Sequester! Any Thoughts?

What are your thoughts on the sequester issue?

– What’s going to happen?
– Will there be a deal? Will the Tea Parties allow a deal?
– Will Boehner craft a working majority of more moderate Republicans and the Democrat minority?
– Does Boehner already have a deal worked out with Obama and they’re pushing it to the deadline so the Tea Partiers can’t build up workable counter-argument?
– If they don’t reach a deal, who’s really to blame, and who will the public blame?
– Is failure the end of the world, and we might as well all just party like it’s 1999?
– Or is failure just the end of the U.S. as the world’s dominant economic power?
– Is Bob Woodward the biggest douche in mainstream journalism?
– Do you actually have any idea how the sequester would actually affect you personally?

Answer any or all of the above questions, or make up your own and answer them, in order to be entered into a drawing for a free ($15.99 shipping and handling charge) Bawdy House T-shirt (inappropriate for all occasions).

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About James Hanley

James Hanley is Associate Professor of Political Science at Adrian College and a Fellow of the Institute for Social Policy and Understanding. The views expressed here do not reflect the views of either organization.
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64 Responses to Sequester! Any Thoughts?

  1. AMW says:

    That’s Democratic minority.

  2. James Hanley says:

    Heh, I just became part of the right-wing media conspiracy. I wonder when my check will come.

  3. lancifer666 says:

    I’ve been hearing a litany of sob stories on NPR from “We’ll have to close Yellowstone because we won’t be able to clear the main road of snow.” to “Military budget cuts will make us all less safe.”
    Does anyone really believe that limiting the growth of spending of the federal government is going to cause some apocalyptic event?

    I say bring it on!

  4. lancifer666 says:

    AMW, I always chuckle when Democrats getting their nose out of joint when some one calls their party the “Democrat” party. Why do (you?) they care?

  5. AMW says:

    I’m a libertarian, and not registered under any party. I care because it’s improper English, and because the sort of people who refer to it as the “Democrat Party” usually leave a bad taste in my mouth.

  6. AMW says:

    (Not that James leaves a bad taste in my mouth.)

  7. lancifer666 says:

    AMW,

    I see your point, and I also hate the clumsy misuse of language.

    I think Republicans use the term “Democrat Party” 1) Because calling them the “Democratic Party” implies that Republicans are the undemocratic party and 2) Because it pisses off the Democrats.

  8. Scott Hanley says:

    I’ve been hearing a litany of sob stories on NPR from “We’ll have to close Yellowstone because we won’t be able to clear the main road of snow.” to “Military budget cuts will make us all less safe.”

    You can laugh about that, but I guarantee that the Wyoming Congressional delegation — Republicans, all three of them — will raise a shitstorm with the Park Service if they stop spending money to keep a certain 9000′, avalanche-prone mountain pass groomed for snowmobiles from Cody. It’s money this government agency would love to save, but they won’t be allowed to.

  9. Scott Hanley says:

    D’oh! Didn’t even look at the calendar to see that the winter season is nearly over and they’ll be talking about real plowing! Still, the general point stands — the Congresscritters will scream if the gummint isn’t spending money to get tourists into Wyoming.

  10. lancifer666 says:

    Scott Hanley,

    The feds that have been chosen to cry on NPR would have you believe that they have no discretion and must let these vital functions lapse instead of making common sense provisions to move funds around.

    I haven’t read the “sequester” legislation but I doubt it prohibits federal agencies from budgeting there money in ways that preserve vital functions while limiting funds to lesser priorities.

    And of course NPR is all too happy to make it sound like the end of the world and of course lay the blame at the feet of Republicans.

  11. Matty says:

    One problem may be that one man’s ‘lesser priorities’ is the next ones ‘key function’. To give one example everyone wants to cut back-office costs, right up to the point where their paycheck is delayed.

  12. Scott Hanley says:

    Yes, yes, there are always “lesser priorities” that can afford the ax. Can you name them? Sen. Mike Enzi didn’t name any when he had his spokesman say, “It’s tempting for agencies and departments to cut the most public and visible programs to generate news stories and public outcry instead of looking where there is actually room for cuts,”

    Sen. John Barrasso didn’t name any when he said, “Instead of prioritizing cuts and targeting wasteful Washington spending, the president chose to put important programs, our national security and our National Park funding in jeopardy,”

    Always the same vague allusions to “waste,” without identifying where it is. Somewhere there must be money being spent that I wouldn’t miss! Just don’t cut anything that affects me!

    The entire time I was in Yellowstone, beginning in 1988, the Park Service’s has operated on tight budget. There used to be a full schedule of daily programs and hikes led by ranger-naturalists; now you’ll rarely see any such thing as a ranger-naturalist. Sewer systems have been failing for decades, with little money to repair them. The archives and research library was squeezed into a tiny, tiny basement; the replacement Heritage & Research Center was financed largely by private donations. Same thing with the new Old Faithful Visitor Center, which the NPS couldn’t afford to build themselves.

    So yes, sometimes officials grandstand. One year the superintendent closed an entire campground to draw attention to the budget squeeze. Another year, the Park temporarily stopped collecting entry fees, because at the time the receipts went to into the general fund, while the cost of manning the gates fell solely on the Park.

    But even if they cut out something like an unnecessary spring retreat to Jackson Lake Lodge, that’s less money to JLL and the Jackson economy. Easy for me to dismiss, since I don’t live in Jackson, but even cutting frivolous expenses is going to hit someone in the private sector.

  13. AMW says:

    Always the same vague allusions to “waste,” without identifying where it is. Somewhere there must be money being spent that I wouldn’t miss! Just don’t cut anything that affects me!

    Cutting x percent of funds while cutting y < x percent of benefits doesn't require waste in the system (although that helps a lot!). It simply flows from the law of decreasing marginal benefits.

    But even if they cut out something like an unnecessary spring retreat to Jackson Lake Lodge, that’s less money to JLL and the Jackson economy. Easy for me to dismiss, since I don’t live in Jackson, but even cutting frivolous expenses is going to hit someone in the private sector.

    Sure; whenever public spending creates an opportunity for the private sector to make money, then the private sector will take a short-run hit if and when that spending gets cut. But surely that’s no defense of the public spending itself, is it? On those grounds we could defend the continuation of any public boondoggle.

  14. Scott Hanley says:

    Cutting x percent of funds while cutting y < x percent of benefits doesn't require waste in the system (although that helps a lot!). It simply flows from the law of decreasing marginal benefits.

    If that were a universal law, I would have to wonder how the saying, “Penny wise and pound foolish” could have arisen. When an agency can’t even afford to build its own buildings, maintain its own infrastructure, or provide services to its patrons, it just seems too breezy to assume that further cuts will be, like Earth, mostly harmless.

  15. James Hanley says:

    Scott gets 24 hours to think about this before I drive over to his apartment and beat him up with Marshall’s Principles of Economics (unabridged edition, for extra heft).

  16. lancifer666 says:

    Scott,

    The federal budget has increased as a percentage of GDP from less than 5% to nearly 40% over the last 100 years.

    Do you think that it is unreasonable to take measures that only moderately forestall that precipitous rate of increase?

  17. ppnl says:

    I don’t think the objection is to cutting spending. I think the objection is to cutting it in the stupidest way possible. It is like they have finally admitted to themselves that they cannot be adults.

  18. Matty says:

    At the risk of leaving Scott at the mercy of a large book my point was not about whether cuts (or lower increases) are a good idea, it was about the idea that you can cut spending without anyone noticing. There seems to be this myth that public bodies are spending billions on gold plated executive washrooms and can cut spending without cutting the spending the public notice when in practice the back room stuff is usually the admin that makes public facing stuff possible.

    There can be a case for cutting the funds but lets admit this will affect what the public see of that organisation and not pretend budgets can be balanced on an imaginary gold toilet.

  19. Troublesome Frog says:

    lancifer666:

    I think Republicans use the term “Democrat Party” 1) Because calling them the “Democratic Party” implies that Republicans are the undemocratic party and 2) Because it pisses off the Democrats.

    I’m pretty sure it’s mostly (2). When somebody calls me the wrong name by accident, it’s no big deal. When somebody calls me the wrong name repeatedly on purpose in order to irritate me, it starts to seem like that person might be an asshole.
    It’s the type of thing you expect a highschool kid to do, not the sort of thing you expect from sitting members of Congress or respected media “thinkers.”

    This instance of it didn’t bother me at all for exactly the same reason.

  20. Troublesome Frog says:

    AMW:

    But surely that’s no defense of the public spending itself, is it?

    No, not in general. But it is a good reason to worry about the timing of it. “Everybody, tighten your belts and start spending less than you earn all at the same time” is a non-starter as long as one person’s spending is another person’s income.

    There’s a coordination problem at work here. When every household in the nation wants to flush their toilets at the same time, federal policy #1 should not be to encourage federal employees to join in.

  21. Scott Hanley says:

    The federal budget has increased as a percentage of GDP from less than 5% to nearly 40% over the last 100 years.

    Do you think that it is unreasonable to take measures that only moderately forestall that precipitous rate of increase?

    I call foul! You can’t draw a straight line from 1913 to 2013 and call that a current trend.

    First, the current budget is only 22% of GDP, not 40% (I expect you meant the debt, not the current budget), and without the recession would likely be around 20%. To put that in perspective, the entire range between 1952 and 2013 is 16.5%-25.2%. At the end of the Clinton Administration, that figures was toward the low end of that range. So it may be higher than many people like, but there’s no straight line trend toward 80% in 2113.

    Historically, there are only a handful of serious increases in federal debt: the Revolutionary War, the Civil War, World War I, the New Deal, WWII (the biggest increase), the Reagan Administration, and the current recession. Each of these jumps is eventually followed by a gradual reduction. There is no long term “precipitous rate of increase.”

    War spending is easiest to reduce, once the crisis passes. I recognize that the New Deal and Great Society — mainly Social Security and Medicare — are different, since they’re ongoing commitments. But they’re also sustainable at levels of taxation much lower than we had between 1950 and 1980, so I can’t see that they’re economically crippling. The rise in US health care costs the last few decades is worrisome, but the last couple years that trend has stopped and no one know if that’s a new trend or not. There are possible ways to address rising costs — moving from fee-for-volume to fee-for-outcome in Medicare, for example. Like those plans for deflecting asteroids, we don’t need to vaporize the budget gap all at once — we just need to nudge it onto a better trajectory. Across-the-board cuts won’t do that, no matter how you target them.

    (Sources for numerical data: http://www.whitehouse.gov/omb/budget/Historicals and http://www.gao.gov/special.pubs/longterm/debt/budgetdebt.html)

  22. lancifer666 says:

    Scott HAnley,
    I meant “US government spending” which is the same as “the budget” I believe, unless their is unbudgeted spending going on.

    http://www.usgovernmentspending.com/us_20th_century_chart.html

    And there most certainly is a “precipitous rate of increase”. Just look at the graph in the link.

    As I said earlier I’d prefer that the congress got together and formulated a decrease in spending that was better considered than an across the board cut but they have shown that that is not possible so I’m good with the sequester.

  23. lancifer666 says:

    Scott Hanley,

    Hmm, the graph may include state and local government spending, but the point remains. And the same page shows that federal spending has risen as a percentage of the total steadily over the period shown.

    I don’t wish to live in a society where the government spends 80 cents for every dollar spent by private citizens, do you? You know where that 80 cents is coming from don’t you?

  24. lancifer666 says:

    Scott Hanley,

    OK, here is the page I should have linked to, showing just federal spending.
    http://www.usgovernmentspending.com/federal_spending_chart

    And your points are well taken, that it is not a linear progression, but it is an upward trend nonetheless.

  25. lancifer666 says:

    Matty,

    Once people get a service or benefit it is hard to stop providing that service or benefit with out some level of push back. That doesn’t mean that such a system of ever increasing government benefits and services is sustainable or desirable.

  26. Troublesome Frog says:

    I don’t see the alarming trend at the federal level. If you were to show me the federal graph without telling me what it was and then ask me what I thought the trend was, I’d probably be thinking something along the lines of it asymptotically approaching a value somewhere around 0.25. I definitely wouldn’t guess that the underlying trend was likely to drive us much above 0.3 any time soon.

    Looking at the federal data in context, it’s pretty easy to see that the only question is healthcare. If costs continue to rise rapidly, we’re screwed. If not, we’re fine. Nothing else really contributes significantly to the trend.

    A side note–for these types of data sets, you can always use FRED. It’s good data and easy to manipulate. You can plot multiple series and combine data series arithmetically. They even have a smartphone app to satisfy economic data junkies who can’t stand to be without FRED.

  27. lancifer666 says:

    TroblesomeFrog,

    Looking at the federal data in context, it’s pretty easy to see that the only question is healthcare. If costs continue to rise rapidly, we’re screwed. If not, we’re fine.

    Really? Government is currently spending 66 cents for every dollar spent by the private sector and that’s “fine”?

    I think we have a fundamentally different view of the role of government. I’m not saying that yours is “wrong” and mine is “right”, just that they may not be reconcilable.

  28. Troublesome Frog says:

    I thought we were talking about long term trends, not levels. The argument I’ve been seeing so far in the media is that if we extrapolate, the feds will be spending eleventy kajillion times our economic output in just a few short years. It simply isn’t true.

    I think that questions about the role of government are interesting ones, but I don’t see how the simple ratio “X dollars of public for every Y dollars private” is all that illuminating. I don’t think I could come up with a cutoff for “too much” by looking at that ratio in a vacuum, could you? It’s more a question of what are legitimate and useful roles for government to play than one of the socially optimal level of government “size.”

    Another (long) side note on your calculation is what constitutes “spending.” Transfers (Social Security, welfare, unemployment, etc.) are a major part of “spending” but they don’t count toward GDP, so dividing the budget by GDP isn’t exactly measuring what you think it is. We could theoretically cause that ratio to approach 1.0 by transferring money back and forth without ever actually consuming any resources. Probably not good policy, but also not the same as spending $0.99 for every $0.01 the private sector spends.

    I’m a little rusty here, so somebody should jump in if I’m misremembering, but in the GDP identity Y = G + C + I + NX, the value you’d put in for G should be government consumption and gross investment. State/local and federal shown relative to GDP here.

    That graph might also tell us why non-transfer services we’ve traditionally had government providing us appear to have started to suck in a way they didn’t back in the good old days.
    You could argue that transfers are the interesting part of it and I’d agree. I just think that for better or worse, there’s a difference between the government allocating resources and the government transferring money to a different private party so that party decides how to allocate those resources.

  29. Scott Hanley says:

    I think we have a fundamentally different view of the role of government. I’m not saying that yours is “wrong” and mine is “right”, just that they may not be reconcilable.

    Well, no doubt about us having very different philosophies. Despite frequent conversations with James, I’m still dim enough to remain an incorrigible liberal rather than a libertarian. I probably have a more expansive idea of what services are “essential” in a modern society than any libertarian, but I’m relatively indifferent to whether they’re provided by government or the private sector — whichever seems to be most efficient. As an example, I can’t imagine how long we’d have had to wait for electronic computers if it had been left entirely to the private sector, but now that they’re a mature industry, I see no reason for the government to compete with Microsoft or Apple.

    It’s fine and wise to be skeptical of government spending, but I can’t help noticing that, in countries with high levels of taxation, fewer people live hand-to-mouth than in countries with “less government.” The link between taxation and oppression isn’t very obvious to me.

    Really? Government is currently spending 66 cents for every dollar spent by the private sector and that’s “fine”?

    I think the keyword there is currently. While the lingering recession suppresses private spending, high unemployment increases government spending, so that figure should not be taken as a baseline. It’s an aberration due to unwelcome circumstances. Even Paul Krugman probably doesn’t want us to maintain that level of government spending for all time, but if you’re ever going to do it, now’s the time.

  30. lancifer666 says:

    Troublesome Frog,

    “Transfers” is a nice euphemism for taking one persons money and giving it to someone else. I don’t suppose we’re going to put the SS and Medicare /Medicaid genie back in the bottle but I don’t see any momentum to stop the ever increasing outlays of new “entitlements”.

    Now “Health Care” is being portrayed as a “right”. When does this stop? Is there no human need or want that cannot be imagined as a right? And if so what is the rationale for the government not taxing some to provide these “rights” to others when this is accepted as its proper role?

    And I know that some idiots on the right have desensitized us to the word “freedom” by using it as a meaningless platitude to rally their base, but where does freedom come in to the equation? Once you have empowered government to be the arbiter or who gets what where does it stop?

  31. lancifer666 says:

    Scott Hanley,

    It’s fine and wise to be skeptical of government spending, but I can’t help noticing that, in countries with high levels of taxation, fewer people live hand-to-mouth than in countries with “less government.”

    By that metric a wise and benevolent dictator that kept everybody fed, clothed and housed would be as good as any other system of governance.

    The link between taxation and oppression isn’t very obvious to me.

    Unfortunately “freedom” is a quantity that is hard to measure and put on a chart. I have probably used this example before here on this blog but, I think it fits this question so I will use it again.

    After the fall of the Soviet Union I saw a “man on the street” interview on the network evening news (ABC I think). An American reporter was walking around near Red Square asking pedestrians questions.

    Most of the people were complaining about the lack of food in the stores, unemployment and the general poor health of the economy.

    One guy was saying that he missed communism and wished some “strong man” like Stalin would take over the government so that the economy would improve.

    While he was spouting this stuff a Russian Army lieutenant pushed in front of him and in perfect English said in disgust “This man would trade his freedom for a potato!”

    i was moved. I thought “Wow! That guy, even though he has lived under Soviet communism his whole life and was part of the military that kept it in place, gets it.”

    Maybe it will taking loosing even more of the freedom to control our own lives for more Americans to understand what this Red Army officer expressed so well.

  32. Matty says:

    Yes it is possible to have a good economy in the sense of lots of stuff without freedom, although the Soviet Union example suggests this fails long term.

    This says nothing about the relationship between tax and freedom or government spending and freedom. Is Singapore (maximum personal income tax 20%) more free than Denmark (maximum 59.5%)? It’s not clear to me that it is in any meaningful sense and the little I’ve heard about the Singapore legal system suggests the opposite, although if Murali shows up I will defer to him on that. At the very least I’d want some information on what it is that Danes are prevented from doing that Singaporeans are not.

    More generally how does government spending decrease you freedom? Is there something you would like to do that having taxes go towards clearing the roads at Yellowstone is preventing you doing?

    Again I think there is a case for controlling spending and tax, I just don’t see it being made that often and the diversions linking income tax to dictatorship or suggesting we can cut painlessly are not persuasive.

  33. Troublesome Frog says:

    … I don’t see any momentum to stop the ever increasing outlays of new “entitlements”.

    That’s the reason I posted. I see pretty much exactly that momentum in the graph of federal outlays. It seems to have been leveling off for some time. The idea that the federal spending:gdp ratio will eventually approach 1 doesn’t seem to be borne out by the data.

    By that metric a wise and benevolent dictator that kept everybody fed, clothed and housed would be as good as any other system of governance.

    It might be better than one in which people aren’t fed, clothed or housed. In the absence of any other metric, that doesn’t seem crazy.

    We trade freedom for X whenever we have government do something for us, but unless your position is that we should have no government, you have to have some way of deciding whether X is worth it. I’m skeptical of any philosophical framework that doesn’t try to measure the value of X before dismissing it out of hand. You’d trade a lot of things for a potato if you don’t have so much as a potato.

  34. lancifer666 says:

    Matty,
    Unless you have won the lottery or have inherited a large sum of money you have to expend some effort to gain income. It is not unreasonable for a system of governance to put be in place to apportion the costs of services that all of us agree to pay for through taxation, so long as those taxes are levied and distributed by democratic means.

    So taxation is equivalent to forced labor. You may agree with the tax but you have no freedom not to pay it, unless you wish to be sanctioned by the state up to and including the threat of imprisonment.

    So at some point taxation and liberty are inversely proportional. If the government were to take 100% of your income you would have no economic liberty even if the government provided all of your physical needs.

  35. Dr X says:

    I’m pretty much on the same page as Scott Hanley. And dare I also refer to Krugman?

    http://krugman.blogs.nytimes.com/2013/03/09/gone-deficit-gone/

  36. lancifer666 says:

    Oh dear Lord, not Krugman.

    I agree that so long as GDP outpaces the debt there will be no fiscal calamity, but that doesn’t mean huge deficits are good policy.

  37. James Hanley says:

    Re: Krugman. The economist whose office is across the hall from mine said the other day that he doesn’t recognize the Krugman of the editorial pages, that he has used Krugman’s textbook, and the editorial Krugman doesn’t match up with the textbook Krugman. I’ve often felt the same thing when looking at any of the multiple popular books by Krugman that I have on my bookshelf.

    I don’t think that by any means everything he says is bullshit. But by reversing himself so substantially, I find it difficult to know when he is spouting bullshit and when he’s not. I certainly can’t take his NYT editorials, as so many of my friends do, as a reliable source of economic wisdom.

    More than anything else, perhaps, I find Krugman an unreliable source of political economic wisdom because he has such facile assumptions about how government works. For his it’s just a matter of getting good people in place to make the obviously right decisions. This is just not excusable in an economist since the development of public choice theory, because all public choice is is the application of economic analyses to governmental, as well as market, behavior. So for an economist to have Krugman’s view of government means he is refusing to use his own tools of analysis when he looks at government.

  38. James Hanley says:

    But Lance, if government doesn’t spend that money, how will it get into the economy?

  39. Troublesome Frog says:

    I don’t read too many of Krugman’s editorials, so I can’t say much about the quality of them. I’ve found that arguments that should rightly be detailed and data-driven don’t usually survive the newspaper editorial process. Try rewriting your policy positions as a Petrarchan sonnet with an 8th grade level vocabulary and see how much sense you make.

    Krugmans blog is generally a good place analysis and clear, interesting thoughts. I definitely do recognize textbook Krugman in those pieces and I’m better off for having read most of them.

    I’ve only read a couple of his books. I wouldn’t say that they’re bad. Just that they’re written a few grade levels below the “interesting” marker, kind of like editorials. Lots of repetition and only a shallow skimming of ideas that that would be really interesting if developed in more depth. I don’t feel like I’m the target audience. The Return of Depression Economics and the Crisis of 2008 was not bad but could have done with fewer examples analyzed at much greater depth.

    I think that public choice theory often overestimates our cynical selfish nature. Not a bad rule of thumb, but I really don’t see why every policy needs to appeal to public choice theory for support.

  40. Troublesome Frog says:

    But Lance, if government doesn’t spend that money, how will it get into the economy?

    I know that this is a joke, but I really, really think that people are missing the point of the argument: If an economy is going to massively deleverage without going into a recession, some group must run deficits to offset. Having government join in on the panic doesn’t make any sense.

  41. Dr X says:

    @Lance,

    “I agree that so long as GDP outpaces the debt there will be no fiscal calamity, but that doesn’t mean huge deficits are good policy.”

    The first half of the sentence is what I would emphasize in response to all of the talk of looming debt catastrophe, which ignores the context of economic growth. As for the second half of the sentence, would you acknowledge that the no one is simplistically arguing that huge deficits are good? The argument is about whether they are sometimes good in light of economic circumstances.

  42. James Hanley says:

    TFrog, Public choice isn’t just about selfishness. It’s about responses to incentives, about the logical impossibility–or at least great difficulty–of scaling up from individual rationality to group rationality, and about the processes of law and policy-making, including, but not limited to, the tendency toward bureaucratic capture, and the tendency of policymakers to add rule upon rule, creating ever more byzantine and self-contradictory rules sets. For example I was recently skimming a (not very well written) book about the financial crisis, and one of the things it pointed out was that bankers could not legally comply with both the Privacy Act and the Patriot Act. Likewise I’ve seen a survey of environmental lawyers that showed a solid majority of them agreeing that for any large firm it was impossible to remain in full compliance with environmental laws because there were too many contradictions within the laws, so that to comply with one sometimes meant violating another.

    Krugman ignores all these things when he talks about policy. That is, he doesn’t ignore the problems, exactly, but he blames them on the particular people involved, and his solution is simply to put different people in place. Public choice theorists, however, have analyzed these things as being more about the rational behaviors of individuals, not dependent on those individuals being either foolish or wicked.

  43. lancifer666 says:

    Dr X,

    …would you acknowledge that the no one is simplistically arguing that huge deficits are good? The argument is about whether they are sometimes good in light of economic circumstances.

    Sure, I don’t think anyone (except certain right wing conspiracists) thinks that anyone intentionally seeks to create “huge deficits”.

    I just think that too many people get caught up in macro-economic theory and forget that taxes come from individuals and that taking more and more of that money and spending it on government programs and projects is a trend that seems to be not only increasing but increasingly acceptable.

    I have a friend that is completely blind to the concept of economic liberty. He envisions a perfect socialist state where all want is eliminated and we will all just use public objects and services while performing tasks that we find personally and spiritually enriching.

    In this socialist utopia there will be no currency and all consumables and services will be apportioned through a democratically determined system.

    I try to tell him that in this system we are all slaves to the tyranny of the majority but he thinks I’m just a greedy materialistic bastard.

    We both see the world and “justice” very differently, but otherwise we are great friends!

    The trick is to have a system of government that works toward the “economic justice” my friend seeks while preserving the economic freedom that is essential to me.

  44. lancifer666 says:

    James Hanley,

    But Lance, if government doesn’t spend that money, how will it get into the economy?

    Well, that’s a good point actually. With out government spending there would be only barter. Before the widespread acceptance of the saw buck I think there were many different currencies in use in the US. I’m no student of historical monetary policy but wasn’t that because these currencies were based on the “gold standard”, where the paper and coins were backed up by a certain among of the precious metal and thus could be exchanged for goods and services?

    I don’t want to go all Ron Paul here, mostly because I have never given the idea much thought because I think it’s extremely unlikely to be done in any thing less than a catastrophic collapse of the existing system, but wouldn’t a precious metal (or other universally accepted commodity) system obviate deficit spending?

    Not that that is necessarily a desirable goal.

  45. lancifer666 says:

    Troublesome Frog,

    I must admit to having only an ad hoc Ecomomics education. I just read a few internet articles on “public choice theory” and perhaps I’m missing something but it seems to be stating the rather obvious conclusion that people vote their own self interest.

    As a Libertarian I see no problem with this idea, so long as people are educated enough to realize that we all live in societies of many individuals with different interests. If you gain a temporary advantage through the legislative process, or other means for that matter, at the expense of others you are creating an adversarial situation that ultimately may not be in your long term best interests.

    One needn’t be an altruist to see that this is impractical as well as unfair,

  46. Troublesome Frog says:

    I guess my point on people voting their self interest is that it’s definitely a factor, but models of people as purely self-interested aren’t really the whole story. There’s always the joke about the city full of self-interested economic model people:

    Stranger: “I’m from out of town. Can you tell me where the train station is?”
    Local: [Pointing away from the station] “Sure, it’s that way. The post office is on the way. Would you mind dropping off this letter while you’re walking past?”
    Stranger: [Taking the letter and intending to open it and steal anything valuable inside.] “Of course.”

    We don’t recognize the interaction above because people are mostly well intentioned. We’d be stupid to assume everybody will always act in good faith, but I think there’s room for optimism that we can do a lot better than we’re currently doing.

    I’m starting to worry that our current situation is evidence that our federal system has been “solved” and the optimal set of strategies have been found. It will always be won by the types of people who would mislead a stranger to get a letter dropped off. That’s certainly a place where formal game theory makes things interesting.

  47. Troublesome Frog says:

    I just think that too many people get caught up in macro-economic theory and forget that taxes come from individuals and that taking more and more of that money and spending it on government programs and projects is a trend that seems to be not only increasing but increasingly acceptable.

    I’m kind of on the opposite side here–people don’t seem to be getting caught up in macroeconomic theory at all. They seem to be responding with their guts rather than their brains, and it’s largely at the expense of the people who are suffering most in this recession. I think we can use more economic reasoning, not less.

    I don’t want to go all Ron Paul here, mostly because I have never given the idea much thought because I think it’s extremely unlikely to be done in any thing less than a catastrophic collapse of the existing system, but wouldn’t a precious metal (or other universally accepted commodity) system obviate deficit spending?

    It would make deficit spending a lot harder. That’s one reason why governments tend to drop precious metal standards when they have to pay for a war. Losing a war because you don’t have enough bars of gold stored in vaults when you have enough men and factories to win it is bad policy. Best to mobilize those critical resources using whatever medium of exchange you can. Paying people to dig up more metal from one hole in the ground and store it in another hole in the ground won’t help you build any more tanks.

  48. lancifer666 says:

    Yeah, I never really saw the appeal of the “gold standard” model. It seems that a reasonable government spending policy needn’t be limited by, as you rightly point out, the number of gold bars in a vault somewhere.

    And even if you have a gold based system the price of gold isn’t set by God or something and who is going to buy all of those gold bars, and with what, if you have to cash out?

  49. lancifer666 says:

    Troublesome Frog,

    I’m kind of on the opposite side here–people don’t seem to be getting caught up in macroeconomic theory at all. They seem to be responding with their guts rather than their brains, and it’s largely at the expense of the people who are suffering most in this recession. I think we can use more economic reasoning, not less.

    Well I’m certainly in favor of using “more economic reasoning” rather than less (who isn’t). ButI do think government representatives and bureaucrats have tendency to see the situation rather abstractly and forget that there isn’t some theoretical “pool” of money that is in play to use as they see fit in some grand ideologically bound game.

    For example I get tired of hearing things like “Well, any tax cut will have to be paid for in some way.” Uh, pardon me but this is exactly backwards. The money isn’t the government’s it is the people’s. I know that if spending is allocated for certain outlays then any reduced revenues will cause a deficit, but this isnt what is implied by the “must be paid for” remark.

    It implies that the people “owe” this money to the government and that any reduction in taxes is to be replaced.

    P.S. I’ve always liked frogs.

  50. Troublesome Frog says:

    Here’s the thing I’ve always thought was funny about precious metal standards: The same people who think that “printing paper and using it to pay people to dig holes and fill them up again” could never cause economic expansion seem perfectly fine with a model that goes like this:

    1) A guy digs a hole and pulls some metal out of it.
    2) Another guy digs another hole and buries the metal.
    3) A third guy stands in front of the second hole with a gun.
    4) A fourth guy prints promises on paper having something to do with the metal in the ground (although the metal never leaves the hole in the ground) and uses it to pay the first three guys.
    5) Economic expansion!

    Apparently one is legitimate, good and moral, and the other one is kooky and treads on our God given rights. As far as I can tell, it’s all just moving paper around to get people to dig holes that aren’t used for anything productive.

  51. lancifer666 says:

    And why exactly are we keeping the gold that’s in Ft. Knox? Since we aren’t using it for the basis of our currency (not since 1971) wouldn’t it make more sense to sell the commodity off instead of paying an entire battalion to guard it?

    I say a properly executed (bloodless) heist is in order to “liberate” the gold.

    Anybody else “in”?

    I say we wear Nixon masks since he was the President that presided over the economy being decoupled from the shiny stuff.

  52. Dr X says:

    And the U.S. government holds a lot more gold than just what’s at Fort Knox. The value has increased from around 300/oz ounce to 1575/oz since 2000. I think the entire US horde is worth 250-500 billion at current prices, though I imagine that to achieve a substantial sell-off would require reduced prices. Otherwise a slower sell off could raise a some cash.

  53. Dr X says:

    The government could probably make coins depicting biblical scenes and sell it for $10,000 an ounce to Fox News viewers.

  54. Troublesome Frog says:

    It seems to me that while selling some of our gold stores during a gold bubble would be a smart move, everything the government does has some effect on market confidence. It might make us look desperate, kind of like seeing President Obama kicking holes in the White House walls to steal the copper. And don’t even get started on the conspiracy theorists. There’s so much psychology in it that it might just be the case that the gold in the bullion depository is effectively “lost” forever just to be held as a symbolic security blanket.

    The other interesting thing about gold as a security blanket has been the weird trend in the physical repatriation of gold held by foreign central banks. Imagine the logistics involved in moving that much gold across the Atlantic. How much would it cost and is it really worth it? Felix Salmon had a good suggestion for “crowd sourcing” the operation at a lower cost. But then it wouldn’t be “their” gold, I suppose. Total nuttery.

  55. ppnl says:

    I always thought gold was a particularly poor choice for backing money. It is pretty much useless in the quantities that are needed for money. A better choice would be aluminum, copper, steel and tin. This puts both a maximum and minimum value on your currency since these can be produced at will in massive quantities. It would be hard to have either inflation or deflation.

  56. Troublesome Frog says:

    I don’t think that choosing an industrial metal to back money would be a good idea either. First, you never know when a technological advance will drive the value down hard. Aluminum used to be a precious metal. Then there’s the other direction. If we suddenly discover a great way to alloy tin to make it the perfect building material for highrises, we would suffer from deflation and hold back the construction industry. Lastly, to have an appropriately sized monetary base, you’d need to hold ridiculously large physical reserves. Holding enough aluminum to back our money supply dollar for dollar would be a logistical pain.

  57. ppnl says:

    But reducing the cost of aluminum would not be a bad thing. Its only bad if you are holding cash. Don’t do that. Also base the currency on multiple metals. A dollar is worth a few grams of aluminum plus a few grams of copper plus a few grams steel plus…

    The larger the base of metals the better. Also you can change the definition every few years. The old issue currency remains the same while new issue currency uses the new definition. The market arbitrates the exchange rate between them.

    I’m not sure why a new use for tin would cause deflation. Increasing the intrinsic value of money makes everyone richer on average. Wealth will just be redistributed a little bit as the market requires. In any case I don’t think the value of metals will change fast enough to be a problem.

    The logistics of producing enough metal to back your money is the weak point. I doubt it can be done. But it still works better than a gold standard.

  58. lancifer666 says:

    I say we use single malt Scotch as the basis for our currency. The longer we keep it the more it’s worth. (If you can keep the soldiers guarding it from consuming it.)

    Dr X,

    My Dad (a walking Fox News demographic, 78 years old, white, evangelic Christian Jurassic Republican) laughs at those gold ads. He says,
    “If the monetary system is about to collapse why are they willing to trade their precious gold for my worthless dollars?”

    Good question.

  59. Troublesome Frog says:

    Its only bad if you are holding cash.

    Or fixed-yield dollar denominated assets. Or a long-term wage contract that made incorrect assumptions about inflation.

    Multiple metals is a better idea, but it still has some of the same fundamental problems that any other metal standard does.

    I’m not sure why a new use for tin would cause deflation. Increasing the intrinsic value of money makes everyone richer on average.

    Well, we’re lucky we didn’t start on a tanalum standard or we’d be in some deep poo right now.

    Your money becoming more valuable relative to everything else is pretty much the definition of deflation. And you’re not getting any richer if you’re a net debtor who owes money in nominal dollars or have a contract liability for future dollars. In fact, if it’s bad enough, it can disrupt things for everybody.

    Without those sorts of things, inflation and deflation aren’t all that relevant. But our economy is full of cases where an unexpected change in the price level disrupts business plans, and those cases are the rule rather than the exception. If they weren’t, we wouldn’t care whether we were using gold or paper or Rai.

  60. James Hanley says:

    we’re lucky we didn’t start on a tanalum standard

    Obscure references passing over my head beg for explanation. ;)

  61. Troublesome Frog says:

    Tantalum is a scarce metal that was never really considered precious and had some laboratory uses in a lot of the same places as platinum. Now it’s used in capacitors and there isn’t a really good use for the stuff. We’re wolfing it down so fast that some estimate that we’re going to run out of it in the next few decades if we don’t figure out how to recycle it properly. I doubt anybody would have predicted that in 1900. The price has been doing what you’d expect it to.

    A big part of that is the short supply, but it’s easy to imagine the same thing happening to a more abundant metal if we find that we can make something valuable out of it that’s larger than a capacitor. Chemistry. Yesterday’s trash may be tomorrow’s treasure.

  62. lancifer666 says:

    Polymer Aluminum capacitors are on alternative to Tantalum.

  63. ppnl says:

    Well tantalum would have been a very bad choice because of the small supply and general uselessness. Giving it a use does not help much given the short supply and the fact that alternatives from aluminum to carbon nanotubes are coming on line. You want to use something that is intrinsically useful, has a virtually endless supply but requires significant industrial activity to obtain. Aluminum is the best example I can think of. Money then becomes a way of storing industrial output.

    If you crank up the printing press and double the amount of paper money you have not changed anything about the underlying industrial structure. You have simply redistributed wealth. Same thing if you reduce the supply of cash.

    In a metal based system you cannot simply print money. The underlying industry is what creates money and only a change in it can change the money supply. If some technological change makes some metal vastly more or less available that is going to affect the money supply and redistribute wealth. But that was going to happen anyway. This differs from paper cash in that here it is driven by changes in the underlying industrial structure. As it should be.

    The key is to have a broad enough base of nonperishable things like metal. That way no single change can have an overly large effect.

    It isn’t clear that you could have a broad enough base, you could store it and keep track of it or that there wouldn’t be other ways for politicians to play with the value of money. Still, it is a better take on real money than the gold standard.

  64. lancifer666 says:

    As I said earlier, my economics education is limited and ad hoc, but the whole concept of monetary “policy” seems like a chaotic system based on an illusion, governed by the emotional state of the participants.

    I find it illuminating that an important “economic indicator” is called “consumer confidence”. It seems that the value of money is whatever people think it is.

    I’m not saying that there aren’t measurable and quantifiable parameters involved but if the people playing the game decide the paper is just paper then it really doesn’t matter what the currency is “based” on.

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