From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: Why Do Soak the Rich Schemes Always End Up Picking Everyone's Pocket?
Date: Fri, 16 Oct 92 10:20:16 EDT
Organization: IFS Project, University of Michigan
Distribution: usa
Reply-To: jwh@citi.umich.edu

In article <16OCT199200354306@utkvx3.utk.edu>, drevik@utkvx3.utk.edu (Drevik, Steve) writes:
|> In article <347-K6_@engin.umich.edu>, jwh@citi.umich.edu writes...
|> >In article <15OCT199216101187@utkvx1.utk.edu>, drevik@utkvx1.utk.edu (Drevik, Steve) writes:
|> 
|> >invested in CD's?  What do you suppose happens to money invested
|> >in bonds?  This creates a pool of wealth which can be used by people
|> >to build houses, factories, etc.  Substantial economic gains can
|> >only come when money is saved.
|> 
|> In SOME forms.  Just because I give IBM $400,000 to buy new issues
|> of stock doesn't mean that they do anything useful with it.  I don't
|> believe that CDs benefit business as much as purchasing stock or
|> funding venture capital.  The benefit to the money supply of a CD
|> savings is far outgunned by the massive borrowing of the federal gov't.
|> 

First, borrowing doesn't increase the money supply.  It simply changes
who owns the spendable cash.  Second, businesses may make decisions
that we think are wrong, or that end up being the wrong decision.  
Businesses are run by humans and humans are fallible.  Government can't
do any better.  You seem to be saying that we shouldn't invest because
someone might do the wrong thing with the money.  That is a risk we
need to take.  Some will do the wrong thing with it and will pay
the consequences, others will do the right thing and they (and the 
economy) will reap the rewards.

|> > 
|> >|> >tax these ``rich'' and take away a big chuck of that money, they are
|> >|> >not going to spend as much.  Less spending means less expansion and
|> >|> >less jobs.
|> > 
|> >Saving creates spending.  A business needs a loan to expand their
|> >business.  If capital is available because someone has saved it,
|> >the capital can be used by the business to expand, hire more people,
|> >who earn wages who buy products etc.  When a business buys new
|> >equipment, the equipment was made by some worker somewhere.  Without
|> >the infusion of funds, business can expand, can't purchase capital
|> >goods, the producers of capital goods can't afford to hire or keep
|> >employees, people lose their jobs, etc.   You are right that less
|> >spending means less expansion, however you need to remember that
|> >capital spending is still spending and it yields far greater results
|> >than consumer spending.
|> 
|> My company had two great years in the past six years.  The first big
|> profit we squandered.  Didn't create a single new job, didn't buy
|> mcuh capital equipment, etc.  This year, we have hired four more people,
|> are looking for two more, bought a $10,000 logic analyzer, etc.  
|> 
|> WHY?   Environmental regulation.  Our jobs were CREATED by the 
|> Clean Air Act that Danny Quayle's COC is trying so hard to gut.
|> (Another classic fallicy: environmental regulation always costs
|> jobs.  Not true, it more often than not creates new jobs, like
|> ANY kind of regulation!)
|> 

Your jobs may have been created by environment regulation, but how
many jobs will be lost because of the increased cost of regulation.
Are the goods and services that are provided because of the regulation
necessarily the ones that the public really wants.  Government can
create lots of jobs by hiring people to dig holes and fill them up
again, but I don't think that will do much for the standard of living
of people living in this country.

|> 
|> > 
|> >|> 
|> >|> Reverse logic.  If you threaten to tax HOLDINGS instead of income, 
|> >|> they will be given a powerful incentice to spend the money, and thus
|> >|> expand.
|> >|> 
|> >You will give a great incentive to waste money, not use it wisely.
|> 
|> I agree... because people will have to decide what to spend
|> it on in ONE year.
|> 

How will that help the economy?  People live longer than one year.  
It is in the best interest of 'society' that people plan their
actions for more than the short term.  I may not 'need' some of
the money I have now, but I may need it in the future (during
retirement, perhaps).  Creating a system which encourages people
to live for today doesn't sound very wise to me.

|> > 
|> >|> Of course, one of the major factors in this recession is the massive
|> >|> federal debt.  It strangles the money markets, holds up long-term 
|> >|> interest rates, and nobody invests.  Why invest in a factory that
|> >|> may make 8-10% when the government has driven the cost of bonds so
|> >|> low they can make you 14%???
|> >|> 
|> > 
|> >Show me where I can get 14% on bonds.
|> 
|> OK, they;re junk bonds...an not TODAY.  I was referring to late 80;s.
|> You could get up to 17% pon junk bonds.
|> 

And what, exactly, were junk bonds?  They were generally bonds issued
by companies that didn't meet the criteria of the rating agencies.  Most
were issued by smaller companies which needed money to grow.  They
were riskier, hence the interest rate.  During the 80's small busineses
fueled job growth.  Since the collapse of the junk bond market,
job creation has been virtually halted.  Junk bonds were a preferable
means for raising funds because of the preferential tax treatment
according debt financing over equity financing.  Perhaps if we
eliminated the capital gains tax, we would see less debt financing
and more equity financing.

|> >  The deficit has not shown
|> >itself to be particularly restrictive on the money markets.  Interest
|> >rates, both long and short term, are dropping, not rising.  Demand
|> 
|> Er,um.  What's the overnight lending rate down to?  3% ? 2.75%?
|> Why are home mortgages and 30 year bonds still at 8%?  There has
|> not been such a vast spread between long-term and short term 
|> interest rates in at least 40 to 50 years (I forget the exact yearage).

There is still an inflation premium built into long term rates.
Home mortgages are still declining.  In many places they are under
8%.  Mortgages can remain higher because there is such a demand
for refinancing as people dump the mortgates they acquired in the
70's and 80's.

|> 
|> Short term is dropping, but as Mr. Perot said, only an idiot finances
|> his business completely on 30-day and 90-day notes.
|> 

Long term is dropping as well.  The inflation premium of a long bond
is much greater than a short term bond.  Given the past history of
our government, many people are still reluctant to believe that 
inflation will be kept under control.  Lenders were burned by their
experience of the 70's and early 80's and aren't eager to repeat
their mistake.

|> >is still there, but overzealous government has made banks reluctant
|> >to lend to 'risky' ventures.  Of course most job creation comes from
|> >smaller business which also happen to be 'risky'.  When you choke
|> >off small businesses, you choke off the economy.  We're doing a 
|> 
|> Agreed.
|> 
|> >good job of that right now and it certainly won't get any better
|> >if Clinton is elected.
|> 
|> Why?  Clinton's health car and family leave plans have exemptions
|> for small businesses.  How else could he hurt small business.  I
|> know he is going to help our small business and thousands of other
|> people in our industry/market.  The Clean Air Act created thousands
|> of jobs, and they're all on the line.

Clinton proposes to tax businesses to fund retraining costs.  The tax
is a per head tax of 1.5% (I believe).  This raises the cost of each
employee (or hurts the average wage paid to an employee).  He has
also proposed things like pay or play which would require a business
to pay for insurance or pay the government.  Many small businesses
can't afford the insurance and would likely either go out of business
or hire fewer employees.  Many of Clinton's ideas put direct costs
on employment.  The incentive will be for businesses to have fewer
full time employers, either by hiring temporary workers or by working
current employees harder.  At the same time, he is proposing an
investment tax credit.  This program in conjunction with the taxes
he would place on employment will result in businesses investing in
capital equipment which will make workers more productive and at the
same time reduce the need for additional employees.  In short, many
of Clinton's proposals raise the cost of having a full-time employee,
as a result, businesses will want fewer of them.  If you want something,
you don't generally get it by making it more expensive.  If you
want to create jobs, make it cheaper for employers to have full-time
employees, not more expensive.

The Clean Air Act simply rearranged employment and probably will result
in net decrease not increase.  The Clean Air Act raises costs which
makes products more expensive.  With products being more expensive,
people spend more on fewer things.  The workers who are hurt aren't
as visible as the workers who were created.  The workers who are
hurt are workers who aren't employed because a business didn't
exist because money was being spent on other products.

|> 
|> And as far as the defense workers go, half of them half to go
|> anyway.  The Cold War is over, and it's a fact of life.  At least
|> Clinton is offering them something substantial (retraining) rather
|> than continued funding for 4 more years for military toys we don't
|> need, like the Seawolf.
|> 
|> And, by the way, isn't the government funding jobs to build things
|> we don't need (Seawolf) basically amounting to the same communism
|> we've been fighting for 45+ years?  We have met the enemy, and it is us!
|> 

I don't disagree.  Defense spending needs to be cut back.  Other
countries need to spend more for their own defense.  The problem
I have with Clinton is that he doesn't want to cut back on government,
wants to rearrange it and expand it.  Bush has done the same thing
but I expect Clinton will do more of it, particularly with a 'supportive'
Congress.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
Newsgroups: talk.politics.misc,alt.politics.clinton,alt.politics.misc,alt.politics.usa.misc