I'm a big fan of this marvellous channel Wayne. I have a few questions; at the current state of the US government deficit as well as trillions of debt and unfunded entitlements, can you explain why the government would need to spend more? And where is the government going to receive the funding to spend more? Borrowing money from the Fed is only going to create more liability, raising taxes would only decrease aggregate demand furthermore. But if we lowered payroll taxes like you suggested, wouldn't the government have less funds to spend?
Hey Thanks BlueIceAce! The nominal quantity of the national debt means very little, imo. Unfunded entitlements can become a huge problem because government is legally obligated to spend the money, but the problem is not nominal, since gov can/will just print the money. The problem is supply side, we may face real resource constraints, i.e. inflation. How far can government push the printing press? No one knows for sure, but there is a general consensus that the limit is much higher than current policy forecasts. How government spends the printed money is significant. Building new highways and airports, modernizing the power grid, and improving fresh water management would have very positive long-run effects on the economy. Deficit financed infrastructure spending is not likely to cause inflation because it increases the productivity of the economy, deploys idle labor, and is typically temporary. New entitlement spending, on the other hand, carries much more risk of long-run problems. Transfers do not directly increase production, or productivity, but rising nominal demand may spur companies to produce more and invest in more productive technologies. The term economists use to discuss these variables is "elasticity." How elastic is real output? Will we be able to meet the demands of the promises we've made? Lots of factors go into answering those questions, but I believe that deficit financed infrastructure spending would be very beneficial for the country. I would be more cautious about creating a new entitlement. Why does government need to spend more? One, we are operating below capacity, we have idle factories, but the issue most important to me is deleveraging household debt. The poor and middle class in the economy carry too much debt, which has constrained potential output and inflated financial asset prices. Briefly, my position is that there is too much savings/deleverage and not enough borrowers. The borrowers (both consumption and productive investment) will not return until we can improve household balance sheets. My preferred policy to achieve this is raising nominal incomes...inflation. How is the government going to finance the spending? It *must* be done with deficit spending if it is going to get any traction. Payroll tax cuts are a great way to increase the Federal Deficit. It is the most broad-based tax cut, and doesn't depend of good government policy to stimulate demand or aide households in reducing debt. Yes, reducing taxes reduces revenue, which increases the deficit, this is exactly why it would be stimulative. Understanding government deficits can be confusing, since we tend to see it through the lens of our own personal debt, and having too much personal debt can be very bad. Few things to remember about public debt. 1) The government cannot default on debt denominated in its own currency...so the total quantity of the debt is fairly meaningless. 2) The government controls the interest rate on its debt, which is set based on inflation conditions, not the market for US treasuries. 3) The national debt is representation of private sector savings, just like the stock market is a representation of private sector savings, therefore increasing the national debt, increases private nominal savings. Disclaimer: Economics is complex, and no one has a perfect understanding of the economy. Economists are better historians than soothsayers. Thanks for watching!
Wow. First of all, thank you for taking your time to write all this. I have honestly learnt so much from you just from our brief interactions so far. Your ability to write so articulately about complex concepts is inspiring. Please let me now dissect your comment, and see if I understood your points correctly. Also, FYI, I'm a business major in university right now, so this is super cool to me, it's like talking to a professor, except you're way less boring :D I agree that entitlements are dangerous to the future of the country, just like Alan Greenspan has said. And the point of about inflation is very true, when the government issues bonds to the Fed to finance their infrastructure spending, the government is actually spending the borrowed money instead of having the cash being in a liquidity trap in banks. But just a few questions though... - When inflation rises, yes income does increase in nominal terms, but the value of money also drops, so won't the wealth 'gain' be neutralised? From my understanding, when the Fed prints currency and the currency actually circulates into the economy, the first customer that receives the government money (e.g. defence contractors) don't feel the impact of inflation right away, so therefore the people whom are hurt by inflation the most are households, at the bottom of the money chain. - Also, if the government can borrow more money to finance their spending, and then tinker with the interest rates to reduce their interest payments, why don't they do this until infinity? I would assume its because of the US's credit rating right? Inflation would be too high for other countries to see the US dollar as the world reserve currency anymore. Also, from your previous video, you mentioned foreign countries use trade surpluses to buy US treasuries, isn't that another form of entitlements to other countries? Where is the point of borrowing too much? P.S. government doesn't just borrow from the Fed right, they also borrow from private institutions. - Are financial asset prices at historic highs because of deleveraging households? E.g. stocks are high because bond yields are too low (0% interest rates), and that the Fed are buying $4.5 trillion worth of treasuries thus pushing up bond prices, therefore households spend their money by buying stocks instead to chase yields. P.S. The Fed is also purchasing private assets like stocks, elevating the market. If I remember correctly, the Swiss National Bank has huge investments into major US tech companies. This honestly sound like the biggest bubble of all time when the eventual sell off happen, volatility is the lowest in 20 years, and the NASDAQ just broke the record of most all-time highs. - Aren't payroll taxes already factored into the employee's salary by the employer? I mean aside from companies not raising wages but instead using the earnings to repurchase shares, what other factors are causing stagnant wages? - We are already at 0 interest rates, how can we ever incentivise borrowing again? Wait until the household eventually pay off their debts by creating more jobs with deficit spending? - You also brought up a great point, household debts are very high not because they are borrowing more, it's because it's more likely they are still paying off the mortgage debt from 2008. Was that what you were describing? - Well, a government can default on their debt, like Greece. Yes the government can print all the money they can, but in the end they could experience hyperinflation like Venezuela. - What's the point of increasing nominal savings through national debt if it creates a larger financial markets bubble and higher inflation as side effects? Sorry there are so many questions, but you are the teacher to my wonders of the universe, I just can't miss this chance! Thanks again! Look forward to your reply.
Hello wayne Does large government defecit without getting back in taxes receipts de-value currency?Yes government that print its own currency can spend as much it want but doesn't it devalues its currency if they get in this loop?
Wonderful this is brilliant and thank you for your great work when do I get to buy a book?
Just watched this video - great analysis!! Especially impressed it was written in 2015.
You should really start making more videos
I'm a big fan of this marvellous channel Wayne.
I have a few questions; at the current state of the US government deficit as well as trillions of debt and unfunded entitlements, can you explain why the government would need to spend more?
And where is the government going to receive the funding to spend more? Borrowing money from the Fed is only going to create more liability, raising taxes would only decrease aggregate demand furthermore. But if we lowered payroll taxes like you suggested, wouldn't the government have less funds to spend?
Hey Thanks BlueIceAce!
The nominal quantity of the national debt means very little, imo. Unfunded entitlements can become a huge problem because government is legally obligated to spend the money, but the problem is not nominal, since gov can/will just print the money. The problem is supply side, we may face real resource constraints, i.e. inflation.
How far can government push the printing press? No one knows for sure, but there is a general consensus that the limit is much higher than current policy forecasts. How government spends the printed money is significant. Building new highways and airports, modernizing the power grid, and improving fresh water management would have very positive long-run effects on the economy. Deficit financed infrastructure spending is not likely to cause inflation because it increases the productivity of the economy, deploys idle labor, and is typically temporary. New entitlement spending, on the other hand, carries much more risk of long-run problems. Transfers do not directly increase production, or productivity, but rising nominal demand may spur companies to produce more and invest in more productive technologies.
The term economists use to discuss these variables is "elasticity." How elastic is real output? Will we be able to meet the demands of the promises we've made? Lots of factors go into answering those questions, but I believe that deficit financed infrastructure spending would be very beneficial for the country. I would be more cautious about creating a new entitlement.
Why does government need to spend more? One, we are operating below capacity, we have idle factories, but the issue most important to me is deleveraging household debt. The poor and middle class in the economy carry too much debt, which has constrained potential output and inflated financial asset prices. Briefly, my position is that there is too much savings/deleverage and not enough borrowers. The borrowers (both consumption and productive investment) will not return until we can improve household balance sheets. My preferred policy to achieve this is raising nominal incomes...inflation.
How is the government going to finance the spending? It *must* be done with deficit spending if it is going to get any traction. Payroll tax cuts are a great way to increase the Federal Deficit. It is the most broad-based tax cut, and doesn't depend of good government policy to stimulate demand or aide households in reducing debt. Yes, reducing taxes reduces revenue, which increases the deficit, this is exactly why it would be stimulative.
Understanding government deficits can be confusing, since we tend to see it through the lens of our own personal debt, and having too much personal debt can be very bad. Few things to remember about public debt. 1) The government cannot default on debt denominated in its own currency...so the total quantity of the debt is fairly meaningless. 2) The government controls the interest rate on its debt, which is set based on inflation conditions, not the market for US treasuries. 3) The national debt is representation of private sector savings, just like the stock market is a representation of private sector savings, therefore increasing the national debt, increases private nominal savings.
Disclaimer: Economics is complex, and no one has a perfect understanding of the economy. Economists are better historians than soothsayers.
Thanks for watching!
Wow. First of all, thank you for taking your time to write all this. I have honestly learnt so much from you just from our brief interactions so far. Your ability to write so articulately about complex concepts is inspiring. Please let me now dissect your comment, and see if I understood your points correctly. Also, FYI, I'm a business major in university right now, so this is super cool to me, it's like talking to a professor, except you're way less boring :D
I agree that entitlements are dangerous to the future of the country, just like Alan Greenspan has said. And the point of about inflation is very true, when the government issues bonds to the Fed to finance their infrastructure spending, the government is actually spending the borrowed money instead of having the cash being in a liquidity trap in banks. But just a few questions though...
- When inflation rises, yes income does increase in nominal terms, but the value of money also drops, so won't the wealth 'gain' be neutralised? From my understanding, when the Fed prints currency and the currency actually circulates into the economy, the first customer that receives the government money (e.g. defence contractors) don't feel the impact of inflation right away, so therefore the people whom are hurt by inflation the most are households, at the bottom of the money chain.
- Also, if the government can borrow more money to finance their spending, and then tinker with the interest rates to reduce their interest payments, why don't they do this until infinity? I would assume its because of the US's credit rating right? Inflation would be too high for other countries to see the US dollar as the world reserve currency anymore. Also, from your previous video, you mentioned foreign countries use trade surpluses to buy US treasuries, isn't that another form of entitlements to other countries? Where is the point of borrowing too much? P.S. government doesn't just borrow from the Fed right, they also borrow from private institutions.
- Are financial asset prices at historic highs because of deleveraging households? E.g. stocks are high because bond yields are too low (0% interest rates), and that the Fed are buying $4.5 trillion worth of treasuries thus pushing up bond prices, therefore households spend their money by buying stocks instead to chase yields. P.S. The Fed is also purchasing private assets like stocks, elevating the market. If I remember correctly, the Swiss National Bank has huge investments into major US tech companies. This honestly sound like the biggest bubble of all time when the eventual sell off happen, volatility is the lowest in 20 years, and the NASDAQ just broke the record of most all-time highs.
- Aren't payroll taxes already factored into the employee's salary by the employer? I mean aside from companies not raising wages but instead using the earnings to repurchase shares, what other factors are causing stagnant wages?
- We are already at 0 interest rates, how can we ever incentivise borrowing again? Wait until the household eventually pay off their debts by creating more jobs with deficit spending?
- You also brought up a great point, household debts are very high not because they are borrowing more, it's because it's more likely they are still paying off the mortgage debt from 2008. Was that what you were describing?
- Well, a government can default on their debt, like Greece. Yes the government can print all the money they can, but in the end they could experience hyperinflation like Venezuela.
- What's the point of increasing nominal savings through national debt if it creates a larger financial markets bubble and higher inflation as side effects?
Sorry there are so many questions, but you are the teacher to my wonders of the universe, I just can't miss this chance!
Thanks again! Look forward to your reply.
@@BlueIceAce2015 i think government can increase savings they can decrease it too via taxes.
Hello wayne
Does large government defecit without getting back in taxes receipts de-value currency?Yes government that print its own currency can spend as much it want but doesn't it devalues its currency if they get in this loop?
How is it that the very best videos on YT have just a few views?
EPIC!
Is that why your channel logo is also a yin and yang?