Sunday, August 28, 2011

INTRODUCTION AND DEDICATION




KEYNESIAN ECONOMICS 101



LEARN HOW WE CAN EMPLOY EVERYBODY WHILE REDUCING OUR DEBT RATIO BY REBUILDING OUR INFRASTRUCTURE



Please join my economics class by clicking on the "Lecture 1" link at the right after reading the following dedication. If the lectures are not listed, click on "August". You don't have to register, pay a fee, keep a schedule, do homework, or pass an exam for credits or degrees. You don't have to log-on, enter a user name, or remember a password. But if you study these lectures, you will discover the ONLY way out of this mess. Economics is too important to be left to the economists. and the most important and the most controversial economic question dividing our government, our voters, and perhaps your family, is the theory of the British economist, John Maynard Keynes (1883-1946). Biography review Our current “Great Recession” brought us plummeting tax revenues, exploding recovery costs, a large federal budget deficit, and hysterical cries for less government spending NOW, exactly when we should be employing our idle resources to rebuild our decaying and obsolete infrastructure. With effort, anyone with an above-average IQ can understand Keynesian economics. But that’s only half of us so, our half must out-vote the other and so, I am offering you this free learning opportunity. The following is a short summary of Keynesian economics that requires only a 12-year-old’s knowledge of arithmetic and, since it is more difficult than the course itself, serves as an entrance examination of sorts. If you can't follow the arithmetic, ask a 12-year-old for help. THE KEYNESIAN CATECHISM Unemployment rate ≈ 9%. National Debt = ND ≈ $14.5T. Gross Domestic Product = GDP ≈ $14.8T. Debt Ratio = DR = ND / GDP ≈ 98.0%. What should Congress do? Just as World War II DEstruction ended our Great Depression, so will massive, nation-wide CONstruction end our Great Recession. With a stimulus large enough to employ everybody who can work (à la World War II), the newly employed will rebuild our infrastructure, spend their paychecks, boost tax revenue, and multiply GDP. The magic of stimulus is in the multiplier: M ≈ 2.5. If the stimulus = S dollars spread over five years, then average GDP growth = ΔGDP = Multiplier × Stimulus / 5 = M × S / 5. Since GDP growth increases tax revenue and, relative to GDP, our tax burden (for all levels of government) = TB ≈ 30%, therefore, our five-year tax revenue growth = ΔTR = GDP growth × Tax Burden × 5 = ΔGDP × TB × 5 = (M × S / 5) × TB × 5. = M × S × TB. And our Infrastructure Purchase Discount = IPD = ΔTR/S = (M × S × TB) / S = M × TB ≈ 2.5 × 30% ≈ 75%, which ain’t bad. But if M = 3.0 (Yes, it’s possible!) and TB = 33% (as it should!), then IPD = M × TB = 3.0 × 33% = 99%!! and that comes with full employment, too! And if M ≈ 2.5 and S = $4T, then average GDP growth = ΔGDP, = M × S / 5 ≈ 2.5 × $4T / 5 ≈ $2T. And the average GDP growth rate = ΔGDP / GDP = $2T / $14.8T = 13.5% (as during WW II) and our Treasury bond rating goes to AAAA++++!!!! and our Treasury bond interest rate drops!!!! And five-year tax revenue growth = ΔTR, = ΔGDP × TB × 5 ≈ $2T × 0.3 × 5 ≈ $3T. And the new (post-stimulus)National Debt = ND + S - ΔTR ≈ $14.5 + $4T - $3T ≈ $15.5T. And the new (post-stimulus) GDP = GDP + ΔGDP ≈ $14.8T + $2T ≈ $16.8T. And the new (post-stimulus) Debt Ratio = new ND / new GDP ≈ $15.5T / $16.8T #8776; 92.3%. And the Debt Ratio change = ΔDR, = the new (post-stimulus)DR − DR ≈ 92.3% − 98% ≈ −5.7%!! So, with a stimulus of $4T, we can re-employ millions to rebuild our crmbling infrastructure at maybe zero deficit increase and also reduce our debt ratio by over 5%! Just as World War II spending hired millions who traded their "Victory" bonds for cars and homes and turned old farms into new suburbs, so will rebuilding our infrastructure restore our prosperity. But what determines the value of the multiplier, M? My course answers your questions about Keynesian economics. I have tried to simplify the theory so that, by understanding the facts and logic, every citizen with an above-average IQ can cast an informed vote. Did I succeed? You tell me! I welcome your comments and questions. In any case, I did my best. Now,it's your turn. Marvin Sussman, retired engineer ©2011 Marvin Sussman All Rights Reserved After reading the dedication below, Please click on "Lecture 1", above on the right. If the lectures are not listed, click on "August".

DEDICATION

This web site is dedicated to my fellow World War II 4th Cavalry Reconnaissance Squadron “A” troopers. My “Fighting Fourth” was a regular US Army unit with a history reaching back before the Civil War. Before entering combat, all the commissioned officers were graduates of West Point or of the Virginia Military Institute. All the non-commissioned officers had five to 25 years of service in the mounted cavalry. These were men who devoted their lives to the defense of their nation. All the privates were wartime volunteers from every corner of the nation: Brooklyn Italians, Chicago Poles, Irish, and Jews, Minnesota Scandinavians, Carolina Appalachians, Dakota Sioux. For the D-Day assault on Normandy, in the wee hours of the morning, long before H-Hour, “A” troop cleared a fortified island lying off the coast, opening the way to the mainland. My sergeant, Harvey Olson, and Corporal Thomas Killoran, both of the 2nd platoon, were the first American soldiers to land on a French beach, swimming ashore from a raft, with flashlights to guide the landing craft. As a boy, Sergeant John Onken, of the 3rd platoon, came to America from Germany with his parents after World War I and retained a slight accent. Especially friendly toward Jewish troopers, John could not understand why Germany followed the Nazis. John Onken was the first American soldier to die on a French beach. In 11 months of combat, from Utah Beach to the heart of Germany, “A” troop, no more than 140 men at full strength, (and never at full strength), suffered more than a hundred battle wounds and 36 deaths, including two captains and four lieutenants. President Franklin Delano Roosevelt awarded his Distinguished Unit Citation to the 4th Cavalry Reconnaissance Squadron for its: “...gallantry and esprit de corps... above and beyond the call of duty...” during the “Battle of the Bulge”. These troopers saw their nation in peril, and, in keeping with the highest traditions of the US Cavalry, rode to its rescue, and did extraordinary deeds of valor. While honoring their service, may this web site also enhance the heritage they preserved. Marvin Sussman

Thanks for your interest. Marvin Sussman, retired engineer Copyright © 2011 Marvin Sussman All rights reserved.    Please click on "Lecture 1", above on the right. If the lectures are not listed, click on "August".

Lecture 1. FEDERAL GOVERNMENT AND NATIONAL DEBT



Please note: For brief definitions of unfamiliar terms, click on "Jargon" at the top of the page or search Wikipedia online for more complete definitions.

National Debt (ND)

The wealth of nations is measured by their assets and liabilities. Our nation’s assets are its natural resources and its productive capacity, including its infrastructure and its people. Our liabilities are the net sums owed to creditors by the federal government: the National Debt (ND). Throughout this course, the ND refers to “Gross Debt”, which includes both Treasury bonds and notes held by the public and insurance payments eventually due to Social Securty, Medicare, and other beneficiaries. Throughout this course, we deal essentially with the federal government, which can issue currency. In economic terms, a state or local government, which cannot issue currency, is like a branch office of the federal government: it can tax, borrow, and spend but cannot issue currency. It does not have a central bank, like the Federal Reserve, that can create currency. If successfully sued by its creditors, it can become insolvent. Only the federal government is sovereign and solvent because it can ultimately create currency.

Government Power and Impotence

By law, the Federal Reserve has a delicate balancing act: "...to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." The Fed is now (mid-2011) failing at the first and most important goal: jobs. During the 1930s and 1940s, Marriner Eccles was the chairman of the Federal Reserve. He steered the economy through the Great Depression, WW II, and into a flourishing post-war era. When Japan bombed Pearl Harbor,he did not call in the Treasury bond holders and beg for sympathy. He laid down the rules. To compare his command of a crisis with the impotence of the current Fed, it is worth reading this full description of his strategy, including this excerpt: "Today’s fiscal conservatives prefer to ignore the history of the 1940s, a period when the Federal Reserve was far more accountable to elected officials and far more independent of the private financial interests that have come to dominate the Fed in recent decades. During the 1940s, the federal government spent and borrowed far greater than today as a percentage of overall economic activity. Today, federal spending is about 25 percent of gross domestic product; in the 1940s, spending peaked at nearly 45 percent of GDP. Today’s federal deficit is about 9 percent of GDP; in the 1940s, the deficit peaked at 31 percent of GDP. Today, the federal debt held by the public is about 61 percent of GDP; in the 1940s, it peaked at over 114 percent of GDP. Did those higher spending and debt levels bankrupt the U.S. economy? Quite the contrary — federal spending was critical to the war effort and the success of the U.S. economy. "After the war, massive federal spending funded social policy on a grand scale through the GI Bill of Rights and made available job training, tuition-free higher education,health care, and housing subsidies to nearly 16 million returning veterans, a third of the workforce. The GI Bill thereby bolstered an expanding middle class and created the conditions for sustainable economic growth. The growing economy pushed up tax revenues, lowering the debt burden and helping the federal government pay down debt." While blaming "Washington", we must also blame the real culprits: the voters, past and present, whose stupidity and/or ignorance of economic and political matters have saddled our nation with four self-inflicted problems: 1.  The Congressional struggle to raise the debt limit. Due to a law that violates the separation of powers, Congress first votes to assume a debt and then forbids payment of the debt by the executive branch until it gives its permission. The turmoil threatens the global economy for purely political reasons. 2. Our self-imposed, legal dependence upon the Treasury bond market to finance the administration of the US government (and therefore our economy). According to law, Congress must either tax or borrow whatever it spends. But a sovereign nation, which issues its own fiat currency, cannot physically fail to pay its debts as long as the computer keyboards of the Treasury Department and the Federal Reserve are still functioning. Treasury bonds offer the public a risk-free haven for savings at an interest rate usually high enough to protect against inflation. There is no good reason to pay a higher interest rate. If bond holders stop buying bonds, we will continue to feed, shelter, clothe, and defend ourselves. Requiring Congress to tax or borrow before it can spend is beneficial only to the bond holders. Our nation thrived for a century before Congress tied its own hands. As a result, over 200 million adults are supposedly at the mercy of a small number of bond-holders, all of whom have willingly invested in Treasury bonds and don't know what else to do with their money. To explain the problem and propose a solution would be outside the scope of this course. Interested students should look into the "New Economic Perspectives" blog for a good explanation of the operations of the Treasury and the Federal Reserve. 3.  The maldistribution of wealth, income, and political power. This is best explained by this excerpt from Michael Hudson's article in the "New Economic Perspectives" blog: "Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government’s balance sheet from high finance, euphemized as “the private sector” as if it were the core economy itself, rather than its calcifying shell. "Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century’s power elite to lord it over taxpayers in industry, agriculture and commerce who will be charged to pay off this debt. "If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations – money –electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure. The bailout of Wall Street showed how central banks can create money, as Modern Money Theory (MMT) explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses. "Even more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy. The Republicans and Obama administration appointees held over from the Bush and Clinton administration have joined to conjure up scare stories that Social Security and Medicare debts cannot be paid, although the government can quickly and with little debate take responsibility for paying trillions of dollars of bipartisan Finance- Care for the rich and their heirs." 4.  The obsession with debt, of which over 80% was produced by the policies of those most obsessed by it. In fact, the ND is important only when debt interest payments are unsustainably high. This is not the case now and can never happen with full employment and high tax revenues. Relative to the GDP, our post-WW II publicly-held debt was twice its present value but was never reduced by a penny. Instead, with unemployment rates rarely below 5% and top tax rates over 50%, our GDP simply grew large enough so that, at Reagans's first inauguration, 35 years later, the ratio was down to 25% of its peak. That is when the tax-cutters began to wreak havoc. Today, the ratio is back up to 50% of its WW II peak. With pre- Reagan GDP growth and tax rates, we could regain the pre- Reagan ratio and also reduce our dangerous income and wealth inequality. We do not have a spending problem. Due to the maldistribution of income and wealth, we have a demand problem that results in an unemployment problem that creates a tax revenue problem that looks like a deficit problem that could become a debt problem if we don't get rid of the maldistribution-of-income-and-wealth problem. Instead of voting for deficit hawks in both parties, an intelligent, educated, and rational electorate would demand a program of full employment based upon repairing, rebuilding, and improving our obsolete and decaying infrastructure. The purpose of this course is to show that such a program finances itself in the same manner that wasteful WW II spending created post-war prosperity.

Proceed to: Lecture 2. GROSS DOMESTIC PRODUCT (GDP)


Thanks for your interest. Marvin Sussman, retired engineer If you don’t like the world as it is, change it this way!:
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