Macroeconomic Lightning Bolt

Sometimes the answer is hiding in plain sight, looming so large that you don’t see it.

That’s what happened to me yesterday when a web acquaintance posted an opinion piece by Michael Boskin claiming the Obama Administration was trying to raise income tax rates to 70%.

My first reaction was Michael Boskin?  Can anyone take this guy seriously after the spectacular failure of the policies he championed as George Bush’s chief economist?

That’s when it hit me — for all my interest in the Kondratyev wave, I failed to see why the major competing economic policies of the past century failed, and especially when they failed.

I know this will take some time and further evidence to flesh it out and get the signposts, but it feels right, and I want to just put it out there and develop it over time.

Here’s the basic premise:

For decades, we’ve suffered under a false dichotomy between two competing theories of economic stimulation:  Supply Side theories (the past thirty years) and before that, Keynesian stimulation.  The fact is that each fails when used in the wrong circumstances, and each works when used appropriately.

How to tell which is needed?  How to tell when we need to “put on the brakes” rather than “step on the gas?”

The answer might be as easy as the first day’s lecture in Econ 10 (Econ 101 for most people.)

Look at the supply/demand curve.

When the economy has so much excess capacity that producers are failing, the economy is shrinking, and prices and wages are falling, the answer is to stimulate (replace) demand  with deficit spending (Keynes).  When the economy has overheated inflation that is prompting people to “buy now” to avoid future price increases, yet adjusted wages are failing to keep up with inflation, the answer is supply side investment stimulation and policies that lower interest rates and other costs of doing business (Friedman/Greenspan).

Yes, it really is that simple.  Increase demand when there isn’t enough to maintain the economy and grow.  Increase supply when there isn’t enough production to maintain the economy and grow.

I’ve already scheduled a call with George Ure to see how we can put this into our joint writing effort.  Like the physicists when they recognized the mathematics that explained the apparent contradiction between matrix and wave models for quantum mechanics, I have a sense that this can unify our longstanding debate on economic policy that has devolved into ugly partisan politics.

Let’s see whether we can develop the unified field theory of economics.

First let me digress and confess my own initial confusion during the last inflationary peak of the K-wave (late 70’s).

Specifically, it really bothered me that Volker was raising rates to stop inflation.  After all, a key part of the cost for any business is the cost of operating capital, especially the short term cash that would be subject to Prime Rate loans from banks.  The Prime Rate went up, literally the same day and the same amount, every time the Fed raised its target for Fed Funds.  It seemed like drastic medicine that made inflation worse, not better.

By the time Prime was over 20%, the economy was going into recession and the demand-fueled inflation of the time was receding.

I think what I missed was importance of breaking the inflationary feedback loop at the time, even though it did take high unemployment and the dreaded “double dip” recession of the early 80’s.

The other thing that happened during that period was was the rise of “supply side” economics.  That was anathema to Keynesians, and, incidentally, very hard on the working poor and lower middle class, because they were expected to provide the increase in productivity that fueled growth in profits, which was then followed by growth in capital investment.

Still, breaking the inflation of wages (and raw materials, and capital) is what the late-cycle K-wave inflation needed.  Of course, we could look back to the early 70’s to see why wages and raw materials were on inflationary spiral in the first place (wage freeze under Nixon and rise of OPEC), but that doesn’t change the fact that the feedback loop was building on itself, which meant no amount of Keynesian stimulation could break a recession in those circumstances.

They even had to invent a new word for what was going on — stagflation.  Since most families and workers (the basic operating unit of any economy) were unable to keep up with the inflation, they were experiencing a recession and a decline in standard of living.

So there it is – the blindingly simple realization – what actually changed the trajectory of the late-70’s and early-80’s malaise was lowering the cost of production, and that meant lowering the cost of capital, lowering the cost of labor, and lowering the cost of raw materials.  Naturally, the politicians could only lower the cost of capital.  It took the Volker/Reagan double-barreled recession to lower the cost of the other two.

But nothing in our complex modern economic system is ever that easy, or that unidirectional.  The tax reform of 1986 actually went against supply side policy by substantially raising the cost of capital for commercial real estate investment.  That triggered a commercial real estate washout, which was overbuilt with tax-incentive driven uneconomic buildings that a casual observer could “see through” because there were no tenants.  The collateral damage (pun intended) took out hundreds of S&L’s, but we’ll have to leave the asymmetric de-regulation cause of that failure for another post.

The point, of course, is that stimulating additional supply when you already have too much supply is counterproductive (and very expensive), just as stimulating demand when you have too much demand can spiral out of control and cost a ton, too.

By the end of the Nixon/Ford era, we had already overused Keynesian demand stimulation.  Once we stopped feeding the Viet Nam war machine and the limits imposed under the wage/price freeze were released, there was no hope that additional government-driven demand could create a healthy economy.  Jimmy Carter came in with a tool bag that only held Keynesian hammers, but all the nails were already driven in.

It was time for the pendulum to swing the other way, and for policy to help it.  Tax cuts for capital especially, and for higher income earners in general, that was the medicine that gave us the means of growing production and defeating the demand-pull inflation.

But we silly humans always fight the last war when faced with the new one, and we always try to keep doing whatever feels good.  In the 80’s certain tax cuts felt good, because they stimulated new investment.  Other tax measures actually cut demand by being increased, such as drastic increases in gasoline, tobacco, sales and school taxes.  Ordinary consumer debt (credit cards and auto loans) lost their deductibility, which raised taxes for those who carried credit card balances, which slowed consumption. Payroll tax was nearly tripled in the 80s, but only on income beneath an arbitrary cutoff that was initially below $80,000 and gradually grew to around $100,000 today.  Taken together, a huge number of taxes were raised during the 80’s, and almost all of them applied to middle class consumers.  That slowed consumption and allowed supply to catch up (on a macro level) as investors and business owners got huge tax cuts.

By the 90’s, those capital and business owner tax cutting policies were already beginning to lose their “punch” but we kept the party going by making credit more widely available, and allowing lenders to “sell” the debt into securitizations while continuing to collect servicing fees.  In the Clinton years, income tax rates increased but capital gains tax rates decreased.  Corporate tax breaks proliferated as special tax treatments, and the prior decades’ shift of the tax burden from corporations to consumers and wage earners as a percentage of GDP continued and even accelerated its decline.  In fact, from about 1990 onward, most companies found that their best “capital” investment was to pay lobbyists to get them special tax breaks, subsidies, or government contracts managing publicly built facilities.  CEO’s started getting single-year paychecks that totaled nine figures, and some even became modern-day popular heroes.

Consumers “kept up” by borrowing, and financial firms went on a true binge of leverage, growing their debt twice as fast as any other sector (government, consumers and corporates).  In fact, the Federal Government almost stopped borrowing by the end of the 90’s, though government borrowing as whole continued to grow by low single digits when state and local government debt was taken into account.  By the end of the 90’s, the total debt in our economy was growing at the rate of about $3 for each $1 increase in GDP.

For comparison purposes, in the 1950’s through the 70’s, debt grew at about $1 for each $1 in growth of GDP, in spite of fears of too much debt offered to millions of new young families for everything from sofas to TVs to dishwashers to cars, and of course, mortgages which the FHA and VA guaranteed with only 3% or 5% down payments.

The total debt load grew even faster after the year 2000, as did the amount of stimulation given to the supply side of the supply-demand balance. By 2005, the rate of growth in all debt had reached $5 for every $1 in GDP growth.  The system was rapidly approaching debt saturation, so aggregate demand could not keep growing no matter how much incentive for investment we put in place.

With tax deductible stock options, generous accelerated depreciation, lowered capital gains and dividend tax rates, massive research credits and tons of local tax abatements, getting new capital to invest became almost free.  Not surprisingly, people and companies responded by trying to maximize their capital gains, dividends and borrowing, and tried to minimize the income and the wage component of their expenses.  After all, wages got taxed at a minimum of 15.3%, and the cost went up from there for higher paid salaried employees, while capital gains and dividends maxed out at a 15% tax rate, and that was only paid at some time that might be pretty far into the future.

By 2005 to 2007, the party was effectively over, and no amount of supply-side stimulation could keep the pendulum from swinging deep into the deflation side of the balance.  Individual middle class workers’ paychecks had already been deflating for a ten years or so by then, once you looked at what was left after paying taxes and the minimum co-payments for the rapidly rising cost of health insurance, not to mention the per-family cost of educating children (both school taxes while still at home, and then through student loans and/or massive tuition bills in college).  Even families with two salaries were having trouble making ends meet.

Once their largest asset (houses) were deflating in price while their mortgage debt was staying, a broad swath of American families were trapped in the cycle of self-reinforcing debt deflation and liquidation.

Just to be clear, I’m not talking about the minority who stretched or even lied to get their houses with alt-A “liar loans” structured as Option ARMs, nor am I talking about the subprime borrowers with two year teaser rates around 7% rather than the 10% they’d be paying with full risk pricing (and which they would have to pay once the rate resets kicked in).

I’m talking about those families that did everything right — documented their income without cheating, paid 20% down payments from savings, and took out 30 year fixed rate mortgages they could afford.  Those families – the ones who did everything “right.”  They are trapped.  Five or ten percent of them have to sell their houses every year.  If they can’t pay off their mortgage, they have to default.  When they default, they lose everything, and you and I as taxpayers keep the investors from losing a dime by covering the losses through Fannie Mae or Freddie Mac.

I have to look on in wonder when economists seriously suggest that the solution is to give even more incentives to investors.  I nearly throw up when another “solution” is to cut demand directly by cutting off unemployment, cutting Social Security payments, or removing half the people now buying food with food stamps.  How can those economists think the investors will do better (and hire people for jobs) when they are losing customers and already have too much capacity?

It’s just as ridiculous as Jimmy Carter proposing stimulus spending in the late 70’s.  Right now, supply side stimulus is a waste, and maybe even counter-productive, especially if you’re talking about tax cuts for international corporations or capital gains tax cuts.

What we really need to do is understand the dynamics of various sub-markets for labor, materials, services and finished goods, and figure out where we have too much demand or too little supply, and where growth is needed.  If any sectors have too little supply or too little demand, then apply the appropriate stimulus policy to that sector.

If, on the other hand, we are supplying any sector too fast (commercial real estate development in the 80’s, for example), we need to put on the “supply brakes”.  In the 1986 Tax Act, we did that, by taking away the leveraged tax break passive equity partners enjoyed.  For Dot Com insanity, the “brakes” would have been to require companies to state their earnings to investors using the same numbers they used to report their taxes.  Instantly we would have seen as investors that the value of compensation (including stock options) was overwhelming the profits we thought we were buying when we bought the company stock.  Bubble avoided (maybe).

We’ve known for a long time that we can tax consumption that we’d rather discourage.  Cigarettes and alcohol come to mind.  Europeans drive high performance diesel cars that get fifty miles to the gallon.  Why, you might ask?  Easy.  Very high taxes discourage profligate use of fuel, and manufacturers respond by building high mileage vehicles that are fun to drive.

So, my national sales tax believing friends, especially those who think even more supply-side stimulation in the form of lower corporate taxes and zero capital gains is what we need, just be aware that you’re saying you want falling prices and shrinking consumption.  How’s that business plan going to work out with falling sales as far as the eye can see?  Are you really sure that’s what you want?

I’ll be working on an system design that turns taxation in various sectors and forms into the “brakes” and investment incentives or government spending into the “gas pedals” for a stable and growing economy.  Key to the effort will be a first try at defining dynamic methods of applying them.

The good news is that I already know what the goal is:

To grow the economy just a bit faster than population growth and inflation, and to translate that growth into a long term, sustainable increase in our standard of living.  Piece of cake.  As a starting point, I already know two approaches that only work some of the time.  We need to be realistic about when we apply them.

hh

PS I’m not crazy enough to believe this could actually be implemented, given our politics.  I just want to play “what if” in a way that might allow us to get the big things right, and stop the insanity of always using the same “solution” no matter what the problem might be.

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19 Responses to Macroeconomic Lightning Bolt

  1. Dinkar Naik says:

    Sounds logical and pursuading.
    Can we transform into sound economic perpetual policy machine that adjusts depending upon the stage the economy is in, and may be apply granularly by the status each sector is in. Regards.

  2. honkytonker says:

    Makes sense to me, but then a lot of economic analysis is over my pay grade. Your argument seems to be focused on the US, but I wonder how any such plan would/might interact with the policies being pursued by other countries, esp if they were going in the opposite direction (e.g. fighting inflation while we fight deflation) vis-a-vis global businesses that can source and deploy capital and labor wherever there is perceived opportunity.

    • hhill51 says:

      I think you’ve hit on the reality that I hope to address systemically. The germ of the idea is that we have tools that encourage capital investment (supply) or discourage it, and tools that encourage/create demand or discourage it. There’s no doubt that over the world, different jurisdictions will be dealing with different (and occasionally exactly opposite) problems.
      //
      Rather than thinking we have to commit to just positive or negative along either axis of adjustment, I think of it as multiple “targets” with associated sighting tools and adjustment tools, like a surveyor using a transit or a bombardier using a bombsight.
      //
      I think the whole issue is that without some kind of moderating influences (policies), markets tend to get into destructive oscillations to extremes. Keeping them from getting there is the trick, of course, and knowing when to stop applying the gas and maybe even tap the brakes. That’s why I’m interested in thinking about continuously variable tools, and how they might work.
      //
      I happen to drive a hybrid car, and enjoy monitoring the mix of electric and gasoline propulsion I’m using at any given time. The fascinating thing is that the lightest use of the brakes recharges the batteries without burning brake pads and disks. Beautiful! That’s like my desire to use taxes to slow down demand, building a reserve to use to stimulate demand at other times.

  3. OilisNotWell says:

    Howard,
    I’m a new subscriber. I’m grateful I was exposed to your work by George Ure.

    Keynes & Hayek? Havent we learned anything since? That was 80 years ago!

    Yes we have. We’ve learned that economics should be subordinated to energy and its not the other way around. We aren’t going to be stimulating anything with oil prices going to $200/ bl and all our wealth and multiplier-effect money going to overseas oil and oil wars. The economists thought oil was no more important than any other input variable. They discounted the future value of it. They thought it was expendable and replaceable. Way wrong!

    With our current approach, oil won’t end well:

    http://oilisnotwell.wordpress.com/2011/03/19/with-our-current-approach-oil-wont-end-well/

    Economic projections crash into geologic reality:

    http://oilisnotwell.wordpress.com/2011/04/28/economic-projections-crash-into-geologic-reality/

    Regards,
    Robert Anderson

  4. Marlon Seevalve says:

    Please get over your tired supply-demand paradigm. It’s s-o-o-o 19th century. The new economy does not require real demand — it supplies its own. We monetize Desire, and pay it off on the installment plan. A whole nation of indentured servants!

    At the end of the day, stimulus is baloney; “pump-priming” is a masturbatory exercise with a predictable outcome (post-coital tristesse and a sticky mess); people will not continue to do work that produces nothing essential or to buy products whose chief function is spinning the merry-go-round another turn — forever.

    Sooner or later, people are going to demand a little reality with their rubber biscuit, chewed interminably to the existential laments of Peggy Lee and Billy Joel. War and endless, mindless consumption are all that we get for our money. Isn’t it all just a waste of time, if that’s what it’s all about? (You know the next line….)

  5. KaD says:

    This assumes that infinite growth is not only desirable but possible; which it is not. You cannot have infinite growth with finite resources. That is why this cannot work in all circumstances as the author believes.

  6. Bill says:

    The logical flaw in your model is that all of the damage done during application of the Keynesian Death Ray can be undone when it’s time to engage the Freemarket Tractor Beam.

    Additionally, the deformation of the natural cycles brought about by the Death Ray is quite possibly of significantly longer duration than the Tractor Bean fix can operate in restorative mode, causing a downward-sloping hiccup bobsled race to bankruptcy.

    Otherwise, it’s a good insight and reasonable theorm.

  7. Bruce says:

    You are hurting me, HH. Everything you say is true, but it comes back to the same old thing. When you artificially influence these markets, you get distortions. How about a tax code that dictates that all decisions be made independently of tax considerations? Let the tax code raise revenue, not create incentives for favored activities. If you expect Central Bankers and politicians to tweak things juuuuuuuuuuuuuust right, you’re going to continually adjust policy to correct the problem you just created, just like we did in all the examples you cited above. A flat tax with 3 progressive rates should work.

    • hhill51 says:

      Thanks, Bruce.
      //
      Let me use a real-world example that actually works the way I think our multi-dimensional gas/brakes policy system might work. I’m talking about state unemployment insurance. During good times, a small (very small) percentage of payrolls is set aside for the fund, so technically that is a drag on the economy whenever the fund is increasing. During bad times, the fund pays enough to extend the economic activity of those who lost their jobs for a while (typically up to six months). That has the effect of keeping people from losing their homes to foreclosure or helping them feed their children, or at least it delays for all and prevents for many the direst consequences of losing their income.
      //
      By its very nature, unemployment insurance is dynamically applying its “brakes” in the good times and applying Keynesian stimulation in the bad times. It also happens to collect more insurance premiums from industry sectors that are doing well, while helping out people who lose their jobs in sectors that are doing badly. OMG! It’s wealth redistribution!
      //
      The free market ideologue would see this as destructive interference. Do you really think it does more harm than good?
      //
      hh

    • hhill51 says:

      Hey, Bruce…

      Since the “Fair and Balanced” guys are being hoisted on their organized corruption petard, I better pick up the slack, and show how supply side taxes and incentives are being used.
      \\
      Consider the supply side tax break given to those who start businesses. They (now) get a permanent tax holiday on capital gains when they cash out on the value they create by starting that business. I believe that was part of the last budget deal.
      \\
      So is that an artificial distortion of the economy? Or is a lower capital gains tax rate vs income tax rate a distortion in and of itself? Be careful when you answer… you might be goring one of the absolute favorite oxen of the “free market” crowd… Or do they only want a market that’s freer for them, while everyone else pays?
      \\
      Makes you wonder.

  8. Stephen Swaim says:

    Howard … Good observations and dovetails with there being two types of inflation over the course of the Longwave during different parts of it’s cycle.

    There are a number of different theories about the Longwave itself but I remain convinced that the FINAL “economic peak” of each cycle is reflected in a huge “Credit Bubble” that distorts the economy out of reason and provides for the final “consumption push” at the very end. When that “Credit Bubble” reaches it’s final peak consumption can NOT resume, even using massive Keynesian stimulus, until the excess debt is destroyed (ie: the saver’s class loses massive amounts of their principal) The time to push Keynesian stimulus hard is AFTER the excess debt is destroyed at which point in time it can actually “Restart” the consumption cycle.

    If the excess debt is NOT destroyed then any stimulus that takes place is for naught since all the stimulus funds will effectively be diverted in one way or another so as to pay moneys towards the worthless debt … thus delaying even further down the timeline the recognition of the capital losses … losses which HAVE to be recognized before consumption can resume.

    Stephen Swaim

  9. Paolo says:

    The counter-cyclical interference in the business cycle as envisaged by Keynes was symmetric. However, Keynesian theory as applied by humans using hyperbolic discounting of the future has only been applied assymmetrically, since it is politically easier for a government to borrow and spend during bad times, but not save and pay back debt during good times.

    A set of alternatives that would function without the usual political pressures could be instituted that would look at two key determinants of an economy and automatically readjust based on new data. The first is the national savings to debt ratio, and the second is the current account balance.

    In the first case, the Fed could develop a target for the savings:debt ratio and increase or decrease its overnight rate to assure adequate savings. In the absence of the Fed, this would be a market process – but I suspect abolishing the Fed is politically impossible at this point.

    In the second case, the Commerce Dept. could look at the current account balances with various countries, and under current WTO-GATT rules, legally place import tariffs on countries that continue to have large trade surpluses with the US. Again, this would not be required if international trade was accounted for on some kind of fixed currency metric, like a gold standard. There is no such thing as “free trade” if countries like China can peg their currency to the dollar, which functions as a huge stealth tariff aimed against the US.

    Since many of the US money center banks have investments that benefit from China’s pegged currency, this would be politically difficult but I think possible.

    On a slightly different topic, I have been looking at business cycle theory for a while, and developed a structural mathematical model of the business cycle. For reasons I do not claim to understand – we appear to be at the cusp of a series of cycles of varying period that all have a large negative first derivative regarding economic activity. Application of the model to both the FTSE since 1800 and the DJIA since 1896 seem to corroborate the thesis. As Martin Armstrong said a while back – “It’s just time” for a major slowdown in economic activity.

    http://econocasts.blogspot.com/2011/06/model-ftsa-ftse-all-share.html

    http://econocasts.blogspot.com/2011/07/model-djia-longshort_18.html

    • hhill51 says:

      Hey, Paolo,
      Thanks for the comments and the chart work. Interesting that you see all the sectors getting into phase together.
      //
      Check out this testimony before congress by Simon Johnson, author of 13 Bankers. He proposes taxation that “gears” itself to the degree of leverage the borrower employs. Put another way, we could simply phase out the deductibility of debt as leverage increases.
      //
      Like my example of unemployment insurance above, this has the potential to be a neutral mechanism that helps the market self-correct (the pipe dream of the free marketeers, who fail to see that destructive oscillation is a far too frequent outcome of truly ungoverned market mechanisms).

      • Paolo says:

        Thanks for that reference to destructive oscillations – I’ll have to have a think on how that concept plays into cycle theory.

        As far as cycles converging, there’s a lot to be learned. For example, while I could come up with a few conjectures, I find it interesting that pretty much all of the financial time series I look at display statistically significant cycle period of about 11.5 years. Which falls within the range of the solar cycle. Go figure.

        I agree that unregulated capitalism, like an unregulated nuclear reaction, self-destructs. Large conglomerates of capital seem to create an economic reality distortion field that facilitates attracting more capital whether or not the underlying service or product sold is “successful” on any number of metrics. GM comes to mind.

        As far as the tax code, I think the opportunity cost of lost human capital dedicated to creating and managing loopholes in the tax code, instead of solving problems and making progress, is much larger and costs much more in the long run than the tax collected. It also opens up the possibility of corruption via selective “buy-outs” out of the tax code by means of political bribes or contributions.

        I’d much rather see a flat tax on all income, foreign and domestic, with no exceptions, with a personal and dependent deductible of 25% of the median income for a family of 4, with the flat tax rate set to cover governmental outlays. With the tax form fitting on a 3×5 post card. card.

  10. Tom D says:

    Welcome back!

    Your Kondratieff wave concept is turned on its head by your hope of central direction (policy) instead of just “happening” due to billions of indidual supply/demand decisions. Volcker got the “credit” for ending inflation in the late 1970’s, but rates had already been going up from 1942/46/49 depending upon your favorite parking spot for bond duration. Volcker was playing catchup, as central bankers always do.

    After, not to speak of during, the past ten years of crude goods bull markets, to be keeping real rates pegged near and under zero, and not to expect and get raging speculation in real estate, financials, and commodities is simply to be ignorant to the greatest degree.

    However brilliant it might be in a real world to fine tune policy to “turn” the long wave, as you suggest, it cannot and will not ever happen in a socialist democracy with competing political parties. If you need evidence, look at the current uninformed debate by our elected officials.

    We’d be better off to accept long wave swings as due to supply/demand imbalances and that the natural inertia of realizing that things have changed and that there are necessarily long lead times required for millions of businesses (farmers to chip makers) to reposition for the new supply/demand reality. Policy can try to adapt more quickly once the turning point is past rather than fighting the last war and interfering with a normal process. Or we could have a contest for best oxymoron describing intelligent central economic planning.

    Regards and all best,

    Tom D

    • hhill51 says:

      Hey, Tom…
      //
      Welcome back to you, too.
      //
      I am not going to kid myself into believing that minority-dominated Senate or our hyperpartisan current government will get any meaningful policy changes done.
      //
      I am, however, interested in thinking about what might work better than our current system, which seems to add to the instability by continuing the wrong policies at the wrong phase of the cycle. I think my example of unemployment insurance (as it operates at the state level) works just that way. Simon Johnson proposed a “leverage tax” for financials who enjoy taxpayer guarantees, though I think he originally wanted to deal with the “too big to fail” issue with a few basis points of asset fees for mega-banks. His estimate of 50 basis points of funding advantage for trillion dollar banks might be a bit high, but there’s no doubt that when they become large enough to threaten the entire system, the rest of us and the smaller institutions should not be on the hook to pay for it when they spin out of control. By the way, the dumbest argument I’ve heard made publicly during that discussion was how bad it would be to increase costs for Citi, BAC, WF, and the others since they would pass the cost to customers. If they have an advantage due to size, why shouldn’t their customers, shareholders and employees bear the cost of mitigating the risk? Why should non-customers and shareholders of other banks suffer? FDIC on steroids for banks on steroids (and insurance companies behaving like AIG, and Fannie and Freddie while we’re at it.)
      //
      The capital-formation incentive/disincentive pair needs some thinking, especially for businesses that have heavy R&D or capital investment needs. Maybe an accelerated depreciation during good times as a dollar-for-dollar benefit triggered by paid income tax from the corporation. (If your company pays $10 million in tax, you get to bring forward an extra ten million in depreciation on current year investment.)
      //
      To summarize, I’m thinking about how to design braking systems that store up “stimulus” energy during good times, since we seem incapable of paying down debt in good times so we can borrow in bad times. I also think we should really think about running our social insurance vehicles like insurance companies, with reserves and rate setting by actuarial reality. I really wonder how many gray haired conservatives are willing to collect social security only to the extent they paid in, plus interest, plus actuarial gains for winning the survival lottery, but then it stops. The welfare component of social security should only be to prevent elderly poverty, not to pay comfortably retired 85-year-olds the dough they use to pay greens fees and country club dues.
      //
      Well, I’ll stop for now. Do you have any ideas about how we make the “invisible hand” a meaningful control for our compound interest world? I just can’t get behind Rand Paul’s idea that coal companies won’t get anyone to work in their mines if miners die in them.
      //
      hh

      • Tom D says:

        Howard suggested: “I’m thinking about how to design braking systems that store up “stimulus” energy during good times, since we seem incapable of paying down debt in good times so we can borrow in bad times.”

        Moses and Keynes thought deeply about this very issue, but human institutions run by pharaohs, LBJs, or worse, cannot or will not keep to plan. Human nature is to party in good times and moan and groan in bad times. If you have some foolproof–pun intended– method for changing human nature without political oppression or drugs, I’d be delighted to know about it. Otherwise interfering less with billions of individual decisions of the invisible hand seems the least damaging of all policy-maker options.

        Tom D

        PS: mREIT prices seem schizophrenic lately along with risk-on and off flips. Any thoughts on that sector now? Over the past ten years mREITs have had the highest annualized total returns of any retail high yield sector apart from US oil & gas trusts. For instance, Annaly (NLY) has annualized at 14.14% p.a. and Permian Basin (PBT) at 22.70% p.a.

      • hhill51 says:

        Here you go, Tom… I got yer “invisible hand” right here, quoting none other than Adam Smith as he pointed out that it was particularly important to have government intervention to protect workers from rapacious employers who “always and everywhere” do everything they can to keep wages as low as possible.

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