From: kbanaian@bernard.pitzer.claremont.edu (King Banaian)
Newsgroups: alt.politics.clinton,alt.politics.democrats.d,alt.politics.elections,ba.politics,co.politics,ne.politics,nj.politics,or.politics,ny.politics,talk.politics.misc
Subject: Re: income vs. consumption (was Re: VOTE, BABY, VOTE!)
Date: 18 Nov 92 23:46:53 GMT
Distribution: usa
Organization: Pitzer College

In article <1992Nov18.201956.23581@cbfsb.cb.att.com> mbb@cbnewsb.cb.att.com (martin.brilliant) writes:
>From article <kbanaian.22.0@bernard.pitzer.claremont.edu>, by kbanaian@
bernard.pitzer.claremont.edu (King Banaian):>> In article <1992Nov17.222644.
6184@cbfsb.cb.att.com> mbb@cbnewsb.cb.att.com (martin.brilliant) writes:
>> We have a credit crunch, not a liquidity trap.  In a liquidity trap, no one 
>> wants to borrow.  In a credit crunch no one wants to lend.  Do you think you 
>> could borrow money to finance a new widget factory right now?
>
>Yes, I think I could borrow money to finance a new widget factory,
>if I were willing to pay the appropriate interest rate for the risk.
>I'm sure I could borrow money for a new hamburger franchise.  Have I
>got that wrong?
I talk to businesspersons regularly;  it's part of my job.  They tell me 
that while business is picking up, getting even little things like bridge 
loans while waiting for bills to be paid has become difficult.  Martin, I 
don't know what your credit is like, but I doubt you can get much financing 
for that hamburger stand.

>
>> The spread between the cost of funds and the prime rate is fairly high now:  
>> look at how banks have profited recently.  Banks are sinking their money 
>> into T-bills because then they don't have to hold loan losses required by 
>> the government.  The problem is not with the firms:  they'd love to invest 
>> if they could get the loans.  They're not.  Don't look at the rates so 
>> much:  It matters little if I can't get a loan.
>
>You're saying the trouble is not so much consumer confidence as banker
>confidence.  Why is banker confidence low?  Are you saying that
>government regulations inhibit lending?  Maybe that's the
>explanation.  When interest rates were high, banks made risky loans to
>meet investor expectations for gain, and lost.  Now that interest
>rates are low, the government regulations intended to prevent what
>happened then are the wrong thing now.  There's neither a shortage
>nor a surplus of savings, it's all due to the Reagan-Bush government
>being on our backs.

Yes, exactly so.
>
>You're also saying that the banks are putting our savings into loans
>to the government instead of into loans to people or firms.  But you
>also said that government borrowing (i.e., the deficit) is not the
>problem.  But if the government didn't borrow, the banks would have
>to lend to people.  So government borrowing is at least part of the
>problem - certainly not part of the solution.

If the government ended the deficit tomorrow, it would still have nearly $4 
trillion in debt securities outstanding.  Many of those come due in a year.  
Government securities have been bought by banks at least as far back as the 
Bank of England in 1694.  It's that the government's regulation policies 
have made these look very profitable now, because banks don't have to put up 
collateral for T-notes, but do for your hamburger stand loan.  That's a big 
reason why they're not lending to you.

>
>> Real Capital Stock, in 1982 dollars, was 3.138 trillion in 1980 and 3.960 in 
>> 1989.  I can't lay my hands on 1990 data.  I don't know where it went in the 
>> terms you asked.  That's still more than enough to handle the increase in 
>> the labor force.
>
>But the recession started around 1989, or maybe a few years earlier.
>We're trying to deal with a recession and you have no data on it.  And
>you called yourself an economist, unfortunately.

There's plenty of data about the recession.  Investment is not climbing yet, 
and hasn't for the last two year.  But that's what a recession really is.
>


>> My point was that the savings effects are not terribly important here;  the 
>> investment effects are critical.
>
>The savings effects are the topic of this thread.  It started with the
>idea that people should be taxed on consumption rather than income,
>and that turned out to mean they should get a deduction for savings.
>Presumably more savings was supposed to be good for the economy.
>
>Do you think more savings, and less consumption, would be good for
>the economy?  I don't.  I think it would be bad.  That's my point.

If we can get people back to work, they both save and consume.  You pose you 
question as if these are alternatives.  They don't have to be.  And you get 
people back to work by investment in new products, new services, far more 
than by relying on expansion of operations in existing plants.  I'm sorry I 
busted in on your thread that way, but I really believe you are asking the 
wrong questions.

>> From the days of Ricardo we know that taxes and deficits 
>> get you approximately the same result in the market place.  The thing that 
>> drives it all is government spending.  If the government spends more, I know 
>> I have to save to pay the bill someday (unless I wish to fob it off on your 
>> children).....
>
>I'm not sure what Ricardo had in mind, but if taxes and taxes can have
>different effects on the economy, depending on who or what is taxed,
>then surely taxes and deficits can have different effects.  I am
>really getting impatient with "macro" economists who don't want to
>look at the details.

Yes, obviously an excise tax on gas differs from one on tobacco.  What I 
meant by the Ricardo comment was that given you decided to increase 
government spending, a proportional increase in all taxes gets the same 
effect as does simply borrowing.  Altering relative tax rates does make for 
real changes.

--K. Banaian
P.S.  Martin:  Let's take this private unless someone else posts. 
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