficits on stimulus programmes and with massive military budgets that cannot be tampered with in the near term anyway. This paper would also tend to lend some support to the FG proposal to cut employers’ PRSI as reiterated by that party’s Finance spokesman in yesterday’s Dail debate; though not for the reasons that FG want to see this policy pursued since its impact on job retention in the short term is questionable.
@mark I think things are a bit confused. My point is that the origins of the current economic crisis lie ultimately in government policies in the US / UK – possibly ECB – at least in so far as it impacts here – and in lax regulatory policies increasing money supply further via M3 and M3.
Inflation has only really been a serious and persistent phenomenon since the the government used money supply as a way to partially default on its obligations and rob tomorrow’s people to placate today.
The financial system was an incentivised actor.
As I said above ‘This is a crisis of debt. At a policy level the responsibility lies with Governments – as regulators, setters of interest rates, providers of tax incentives (as a free marketeer I am against these) and as the biggest and most profligate spender of all.”
This statement is not only true I don’t even think it’s controversial.
Don’t misunderstand me. I’m not making any excuses for banks or anyone in the private sector who messed up.
Now having quoted me as saying that the public sector unions were big winners from the boom you then say that this is not accurate!!!
The ECB is an organisation created by governments. It is a government organisation. An example of a non-government organisation is Google Inc.
What are you trying to tell me? That the ECB, because it is independent, is, therefore, non-governmental??
You then ‘quote’ me as saying in effect ‘he ECB is part of government, government sets interest rates, governments create money, governments guarantee mortgage borrowers, all for the benefit of……………public sector unions.’
– which I didn’t say and then you say it’s not accurate……well I didn’t say it so I agree.
I still don’t know what your point is.
It would be helpful if you spelled out what it is you think I’m saying clearly and ask me if that is what, in fact, I am saying.
For example I don’t believe that government fiscal policy was run with the intention of benefiting public sector unions. Nowhere do I suggest this.
let me modify my claim that the market by definition cannot be wrong. We cannot BE CERTAIN when or whether the market is wrong’.
A market that is operating with out bubbles is – probably – the best approximation to the truth about an economy that can be got because it represents the wisdom of all its participants about what should be produced and sold and at what price. Governments cannot know this – by definition – they comprise too few people and are not participants in the market but instead use dogma, political favouritism and cronyism to determine what economic decisions should be made.
@ Paul MacDonell
“let me modify my claim that the market by definition cannot be wrong. We cannot BE CERTAIN when or whether the market is wrong’.”
So, unlike an omniscient God, the market might be right sometimes, or not.
Slainte, Is this one on you?
@Mark Bubbles are a form of mass delusion. South Sea Bubble, Tulip Craze in Holland….recent property bubble. The market comprises people and, of course, people can be wrong. So therefore markets can be wrong. So this one’s on me. BUT the key truth about governments’ attempt to regulate and interfere in markets is that governments are more often wrong – in fact nearly always wrong. So it’s like what Churchill said about Democracy. Markets are the worst system – apart from all the others.