Category Archives: Economics

To My Fellow Economists:…

To My Fellow Economists:

It is my understanding that Chaos Theory is normally explained first as “sensitive dependence to initial conditions.” However, what interests me also is the necessity for a “Non-Linear Equation or System of Equations” to exist. Or, to put it another way, if either “Additivity” or “Homogeneity” are missing, necessary to be a “Linear equation,” then it becomes “Non-Linear.” What all this gobbly gook means to me is that the Linear one is solvable while the Non-Linear one is dependent on the Initial Conditions. Or the way I see this the former has a Single Answer while the latter is one that it “Depends.”

So my question to my fellow economists is:

Is Micro Economics dependent on Linear Equations while Macro if finally realizing that it is only understandable in a Non-Linear system? I define Macro broadly to include the Financial Markets where Black-Scholes is a non-linear differential equation. Other Chaotic research efforts have involved stock market crashes, cotton & wheat pricing, as well as other macro aspects.

The implications for Macro are:
(1) Long term forecasts are rather foolish because of “Sensitivity Dependence.” This leads to the cliché: A good forecaster forecasts often.
(2) “Strange Attractors” lead to chaotic conditions that cannot yield reliable forecasts and, worse, the chaotic condition’s duration is unknown. However once it works its way through that a new “sort of equilibrium” will exist. I don’t know if I would go so far as to call this a paradigm shift but it fits the idea fairly well.

In summary, I now try to think of our global economy in a non-linear fashion and do believe we are in a “Strange Attractor Phase.”

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Yo, Pedro, don’t stand …

Yo, Pedro, don’t stand behind the esparcidor de abonos cause there are lots of smelly economic statements flying out. The level of Federal Debt is a problem but some folks aren’t saying it straight. True, our Public Debt as a % of GDP is approaching 100% and it wasn’t always that way. Starting in 1946, the end of WWII, when the ratio was 120% the Public Debt Ratio fell steadily downward to below 30% until 1981 when Reagan cut taxes. Through Reagan and Bush I the debt ratio rose back close to 70%. When Clinton raised taxes the ratio started going back down to under 60%. Bush II cut taxes and the Ratio went slowly back past 65% until the final two years under Bush when it started leaping up. That has continued through Obama (Wikipedia; The Economist, July 18, 2011; BEA).

Three major Personal Income tax cuts are touted. The first, Kennedy-Johnson in 1964, occurred at the same time as Johnson broke the budget by fighting two wars, one in Southeast Asia which those of us who served in the 60’s remember all too well, and another called the War on Poverty. Johnson hid his deficits by going to a Unified Federal Budget, that is adding in Social Security that was running nice surpluses because of women entering the work force. Even this wasn’t enough – Johnson needed to put a “temporary income tax” in place in 1968 to hold the line on Public Debt.

Reagan cut personal income taxes in 1981 but he didn’t cut federal spending; he shifted it from social programs to defense. By 1982 he reversed (raised taxes) on a part of the 1981 bill. Over his remaining years he raised taxes an additional 10 times! These included a major increase in Social Security following the recommendations of a committee chaired by Alan Greenspan. Reagan’s corporate tax increase during his second term remains the largest ever. By end of the Bush I term the USA’s Public Debt Ratio had doubled and we had changed from the largest lending nation to the largest debtor nation.

Bush II also chose to fight two wars, both of which we are still involved in, without paying for them through increased taxes. Instead he cut taxes that, in turn, were accommodated by massive increases in the Money Supply by the Fed, chaired by none other than Alan Greenspan. Couple this with little to no financial market regulation and the end result was a massive mess in the financial markets where toxic derivatives, a real estate bubble, and over borrowing of all sorts came close to pushing us into a depression.

The old adage applies: If you’ve dug yourself in a hole it’s time to stop digging. Pie-in-the-Sky tax cuts put us where we are so it’s time to stop shoveling it in the esparcidor.

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Would the Removal of Tax …

Would the Removal of Tax Cuts for high-income people reduce jobs as claimed by the Kill Jobs Believers, hereafter the KJB? Most people would answer Doubtful and for good reason. It doesn’t meet the test of common sense. Unfortunately many of our political leaders don’t have common sense. Let’s walk them through what’s happening. The basic idea for Tax Cuts proposed by the KJB is that the Rich can SAVE more than the Poor since the Poor have to spend all their income on just staying alive. Any tax cut for the Rich will increase their Savings. The KJB’s next step is to say that Savings will be Invested. Their unspoken assumption that follows this is that Investment will be in Plant & Equipment that will create jobs in the USA. There are three problems with that assumption. First, a cut in personal income taxes could, just as easily, result in Spending, not Savings. Since when is the Poor’s Spending any less Job Creating than the Rich’s Spending? Second, Investment in Plant & Equipment might be in “Job Replacement”, meaning replacing workers with machines or maybe in “Movement Overseas.” Either way that results in Job Losses. Third, people don’t Invest in Jobs anymore; they invest in the Financial Markets. At one time Savings went into Banks that, way back then, lent the money to Businesses who, in turn, created jobs. Now Savings goes to Financial Advisors who place money in Financial Investments. Where that money goes is a complicated story full of acronyms – CDs, MMMFs, MBOs, Hedge Funds, CMOs, Credit Default Swaps, etc. The KJB argue that these new “instruments” make the financial market more efficient by spreading risk. Even though the growth of the “so called contribution” (Value Added) by the Financial Sector has risen dramatically in the last decade is our economy better off because of that? Common sense again says No Way. The recent economic events seem to more than challenge that idea; it appears more like all these new financial dealings did was increase catastrophic (systemic) risk. Some working people go so far as to say that the High Income Folks engaged in High Stakes Gambling that the American taxpayers had to cover when the Rich’s losses showed up. In truth cutting personal income taxes does not guarantee Increased Jobs; it is just a hope or a prayer that it will. As a result of the “temporary” tax cut in 2003 it appears that the freed money went into the financial markets and helped create a real estate bubble that almost sent us into a depression, now aptly titled The Great Recession.

So what would the removal of tax breaks for the high rollers do? It might decrease their Spending, although that is probably not much of a big deal. Will it decrease Investment in US-Based Plant & Equipment? There are plenty of data to support the facts that Banks have lots of money to lend, just nothing great to lend to. Corporations are also flush with Cash from Retained Earnings, which means they can internally fund any new investment opportunities. So there appears to be no “Crowding Out” if we allow those 2003 tax breaks to expire as they were legislated to do. What would the high rollers do when required to pay more in taxes? It seems only logical to conclude they might invest smarter and more on real business opportunities rather than chasing esoteric financial dreams, that is truly take care of their remaining stash of cash. Stated another way, there would be less froth in the market – a darn good thing. Cynically one might also add that since there would be now less new federal debt so the high rollers wouldn’t be buying it and clipping more coupons. That is to say we’d be returning the money from Paul’s pocket back to Peter’s.

Enacting Fiscal Policies of General Income Tax Rate Cuts that “hope” the outcome will be correct just doesn’t just work. This country needs a “Jobs Tax Credit”, where the business firm has to hire a US worker to get it. We did that with an “Investment Tax Credit” and it worked. We might think of having the Federal General Fund pay all the new worker’s Social Security and Medicare payments for, say, three years. Small and mid-sized businesses, which are the job creators, would step forward.

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