three questions about stimuli

[grasswire]

1. When the government issues stimulus checks to taxpayers, where does the money come from? Is it borrowed? Do the checks represent actual dollars debited to the U.S. Treasury?

2. If lenders creating debt "creates" money, how can creating stimulus create money?

3. If stimulus money paid out does not create debt to the U.S Treasury, what would be the downside to the government just printing $5000 for each citizen over 21 and passing it out? (Notice that I did not say taxpayer -- many unemployed and lower income would not fit that category now.) Or maybe, since the rich are just sitting on their money, the $5000 should go to people with less than $100,000 income/year.

[RandomThoughts]

1. Giving everyone 5000 would be inflationary.

Your specific question is should people just be given money, or should government use money to do things that need to be done, infrastructure for instance, and that then give people money by creating jobs.


The question is who should decide what is done in society. If you give everyone 5000 they will democraticaly decide what factories need to be built, by what demand is created from that extra money.

If an elected government decides, they find something that needs to be done, and then pays for that, and wages go to people.

So the reason giving everyone 5000 dollars doesn't work is people do not buy things that are needed in much of society. Like roads and research.


Really a complex question and goes to the whole issue of if a group should decide where money is spent, or let the spending of people decide.


If the spending of people decide, then you have to assume people have learned where spending needs to be done. So some might invest in building a bridge in a pure private world, knowing they could put a toll on it. While the government view would be to tax part of that 5000 and pay for the bridge that way. But an individual would not build a bridge. So corporations get formed to build the bridge, or a group gets elected to decide that a bridge should be built. privat/public


You can make the argument that people would not spend the money where it is needed, which is the same argument that capitalism does not spend money where it is needed. So you need some elite to decide that we need some spending that has some advantage that is better over long term, but is not what a corporation or person would think best, because they are not studied in those areas. The individual buys what he needs, the corp buys what is profitable, and the elected elite buys what is best for all people. Assuming the elected aristocrat has that motive, and that is key to working government.

Interestingly your comment is the counter to why a billionaire should decide where money is spent, although being a billionaire and knowing where money should be spent is only connected if long term planning and better outcome for society was the way someone got their billions. And that is not always the way it happens. Although I do agree that is an argument to counter earlier post on schools.

However how the elites gets picked is the real question. Is it some attribute that gets people money like bank skimming, or is it being elected by an informed electorate picking the best people, or is it some quality that should be passed on by favoritism of family connections.

Great question.


So in summary, who decides what needs to be done, an informed electorate directly, an informed electorate through a representative, or a corporation created by demand from an electorate leading to a profit in doing something.

People doing it really loses specialized skills of aristocracy. Business doing it runs into profit motive problems since profit motive is not the same as best for society. And government doing it runs into people in government being self serving. (you can also make the argument of that being why charities are a great way to help society, since most people in those sectors, like monasteries of old, did not have much self interest, although there is some missing specialization in infrastructure many times there, so NGOs can also fill in there.)

Best guess is best way is if the money is given to people that care about society most, then the money gets spent best, and if those people also have some skills in where it should be spent, not just about self interest, so not money first.

So an elected government that shows people they care about them, and that have the knowledge of what needs to be done. is best guess, capitalism sometimes works because what people want is profitable, but things get a bit screwy when consumers are created to push productions in profitable areas and not areas good for society.

Or something like that.


There is also the problem of individual choice and societal mandate, an elite can decide that people don't know what is best, and force it on them, same thing capitalism can do by consumerism, so the people have to be brought with the government by showing them why it is a good idea by education.

So with governing is educating, and it is tough to get people to also learn what is best, so some go to distraction and deception and just do it without bringing the people along with them, but that leads to having to make populations dumb, and breaks down best for society except by creating two tier classes, one dumb and no decisions, the other making the decisions, and after a couple generations, they are separated like in The Time Machine story, and the one class preys on the other since empathy broke down, and the made dumb class becomes livestock for the former class that was suppose to help them. Note in planet of the apes, not being able to speak is also dumb. So making a group dumb is both keeping them from learning, feeling, or thinking, and also not letting them be heard.

[grasswire]

4. you said " the elected elite buys what is best for all people"

That is apparently not so now. The elected elite does not choose what's best for the people, only the corporations and banksters and elite.

You're saying that the only solution has been political. Things may change -- the people may not be able to wait to build political concensus.

[girl gone mad]

15. It hasn't been inflationary so far.

Both Bush and Obama pushed money gifts or "helicopter money" drops via tax rebate checks and tax cuts. Interestingly, the Obama administration seems to have concluded that the Bush money drop was unsuccessful because the checks were given in one lump sum, therefore failed to create any sustained demand. Thus, Obama's economic advisers devised a tax cut that resulted in bigger paychecks throughout the year.

In my view, both money drops failed for reasons that Hyman Minsky understood well. We were faced with a solvency crisis, not the less serious liquidity crisis that the policy architects were attempting to address. More importantly, debt deflation, de-leveraging and repudiation were and are the prevailing economic forces. The neoclassical model is broken, but it appears that Washington never got the memo.

[sandnsea]

2. The stimulus created debt to the US Treasury

The stimulus amounted to about $1500 per citizen, iirc. The reason it doesn't go straight to people is so we get things out of it, like roads, green buildings, electric car technology, college educations, education for our kids, etc. Those investments are supposed to create the economy of tomorrow, much like Clinton's investments in computers and the internet helped create the economy of the 90s.

[RandomThoughts]

3. A simple answer.

Give the 5000 out, and get it from raking back wealth of rich.

Although that would be inflationary, your question does brings up the point, most of the argument is

Everyone wants to rule the world.
http://www.youtube.com/watch?v=FOA4ixV-3jU

You have to see the song in the right context, since it has bad parts in it also. It is more of explaining a problem as I see it, not an endorsement of what is said.

And from that the rich want to make the decisions, just like every individual does.



Personally I would like a beer. sigh.

[bemildred]

5. In order:

1.) It comes out of thin air, it's imaginary, and it stays that way.
2.) Creating money is creating money, how you describe that is secondary. This also applies to question #1.
3.) I think giving $5k to everybody is a great idea, I can't think of a downside in the present economic situation.

[jtuck004]

6. I know this is a little long, but if you are really interested in this,

the first thing to read is Wray: The Federal Budget is NOT like a Household Budget – Here’s Why ". That same theme is developed a little bit more here...

The paper above acquaints (or reacquaints) the reader with the "fallacy of composition"; that is, what might be true for individuals is probably not true for society as a whole. An old parable talks about how 3 blind men, stationed at different places, (such as the trunk, the tail, and the body) might provide very different explanations of what an elephant is. Similarly, most people's understanding of "economy" is from the perspective of how things work for them - their limitations on debt, their requirement that they pay taxes, the fact that they must get "money" from the government. Further, when they go to school and learn macroeconomics, much of what is in our textbooks is based on how "money" was understood when it was based on gold. We are in a new era, and deserve some updated thinking. Authors of texts such as "Understanding Modern Money" by Randall Wray (at Amazon) or The 7 Deadly Innocent Frauds of Economic Policy, found here...

I added the above in the answer to your question so that you understand I am answering from a perspective that I think explains how our "money" functions much better than theories based on a gold or commodity money standard. That is "Modern Monetary Theory", sometimes referred to as Chartalism. I apologize for not grokking it as well as I one day will, but there are others here who, I suspect, will pick up my slack (thank you in advance).

But to your questions:

1. When the government issues stimulus checks to taxpayers, where does the money come from? Is it borrowed? Do the checks represent actual dollars debited to the U.S. Treasury?

The dollars come from, essentially, thin air. They are zeroes added to the reserves of commercial banks at the Federal Reserve by someone at a computer. In Ben Bernanke's words "to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed". We are not constrained by having to borrow. The Fed can pursue spending in the economy as is needed to stimulate, or prevent deflation and unemployment. From a government perspective (which is different from our personal economies, remember) people desire money to pay taxes. (That is a hard concept to get one's head around, but it is specifically from a government perspective. People do work for money, but then we are moving into a personal perspective again).

Does that mean we can just create as much as we want with no ill effect. No. At some point the way people "feel" about the dollar will cause it to lose value. For that reason we have a thing called "taxes' which are used to sweep excess "money" from the economy, a method by which we control inflation, and increase unemployment. The best explanation I have seen on that subject is by Professor Wray, here...

Think of a basketball game. There is no box of "points" which are added to the scoreboard. Rather the referees direct the scorekeeper to put ones and threes up there. They can't run out. Your check to the IRS essentially disappears. Treasuries are not used to "borrow" money, they are used to provide a way to pay interest to people in the manipulation of interest rates.

2. If lenders creating debt "creates" money, how can creating stimulus create money?

Lenders don't create money, people at computers do. Creating stimulus doesn't either. Stimulus creates demand, that demand uses our "fiat money" to settle accounts at banks and pay taxes. What we "want" is refrigerators, cars, homes, not money.

So by increasing the money in the economy, the government makes it easier to use, and that use translates to demand. Demand drives business. It is the only thing that ever has.

3. If stimulus money paid out does not create debt to the U.S Treasury, what would be the downside to the government just printing $5000 for each citizen over 21 and passing it out? (Notice that I did not say taxpayer -- many unemployed and lower income would not fit that category now.) Or maybe, since the rich are just sitting on their money, the $5000 should go to people with less than $100,000 income/year.

In and of itself there is no downside to this. Some have suggested we take a holiday from payroll taxes for a couple years, and that would have about the same effect, injecting a little over a trillion dollars, based on a little quick math. We have spent well over that to prop up the wealthy, the finance sector, foreign investors, and the like, while leaving multiple trillions of unsupportable debt in the banking system (with the taxpayer on the hook, btw), and are very likely to make that multiple trillions before it is all said and done. In spending those dollars people would create demand, which would increase employment, something we desperately need right now. But it would just kick the can down the road and we would wind up in the same place we are today in a year.

You cannot do this by itself, because of some structural problems we have created in our economy that would lead to real problems.

The first of these is that we have allowed the uber-wealthy to quit paying taxes which would help balance our budget. The second is that for many years we have been encouraging corporate welfare which also prevents us from getting our financial house in order. Third, we have also gotten rid of millions of good-paying jobs in manufacturing and the sales that would have been made here, and thus the taxes paid, and instead have shipped those functions out of the country. So when people spend their dollars the dollars travel out of the country to others, such as in China (who has over 2 trillion of those in reserve, but that's another post). We keep this up, and, as I said above, people will begin to think our dollar is worth less.

So, IF we fix the structural problems above by spending WHATEVER IT TAKES to rebuild our employment, reinvigorate our business sector and manufacturing, and move ourselves into the 21st Century, then sending $5000 to everyone wouldn't have a downside.

It would also take re-educating the people, taking back the rhetoric which has allowed the reckless, greedy, traitorous, avaricious scumbags that make up the financial sector to gain so much power that they are undermining our economy. In other words the Democrats would have to champion some of the policies that Bill Clinton started, clean house of all the ex- and future Goldman Sachs and other Wall Street employees, and re-regulate the financial markets, putting the good of the majority of the American people ahead of the selfishness and greed of the wealthy minority, for a change.

Please feel free to poke holes in this, however ;)

[grasswire]

7. okay, that's useful....thanks

I'll read the link later tonight.

Tax the rich.
End corporate welfare.
Make laws that discourage offshore jobs and bring jobs home.
Pass a significant stimulus to all adults except the rich.

That should be the Democratic agenda immediately. Sigh.

[deficitjobs]

8. Not EXACTLY "thin air"

The budget is accounted for - it's not exactly as if the money was invented from nowhere. As I understand it (and please correct this if it's wrong,) the treasury sells bonds to raise funds which are then allocated for spending. If the treasury ever fails to sell enough bonds to meet the needs of the budget, then guess what - there's no more money to spend. The national debt is largely the obligation to pay back bonds (+ interest) that the treasury has sold. It's a little more complex still; the federal reserve can (and does) buy treasury bonds. So, if a lot of cash needs to be raised quickly, the fed can buy from the treasury, and make that cash available. Further, the treasury can also borrow from other government departments, such as the social security trust fund. All of which leads to the same result: the treasury owes somebody money at some point, for money that is spent today. The gamble of the stimulus is that the economy will pick up enough with a sharp enough jolt that tax revenues will increase in future and provide the money needed to pay back the loans which were obtained today.

[jtuck004]

9. If you don't mind, read this, and the links above, then think about that question.

They specifically mention treasuries in this article:
http://www.newdeal20.org/2010/04/27/the-deficit-nine-myths-we-cant-afford-10162/



These articles describe how it works, the mechanics. Not policy.

The US dollar is really nothing but a creation of law. We can't become insolvent, because we can always make more, but its value can change. there are a few "printed" but that is just to facilitate transactions. There is no commodity under it, just a belief in what it is worth, which changes by the minute based on...our behavior, other people's perceptions...?

So one could describe the US dollar as electrons, air, or whatever, but it cannot be described as something that has to be borrowed, and we can never run out of it (well, as long as we have computers or something like that).

I don't know if the gov truly thinks things are going to pick up, which there is scant evidence of, or if they are just assuaging the public's fears to keep the pitchforks from the door while people work to create wealth for others to take...

[deficitjobs]

10. Chartalism

This is controversial stuff. Let me point you at a critique of the Chartalist worldview: http://www.ucm.es/info/ec/ecocri/cas/Febrero.pdf

I have to say that the collection of "myths" does not come across well. I agree with one of the commenters on there; the mechanics of monetary transfer have little to do with the value represented by money.

[jtuck004]

11. Well, thank goodness controversial doesn't mean incorrect

Ignaz Semmelweis put forth a controversial idea that doctors were hurting their patients by something they carried on their hands, instead of the prevailing theories that disease primarily came from the patient. He was fired, humiliated, eventually died in an asylum from an infection. But he saved a number of lives in the free clinic of a Viennese hospital at a time when the vast majority of the world, especially the best doctors, didn't even have a conception that germs caused infections. (They thought is was from "bad" stuff that was just inside of you, among other things). Dr. Lister who later earned fame for his advancements in antiseptic surgical methods, said his success was partly due to the discoveries of Dr Semmelweis. And germ theory is no longer controversial.

As they say in the paper, they don't disagree with the central tenets and "believe that the policy implications which can be drawn from neo-Chartalism are essentially correct". They (and that includes statements by Ben Bernanke and Alan Greenspan, who ain't exactly on the fringe) are referring to the mechanics of the system, which is what I was talking about. (I think I even said something about it not going into the policy area, just mechanics.)

The critiques in that paper go beyond what I was talking about to ideas about money and value (as you stated) such as that fiat money has value because the state accepts it for tax, (really? if the state wasn't there, would you trade me your pig for piece of paper guaranteed by a non-existent Federal Reserve?); the state has the ability to set value, (perhaps it would work better if they based their purchasing on labor, not goods, as "Modern Monetary Theory" suggests, I don't know); and that the precedence of state money gives private bank money value (maybe that means I should be able to use my Travelers checks to pay taxes, but I can't, I don't think. That's a little esoteric for me, not being that interested in the fringes of the games academics play). The first two items have been brought up and addressed by others and those discussion are sprinkled around on the Internet, the last one was new to me but perhaps not to a doctoral student at UMKC.

I find conventional theories somewhat awkward, because we clearly don't depend on borrowing to create our money; again, look at the public comments of Bernanke or Greenspan or any one of dozens of top economists, people who don't really have a axe to grind. The mechanics of how the government uses money is a different thing than it's value, which has everything to do with perception, not how high it is stacked in relative to a commodity upon which it is no longer based. It's too bad more people don't address this - it might give them better odds against those who seek to keep them under control and less wealthy. But the most significant place this would be challenged would be in a college macro class, which, clearly, most people sleep through without feeling much effect on their lives, I suspect, so there is not much endogenous motivation to challenge old ideas.

I don't have any problem with the fact that there are criticisms, because any theory which can't be criticized can't be measured and is essentially worthless, (like using magic or superstitious beliefs to explain everything you can't explain otherwise). That there are criticisms doesn't invalidate the whole theory any more than the failure of mathematical models to adequately predict risk in derivatives or people clinging to outmoded ideas in the face of incontrovertible evidence about fiat money invalidates conventional economic theory. It does mean that you can measure things, that the theory may not adequately predict certain events, maybe that the theory has not been developed enough. Yet.

I really do appreciate the paper, though. It was kinda nice that you didn't start screaming "ZIMBABWE"! and "WEIMER!!" accusing me of wanting to print money like the Sunday funnies ;)

I will spend more time with it and learn something.

[girl gone mad]

14. Chartalism isn't controversial.

It's essentially standard double entry bookkeeping, which has been in use for hundreds of years. The 12-page paper you cite, full of inconsistencies and demonstrably false assertions isn't enough to topple seven centuries of successful accounting.

[maddogg41283]

12. It's all about deflation

1. It is borrowed from the government Bond market
2. I'm not sure what you mean by "create stimulus".
3. The answer of why giving out money isn't very stimulative during a recession (it is a little bit, but not much) is because people are smart. I'm pretty sure this requires some explanation...

Let's imagine for a moment, a smart pair of human beings that are married. This couple has a mortgage, and a car payment. Now let's say that one of them loses their job and is now having trouble keeping up with the bills and gets behind on their mortgage, car payments, and maybe even credit card debt. Suddenly, they are given $5,000. What would be the smart thing to do? The smart thing is to pay off their debts and then save the rest because the one person still doesn't have a job. This is a SMART thing to do in their situation. The problem is, paying off debt is not very stimulative for the economy.

Now let's take the same pair of human being. Instead of giving them a one time payment, give one of them a job. Say the government is going to build a new road or a railroad station. That project is going to require construction workers, civil engineers, foreman, and it's going to require that they buy supplied from other companies - this creates a lot of new job. The person who lost their job gets hired to do one of these new jobs. Now the couple can pay off their bills, and start buying luxury items. Since their income is now steady and certain they feel that they can take on new debt, maybe trade in their old car for a new one. When they buy those items, that is VERY economically stimulative. As a bonus, once this new project is completed, people and goods will be able to be moved more efficiently - further stimulating the economy.

These 2 scenarios is at the heart of why stimulus spending is more economically stimulating than handing out cash to the rich or even handing out cash to the poor.

[grasswire]

13. I think you (and others) do not understand the plight of ...

...millions of Americans who on receiving five thousand dollars would not be able to "save" it. A mortgage and a car payment? Too many millions of people have no mortgage. Too many millions of people are driving an old jalopy or have no car at all.

I'll wager that in America the Beautiful millions of people would buy the kids their first new shoes in a while, and pay rent and buy groceries and replace a worn-out stove and have a tooth pulled. Some might buy an old camper to live in.

What is this "mortgage and car payment" talk? ::::shaking head:::::