What's the alternative to QE?

[mhdousa]

Hi all-

I apologize if this is an elementary question, but my grasp of macro stuff isn't great.

 

Recently, I've been seeing a few intelligent folks (recently Romick from FPA Funds) railing against Bernanke for monetary policy in response to concerns about a double dip recession.  James Grant has had some negative things to say as well. From Romick's recent letter:

 

We still see inflation as inevitable, especially since it appears the knee-jerk is the only skill required to operate the Mint’s printing press. In fact, we think the Fed is using today’s moderate inflation to continue to justify easy money. One of my colleagues, Mark Landecker, recently played Monopoly with his two young daughters (probably introducing them to the real world by zealously collecting their rent). The rules of this 1935 board game, he discovered, seemed eerily prescient given the actions of Mr. Bernanke and the other governors at the U.S. Federal Reserve. The Monopoly instructions state, “The Bank can never ‘go broke’. If the Bank runs out of money, the Banker may issue as much as needed by writing on ordinary paper.”

 

As Mark points out, we suspect “Helicopter” Ben Bernanke played a lot of Monopoly as a child. However, what young Ben failed to grasp was that the Monopoly approach to banking — while risk-free within the confines of the board game — has potentially damaging repercussions in the real world. In this case, the unprecedented monetary expansion and profligate federal spending reflected in the graphs below is bound to trigger higher inflation and then lead to higher interest rates. However, as we’ve discussed in the past, perennially large deficits and an already elephantine national debt should drive interest rates higher on their own.

 

My question is the one posed in the Subject: what's the alternative?  If banks aren't lending and businesses aren't spending their cash, is there a better way out of this than the Fed's easy money policy?

 

Thanks for the thoughts.

-M

[scorpioncapital]

'However, as we’ve discussed in the past, perennially large deficits and an already elephantine national debt should drive interest rates higher on their own."

 

If people aren't borrowing when money is free, why would they be clamoring to borrow when money costs 10%?

 

 

[twacowfca]

'However, as we’ve discussed in the past, perennially large deficits and an already elephantine national debt should drive interest rates higher on their own."

 

If people aren't borrowing when money is free, why would they be clamoring to borrow when money costs 10%?

 

 

 

Quantitative easing is a misnomer for much of what has occurred . Initially, a huge amount of money was injected into the financial system to increase reserves and counteract the dramatic contraction reflected in the reduced velocity of the money that was in the system. This was truly quantitative easing.

 

Since then, the stimulus spending has been directed to nonproductive parts of the economy ( subsidizing government spending and favored groups  that don't produce much ). This spending has largely been offset by a corresponding increase in government debt.  Therefore, it's mostly NOT quantitative easing.  Some of this stimulus has trickled over to big business, and big business has made a partial recovery.

 

Recent economic studies have found that the rationale for this policy , (Keynes' multiplier) is deeply flawed.  Keynes' multiplier is no multiplier at all, it's actually less than 1. In a sense it is actually a relative deflator because directing funds to nonproductive uses through government spending, squeezes out productive enterprise, especially in small businesses and among the self employed that make up over half the economy.  This is where most of lingering unemployment and recession hangs on.  The stimulus fails to help "the little people" to use the phrase of a dismissed official.

 

What would have worked?  That's simple.  A deep cut in the most regressive tax:  Social Security withholding.  Suspending this most regressive tax for the duration of the recession would result in a 7 1/2 % increase in take home pay that would be spent for the most part rather than saved because this tax falls disproportionately on the lowest income taxpayers.  This increased spending would be directed to useful goods and services and mostly toward the part of the economy that is still mired in recession.  This would soon supercharge the economy and take up the enormous slack that has developed. The cost would be far less than the counterproductive stimulus spending that has resulted in a huge increase in government debt that will be a drag on the economy for many years.

[scorpioncapital]

but then how do we pay for social security?

[twacowfca]

but then how do we pay for social security?

 

The growth would be so large that general tax revenues would rise as the economy picks up.  Some of this inflow could be redirected to the Social Security trust fund in the future to make up the shortfall.  The shortfall would be far less than what we'll have to pay in increased interest costs for all the stimulus spending and associated increase in the national debt, especially when overseas banks stop buying our inflated paper in exchange for very low interest rates.

[Guest Bronco]

I admit I am a broken record, but the intelligent move would be cut corporate taxes.  It is so obvious it is apalling.  All in all, I believe the US has the highest tax rates in the world.  Second highest statutory rates and a global taxation policy to boot. 

 

Before any debate begins, read the joint committee report on income shifting.  Newslash, it is job shifting as well.  Get rid of the ridiculous Kennedy tax system and cut corporate rates to 20 or 15 percent.  You will have massive capital, jobs, and tax revenue.  Place a small toll on foreign earnings, not the 35 percent job killer we have today.

 

Until we get this right, forget everything else.  Forget it.

[twacowfca]

I admit I am a broken record, but the intelligent move would be cut corporate taxes.  It is so obvious it is apalling.  All in all, I believe the US has the highest tax rates in the world.  Second highest statutory rates and a global taxation policy to boot.  

 

Before any debate begins, read the joint committee report on income shifting.  Newslash, it is job shifting as well.  Get rid of the ridiculous Kennedy tax system and cut corporate rates to 20 or 15 percent.  You will have massive capital, jobs, and tax revenue.  Place a small toll on foreign earnings, not the 35 percent job killer we have today.

 

Until we get this right, forget everything else.  Forget it.

 

 

That would also be helpful, but suspending the employer's portion of the social security tax would have the most immediate effect, immediately increasing cash flow for businesses and ultimately increasing profits, sparking reinvestment and increasing the taxes collected on these increased profits as taxes come due.  The deficit could be reduced by eliminating the maze of tax breaks, exemptions and subsidies in the current system.  These are just as unproductive as the recent massive stimulus subsidies.

[Guest broxburnboy]

I admit I am a broken record, but the intelligent move would be cut corporate taxes.  It is so obvious it is apalling.  All in all, I believe the US has the highest tax rates in the world.  Second highest statutory rates and a global taxation policy to boot.  

 

Before any debate begins, read the joint committee report on income shifting.  Newslash, it is job shifting as well.  Get rid of the ridiculous Kennedy tax system and cut corporate rates to 20 or 15 percent.  You will have massive capital, jobs, and tax revenue.  Place a small toll on foreign earnings, not the 35 percent job killer we have today.

 

Until we get this right, forget everything else.  Forget it.

 

This has been the mantra of the corporate right since the Reagan revolution - cut taxes and tax revenues will increase. Not only is this belief counterintuitive it has pretty much be proven false in practise.

 

The larger problem is that there is no way out - there needs to be a cyclical debt delevering and consequent widespread economic pain - QE simply kicks the can down the road until the crash is sudden and more severe.

[Guest Bronco]

I dare say a monumental change in tax policy such as the one I described would have a much higher impact, both short term and long term.  Public corporations aren't cash starved. They won't change their business models on short term gimmicks.  

 

Besides, the approach I suggest will increase the tax base.  Not more deficit spending.  

[Guest Bronco]

Bronx - This will be my last post, but come on.  One, when has there been a movement to get rid of the Kennedy tax system?  Two, do you doubt corporations leave profits overseas and move jobs overseas because of our punitive system.  No corporate management team that I have seen will violate apb 23 and cause a tax hit.  This is all basic finance.  If you believe otherwise, well, I guess the ignorance of the masses is tough to overcome.

 

By the way, it is not counterintuitive.  Ask employees working in geneva.  You think they are that much smarter in Switzerland.  Maybe tyco and transocean moved there because of the beautiful mountains.

 

Or maybe pharmas moved their plants to Ireland and Puerto Rico because of the good ale and nice weather, respectively.  And insurance companies in Bermuda probably incorporate there for the chance to see Michael Douglas ( great as GG by the way).

 

I can't take it.  But everyone has the right to their opinion...mine just coincides with reality and the governmennt's own findings (sponsored by democrat carl levin). 

[Guest broxburnboy]

Bronx - This will be my last post, but come on.  One, when has there been a movement to get rid of the Kennedy tax system?  Two, do you doubt corporations leave profits overseas and move jobs overseas because of our punitive system.  No corporate management team that I have seen will violate apb 23 and cause a tax hit.  This is all basic finance.  If you believe otherwise, well, I guess the ignorance of the masses is tough to overcome.

 

By the way, it is not counterintuitive.  Ask employees working in geneva.  You think they are that much smarter in Switzerland.  Maybe tyco and transocean moved there because of the beautiful mountains.

 

Or maybe pharmas moved their plants to Ireland and Puerto Rico because of the good ale and nice weather, respectively.  And insurance companies in Bermuda probably incorporate there for the chance to see Michael Douglas ( great as GG by the way).

 

I can't take it.  But everyone has the right to their opinion...mine just coincides with reality and the government's own findings (sponsored by democrat carl levin). 

 

Bottom line .. there is no free lunch.. not even for corporations focused on their next quarter bottom line, selling there job creating promises to the highest sovereign bidder. Any shortfall in corporate tax revenues has to be made up from the general public's tax share.. either that or the supply side "solution" - borrow more money to spend on supply side stimulus as demanded by the very corporations whose taxes have been cut.

When sovereign entitites are reduced to buying jobs, the same arithmetic applies.. the cost of purchasing them outweighs the revenues generated.

It's just another transfer of wealth from the taxpayer to the supply side... good luck to Ireland (woops, its bankrupt), Switzerland (oops they recently debased their currency ), Costa Rica (and you think Mexico is mired in corruption!). You can continue to register your ships in Bermuda to avoid liability and responsibility.

[twacowfca]

Bronx - This will be my last post, but come on.  One, when has there been a movement to get rid of the Kennedy tax system?  Two, do you doubt corporations leave profits overseas and move jobs overseas because of our punitive system.  No corporate management team that I have seen will violate apb 23 and cause a tax hit.  This is all basic finance.  If you believe otherwise, well, I guess the ignorance of the masses is tough to overcome.

 

By the way, it is not counterintuitive.  Ask employees working in geneva.  You think they are that much smarter in Switzerland.  Maybe tyco and transocean moved there because of the beautiful mountains.

 

Or maybe pharmas moved their plants to Ireland and Puerto Rico because of the good ale and nice weather, respectively.  And insurance companies in Bermuda probably incorporate there for the chance to see Michael Douglas ( great as GG by the way).

 

I can't take it.  But everyone has the right to their opinion...mine just coincides with reality and the government's own findings (sponsored by democrat carl levin). 

 

Bottom line .. there is no free lunch.. not even for corporations focused on their next quarter bottom line, selling there job creating promises to the highest sovereign bidder. Any shortfall in corporate tax revenues has to be made up from the general public's tax share.. either that or the supply side "solution" - borrow more money to spend on supply side stimulus as demanded by the very corporations whose taxes have been cut.

When sovereign entitites are reduced to buying jobs, the same arithmetic applies.. the cost of purchasing them outweighs the revenues generated.

It's just another transfer of wealth from the taxpayer to the supply side... good luck to Ireland (woops, its bankrupt), Switzerland (oops they recently debased their currency ), Costa Rica (and you think Mexico is mired in corruption!). You can continue to register your ships in Bermuda to avoid liability and responsibility.

 

Burmuda registered ships have the best worldwide record for safety and maintenance as reflected in their record of being cleared by worldwide port authorities quicker than the ships of any other country.

[twacowfca]

I admit I am a broken record, but the intelligent move would be cut corporate taxes.  It is so obvious it is apalling.  All in all, I believe the US has the highest tax rates in the world.  Second highest statutory rates and a global taxation policy to boot.  

 

Before any debate begins, read the joint committee report on income shifting.  Newslash, it is job shifting as well.  Get rid of the ridiculous Kennedy tax system and cut corporate rates to 20 or 15 percent.  You will have massive capital, jobs, and tax revenue.  Place a small toll on foreign earnings, not the 35 percent job killer we have today.

 

Until we get this right, forget everything else.  Forget it.

 

 

 

This has been the mantra of the corporate right since the Reagan revolution - cut taxes and tax revenues will increase. Not only is this belief counterintuitive it has pretty much be proven false in practise.

 

The larger problem is that there is no way out - there needs to be a cyclical debt delevering and consequent widespread economic pain - QE simply kicks the can down the road until the crash is sudden and more severe.

 

 

May I suggest doing a search for the words: Authur Laffer  and  Laffer Curve. The wall Street Journal's editorials on this phenomenon have been most informative. Here's the true multiplier.

[Guest broxburnboy]

Interesting that you choose Ireland as an example of a low corporate tax regime which has "benefited" by buying corporate jobs. This morning it seems to be following Greece (another country where corporate tax avoidance reached ridiculous heights) into insolvency and subsequent "bail-out" by the taxpayers of those countries who have a more balanced set of national accounts. And oh yes... the purchased jobs are long gone.

There is no way around it, governments have not discovered the goose that laid the golden egg, borrowing money to subsidize corporations to create jobs.

Try running a set of books by reducing this argument to its logical endpoint... no business pays any taxes at all, governments borrow endlessly at zero interest to subsidize industry on unproductive ventures. Consumers accept lower wages and assume more tax burden to pay for a decreasing amount of public services.

 

 

[Guest longinvestor]

I admit I am a broken record, but the intelligent move would be cut corporate taxes.  It is so obvious it is apalling.  All in all, I believe the US has the highest tax rates in the world.  Second highest statutory rates and a global taxation policy to boot.  

 

Before any debate begins, read the joint committee report on income shifting.  Newslash, it is job shifting as well.  Get rid of the ridiculous Kennedy tax system and cut corporate rates to 20 or 15 percent.  You will have massive capital, jobs, and tax revenue.  Place a small toll on foreign earnings, not the 35 percent job killer we have today.

 

This has been the mantra of the corporate right since the Reagan revolution - cut taxes and tax revenues will increase. Not only is this belief counterintuitive it has pretty much be proven false in practise.

One is reminded of WEB's retort to the Bush admin that "Berkshire Hathaway paid as much in taxes as the next 40 companies on the fortune 100 list COMBINED". 

 

Have a question to the board? Where would one go to find the actual DOLLAR AMOUNT paid by corporations to the IRS?

 

[Guest Bronco]

Don't kid yourself - WEB is great at tax avoidance.  Estate tax, Income Tax. 

 

BRK probably pays more in U.S. tax relative to its overall earnings because it has many domestic interests.  That may have been what he meant, but I am not sure.

 

Form 1120 is the place to get taxes paid to Uncle Sam, but I don't think you can access that.  It gets a little tricky because Federal Taxes in the F/S are GAAP based.  But let me take a look for you.

 

 

[Guest Bronco]

Looks like for all of 2009 BRK paid $2B in tax (all jurisdictions).  For 2008 the amount was $3.5B.

 

Tough to break out foreign, state and federal.

[Myth465]

Surprisingly I agree with you both.

 

http://articles.moneycentral.msn.com/Taxes/Advice/why-your-tax-bill-is-higher-than-ges.aspx

[Guest Bronco]

This is more or less what I have been saying.  Of course capital stays overseas under the Kennedy tax policy.  Jobs are also moved overseas.  Plants are built overseas.  Intangibles are either sold or out licensed overseas. 

 

It is tough enough for the U.S. to compete on a wage basis, but our tax policy blows things out of the water.  And this has nothing to do with supply side economics, where the focus is domestic only.  This is international competition for the things I mentioned - capital, jobs, plants, functions, etc. 

Why would the U.S. encourage this type of behavior?  Well, you figure it out. 

 

You give incentives to move all this back to the U.S., and you have more capital, more jobs, more tax revenue (because you have a much higher income base to tax).  Dear God this is stupid.  And once all the good stuff comes back to the US, you have more spending, velocity of the dollar, etc. 

 

Most countries have observed this.  The UK is lowering their rates to become more competitive.  But we (US only, no offense Canadians) are dumb.  Fat.  Lazy.  Stupid.  F the corporations.  Punish them.  No tax breaks for the rich! (although coporations are just legal entities).  It must make sense to tax owner earnings at 50% or 60%, right?  That's the way it should be.  Put the taxes in the hands of the government, where spending is both efficient and effective. 

 

Oh boy.

[eggbriar]

This has been the mantra of the corporate right since the Reagan revolution - cut taxes and tax revenues will increase. Not only is this belief counterintuitive it has pretty much be proven false in practise.

 

Where has this been proven false?  Tax revenues, as collected by the IRS have increased steadily over the past 35 years that I can find records for.  IRS gross collections during that period have risen, through 2007, on avg, 7.6% per year.  That is greater than both population growth and in recent years, inflation.  During this time, there has only been 3 years of declines, 1983, -.8%, 2002, -5.27%, and 2003, -3.16%, all after big tax cuts.  But, shortly after the cuts, collections climb right back and continue to rise.  During the Bush years, collections still managed to increase roughly 4.5% annually, even including those two down years.  These collections include both individual and corporate taxes.  Gov tax revenues rise, especially during a period of time when rates fell.

 

see table 29 for data:  http://www.irs.gov/taxstats/article/0,,id=205182,00.html

 

 

[Guest Bronco]

The truly sad thing is that the government never mentions what tax rate (lets just assume corporate for now) would maximize tax revenues.  My guess is that it aint 35%.  In fact, the JCT report suggests the opposite, that mountains of otherwise taxable revenue is shifted overseas.  You can tax 35% of zero all day long...you won't see a damn penny with the punitive nature of the US tax code.

[Guest broxburnboy]

This has been the mantra of the corporate right since the Reagan revolution - cut taxes and tax revenues will increase. Not only is this belief counterintuitive it has pretty much be proven false in practise.

 

Where has this been proven false?  Tax revenues, as collected by the IRS have increased steadily over the past 35 years that I can find records for.  IRS gross collections during that period have risen, through 2007, on avg, 7.6% per year.  That is greater than both population growth and in recent years, inflation.  During this time, there has only been 3 years of declines, 1983, -.8%, 2002, -5.27%, and 2003, -3.16%, all after big tax cuts.  But, shortly after the cuts, collections climb right back and continue to rise.  During the Bush years, collections still managed to increase roughly 4.5% annually, even including those two down years.  These collections include both individual and corporate taxes.  Gov tax revenues rise, especially during a period of time when rates fell.

 

see table 29 for data:  http://www.irs.gov/taxstats/article/0,,id=205182,00.html

 

 

Government tax revenues may have risen after tax cuts, but not because of them.... the increase is due to the stimulus of borrowed moneys needed to replace the loss of revenue from tax cuts. Deficits have widened everywhere tax cuts have been implemented without cutbacks on the spending side.. this is really accounting 101.. conservative style. As a result we have accumulated an unmanageable amount of public debt to offset the tax avoidance of corporations. Your plea for yet more supply side stimulus in the form of tax cuts is simply another request to transfer wealth from the public to private purses.

Do you actually believe that if corporate taxes were eliminated altogether and not balanced by spending cutbacks overall tax revenues would increase and deficits reduced?

 

 

 

[Guest Bronco]

I do believe that if, like I suggested, corporate rates were cut to 20% and the worldwide tax system created by Kennedy was eliminated (replaced by a small toll 2% - 5% on repatriated earnings), corporate tax revenue would grow dramatically. 

 

Even if I save just one job in the U.S., and that job increases corporate revenue by $100,000 but I also pay that person $100,000, then I receive $0 incremental corporate tax revenue.  But the government collects tax on those wages, instead of paying 2 years of unemployment.

 

You may be confusing supply side economics, which is US only, versus global corporate taxation.  Peace.

 

I'm out.

[eggbriar]

There has to be something to it.  Tax rates decline, yet gov revenue increases at a rate faster than the economy is growing over a long period of time.

 

The deficits are simply a result of spending increasing at a higher rate than that increasing revenue.  We don't necessarily need actual cuts in spending (although that would be nice), rather simply limit government spending to inflation plus population growth.  Or, at least keep spending below revenue growth.  I don't know what the avg growth rate in spending has been during those 35 years, but I would guess at least 9%.

 

Let's really hope that that gov revenue growth rate doesn't turn negative.

[Myth465]

Personally I think supply side econ is retarded, and it has been shown to not work.

 

More importantly corporations are mobile and will find the lowest costs (generally labor, taxes, and regulation). We cant compete when you look at all three. We should A reduce Taxes and Regulation (more the red tape, and not the useful stuff, I am for streamlining, not butchering), while pushing to some world standard for minimums on both (I like 10% for taxes). Second we should enable corporations to move money more effectively to the US.

 

Things will be more streamlined, corporations wont leave for tax heavans (Switerland, Carribeans, Ireland), and things will be more efficient. Now to close the shortfall I would tax the owners and consumers more (they are less mobile and the US taxes world wide income). I would have a VAT tax, or some sort of tax aimed at taxing access to the US market. Its not fair for everyone to leave America, but sell to America. It sounds good but like the paradox of thrift, it doesnt work when too many people play the game.

 

Thats what I would do. It would be more streamlined, and revenue nutural. I would tax things that cant really move effectively (people and access to the markets) and would leave the corporations alone.

 

I do agree with Brox though. Simply cutting the taxes of business in an effort to win them over, will just be a race to the bottom. Companies will do what they do now with states. - They play them against each other to get fully subsidized and free land. It helps no one at the end because all of them start doing it.