Inspired by Casey Mulligan's blog post, I went to read some of the "Build Back Better" bill. (Is it just me, or doesn't "Build Back Better" sound a lot like "Make America Great Again?") Heavens, not the whole thing -- that's way beyond me. I just read the first half of the child care tax credit, starting on p. 241. I was also inspired by PBS, which, coincidentally, I'm sure, announced last week a Child Care Crisis. Well, what is the federal government going to do about this "crisis?" Following media coverage, I thought this was mostly a line on your income taxes. I was wrong.
p. 251
(d) ESTABLISHMENT OF BIRTH THROUGH FIVE CHILD CARE AND EARLY LEARNING ENTITLEMENT PROGRAM.—
(1) IN GENERAL.—The Secretary is authorized to administer a child care and early learning entitlement program under which families, ... shall be provided an opportunity to obtain high-quality child care services...
(2) ASSISTANCE FOR EVERY ELIGIBLE CHILD.—Beginning on October 1, 2024, every family who applies for assistance under this section...shall be offered child care assistance...
A new entitlement. Forever. How much is this going to cost, I wonder? Oh, good, p. 249
Appropriations(A) $20,000,000,000 for fiscal year 2022, to remain available until September 30, 2025,
(B) $30,000,000,000 for fiscal year 2023, to remain available until September 30, 2026
(C) $40,000,000,000 for fiscal year 2024, to remain available until September 30, 2027;
(D) such sums as may be necessary for each of fiscal years 2025 through 2027, to remain available for one fiscal year.
Those look like awfully round numbers, don't they? Actually, this isn't even money for child care, it's money for the federal government to give to states to pay for a lot of the bureaucracy, which is what this section is about. But it's a good sign of how costs are treated here.
The public discussion of this bill focuses on the cost number. Is it $3.5 Trillion? Or only $2 Trillion? In this line, it is perfectly clear what the answer is: nobody has any idea what it will cost. Lawyer friends: Can Congress appropriate "such sums as may be necessary?"
Discussing the cost of these provisions is pretty much useless given the current level of analysis. We should discuss the programs, whether they do any good and what their disincentives are.
Casey noticed this huge provision: (p. 255)
(II) the State’s payment rates for child care services for which assistance is provided in accordance with this section...
(AA) at a minimum, provide a living wage for all staff of such child care providers; and
(BB) are equivalent to wages for elementary educators with similar credentials and experience in the State; and
(dd) are adjusted on an annual basis for cost of living increases...
Casey,
According to the Bureau of Labor Statistics, elementary school teachers earned an average of $63,930 annually in 2019. The same BLS data show childcare workers earning an average of $25,510.
There is a bit of a puzzle here, that the PBS piece (of course) did not notice. If child-care costs $10,000 per child (their number) and child-care workers are paid $20,000 (also PBS), and child care does not have two children per worker (obvious), then where is all the money going? Or, which number is wrong?
In any case, this is a whopping mandated cost increase. Of course, if a child care worker had the credentials and experience to be a $63,930 unionized public school teacher, they would be a $63,930 unionized public school teacher. Oh, "equivalent," not "equal." This will be fun.
The bill mandates a
(B) TIERED SYSTEM FOR MEASURING THE QUALITY OF CHILD CARE PROVIDERS.
...the State will implement within 3 years after receiving funds under this section, a tiered system for measuring the quality of eligible child care providers. Such tiered system shall...
(iii) provide for sufficient resources and supports for child care providers at tiers lower than the highest tier to facilitate progression toward higher quality standards.
(C) ACHIEVING HIGH QUALITY FOR ALL CHILDREN.—.... all families of eligible children can choose for the children to attend child care at the highest quality tier...
OK, so if you operate a low quality tier day care, you get more money. But everyone has the right to only the highest quality tier. Hmm, just how is this going to work out? All of the children shall be above average? The only equilibrium I can spot is the whole thing becomes useless and all day care centers are certified high quality.
(ii) SLIDING FEE SCALE.—A full copayment ... shall use a sliding fee scale .. for a family with a family income—
(I) of not more than 75 percent of State median income for a family of the same size, the family shall not pay a copayment, toward the cost of the child care involved for all eligible children in the family;
(II) of more than 75 percent but not more than 100 percent of State median income for a family of the same size, the copayment shall be more than 0 but not more than 2 percent of that family income, toward such cost for all such children;...
(V) of more than 150 percent of the State median income for a family of the same size, the copayment shall be 7 percent of that family income, toward such cost for all such children.
Here is the work disincentive writ clear. It's not totally clear if this is 7 percent overall or 7 percent per child. That may seem small, but the smaller it is the longer it lasts. For example, 7% of family income is $7,000 at $100,000 per year income, typical of 150 percent. Childcare now costs $10,000 per year according to PBS, so the 7% marginal tax rate keeps going until the family hits $150,000 per year. If doubling the wages paid to childcare employees raises the price, keep going. 7% isn't the end of the world, but remember it adds on top of everything else -- 30% for section 8 vouchers, food stamp income limits, regular taxes, and so on.
The cliffs may be more significant. A couple where one party makes $40,000 and the other makes $150,000 could save a lot of money by not getting married. The percentages apply to all income. If you make 149% of state median income, a raise to 151% moves you up a bracket on total income, not just the 7% of income above 150%.
So, this means you have to bring your form 1040 in to the day care center, disclose your "family income," however that is going to be defined, somebody figures out what "state median income for a family of the same size" is... This is the tip of what Casey points out
See also Section 132002 [and following]. Complying with all of these statutes, certifications, and the implementing final rules will add administrative costs to childcare. E.g., just as physicians today complain about paperwork taking away from their real job, so will childcare providers under BBB.
Suppose you have a really good child-care facility. Or you're located in a convenient but high-rent area.
(F) PROHIBITION ON CHARGING MORE THAN COPAYMENT.—The State plan shall certify that the State shall not permit a child care provider receiving financial assistance under this section to charge... more than the total of—
(i) the financial assistance provided for the child under this section; and
(ii) any applicable copayment pursuant to subparagraph (E).
I presume blog readers know how well price controls work. The result is, of course, lines. Between mandating higher wages and forbidding higher prices, I cannot think of a better way to shift the supply curve of child care... to the left.
Oh, yes, p. 264
(J) LICENSING.—The State plan shall include an assurance that the State has or will develop within 3 years after receiving funds under this section, licensing standards for child care providers..
Now there is a key to increasing supply -- add a new state-by state occupational license.
I won't even start on immigration. If you have a child-care cost "crisis," maybe letting in some of the eminently qualified child-care providers massing on our borders might be a good idea.
Even the definitions are humorous. p. 247
(H) INCLUSIVE CARE.—The term ‘‘inclusive’’, with respect to care (including child care), means care provided by an eligible child care provider—
(i) for whom the percentage of children served by the provider who are children with disabilities reflects the prevalence of children with disabilities among children within the State involved; and
(ii) that provides care and full participation for children with disabilities ... alongside children who are...not children with disabilities...
OK, so you can't have less than the state average of disabled children. But by addition, that means you can't have more than average either! And no matter how severe the disabilities, heaven forbid you hire a teacher with real qualification and expertise at handling disabled kids and run a specialized facility.
It goes on. Section 132002 and following describes the tax part of it. I'm exhausted.
*****
So what will all this do? I'll hazard a forecast. This will create a big state bureaucracy. The majority of child-care operators, especially those who work for actual poor and disadvantaged people, in poor and disadvantaged areas, will look at this mess and say no thanks, we don't take federal money. (All of these are couched as requirements conditioned on receiving federal funds, as they must be given what's left of the commerce clause.) They take cash, hire who they want, and operate under the current slightly less restrictive set of rules. Or, they operate underground. As the wealthy send their kids to private schools, they send their kids to high cost private day care also outside the system to avoid price caps.
The US creates one more of thousands of programs with take-up rates in the low single digits. Politicians get to feel good about offering child care, without actually doing it. Costs of the official programs balloon. But overall costs may not end up that large, because it reaches so few people. On the margin, though, a few more people work less, to avoid losing benefits, to avoid losing coveted spots in half decent child care facilities, and a few less people get married.
Programs that only a small percent of people actually use are key to our political economy. Many people are eligible for hundreds of programs. If they signed up for all of them, their marginal tax rates would be in the many hundreds of percent, and the federal government would be even more bankrupt than it is.
Over a decade or so states clamp down, and add requirements. There will be occasional scandals about illegal cash only low-quality child care. We create a mildly costly program, supporting a large bureaucracy, throwing sand in the gears of what should be a low-cost, competitive, flexible necessary business. Child cate remains expensive, hard to find, and distressingly low quality.
And this is one tiny section of one enormous piece of sausage. If the rest is like this, heaven help us.
***********
Update: I may have gotten the forecast wrong. People don't have to pay more than x% of their income. That means the state pays the rest? How much is the rest? That is left unsaid. So, a better forecast is that, that the price of child care will skyrocket. If a child care place doubles what it charges, none of its customers have to pay any more at all!
Imagine if restaurants charged a set fraction of your income, no matter what you order, and the state pays the rest. Steak. No, I meant caviar!
A good forecast following that is price controls. This is going to look like Medicare or Medicaid very quickly.
Update 2: Mulling it over, this bill is really shocking. It's been 60 years since the Great Society programs, and 90 since the New Deal. This program is shot full of holes. The most basic question is unanswered: if every family has the right to child care, at x percent of their income, who sets the price and who picks up the tab for the rest? Basic disincentives scream at you -- an obvious disincentive to marriage, and financial cliffs where earning one dollar more loses hundreds of benefits. Have our social program writers learned absolutely nothing in 60 years?
"Lawyer friends: Can Congress appropriate 'such sums as may be necessary?'"
ReplyDeleteI am not a lawyer, but Congress can (and does) appropriate funds for programs in this manner. It's my understanding that Social Security and Medicare both follow this model. Congress has set broad eligibility criteria and payment formulas. Both programs then operate largely on autopilot, outside of the annual legislative budgeting process.
Realist,
DeleteI would call it more like building back sand castles that are washed away as the political tides change. Social Security and Medicare have stood the test of time in large part because they received overwhelming support in Congress when they were passed:
Social Security
https://www.ssa.gov/history/tally.html
House Vote:
372 Yeah, 33 Nay (Including 81 of 102 Republicans)
Senate Vote:
77 Yeah, 6 Nay (Including 16 of 25 Republicans)
Medicare
https://www.ssa.gov/history/tally65.html
House Vote:
307 Yeah, 116 Nay
Senate Vote:
70 Yeah, 24 Nay
Meanwhile, the vote that authorized the US Treasury to sell TIPs and Inflation Indexed Bonds
House: 0 Yeah, 0 Nay
Senate: 0 Yeah, 0 Nay
Yes, but this one is not on autopilot. This program expires after three years. It's a very unworkable provision, probably the worst in the entire bill.
DeleteFRestly,
DeleteYour question re: authorization for TIPS is answered in part in the following from CFR 2011-Title 31-Volume 2-Part 356, which reads, in part,
"PART 356—SALE AND ISSUE OF MARKETABLE BOOK-ENTRY TREASURY BILLS, NOTES, AND BONDS (DEPARTMENT OF THE TREASURY CIRCULAR, PUBLIC DEBT SERIES NO. 1–93)
"Subpart A—General Information
Sec. 356.0 What authority does the Treasury have to sell and issue securities?
356.1 To which securities does this circular apply?
"Subpart A—General Information
"§ 356.0 What authority does the Treasury have to sell and issue securities?
"Chapter 31 of Title 31 of the United States Code authorizes the Secretary of the Treasury to issue United States obligations, and to offer them for sale with the terms and conditions that the Secretary prescribes.
"§ 356.1 To which securities does this circular apply?
"The provisions in this part, including the appendices, and each individual auction announcement govern the sale and issuance of marketable Treasury securities issued on or after March 1, 1993. This part also governs all securities eligible for the STRIPS (Separate Trading of Registered Interest and Principal of Securities) Program (See §356.31.). In addition, these provisions and the auction announcements govern any other types of securities we may issue under this part."
[Source: https://www.govinfo.gov/content/pkg/CFR-2011-title31-vol2/pdf/CFR-2011-title31-vol2-part356.pdf ]
Notice the date, "March 1, 1993", to wit:
"§ 356.1 To which securities does this circular apply?
"The provisions in this part, including the appendices, and each individual auction announcement govern the sale and issuance of marketable Treasury securities issued on or after March 1, 1993. ... ."
So, you can relax now. The Sec. of The Treasury was authorized by Chp. 31 of Title 31 of the United States Code to issue TIPS (TIIS) in 1996-7, and following. No separate act of congress was required to authorize the introduction and auction of TIPS.
This answers your specific criticism of TIPS and addresses my criticism of your proposal for issuance of "government equity" (a type of tax credit forward contract). If the Sec. of The Treasury believes that your "government equity" has merit and is marketable, she has the full authority required to issue such as when and in quantities that she determines the market will accept. So, put your question to her; and, if at first you don't succeed, try, and try again.
OEE,
Delete"Chapter 31 of Title 31 of the United States Code authorizes the Secretary of the Treasury to issue United States obligations, and to offer them for sale with the terms and conditions that the Secretary prescribes."
Okay, thank you for the CFR reference. So the Treasury Secretary (under broad authority granted by CFR) can sell equity (forward tax credits) as I describe.
Do you also understand why a Treasury Secretary might be "forced" into doing such a thing?
It is entirely within the framework of the Constitution for the US Congress to vote yes on a spending bill, then vote no on any legislation designed to pay for that spending (debt / borrowing limit increase - no, tax increase - no, coinage of money - no).
Under that scenario, it falls upon the Executive Branch of government under Article II, Section 3 to execute the legislative action of Congress:
https://constitution.congress.gov/browse/essay/artII_S3_1_3_1/
"...he shall take Care that the Laws be faithfully executed."
Your statement:
"If the Sec. of The Treasury believes that your government equity has merit..."
My government equity has merit because it may be the only option available to him / her facing a divided Congress that wants to spend, but does not want to tax or borrow to pay for it.
OEE,
DeletePart of the problem (I think) is that people believe that "United States obligations" as mentioned in Subpart A, 356.0 of the CFR that you reference are always the result of government borrowing.
The tax credit forward contracts (equity) that I describe would be considered obligations of the United States in that the Internal Revenue Service would be obliged to accept them in discharging a tax liability, but would not be considered to be borrowing / debt subject to limit under Article 1, Section 2 of the Constitution.
OEE,
Deletehttp://www.famoustexans.com/philgramm.htm
"A main theme of Gramm's campaign was a test he concocted for government spending programs called the Dickie Flatt test. It was named in honor of Dickie Flatt, Gramm's symbolic everyman who ran a small print shop in Mexia, Texas. The test was based on Gramm's question: Will the benefits to be derived by spending money on this program be worth taking the money away from Dickie Flatt to pay for it?"
And so, here is question worth pondering. Would Dickie Flatt be willing to use her money to purchase equity (forward tax credits) from the federal government recognizing that her future tax liability will be reduced in doing so?
FRestly, there are two differences that I see between Gramm's "test" and Dikie Flatt's decision to enter into a forward contract w/ the IRS. The first is that Gramm's test is intended to apply to Congress along the lines of the Hypocratic Oath ("First, do no harm"), or, stated in economic terms, the legislation or policy should be Pareto efficient, i.e., it should not make Dickie Flatt worse off, economically or socially, while making others better off. The second is that Dickie Flatt's decision to acquire a forward contract with the IRS is personal to Flatt and his circumstances. In this case, we can liken the forward contract to the U.S. Savings Bond agreement--both are personal to the purchaser, are non-transferrable (except to heirs, in the case of Savings Bonds), are not tradeable securities (non-assignable), and cannot be hypothecated. The difference between the forward contract that you have described and U.S. Savings Bonds (neglecting the magnitude of the discount factor's implied interest rate, and the rate of interest on Savings Bonds) is that at maturity, the Savings Bond pays a fixed sum of money whereas the forward contract settles a stochastic income tax liability at maturity. It is the stochastic aspect of the forward contract settlement value that would give rise to concern for the Flatt's of this world--unless they are sophisticated traders or corporate shareholders. Gramm's "Dikie Flatt", an 'everyman' who runs a small print shop in Mexia, TX, would not likely qualify as a sophisticated investor per SEC definition. The issue is one of equity--the IRS and the U.S. Treasury would not want to face the image of a Dikie Flatt (unsophisticated investor) seen to be taken advantage of by the sophisticated machinations of a government bureaucracy. 'Caveat emptor' does not apply in such situations. The government would rather be seen being cheated out of taxes by sophisticated taxpayers than to be seen 'cheating' the unwary of their savings through the vehicle of a U.S. Treasury contract no matter how extensive the warnings in the fine print of the contract document. In other words, image is more important to the Secretary than the money the contract would raise if the forward contract scheme is implemented.
DeleteYour question raises matters touching on utility, in the economic and social welfare sense. There are two utility functions to consider: (a) Dikie Flatt's, and (b) the Secretary of The Treasury's. Whereas the former is idiosyncratic, the latter relates to the norms and mores of the bureaucracy of government. It is the latter that will likely govern whether your proposal sees the light of day.
"So, put your question to her; and, if at first you don't succeed, try, and try again."
DeleteBelieve me, I have been trying for a multitude of years.
I first proposed this idea during the Obama administration here:
http://library.cqpress.com/cqalmanac/document.php?id=cqal-1390-77513-2462151
I sat face to face with Mrs. Alice Rivlin in Philadelphia and explained exactly what I was proposing. I did the same with Mr. Alan Simpson in Washington, DC. I emailed this vary same plan to Greg Mankiw, Larry Summers, Robert Reich, Paul Krugman, Erskine Bowles, and a whole host of others.
Since that time, the Fed's balance sheet has ballooned, the employment to population ratio has fallen (including the 25-54 year old category), and inflation is approaching levels not seen since the 1970's.
OEE,
Delete"Gramm's Dickie Flatt, an every man who runs a small print shop in Mexia, TX, would not likely qualify as a sophisticated investor per SEC definition."
Nor is Dickie comparable to Joe the garbage man or Jack the janitor. As described Dickie runs his own business and presumably does his own taxes - which can be daunting in and of themselves.
"It is the stochastic aspect of the forward contract settlement value that would give rise to concern for the Flatt's of this world--unless they are sophisticated traders or corporate shareholders."
The returns on investment for Dickie in owning FTC's are no more random or stochastic than his returns on running his print shop. If his print shop is doing well, then his realized returns on investing in FTC's will do well and vice versa.
The contra-cyclical aspect of FTC's is the rate of the return offered by Treasury in response to business cycle changes. As the output gap widens, the policy rate of return offered by Treasury increases. This is not much different than monetary policy. As the output gap widens, the policy borrowing rate offered by the Fed falls.
Dickie as described runs a print shop that must deal with variable changes all the time (changes in bulk paper prices, inventory management, etc.). Purchasing and maintaining an "inventory" of FTC's would be no different for Dickie than maintaining an inventory of anything else (paper, ink, etc.).
Dickie (as Gramm's "everyman" or "every woman") surely has a basic grasp of return on investment, filing tax forms, and inventory management.
The problem for Dickie is when Mr. Gramm's political party loses control of Congress and the opposing party raises taxes to pay for debt accumulated by both parties. (See 1993 Congressional budget resolution).
OEE,
DeleteFed raise policy rate of interest on the money that it lends to contain inflation.
Treasury raises policy rate of return on the FTC's that it sells to close the real output gap.
Seems to me that you get the best of both worlds as opposed to the stagflation (high inflation, low / negative real growth) that we are going to go through.
OEE,
DeleteWith modern day computing and electronic securities, a lot of the processing can be handled directly by the IRS and Treasury.
Dickie purchases a ladder of FTC's (1 year, 2 year, 3 year, etc.) for however long he anticipates operating his print shop. These are registered through the Treasury CUSIP system. Each tax season, the value of the FTC's with a maturity date corresponding to the tax year owned by Dickie are automatically deducted from Dickies tax liability to the IRS.
If Dickie's tax liability is less than the value of the FTC's that he owns, the balance is rolled into future years until his demise or until all of the FTC's he owns are redeemed.
Easy peasy, no muss, no fuss. Federal debt falls AND Dickie's tax liability also falls regardless of what Congress (under either political party) does.
Can't access the document at http://library.cqpress.com/cqalmanac/document.php?id=cqal-1390-77513-2462151 -- it's behind a sign-in page.
DeleteInnovation is difficult; innovation in government bureaucracies is more difficult. I expect that the response, or lack of response, is, in itself, the answer to the question.
What questions has this discussion answered? It has answered your question concerning the legitimacy of the Treasury inflation-protected securities--those debt instruments are U.S. government debt (Chp. 31, Title 31 of U.S. Code) and the debt falls under the 14th Amendement, Sec. 4. It appears to have settled the question of whether the notional 'government equity' security would be issued and under what authority it could be issued to meet the test of the 14th amendment, s. 4.--Chp. 31, Title 31 of U.S. Code would suffice for that purpose, should the Sec. of The Treasury give it the go-ahead; separate Congressional authority would not be required.
Perhaps not entirely satisfactory, from your perspective, but for a casual discussion on a web-blog, I would argue that it is a result that is far from common.
That is quite satisfactory. It confirms a lot of what I have believed to be true over the last decade plus.
DeleteAnd so the next time an economist comes along and says that the federal debt is a natural consequence of prior deficits or another economist comes along and says that the federal debt ceiling MUST be raised to avoid a default - now both you and I know that they are either poorly educated or are lying through their teeth.
The document that I provided a link to is a result of this:
Deletehttps://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform
OEE,
Delete"Innovation is difficult; innovation in government bureaucracies is more difficult. I expect that the response, or lack of response, is, in itself, the answer to the question."
That might be said for socialist / communist institutions where outside opinions and ideas are shunned or ignored completely.
FRestly,
DeleteSimpson-Bowles appears not to have been put into effect.
Innovation is difficult in bureaucracies (private or public) because of "frictions" which have been put in place to ensure consistent practices (even if inefficient compared to alternatives). The bureaucratic mind-set, if we can call it that, is summed up (efficiently) by a phrase common in the Royal Navy, circa 1790-1815, "May nothing new arise (on your watch)." "New" in this particular case being anything innovative or undesireable as destablizing the status quo ex ante. Your proposal for "government equity" Treasury securities would fit the definition of "new" within the ambit of the Royal Navy of the 18th and 19th centuries.
An economist who "...says that the federal debt ceiling MUST be raised to avoid a default... " must be a 'single-handed economist', for everyone knows that every true economist when offering a recommendation invariably offers an alternative recommendation in the same breath, viz., "... on the other hand... ." [cf., Harry Truman]
The alternative is, "Doctor, cure thyself."
That the debt ceiling is an artificial construct is self-evident (axiomatic) and needn't be proved. By the same token, there is no "natural" level for the debt to gross-domestic-product ratio. Take for example, the celebrated FTPL identity, B(t-1)/P(t) = {the conditional expectation of the discounted infinite sum of future primary real surplus}, the numeraire being $1 for convenience; the expectation conditioned on the information set Q(t). We can argue over the appropriate discount factor to use, and over the measure Q(t), but the basic structure is non-controversial.
The state transition function for B(t), federal debtd, is B(t) = r B(t) dt - P(t) s(t) dt. An expression for the state-transition of the federal debt to gross-domestic-product (B:PY) can be found using the simple relation dY(t) = g Y(t) dt. Let Z(t) = (B/PY)(t), where B/PY = "debt:GDP" ratio. Then, dB(t)/PY(t) = r Z(t) dt - s(t)/Y(t). The chain-rule of calculus can be used to find an expression for the rate of change of Z(t), thus, d(B/PY)(t) = dB(t)/PY(t) - B(t)/Y^2(t)/P(t) dY(t) - B(t)/Y(t)/P^2(t) dP(t). This then gives, dZ(t) = r Z(t)dt - s(t)/Y(t) - Z(t) dY(t)/Y(t) - Z(t) dP(t)/P(t). If we let the time rate of change of the price level be defined as dP(t)/P(t) = q dt, where q is the instantaneous rate of inflation, then, we can find the the time rate of change of the debt:GDP ratio, namely, dZ(t)/dt = -s(t)/Y(t) + ( r - g - q) Z(t). This is John's expression for the federal debt:GDP ratio with the Fisher relation incorporated [ r being the nominal rate of interest on the nominal dollar bond B(t)]. This is not controversial and there is no constraint placed on Z(t) by this relation.
So, where does the "debt level" come in? It is a 'creature' of Congress. A device that gives a semblence of "control" over the rate of unfunded spending ("deficit-spending" appropriations), might be one way of describing it. It is more often 'observed in the breech', than used as a means of moderating the governing party's reach.
Provided B(t) is bounded, i.e., 0 ≤ B(t) < ∞, the level of debt:GDP is not an issue, absent social welfare considerations. If social welfare is a consideration, then it should be overtly included in the economic model and worked in as a constraint on Z(t).
OEE,
Delete"An economist who ...says that the federal debt ceiling MUST be raised to avoid a default... must be a single-handed economist, for everyone knows that every true economist when offering a recommendation invariably offers an alternative recommendation in the same breath, viz., ... on the other hand..."
https://www.cnbc.com/2021/09/28/congress-must-raise-the-debt-limit-by-oct-18-yellen-warns.html
“We now estimate that Treasury is likely to exhaust its extraordinary measures if Congress has not acted to raise or suspend the debt limit by October 18,” Yellen wrote."
https://home.treasury.gov/news/press-releases/jy0390
"Congress must address the debt limit immediately."
So Janet Yellen (Treasury Secretary of the United States) is a single handed economist rather than a 'true' economist?
"That the debt ceiling is an artificial construct is self-evident (axiomatic) and needn't be proved. By the same token, there is no natural level for the debt to gross-domestic-product ratio."
Not exactly. The debt ceiling serves a number of purposes.
"So, where does the debt level come in? 'It is a'...device that gives a semblence of control over the rate of unfunded spending (deficit-spending appropriations), might be one way of describing it."
Incomplete. Yes, the debt ceiling gives a legislature the opportunity to pause and reconsider it's commitments to financial expenditures. The debt ceiling also prevents an unscrupulous Treasury Secretary / Executive Branch of Government from selling government bonds on demand.
And if you think that can't happen please see the Solomon Brothers scandal:
https://en.wikipedia.org/wiki/Salomon_Brothers
"In 1991, U.S. Treasury Deputy Assistant Secretary Mike Basham learned that Salomon trader Paul Mozer had been submitting false bids in an attempt to purchase more treasury bonds than permitted by one buyer during the period between December 1990 and May 1991."
With government bonds sold on demand, a bank / multiple banks with access to the Fed's discount window could purchase a sufficient quantity of bonds (borrow short from the Fed, lend long to Treasury) such that the Ponzi limit would soon be reached.
The limit on government debt that can legally exist is referred to as the Ponzi limit.
Ponzi finance (aka a pyramid scheme) is illegal under federal law. When the total interest expense owed by a federal government exceeds the total amount of revenue that it receives, the federal government would be making interest payments on it's existing debt with new debt issuance, which would be a violation of federal law (yes federal government employees are not above the laws they are sworn to protect).
"Provided B(t) is bounded, i.e., 0 ≤ B(t) < ∞, the level of debt:GDP is not an issue.."
Perhaps not, but the interest expense relative to government revenue is always an issue.
GDP = Nominal GDP
TR% = Taxes and other government revenue expressed as a percentage of GDP
B = Quantity of government bonds
I% = Average annual interest
GDP * TR% > B * I% - Under the no Ponzi condition, this is always true
What should be obvious is that when the federal government sells equity (FTC's) as I have described it, the Ponzi condition can never be breached irregardless of the term structure or the offered rate of return for that equity.
DeleteThe problem with the celebrated FTPL "identity" is that it presumes that government bonds are a necessity or legal requirement of government finance when in fact they are not.
Deletehttps://en.wikipedia.org/wiki/Accounting_identity
"In accounting, finance and economics, an accounting identity is an equality that MUST BE TRUE REGARDLESS OF THE VALUE OF ITS VARIABLES, or a statement that by definition (or construction) must be true."
And so if there are no government bonds ( B(t)=0 ), does the FTPL identity still hold true?
Re: Paul Mozer,
DeleteMozer entered bids for 5-yr Treasury notes at an auction held by the Treasury dept. He violated several laws, but he wasn't running a Ponzi scheme, nor was he borrowing money at the Fed's discount window. Solomon did not have privileges to borrow at the discount window. Mozer was attempting to buy 5-yr T-notes at public auction. Hard to disguise that.
True, there is nothing in law that states that the government must issue debt to fund its operations and the creation of public works. It can run itself on a pay as you go basis, limiting its current expenditures to its current receipts and cash on hand. If it needs more money than that it could farm future revenues in exchange for present ready money--you're concept of "government equity" comes to mind as being largely equivalent.
The debt ceiling is imposed to exert a restraint on Congress's natural inclination to spend without end. Given that Congress can modify the level of the ceiling this makes the debt ceiling ineffective as a restraint on the level of federal debt.
The "no Ponzi scheme" criterion is simply another way of stating that the bond market cannot sustain a rational valuation bubble, because otherwise infinite profits would earned and arbitrage opportunities would see to it that those profits will be rapidly eroded away.
If there are no government bonds does the FPTL still hold? If the FTPL holds when the government issues debt, then it holds when the government doesn't issue debt. If Newton's 2nd Law holds when a body is in motion, then it holds when the body is at rest.
The FTPL is assumed to describe the dynamics of the price level when government spending is non-Ricardian. When government spending is Ricardian, then the FTPL is assumed to be indeterminant of the price level. One could look on this as being somewhat equivalent to the behaviour of a physical system which is linear in a region r < d near its state of equilibrium but non-linear in any region at a greater distance r > d from its state of equilibrium, d marking the transition point, or distance.
M•v = p•Y is a little easier to apply when it comes to estimating the effects of government policy on the price level.
The government can decide not to meet its obligations as those come due. It did so quite early in its existence and managed to survive the experience.
Don't know if any of this helps.
"irregardless" is not a word in the English language. You can have "irrespective" or "regardless". I learned this from a couple of erudite 'dolls' who were majoring in English Lit. at the time I was toiling away in undergrad engineering. Took some effort to break myself of the habit of using "irregardless".
Regarding the erudite 'dolls'....
Deletehttps://www.npr.org/2020/07/07/887649010/regardless-of-what-you-think-irregardless-is-a-word
"But irregardless was first included in Merriam-Webster's Unabridged edition in 1934, a spokesperson tells NPR. Other dictionaries, including Webster's New World College Dictionary, The American Heritage Dictionary of the English Language and the Cambridge Dictionary all recognize irregardless as a word."
OEE,
Delete"If there are no government bonds does the FPTL still hold? If the FTPL holds when the government issues debt, then it holds when the government doesn't issue debt. If Newton's 2nd Law holds when a body is in motion, then it holds when the body is at rest."
Bad analogy. Does Newton's 2nd law hold when the body doesn't exist at all (or in our case when government bonds don't exist at all)?
FRestly, the existence of a physical body or its absence does not alter Newton's 2nd Law. Einstein's Law of Special Relativity does not depend on the mass of the Moon or the presence of the Solar System.
DeleteThe FTPL, if it applies, is not dependent on whether or not the government issues debt. If the government never issues debt, but it has monopoly control over a gold mine from which it can draw an endless supply of gold and silver bullion which it uses to coin gold and silver species to pay its creditors, then if the government issues too much coinage, the FTPL will likely apply.
Adam Smith noted, in his day, that the corn price of gold in The Kingdom of Spain far exceeded the corn price of gold in England at the time. He concluded that the difference in prices arose because the Kingdom of Spain was issuing excessive quantities of gold and silver coinage. A surfeit of gold rendered corn (in limited supply) dear, measured in the weight of gold coin.
Your questions remind me of the joke told on the Doctor of Modern Philosophy who posed the question, "If there is no one about when the majestic 300-year-old oak tree falls in the forest, does the oak tree in falling make a noise?" He asks whether or not the laws of physics apply to the oak tree if no one is around to witness its fall. You ask, "If there are no government bonds issued, does the FTPL still hold?" If FTPL is a theory that links the price level to government spending, then, as was the case with the Kingdom of Spain in Adam Smith's day, the answer is yes, almost surely. But, as with the laws of physics, there are certain situations in which it does not hold, a.s. The analogue in physics is the region of applicability of Euclidian mechanics, vs. Einsteins theories of Special and General relativity. If bond issuance is limited and the government pursues Ricardian policies, then it is likely that the FTPL will have little to say about the causes of change in the price level, whereas if the government acts in a way that gives rise to non-Ricardian policies and related conditions in the economy, then the FTPL will have much to say about the evolution of the price level, according to those economists who have critiqued the theory.
If you are speaking or writing standard English, you would avoid using "irregardless" when you mean "regardless". It appears in dictionaries but it is labeled as "non-standard" English usage. The erudite "dolls" were not mistaken.
OEE,
Delete"If FTPL is a theory that links the price level to government spending, then, as was the case with the Kingdom of Spain in Adam Smith's day, the answer is yes, almost surely."
1. Where does government spending (or taxes) appear in this equation?
B(t) = r B(t) dt - P(t) s(t) dt
B(t) = Bonds at time t
r = Rate of interest
P(t) = Price level at time t
s(t) = Surplus / deficit at time t
Instead, I believe the equation should be:
B(t) = r B(t) dt - TR%(t) * P(t) * Y(t) dt + G(t) dt
TR%(t) = Taxes as a percentage of nominal GDP
G(t) = Government expenditures (other than interest payments)
Then there is a bounding condition:
P(t) * Y(t) * TR%(t) > B(t) * r - Under all cases (the Ponzi limit)
2. If B(t) is set to zero, what does that say about P(t)?
0 = 0 - TR%(t) * P(t) * Y(t) dt + G(t) dt
G(t) dt = TR%(t) * P(t) * Y(t) dt
Then you see the implied relationship between government spending and the price level absent the existance of government bonds.
OEE,
Delete"Your questions remind me of the joke told on the Doctor of Modern Philosophy who posed the question, If there is no one about when the majestic 300-year-old oak tree falls in the forest, does the oak tree in falling make a noise? He asks whether or not the laws of physics apply to the oak tree if no one is around to witness its fall."
Actually I am asking if the laws of physics apply to an oak tree that does not exist in the first place. If there are no bonds ( B(t) ) then what does the FTPL say about the price level absent the existence of bonds?
FRestly, there was an omission/error in the equation that I wrote down--the equation should read: dB(t) = r·B(t)·dt - P(t)·s(t)·dt. The variable s(t) is the primary real surplus. Your equation is the equivalent of my equation when the term on the left-hand side of the equality sign is corrected to read dB(t). The primary real surplus s(t) = Y(t)·TR% - G(t) - T(t), where G(t) is real government spending and T(t) is the real transfer to households (normally not included in G(t)).
DeleteThe full equation which John and other economists use in the development of the FTPL includes money, typically represented by the variable M(t). It the variable is expressed in nominal or then-current dollars it would be written out as P(t)·M(t), or abbreviated PM(t). Using your terminology, and assuming that the government does not issue debt securities ("funded debt"), then it will issue either notes or it will issue currency (i.e., coins, not bullion, and paper notes, e.g., "dollar bills" that state "This note is legal tender for all debts public and private") and we can represent these notes and coins by the variable PM(t).
The equation used with the FTPL will then read:
d PM(t) = -P(t)·[Y(t)·TR% - G(t) - T(t)]·dt = -P(t)·s(t)·dt
Dividing through by P(t) gives the real or constant purchasing power expression:
d M(t)/dt = -Y(t)·TR% + G(t) + T(t) = -s(t), where I have divided through by P(t)·dt to obtain the O.D.E. expression.
Just because funded debt (bonds, i.e., B(t)) is not issued, does not in anyway change the fundamentals of the FTPL.
In earlier ages, the monarchs of Europe, and the Revolutionary congress of the 13 colonies issued currency and paper money (notes). The rate of issuance was heavily predicated on the needs of monarch or the congress for supply. Control over the currency (money) became, in time, centered on the royal mint and the congressional printing press. Bank money (notes and coin) was usu. outlawed after a time in order for the central authority to control the issuance of currency, in part to obtain seigniorage, and, in part, so that the central authority could concentrate the good money in the hands of that authority, and issue bad money in exchange. So, you had President Roosevelt suspend conversion of the dollar into gold and then subsequently outlaw the holding of gold by private persons and corporations. The private gold holdings were exchanged for notes (dollar bills in various denominations) in a good-money-for-bad money exchange.
Today, that type of exchange is unnecessary. The dollar is incontrovertible, and the exchange of good money for bad money is effected through inflation (reduction of purchasing power) of the dollar notes. The reason that the FTPL equations are largely focused on B(t) instead of M(t) is because the volume of B(t) is much larger than that for M(t). The advantage of M(t) is two-fold: (1) it pays no interest, and, (2) it has no specified maturity date. The disadvantage of M(t) is that is physically awkward to handle in large volumes. One can substitute central bank reserves for M(t), and avoid the physical handling issues, but that involves the central bank in the payment of interest on reserves.
Nonetheless, your question is now answered--in the absence of funded debt issuance, B(t), the government issues dollar notes (legal tender), M(t), or "money", and the FTPL then holds as it did when B(t) was issued and traded.
OEE,
DeleteOkay, now we are getting somewhere.
We live in an economy with both money and bonds and so the equation should include both, not one or the other.
dB(t) = r·B(t)·dt - P(t)·s(t)·dt
s(t) = Y(t)·TR% - G(t) - T(t)
dB(t) = r·B(t)·dt - P(t)·[Y(t)·TR% - G(t) - T(t)]·dt
Where is the money in this equation?
OEE,
DeleteOkay, so we have the equation:
dB(t) = r·B(t)·dt - P(t)·s(t)·dt
s(t) = Y(t)·TR% - G(t) - T(t)
dB(t) = r·B(t)·dt - P(t)·[Y(t)·TR% - G(t) - T(t)]·dt
One method of conventional thinking says setting dB(t) = 0 through either increasing TR% or decreasing G(t) + T(t) will maximize Y(t) - The balanced budget model (See Clinton / Greenspan years).
Another method of conventional thinking says maintaining a positive real interest rate ( r - dP(t) / P(t) ) will maximize Y(t) - The central bank model (See Reagan / Volcker years).
Now we are going to add equity ( EQ(t) ) as I have described it:
dB(t) + dEQ(t) = r · B(t) · dt + re · EQ(t) - P(t) · [Y(t) · TR% - G(t) - T(t)]·dt
re · EQ(t) = Realized returns on equity
We now stipulate that the realized returns on equity are conditional of Y(t) - Real GDP:
re · EQ(t) = ß · Y(t)
dB(t)/dt + (ß / re) · dY(t)/dt = r · B(t) + ß · Y(t) - P(t) · [Y(t) · TR% - G(t) - T(t)]
Now we can set dB(t)/dt = 0 without touching either TR%, G(t), or T(t)
(ß / re) · dY(t)/dt = r · B(t) + ß · Y(t) - P(t) · [Y(t) · TR% - G(t) - T(t)]
FRestly, you make the leap of faith into the beyond with your assumption that re·EQ(t) is in a causal relation to Y(t).
DeleteYou assert that, re·EQ(t) = ß·Y(t) , but is this true? If it is true, what does it say about the relation between the country's real gross domestic product, Y(t), and a government program which issues an n-year forward income tax credit contract to investors in exchange for a payment of (q(t) + 1)⁻ⁿ·EQ(t) today (where q(t) is a discount rate)?
Let's assume, for the sake of argument, that EQ(t) is C¹ on the non-negative real line. Then, based on this assumption, dEQ(t)/dt exists and is continuous, but d²EQ(t)/dt² does not exist. Again, by this assumption and your postulated relation between EQ(t) and Y(t) which is assumed to be C² on the non-negative real line,
(1) .................... dEQ(t)/dt = (ß /re)·dY(t)/dt
[where, the quotient ß /re is taken to be a positive constant.]
Substitution gives,
(2) .................... (ß /re)·dY(t)/dt – (ß – P(t)·TR%)·Y(t) = G(t) + T(t).
Divide through by Y(t) to eliminate the non-linearity posed by the presence of P(t) in (2) and define g(t) = G(t)/Y(t) and f(t) = T(t)/Y(t), to obtain,
(3) ..................... (ß /re)·d(ln(Y(t))) = (ß /re)·dv(t) = [g(t) + f(t) – P(t)·TR% + ß]·dt
where ln(Y(t)) is replaced by v(t) for convenience.
Equation (3) can be integrated directly, giving,
(4) ...................... v(t) = constant + ∫₀ᵗ (g(τ) + f(τ))·(re/ß)·dτ – ∫₀ᵗ (P(τ))·TR%·(re/ß)·dτ + re·t
where it can be easily seen that the constant must be v(0).
Substituting ln(Y(t)) for v(t) in (4) and exponentiating on both sides of the equality sign, yields,
(5) ...................... Y(t) = Y(0)·exp(∫₀ᵗ (g(τ) + f(τ))·(re/ß)·dτ – ∫₀ᵗ (P(τ))·TR%·(re/ß)·dτ + re·t)
What does this tell us? It tells us that under the restrictive conditions imposed by your assumptions, GDP is: an exponentially increasing function of g(t) + f(t), the share of the economy represented by government spending on its own operations (G(t)/Y(t)) plus transfers to households (T(t)/Y(t)); an exponentially decreasing function of the price level, P(t) and the tax rate, TR%; and a pure exponential function of time with a time constant equal to the inverse of the "realized return rate" (“re”) of EQ(t).
It is necessary that we ask whether this is a reasonable model of the economy when the government does not issue bonds, B(t)?
I leave that question to you for an answer.
OEE,
Delete"FRestly, you make the leap of faith into the beyond with your assumption that re·EQ(t) is in a causal relation to Y(t)."
There are very few (if any) causal relationships in economics and so economic policy must rely on incentives.
re · EQ(t) = ß · Y(t)
The incentive to provide goods / services and increase Y(t) is embedded into the equity since the only way for an individual to recover his / her investment is through redeeming that equity in fulfilling a tax liability.
Meaning to reap any return on equity sold by the federal government, you must produce and sell some good or service ( Y(t) ) to incur a tax liability to redeem the equity against.
The equity that I am referring to can best be described as a contingent contract (similar to Social Security) - you will reap a benefit, but you must be willing to work to receive that benefit.
"It is necessary that we ask whether this is a reasonable model of the economy when the government does not issue bonds, B(t)?"
We are not modeling the entire economy, we are modelling fiscal policy and it's effect on the price level (FTPL remember)?. There are a whole host of other factors to consider when trying to model an entire economy.
For instance, equity shares and bonds sold by private companies are not included in the model.
Birth / death ratios are not included in the model.
Political / legal restrictions for various activities are not included in the model.
OEE,
Delete"What does this tell us? It tells us that under the restrictive conditions imposed by your assumptions, GDP is: an exponentially increasing function of g(t) + f(t)..."
Not exactly. This isn't a model of the whole economy. What it tells us is that we can limit or even eliminate the interest expenditures r * B(t) made by the federal government when equity is sold in lieu of debt.
FRestly,
DeleteFrom your remarks, above, I conclude that the "leap of faith" ( re·dEQ(t)/dt = ß·dY(t)/dt ) is not warranted. Your rationale justifying EQ(t) is forced. Given that the business man will operate his firm for as long as it remains profitable for him to do so, i.e., MPB > MC, he is likely not to require EQ(t) to justify continuing doing so.
The only justification for entering into the forward contract (EQ(t,t+n)) is to acquire a benefit relating to the discount, offered at an annual rate of d, in excess of the rate of interest, after factoring in the uncertainty of the payoff at maturity, re· EQ(t-n,t). The uncertainty arises because his knowledge, in period t, of the future business activity, its profitability, and its tax liability in the year t+n, is hazy. He will, in all likelihood, use EQ(t) to prepay his base tax liability, from his established business lines, if the discount rate, d, exceeds his cost of capital, kₜ. His cost of capital, kₜ, is greater than the government's cost of borrowing, i(t). Therefore, we have the following ranking relationship: d > kₜ > iₜ. If kₜ > d, then he won't be likely to enter into the forward contract because his MPB = d < MC = kₜ in that investment opportunity.
Because the business owner will seek only to cover his future tax liability for his baseline business activities, if he can obtain a rate of return exceeding his cost of capital, he can only be expected to do so with certainty if his expected tax liability E{T(t+n)} > EQ(t,t+n) with a margin >= θ∙σ²(ᴛⱼ), where θ is a measure of his risk aversion and σ²(ᴛⱼ) is the variance of his annual tax liability in his business line (j).
In other words, he assures himself that he will make money off the government by entering into only the number of forward contracts, N∙EQ(t,t+n), that he expects to realize at a profit of πₜ = d – kₜ > 0, and no more than that number. He will not expand his business beyond its normal rate of expansion simply to realize on the forward contracts.
The business owner is acting prudently. If the government is so imprudent as to offer the forward contracts at rates of discount, d, greater than the businessman's cost of capital it will sell out, but only to the extent that the businessman's MPB > MC = kₜ. Ergo, ΔY(t) ≠ f(EQ(t-n,t)) -- i.e., the forward contract, EQ(t,t+n) does not have the attributes that you impute to it.
"What it tells us is that we can limit or even eliminate the interest expenditures r * B(t) made by the federal government when equity is sold in lieu of debt." — This was never in the ''cards'', FRestly. If you thought it was, then you stood a very good chance of being greatly disappointed. Government bills, notes and bonds, have attributes and benefits to the country that no amount of EQ(t) could possibly attain or hope to achieve. If you maintain otherwise, you have not grasped the essential difference between a country that has no government debt circulating in its economy, and one that has a great deal of government debt in circulation in its economy.
OEE,
Delete"The only justification for entering into the forward contract (EQ(t,t+n)) is to acquire a benefit relating to the discount, offered at an annual rate of d, in excess of the rate of interest..."
IN EXCESS OF THE REAL RATE OF INTEREST. If the discount with an annual rate "d" offered by Treasury can always exceed the real rate of interest, then why would the businessman ever need to raise prices?
See Great Depression. Nominal interest rates were near zero but real interest rates were excessive because of the deflation. Treasury Secretary at the time (Andrew Mellon) could have sold equity that would be used by private business to offset their real cost of debt service.
"In other words, he assures himself that he will make money off the government by entering into only the number of forward contracts, N∙EQ(t,t+n), that he expects to realize at a profit of πₜ = d – kₜ > 0, and no more than that number. He will not expand his business beyond its normal rate of expansion simply to realize on the forward contracts."
First, I am sorry, but what the f!@? are you talking about. The business man is simply paying his taxes.
It is the government and it's various welfare / warfare interest groups that are "making money" off the business man's efforts.
https://www.forbes.com/sites/ralphbenko/2011/02/22/ending-the-warfarewelfare-state/?sh=32adcc1325bf
Second, what does a "normal rate of expansion" even mean? When a businessman decides to expand, he will weigh all the pro's and con's of that expansion including how much additional EQ he may need to purchase just like any other good he may need in pursuing that expansion (additional warehouse space, additional equipment, additional workers, etc.).
Depending on the rate of return offered by the Treasury, he may even purchase additional equity with the intent of expanding at a future date.
"Government bills, notes and bonds, have attributes and benefits to the country that no amount of EQ(t) could possibly attain or hope to achieve."
Such as what exactly?
1. Having the central bank print up a bunch of money to buy them?
2. Selling them overseas and in the process destroying your own productive capacity?
3. Using them to fund a bunch of warfare and welfare programs?
"This was never in the cards, FRestly."
What does that even mean?
OEE,
Delete"Government bills, notes and bonds, have attributes and benefits to the country that no amount of EQ(t) could possibly attain or hope to achieve."
Perhaps. But as they say, everything in moderation.
In addition, there is no Constitutional requirement that the government MUST sell bonds under any circumstance.
Would government equity ever fully supplant government bonds - probably not because of the term you list above:
"θ is a measure of his risk aversion"
The risk adverse will shun away from government equity.
The risk tolerant will purchase government equity.
OEE,
Delete"Given that the business man will operate his firm for as long as it remains profitable for him to do so, i.e., MPB > MC, he is likely not to require EQ(t) to justify continuing doing so."
To "take" business away from a foreign competitor that has a lower wage cost while maintaining profitability, the businessman may decide to purchase EQ(t).
In 1978-1979, Congress passed the Humphrey-Hawkins Act.
https://en.wikipedia.org/wiki/Humphrey–Hawkins_Full_Employment_Act
1. Explicitly states that the federal government will rely primarily on private enterprise to achieve the four goals.
2. Instructs the government to establish a balance of trade, i.e., to avoid trade surpluses or deficits.
3. Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability.
Every one of these goals becomes possible when government equity is brought into the mix.
OEE,
Delete"Your rationale justifying EQ(t) is forced."
Not really, it is a means to an end (actually multiple ends).
OEE,
Delete"Because the business owner will seek only to cover his future tax liability for his baseline business activities..."
So what you are saying is that a business will never seek to expand it's operations?
FRestly,
Delete""Because the business owner will seek only to cover his future tax liability for his baseline business activities..."
"So what you are saying is that a business will never seek to expand it's operations?"
You have misconstrued the statement. The business owner (male or female), will only use EQ() if: (i) he is assured that he will realize the full (nominal) discount rate, d(t); (ii) the nominal discount rate, d(t), exceeds his cost of capital, k(t); and, (iii) he will only do so if he expects to have a positive tax liability at maturity, i.e., in period t + n, where n is the term to maturity of EQ(t). Conditions (i) and (iii) imply that he will only buy that fraction of EQ(t) that he needs to cover the full tax liability in n years--i.e., only that income from a taxable line of business or product line, or a mature business unit with predictable positive net income. The business expansion will not generate steady profits, will likely have tax loss carry-forwards against which EQ(t) is inapplicable, and have uncertain prospects which cannot be forecast with certainty. Condition (ii) is necessary because otherwise he would spend money on EQ(t) when he can earn more for himself and his shareholders and employees by investing in (buying) business opportunities that earn his cost of capital k(t) or more than his cost of capital -- i.e., EQ(t) at a discount rate d(t) < k(t) doesn't do it for him.
Consequently, EQ() will not be used for expanding Y(t), as in your contention that "dEQ(t) = (ß/re)·dY(t)" which you read as implying that the change in EQ(t) translates into an increase in GDP. It does not, if the businessman follows a disciplined investment program (i.e., conditions (i) through (iii), above). EQ() will merely shift the timing of government tax receipts, in the manner of 'tax-farming'.
FRestly,
Delete"To "take" business away from a foreign competitor that has a lower wage cost while maintaining profitability, the businessman may decide to purchase EQ(t)."
If he ever decided that, and you were sitting on his board of directors as an independent director, submit your resignation immediately. He is no businessman, but an idealist.
FRestly,
Delete"The risk adverse will shun away from government equity.
The risk tolerant will purchase government equity."
The wise, whatever their risk tolerance, will steer clear of it. You attribute to EQ() many positive attributes and public benefits, but there is little evidence in your arguments put forward here that you have undertaken a serious study from the perspective of the business owner. I strongly recommend that you try doing so, soon. It will either help you make a better business case for EQ(), or prevent you from wasting more time on it than you have already spent. I notice that your blogspot contains only the announcement of EQ() and no details such as those you have proposed on these pages. If you're at all serious, and I suspect that you are, then you will do as John does, and put flesh on bones, after first crafting the bones to that you later put flesh onto. Good luck.
OEE,
Delete"To take business away from a foreign competitor that has a lower wage cost while maintaining profitability, the businessman may decide to purchase EQ(t)."
"If he ever decided that, and you were sitting on his board of directors as an independent director, submit your resignation immediately. He is no businessman, but an idealist."
Nope, he is a pragmatist trying the reconcile the wants of the ownership of the company with the wants of his labor force.
"... but there is little evidence in your arguments put forward here that you have undertaken a serious study from the perspective of the business owner."
And that study would involve what precisely - looking at past effects on prices / wages / trade balance / real GDP when prior governments have sold equity? Tell me what country has ever attempted it, and I would gladly undertake such a study.
That is like saying we should study the effects of sending a human being in a space ship beyond the edges of the solar system before doing so - you can't study the effects until the space ship actually leaves the solar system.
OEE,
Delete"Conditions (i) and (iii) imply that he will only buy that fraction of EQ(t) that he needs to cover the full tax liability in n years--i.e., only that income from a taxable line of business or product line, or a mature business unit with predictable positive net income."
And n years could be 2 years, 10 years, 30 years, 50 years....what's your point?
"The business expansion will not generate steady profits, will likely have tax loss carry-forwards against which EQ(t) is inapplicable, and have uncertain prospects which cannot be forecast with certainty. "
If the business expansion is successful, it will be profitable, if not it won't.
Government equity increases the likelihood of that success in that it lowers the firm's after tax cost of capital.
No company can see out to the indefinite (n year) future.
All prospects that a company may invest in involve a degree of uncertainty.
OEE,
DeleteMy Blog spot now contains most of what I have relayed to you in terms of GEQ (Government Equity).
FRestly, thanks for the info on your updated blogspot -- I will navigate to it as time permits.
Delete"n" is the time to maturity of EQ(t,t+n). In your earlier description of government equity you set n = 5 years which seemed reasonable for business planning purposes. You set the discount rate, d, at 6% per annum which together with n = 5 yields a discount factor of 0.747258:1. The discount rate seemed to me to on the high side before I looked closely at the risk dynamics.
The reason that I expect that the businessman will act conservatively is your remark (earlier) that you thought the discount rate offered (6%) would yield a very attractive rate of return (without specifying what you thought the risks might be for holding EQ()). I spent some time looking at the risks given (i) non-assignability, (ii) non-redeemable except in the year of maturity against the holder's tax liability in that period, (iii) no credit for tax loss carry-back or carry-forward, and (iv) uncertainty concerning the recoverable value of EQ() prior to maturity should the business or the owner go bankrupt or die before the maturity date. I concluded that the conservative business owner would only purchase EQ() for that part of his future tax liability which he is certain of redeeming; he will not purchase EQ() for that part which he considers to be uncertain (inadequate profits, expected losses, or, profits covered by an expected tax loss carry-forward).
A business segment that generates steady profits, at low annual growth rates, is, in the terminology of the Boston Consulting Group, a "cash cow". The sharp business owner would buy EQ() at a 6% discount rate to cover those future tax liabilities of a "cash cow" and pocket the savings, provided 6% > k(t) his cost of capital.
A "cash cow" business grows at a rate approximating the rate of expansion of the economic in general, so dEQ() would not be expected to contribute to an increase dY(t) under those circumstances. If the businessman buys EQ() to cover a potential future tax liability of a business unit that is not a "cash cow", i.e., profits that may or may not materialize in n years time, he runs the risk of not realizing on the par value of EQ() and in that case he probably won't enter into the forward contract.
Since we're discussing expectations, there will always be cases that don't conform to expectations, but in general we can say that E{dY(EQ())} = 0, a.s., for such situations.
This foregoing describes the reasoning that I relied on to support the remarks that I have put forward to you concerning government equity, EQ(), or GEq().
OEE,
DeleteThe Blogspot info is basically a rehash of our discussion over the past couple months. I tried to stay away from the math.
"A business segment that generates steady profits, at low annual growth rates, is, in the terminology of the Boston Consulting Group, a "cash cow". The sharp business owner would buy EQ() at a 6% discount rate to cover those future tax liabilities of a cash cow and pocket the savings, provided 6% > k(t) his cost of capital."
The 6% discount rate was just an example. In another post I mentioned that the discount rate should be set to something like the real output gap plus potential real GDP growth rate. Setting the discount rate in this manner gives the Treasury a contra-cyclical approach to adjusting the rate in response to economic conditions (similar to central bank).
Another manner in which to set the discount rate is just let it be set at auction.
An auction with securities that have various durations can be conducted in one of two ways:
1. Treasury sets duration, market sets discount rate
2. Market sets duration, Treasury sets discount rate
And so it is conceivable that businesses could bid on the discount rate instead of the Treasury setting it administratively.
"Since we're discussing expectations, there will always be cases that don't conform to expectations, but in general we can say that E{dY(EQ())} = 0, a.s., for such situations."
I try to stay away from "expectations" in terms of economic policy. Instead think of it this way. The company seeking to expand is going to know for certainty two things upfront - his pretax cost of capital and his aftertax cost of capital. Notice that right now a company can only know its pretax cost of capital.
Part of the reason for the government to sell equity is that by doing so, it stabilizes tax rates - remember George Bush, Sr. - "Read my lips, no new taxes". If a company or individual was relying on Reagan era tax policy to stay afloat, then that company or individual was sideswiped when Bush, Sr. reneged on that statement.
The reason Bush, Sr. had to reneg on that promise was because the interest payments on existing government debt were becoming a significant portion of available tax revenue. This problem became particularly acute during the 1990-91 recession.
And so, not only does the company that buys equity benefit, but every other company that operates under the same tax rate regime benefits as well.
OEE,
Delete"The sharp business owner would buy EQ() at a 6% discount rate to cover those future tax liabilities of a cash cow and pocket the savings, provided 6% > k(t) his cost of capital."
Perhaps. Or perhaps he would use the savings to further expand his business or pay his employees a higher wage to retain them or to lower the prices of the goods he sells in an attempt to grab market share.
""The sharp business owner would buy EQ() at a 6% discount rate to cover those future tax liabilities of a cash cow and pocket the savings, provided 6% > k(t) his cost of capital."
Delete"Perhaps. Or perhaps he would use the savings to further expand his business or pay his employees a higher wage to retain them or to lower the prices of the goods he sells in an attempt to grab market share."
If I understand the essentials of EQ() or GEqt() correctly, the forward contract for the income tax credit implicit in EQ(t,t+n) or GEqt(t,n) requires prepayment ("cash in advance"), and as a result the business owner who enters into the forward contract will reduce his cash balance in period t while hoping to increase it in period t + n. With less cash he must increase his borrowing, but because EQ(), or GEqt(), is non-assignable and the future benefit is uncertain, he cannot borrow against it as he would be able to borrow against T-bills or T-notes (marginable in a brokerage account at leverage 90:10). He won't be able to do either (i) expand his business, (ii) pay his employees a higher wage, or (iii) lower the prices of the goods he sells. EQ() or GEqt() does not improve his profitability in the short run (i.e., immediately), but it is a use of cash and it is not marginable which accounts receivable are (at perhaps 30:70 or 50:50 depending on the lender and the stage of the business cycle.)
It does sometimes help to develop the mathematics (or arithmetic) to 'flesh out the bones' and improve the design of an essentially financial product (even one intended to be issued by the U.S. Treasury). Occasionally, bringing together a focus group of individuals with experience in business does help one to avoid pitfalls and pratfalls in product development. The customer's perspective is essential for successful product development. The alternative is to launch without the necessary KYC, and then engage subsequently with prospective customers to learn their preferences and the reason they express no interest in the product or service offered. The alternative is the more costly, but often the most common approach to new product development.
Your customer is the US Treasury; the US Treasury's customer is the businessman-owner. The product is a financial product in the form of standardized forward contracts that exchange current period cash payment for a future period (n time units ahead) income tax credit that is available in one period only, is non-assignable, and cannot be deferred in the event of the absence of a positive income liability in that future period. The constraints can be relaxed--it could be assignable, it could be deferrable (with additional cash payment by the holder) and it could allow the holder to apply the credit back three periods or forward two periods (again with an additional cash payment); but, then the discount rate d is reduced, possibly below k(t).
Auctions are possible but who would engage with the Treasury in that case? There's no financing (can't be hypothecated), the discount rate is greater than the bidder's cost of capital (because the contract is non-assignable and non-tradeable, etc.) The restrictions are fatal to the instrument. The cost of a failed auction is an unacceptable burden on the Treasury, cf. to the alternative auction of T-bills, notes and bonds today. But, I leave it to you to decide what will achieve the goal that you are seeking to attain.
OEE,
Delete"If I understand the essentials of EQ() or GEqt() correctly, the forward contract for the income tax credit implicit in EQ(t,t+n) or GEqt(t,n) requires prepayment (cash in advance), and as a result the business owner who enters into the forward contract will reduce his cash balance in period t while hoping to increase it in period t + n."
Correct.
"He won't be able to do either (i) expand his business, (ii) pay his employees a higher wage, or (iii) lower the prices of the goods he sells. EQ() or GEqt() does not improve his profitability in the short run (i.e., immediately), but it is a use of cash and it is not marginable which accounts receivable are (at perhaps 30:70 or 50:50 depending on the lender and the stage of the business cycle.)."
"The product is a financial product in the form of standardized forward contracts that exchange current period cash payment for a future period (n time units ahead) income tax credit that is available in one period only, is non-assignable, and cannot be deferred in the event of the absence of a positive income liability in that future period."
Please read the blog, I have already addressed this. In the Blog, I describe the securities as being sold in ladder form - similar to bank CD laddering, but prepackaged as such. Meaning a portion of the benefit occurs for the business in year 1, another portion of the benefit occurs in year 2, etc., etc. I also indicate that any portion of the security that is unused in a current year can be rolled over to future years. And so GEQT does improve the outlook for the profitability of a business both in the short and long runs and any unused portion of that security can be rolled into future years.
I understand your point about a businessman being unable to borrow directly against such securities because they are non-transferrable. How would a prospective lender treat the securities when looking at the viability of a company? Meaning should ownership of the securities be transferrable under the condition of bankruptcy or other transfer of ownership of the company.
I want to say no, but I don't know how a prospective lender to a company would treat that GEQT when looking at the company.
Are there examples of non-transferrable company assets that cannot be borrowed against, but are treated as a positive entry into the book value of a company? I would think there are, but specific examples elude me.
OEE,
Delete"Your customer is the US Treasury; the US Treasury's customer is the businessman-owner."
Not exactly. The US Treasury customer is any US taxpayer (businessman or otherwise).
This discussion revolves around businessmen because of the Dickie Flatt test that I brought up earlier in this thread.
In the Blog, I don't limit purchases of GEQT to businessmen/women or corporate interests.
OEE,
Delete"Occasionally, bringing together a focus group of individuals with experience in business does help one to avoid pitfalls and pratfalls in product development. The customer's perspective is essential for successful product development."
Which is all well and good. However there is a Constitutional aspect to consider - again read the Blog. It is entirely within the framework of the Constitution for a legislature to vote yes on a spending bill but then refuse to raise taxes, increase borrowing, or print money to pay for that spending.
Under such a scenario, it would be left to the Executive Branch of government to come up with the funding for the approved spending (See the "Take care clause" under US Constitution, Article II, Section 3).
Government equity would be a viable choice in that it would not impede on the taxation, spending, and borrowing powers given to Congress.
Government equity may be born out of necessity rather than a result of focus group study.
OEE,
DeleteBack in 1993, George Akerlof and Paul Romer wrote a paper discussing "Bankruptcy for Profit". Link to paper is here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162
In it they discuss episodes in various countries where private individuals "loot" companies with an eye toward public bailouts.
I would think that when a company owns non-transferrable equity sold by the Federal government, it becomes more valuable as a continuing enterprise than if it is broken up and sold for scrap.
FRestly, I will look at the blogspot postings, time permitting -- I haven't had the time as yet (lost a computer two days ago and have been scrambling since to retrieve the accounting data for an estate that I administer).
DeleteBankruptcy and receivership change the ownership of the bankrupt's assets and leave the liabilities in the insolvent firm (the debtor). A bank that places a firm into receivership appoints a receiver. If the corporate name of the solvent firm was ABC Future Engineering, Inc., the assets will be transferred to a new corporation, say, ABC Future Engineering in Receivership, Inc. The receiver will determine whether GEqty can be transferred into the Receiver's name. The discussion will be held between the US Treasury and the Receiver. If it can't be transferred or assigned then it will probably be left in ABC Future Engineering, Inc. and the non-bank creditors can fight over it (the IRS will likely claim it as the priority creditor).
The decision on whether to continue operating the firm in receivership depends on the lenders' appetite for risk and whether the operations are worth more alive than dead. Most receiverships operate on a very limited basis and then only to sell the firm's assets to another firm or an investor in whole or in part. Sixty days is a common time frame for disposing of the assets following appointment of the receiver, although it can take longer in the case of more complicated organizations (international assets, multidivisional domestic operating in more than one state, etc.) GEqty wouldn't make a difference at all to the receiver--if it can't be sold assigned or transferred, he'd dump it and continue working to maximize the realization of the remaining assets for the bank his client.
When the receiver has collected the value of the assets for his client, the bank, then ABC Future Engineering, Inc., which by that point has been stripped of all of its marketable assets, is petitioned into bankruptcy through the courts in order to resolve the liabilities.
Bottom-line: GEqty() won't save an insolvent firm from receivership and bankruptcy.
"How would a prospective lender treat the securities when looking at the viability of a company? Meaning should ownership of the securities be transferrable under the condition of bankruptcy or other transfer of ownership of the company."
DeleteBanks have various ways of controlling the business lender's investment decisions. Assume that GEqty() is as originally described in these blog pages (not as revised on your blogspot postings). Then, the lender (a commercial bank) may include a prohibition on entering into the forward contract GEqty() if the lender perceived that the borrower might be inclinded to divert funds from operations (which support debt servicing) to financial investments (such as GEqty) that put funds from operations beyond the reach of the bank in the event of an insolvency or imperiled a working capital condition in the loan indenture. If I were the lender, I would definitely include a caveat in the loan contract prohibiting purchase of forward contracts having a term to maturity longer than, say, 1 year. If you the borrower were to buy a 2-year forward contract (GEqty), and it was prohibited under the loan contract, I would issue a notice of technical default to you and I would send in a receiver (big name accounting firm) to audit your firm's books to protect the bank's investment (the loan). Other provisions of the loan indenture would control strategy, debt:equity, coverage ratios, etc.
This is one reason why I don't agree with your conclusion regarding GEqty as a means to increase GDP growth.
"Are there examples of non-transferrable company assets that cannot be borrowed against, but are treated as a positive entry into the book value of a company? I would think there are, but specific examples elude me."
Delete"...a positive entry into the book value of a company" -- I think what you are attempting to ask is whether a non-transferrable asset acquired by a company can lead to an increase in the value of the firm over and above the acquisition cost. The answer is yes, a non-transferrable asset can raise the value of the firm's equity if it yields a return on capital in excess of the cost of capital, k(t). Certain intangible assets that are obtained through licensing where the license prohibits assignment or transfer of the assets to a third party can add value to the firm. The only way that I can GEqty adding value to the firm is through a conservative approach in the manner that I have laid out previously, i.e., the discount rate, d, is higher than the cost of capital, k(t), and the total value of the forward contracts entered into is not larger than the sum of the (conservatively) expected future income tax liability of the firm's "cash cow" business segment(s) at the maturity date(s) of the contracts. Any other approach will result in the rate of return falling short of the cost of capital and therefore will not be accretive to the corporation.
OEE,
Delete"Certain intangible assets that are obtained through licensing where the license prohibits assignment or transfer of the assets to a third party can add value to the firm. The only way that I can GEqty adding value to the firm is through a conservative approach in the manner that I have laid out previously, i.e., the discount rate, d, is higher than the cost of capital, k(t)."
When a firm enters into a licensing agreement, does it always know up front whether the returns on those non-transferrable licenses are going to be greater than a firm's cost of capital - I would suspect not. When a firm expands it's business, does it always know whether that expansion is going to pay off in terms of higher returns - again I suspect not. - It's called taking risk.
"If you the borrower were to buy a 2-year forward contract (GEqty), and it was prohibited under the loan contract, I would issue a notice of technical default to you and I would send in a receiver (big name accounting firm) to audit your firm's books to protect the bank's investment (the loan)."
Do the same loan contracts preclude a firm from entering a licensing agreement?
"Bottom-line: GEqty() won't save an insolvent firm from receivership and bankruptcy."
I never said it would. What I said is that non-transferrable GEqty will make the company more valuable as a going concern versus it's liquidation value for the same reason that non-transferrable licensing agreements make a company more valuable versus it's liquidation value.
OEE,
Delete"This is one reason why I don't agree with your conclusion regarding GEqty as a means to increase GDP growth."
Just to be clear, I stipulated that GEqty will result in an increase in Real GDP growth ( Y(t) ), not nominal GDP growth ( P(t) * Y(t) ).
When a firm purchases GEqty, the rate of return offered by Treasury can be set in excess of the firm's REAL cost of capital ( k(t) - dP(t)/P(t) ) not k(t).
For instance (an example) - firm's nominal cost of capital ( k(t) ) is 5%, firm's real (inflation adjusted cost of capital ( k(t) - dP(t)/P(t) ) is 10%. Treasury sell's equity with a discount of 10%. Firm's AFTER TAX real cost of capital is now 0% even accounting for deflation ( dP(t)/P(t) is -5% ).
Again, if you read the Blog, I already said that the discount rate should be adjusted in relationship to the real potential GDP + output gap.
FRestly, when you determined whatever it is that you are to as "government equity" and you can give a stable coherent definition of that concept, we'll take up the discussion again.
DeleteIf the outcome in period t+n of a business decision to invest in a project in period t is known with certainty, then the rate of return is the risk-free rate, r. Since we are talking about a risky forward contract, offered at a discount rate, d > r, certainty as to the outcome in period t+n is not known in period t, and the astute business executive will use his firm's cost of capital, k, as the yardstick with which to judge the attractiveness of the investment opportunity.
... "in relationship to the real potential GDP + output gap"? Neither "the real potential GDP", nor the "output gap" are observable quantities. Those are neo-Keynesian theoretic conceptual state variables. They're not measurable. A dynamic system that incorporates those concepts as state variables is a purely abstract construct. It's a bit like invoking the "market portfolio" in a theoretical discourse and then substituting the S&P 500 Index as the "market portfolio" when applying ICAPM or CCAPM to determine the cost of equity or the performance of a portfolio manager's ability to beat the market on a risk-adjusted basis. It sounds sophisticated and it stuns the audience into silent reverie whenever the terms are uttered but it has little practical value or significance outside the academy. You're chasing will-o-whisps invoking those two concepts as a basis for pricing of your "government equity" instrument.
If an entity is a going concern, and not insolvent, then it is irrelevant whether the firm's assets include a forward contract or not provided the terms and the counter party are solid and can be expected to achieve a risk-adjusted rate of return in excess of the cost of capital. We might add that the cost of capital in economic terms are k plus the rate of depreciation and depletion, as the case may be, of the asset in question.
A firm having an after-tax weighted cost of capital of 5% per annum would likely be a regulated utility in a stable industry sector.
rt
OEE,
Delete"FRestly, when you ... can give a stable coherent definition of that concept, we'll take up the discussion again."
Again, READ THE BLOG. It explains exactly what I am describing in detail.
"You're chasing will-o-whisps invoking those two concepts as a basis for pricing of your government equity instrument."
How is that any different from monetary policy, or the Taylor rule?
https://en.wikipedia.org/wiki/Taylor_rule
Implicit in the Taylor rule is the logarithm of potential output.
Or how about incorporating "expectations" into any economic model? How do you quantitatively measure something as ephemeral as what an individual or group of individuals might expect?
"If an entity is a going concern, and not insolvent, then it is irrelevant whether the firm's assets include a forward contract or not provided the terms..."
It is very relevant when bankruptcy for profit is taken into consideration. Again see:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162
A firm with non-transferable assets will have a higher value as a going concern versus it's liquidation value.
It is very relevant when the realizable returns on the equity ( discount rate d ) held by a firm exceed it's real (inflation adjusted) cost of capital ( d(t) > k(t) - dP(t)/P(t) ).
R.T. = Richard Thaler??
OEE / RT,
DeleteAnd even if you don't like using the "Real output gap" and "Potential real GDP", then fine set rate of return on government equity to the following:
Discount rate (d) on equity sold by Treasury (EQ) is equal to Target real GDP growth rate + ( Target Real GDP growth rate - Current real GDP growth rate ).
d = TRGDP% + ( TRGDP% - RDGP% )
As RGDP% converges to equal TRGDP%, the discount falls (risk becomes more expensive to purchase).
As RGDP% diverges from TRGDP%, the discount rises (risk becomes less expensive to purchase).
I only used the output gap and potential real GDP to create a "Taylor like" rule regarding equity sold by Treasury.
Finally, regarding targeting the real GDP growth rate, I believe a bunch of economists tried and failed regarding that:
https://www.amazon.com/4-Solution-Unleashing-Economic-America/dp/0307986144
FRestly, there is no significance to the characters "rt" in my previous post. The Android tablet that I used to write that post froze up as I was editing it and wouldn't permit to erase those two remaining characters, hence "rt" as the last two characters in the post.
DeleteRegarding the determination of the discount rate "d", you will want to keep it simple. The more you attempt to tie it to theoretical economic concepts the less likely you to find acceptance of the concept.
For example, yesterday I viewed the discussion between R. Clarida, B. Bernanke, and a representative (can't recall his name) of the ECB. The discussion was moderated by a young woman from Brookings Institute. R. Clarida presented the FOMC case for allowing the rate of inflation to drift, and the case for driving the unemployment rate down to maximize or achieve a state of "full employment" (cf., Chmn. Powell). B. Bernanke argued the risks of letting inflation expectations run away beyond the control of the FOMC. He referred to the neutral rate of interest, etc., in his arguments which recalled the efforts decades ago to control inflation, etc. The discussion was esoteric and only intelligible to those listeners who were well-versed in macroeconomic theory. For the run of the mill businessman, the discussion offered no insights or solutions.
Using the associative rule of algebra, d = TRGDP% + (TRGDP% - RDGP%) = (TRGDP% + TRGDP%) - RDGP% = 2×TRGDP% - RDGP%. Is this what you intended?
Who determines TRGDP% and how is it determined? The FOMC's dual mandate, in law, is (1) price stability, and (2) full employment.
Congress creates the laws (legislation), and the executive branch implements the law, determines foreign policy, and commands the military branches. Who in that mix would establish TRGDP%?
You will find that "d" is endogenous, i.e., internal to the economic model. In all likelihood, "d" is a shadow price that drops out of the solution to the optimization problem. In a warehouse stocking problem it is the marginal revenue foregone when the a physical or budgetary constraint become binding on the solution. It is the financial cost of bolted down (physical) capital in the central planner's problem, and the wage rate of labor in that same problem when the labor supply constrant is binding. From the perspective of the secretary of the treasury, it is the opportunity cost of capital.
OEE,
DeleteRecognize that to increase the real GDP growth rate - dY(t)/Y(t), all that you need to do is hold the nominal GDP growth rate fixed while allowing the price level to fall.
NGDP(t)% = 2%
dP(t)/P(t)= 0%
dY(t)/Y(t)=2%
NGDP(t)% = 2%
dP(t)/P(t)= -3%
dY(t)/Y(t)=5%
Etcetera, etcetera. Allowing prices to fall is problematic for monetary policy and the Taylor rule. Not so, for fiscal policy using government equity.
"FRestly, when you ... can give a stable coherent definition of that concept, we'll take up the discussion again."
Are you starting to get the picture?
OEE,
Delete"Who determines TRGDP% and how is it determined? The FOMC's dual mandate, in law, is (1) price stability, and (2) full employment."
First off, the directive given to the Federal Reserve comes from the following legislation enacted by Congress:
https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act
"Mandates that the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability."
No where in that sentence is "full employment" even mentioned or what would be considered to be "full employment". The Fed has already indicated that their preferred definition of price stability is 2% either way (which they are missing by a long shot). What level of employment to population ratio is considered full employment? Has the Fed (in it's "dual mandate" that you think exists) even given any indication what that ratio should be?
"Congress creates the laws (legislation), and the executive branch implements the law, determines foreign policy, and commands the military branches. Who in that mix would establish TRGDP%?"
It's already a matter of law:
https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act
"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."
OEE,
Delete"Regarding the determination of the discount rate d, you will want to keep it simple. The more you attempt to tie it to theoretical economic concepts the less likely you to find acceptance of the concept."
Did that stop the acceptance of the Taylor rule?
FRestly, between 1960 and 2021, the United States has experienced just one year during which the consumer price index recorded a negative value for inflation, i.e., deflation (2009, -0.356%).
DeleteYou are putting forward metaphysical examples and purporting that those example 'prove' the efficacy of a concept you refer to as "government equity". Then you have the temerity to ask, "Are you starting to get the picture?" Answer: Yes, I'm getting a picture, FRestly, but it's not the one you want me to get, but it's the one that is coming through loud and clear in your responses.
A typical response is "...to increase the real GDP growth rate - dY(t)/Y(t), all that you need to do is hold the nominal GDP growth rate fixed while allowing the price level to fall." Another typical response is, "Allowing prices to fall is problematic for monetary policy and the Taylor rule. Not so, for fiscal policy using government equity."
It is one thing to discuss economic theory that has at least a modicum of connection with the real economy, and quite another to engage in discussion of an idea that has no connection whatsoever with either theory or practical reality and likely never will at the rate this discussion is going. You haven't given a stable coherent definition of the concept, and you never will, a.s. In sum, I see little purpose in taking up more of John's editorial time on this topic. I wish you well with whatever you manage to pull together, but as for me, looking forward, further discussion is not worth the candle.
OEE,
Delete"You haven't given a stable coherent definition of the concept..."
What part do you not understand? I have tried to explain it as best I could. You asked me to flesh out the details (bones and flesh - remember?) and so I did on the Blog. Then you claim you don't have time to read it.
You asked: Who in that mix would establish TRGDP%?"
It's already a matter of law:
https://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act
"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."
"FRestly, between 1960 and 2021, the United States has experienced just one year during which the consumer price index recorded a negative value for inflation, i.e., deflation (2009, -0.356%)."
And so it did happen, and it happened back in the 1920's and 1930's during the Great Depression - case closed.
"It is one thing to discuss economic theory that has at least a modicum of connection with the real economy, and quite another to engage in discussion of an idea that has no connection whatsoever with either theory or practical reality..."
Well now that we have established that government equity has an application with regard to real time events that HAVE HAPPENED both fairly recently at an earlier time in US history, perhaps you should just go ahead and read the Blog.
This comment has been removed by the author.
DeleteThis comment has been removed by the author.
DeleteCorrections
Deletei(t) = pi(t) + r'(t) + alphapi * ( pi(t) - pi'(t) ) + alphay * ( y(t) - y'(t) )
d = Discount rate offered on government equity
da = Realized returns on government equity
Notice, at any discount rate d offered by Treasury, TR% * Y(t) * P(t) is always greater than or equal to da * EQ(t) because the equity can only be used to fulfill a tax liability (no cash settlement by the Treasury) - Problem #2 solved.
OEE,
Delete"(E) Your proposed formula for the discount rate d, has some serious issues that you may wish to examine"
Agreed, I was trying to match the variables in the Taylor rule.
It should be:
d = 2 * dY'(t)/Y'(t) - dY(t)/Y(t)
Or as above:
d = 2×TRGDP% - RDGP%
"Conclusion: Dispense with the Taylor Rule, it can only get you into hot water."
And what rule or guide is the central bank using today in setting the discount rate that it is willing to lend at?
"(2) Deflationary periods are infrequent and are the consequence of errors in judgement by the central bank authorities (1930s and 2007-2008)."
Prior to the creation of central banks and credit based money, deflations were quite common.
https://www.investopedia.com/ask/answers/040715/were-there-any-periods-major-deflation-us-history.asp
"Buoyed by the rise of industrial mechanization after the war, the prices of goods dropped starting in 1817 and continued to drop until 1860. Even though prices were dropping, output grew consistently during this time and continued to grow at the same time that prices were dropping until approximately 1860, at the start of the Civil War."
There are two types of deflation - good deflation sparked by increases in productivity that are accompanied by higher real growth and bad deflations associated with depressions.
The problem is central banks (and politicians and economists) try to fight both types without understanding the distinction between the two. Hence the need for a fiscal policy rule to marry with a monetary policy rule.
"In 2009, the choice financial security was the Treasury bill or Treasury note, acting as a safe haven."
Because that was the only choice available?
"Conclusion: government equity would not have received an audience."
You don't know the audience very well.
OEE,
Delete"(3) In 2009, the choice financial security was the Treasury bill or Treasury note, acting as a safe haven."
That's kind of like saying everybody at the party preferred pretzels over potato chips to snack on, even though potato chips were not served.
This comment has been removed by the author.
DeleteThis comment has been removed by the author.
DeleteOEE,
DeleteMore importantly, 7 of those instances have occurred in the last 20 years (2001, 2008, 2009, 2012, 2013, 2016, and 2020).
Please explain the divergence.
FRestly, Stephen Williamson's paper "Inflation control--do central bankers have it right? Found at
https://research.stlouisfed.org/publications/review/2018/04/16/inflation-control-do-central-bankers-have-it-right
"Neo-Fisherites argue that conventional central banking wisdom has inflation control wrong, in that the way to increase (reduce) inflation is to increase (reduce) the central bank’s nominal interest rate target."
Steven's model is incomplete. Central bank sets it's interest rate to 0.0001% and lends federal government $1 quadrillion dollars which it turns around and spends on everything. The quantity of bonds (borrowed money) matters just as much as the interest rate.
'FRestly, the formula d = 2×TRGDP% - RDGP% is not testable."
Sure it is. Try it out and see what happens. Set your target rate of real GDP growth at some number (4%, 6%, 8%), start selling securities with the proposed rate of return, and monitor the results. What you mean to say is that it has never been tried and tested.
Flying into outer space was never testable until it was tried and tested.
Climbing Mt. Everest was never testable until it was tried and tested.
OEE,
Deletehttps://en.wikipedia.org/wiki/Humphrey%E2%80%93Hawkins_Full_Employment_Act
"REQUIRES the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals."
This comment has been removed by the author.
DeleteOEE,
Delete"Read the economic history of Europe and Great Britain."
Europe and Great Britain were engaged in some type of warfare for the better part of a millenia (many times with each other).
https://en.wikipedia.org/wiki/List_of_conflicts_in_Europe
I would hope that we as a civilized people would be able to get beyond that.
I mean, you do realize the nuttiness of all of this don’t you?
We “need” a war to generate inflation.
We “need” inflation to avoid deflation.
We “need” government bonds to be able to pay for a war.
It’s a circular argument.
Once you realize that you don’t “need” government bonds (government can sell equity) and that the equity sold by government can be used to offset the real (inflation adjusted) cost of private debt service, then the other “needs” (inflation and war) disappear.
Deflation in and of itself is not something that should be frowned upon or discouraged. Yes, it creates problems in credit markets and for central bankers, but those problems can be easily remedied without resorting to war and inflation.
Leaving aside the economics, which, I am pretty sure we can't afford, and are your bailiwick professor; I am really hazy on where in the Constitution this stuff comes within the federal purview. The writing in the 9th and 10th Amendments on the other hand, is clear, concise and understandable by the meagerest intellect.
ReplyDelete"General welfare" is interpreted mystically, as transcending mere individuals (abstractions FROM society, said Marx) and those pesky rights (denied by Holmes in favor of shifting majorities). General welfare, interpreted rationally, applies only to individuals as individuals. From the Renaissance to the Enlightenment is 400 years of basic cultural change from superaturalism to real individuals. Leftists and conservatives have regressed to Dark Ages supernaturalism, whether of God or society. But we have, with flaws, an individual rights constitution. There is no rational justification for a collectivist interpretation. Tragically, Aristotle's idea of law as rational has been changed to law as will. Its the will of the people now, but, as Aristotle explained, the people's irrationality necessarily changes to an individual's irrationality.
DeleteThis is the context of the Constitution.
"Politicians get to feel good about offering child care, without actually doing it"
ReplyDeleteThis reminds me of Huemer's "In Praise of Passivity":
"But there is at least one way of distinguishing the desire for X from the desire to perceive oneself as promoting X. This is to observe the subject’s efforts at finding out what promotes X. The basic insight here is that the desire [to perceive oneself as promoting X] is satisfied as long as one does something that one believes will promote X, whereas the desire for X will be satisfied only if one successfully promotes X. Thus, only the person seeking X itself needs accurate beliefs about what promotes X; one who merely desires the sense of promoting X needs strong beliefs (so that she will have a strong sense of promoting X) but not necessarily true beliefs on this score".
It’s, indeed, about time to praise effectivity over narratives.
"Imagine if restaurants charged a set fraction of your income, no matter what you order, and the state pays the rest."
ReplyDeleteCollege?
This comment has been removed by the author.
ReplyDelete