Explaining Why Federal Deficits Are Needed[W:5330]

[James972]

how are they investing them john?
By buying stocks back and forth among each other... with not one dollar going to the actually companies.

1) stock holder are owners who manage the company. A well managed company is the source of our growing GDP

2) most companies go bankrupt or expand and the capitalization responds accordingly thus always being allocated toward higher and higher GDP

1+1=2

 

[jaeger19]

You are the one that claimed people could invest dollars while sitting on them.

In reality, you can't do either while sitting on your dollars. Even if you just buy stocks, you are exchanging your dollars with someone else, not sitting on them.

Oh lordy.. this kind of semantic BS again.

Oh great.. Okay.. I'll play a turn.. okay then John.. then please explain how saving is a bad thing again? If its not sitting in a mattress... then its being invested right? So companies and individuals deciding to save their money has no effect.

That true John?

 

[jaeger19]

1) stock holder are owners who manage the company. A well managed company is the source of our growing GDP

2) most companies go bankrupt or expand and the capitalization responds accordingly thus always being allocated toward higher and higher GDP

1+1=2

honestly.. you have no clue.

Stockholders are not "owners that manage companies". Go buy a share of Exxon and waltz into their office declaring that its time to make some changes around here because you are the new owner. See how far it gets you. (I am betting the curb.).

the rest of your post isn't worth even responding to.

 

[mmi]

the rest of your post isn't worth even responding to.

I'll take a crack at it anyway.

A well managed company is the source of our growing GDP

No role for labor, eh? And what about the large number of companies that are not "well-managed"? Are they excluded from GDP calculations?

 

[jaeger19]

No it does not! If you consider "saved dollars" prime for investment, why wouldn't this pool of capital be seeking the best ROI given the risk parameters? Remember, lenders compete in terms of their investment decisions. Cost of capital is not explicit to borrowing... there are opportunity costs associated, among others (interest rate risk, inflation risk, etc...).

Well exactly.. why wouldn't they use this pool of capital to seek the best ROI given the risk parameters? One of those risk parameters is the government and government spending. Why would I go build another clinic.. when the government is building another clinic to compete with mine? the risk is too high.

Why would I expand my farming operation.. if my competition, flush with a government grant that's not available to me can now outcompete me?.. the risk versus return is too high.

Why invest in putting in more low income housing for retired seniors.. when the government has plans to build a 200 unit facility for low income senior housing in the area?

Those risks and costs don't show up when comparing a Treasury note interest, to an interest rate on 10 year Microsoft bond.

 

[JohnfrmClevelan]

Oh lordy.. this kind of semantic BS again.

Oh great.. Okay.. I'll play a turn.. okay then John.. then please explain how saving is a bad thing again? If its not sitting in a mattress... then its being invested right? So companies and individuals deciding to save their money has no effect.

That true John?

It is not semantic BS. You still don't get it.

Dollars sitting in a bank account ARE functionally sitting under the mattress. They do not get loaned out, they do not get borrowed against, they do not get used in any way. THEY ARE NOT BEING INVESTED.

Income saved is income NOT spent on consumption or investment. And year over year, if we aren't spending 100% of our income (and we almost never do), then that loss of demand must be made up for with investment borrowing and/or deficit spending. Otherwise, production will shrink to meet the lower demand (income minus savings), and the economy will contract.

 

[Gimmesometruth]

Oh.. my bad.. I thought you had a point to your post regarding non profits...

I did, you ignored it.

I didn;t understand it was another useless meaningless post from you.

The irony.

 

[Kushinator]

Well exactly.. why wouldn't they use this pool of capital to seek the best ROI given the risk parameters? One of those risk parameters is the government and government spending. Why would I go build another clinic.. when the government is building another clinic to compete with mine? the risk is too high.

Why would I expand my farming operation.. if my competition, flush with a government grant that's not available to me can now outcompete me?.. the risk versus return is too high.

Why invest in putting in more low income housing for retired seniors.. when the government has plans to build a 200 unit facility for low income senior housing in the area?

Yeah, why would you invest in such a market that is likely going to give you a return lower than investing in a 30yr, risk free, Treasury bond?

Those risks and costs don't show up when comparing a Treasury note interest, to an interest rate on 10 year Microsoft bond.

Nobody gets into the investments you describe, because... without some sort of government support, they wouldn't be profitable investments to begin with. Crowding out only becomes a problem if it increases the cost of capital for the private sector. There isn't anything more to debate, as this point should be crystal clear by now.

 

[jaeger19]

It is not semantic BS. You still don't get it.

Dollars sitting in a bank account ARE functionally sitting under the mattress. They do not get loaned out, they do not get borrowed against, they do not get used in any way. THEY ARE NOT BEING INVESTED.

Income saved is income NOT spent on consumption or investment. And year over year, if we aren't spending 100% of our income (and we almost never do), then that loss of demand must be made up for with investment borrowing and/or deficit spending. Otherwise, production will shrink to meet the lower demand (income minus savings), and the economy will contract.

And just a few posts before you argued that if I had money in the bank earning interest and was not investing it in building a new facility (because the government was building one that would compete with mine) .. that I was not sitting on it.

You need to take a breather and step back and stop trying to "score points". You will learn a little something if you do.

 

[Critter7r]

And just a few posts before you argued that if I had money in the bank earning interest and was not investing it in building a new facility (because the government was building one that would compete with mine) .. that I was not sitting on it

....

I don't think he did ...

He said ...

If they are investing their dollars, then they aren't sitting on them.

and ...

You are the one that claimed people could invest dollars while sitting on them.

In reality, you can't do either while sitting on your dollars. Even if you just buy stocks, you are exchanging your dollars with someone else, not sitting on them.

but not ...

... that if I had money in the bank earning interest and was not investing it ... that I was not sitting on it

In fact I read it as that he said exactly that: If you have money in the bank, you ARE sitting on it.

Putting money into a savings account is NOT an investment.

 

[jaeger19]

Yeah, why would you invest in such a market that is likely going to give you a return lower than investing in a 30yr, risk free, Treasury bond?



Nobody gets into the investments you describe, because... without some sort of government support, they wouldn't be profitable investments to begin with. Crowding out only becomes a problem if it increases the cost of capital for the private sector. There isn't anything more to debate, as this point should be crystal clear by now.

Well.. I don't think you would make the assumption that instead of investing in a new facility, I would lock up my money in a 30 year risk free Treasury bond. I would probably just hold it as cash or some other liquid asset.

And people do get into the investments I describe without government support. All the time. Why in the world would you ever say that? They are definitely profitable entities. A medical clinic is a profitable enterprise (though admittedly getting harder). Rentals are a profitable enterprise. Agriculture is a profitable enterprise..

Crowding out does not only occur because "of the crowding out of capital". The governments actions in its spending have far greater effects on the economy than simply "it increases the cost of capital". The government can and does directly compete with the private sector and additionally government spending gives competitive advantage to other entities.. both profit and non profit.. that can crowd out investment by other less connected competitors.

There is really more debate.. because your assumption that crowding out occurs only with an increase in capital for the private sector displays a real lack of understanding the economy and the governments effects on it.

 

[Kushinator]

Well.. I don't think you would make the assumption that instead of investing in a new facility, I would lock up my money in a 30 year risk free Treasury bond. I would probably just hold it as cash or some other liquid asset.

:lol:

What is a 30 year treasury bond, if not liquid?

And people do get into the investments I describe without government support. All the time. Why in the world would you ever say that? They are definitely profitable entities. A medical clinic is a profitable enterprise (though admittedly getting harder). Rentals are a profitable enterprise. Agriculture is a profitable enterprise..

Medicine and agriculture are heavily subsidized.

Crowding out does not only occur because "of the crowding out of capital".

The point has been explained rather clearly. Your point hinges on multi-order hypotheticals.

There is really more debate.. because your assumption that crowding out occurs only with an increase in capital for the private sector displays a real lack of understanding the economy and the governments effects on it.

This statement doesn't even make sense.

 

[jaeger19]

I don't think he did ...

He said ...



and ...



but not ...



In fact I read it as that he said exactly that: If you have money in the bank, you ARE sitting on it.

Putting money into a savings account is NOT an investment.

that's nice. then what is he arguing with me about Critter?

I have been making the point that government spending can crowd out private investment. and not simply because of "a higher cost of capital".

Wealthy individuals and companies save money and they can use that savings to invest in other ventures or expansions. Heck, for a time, (I am not sure if its occurring now), corporations were sitting on more cash than almost any time in history.

They can use that without needing to get a loan from a bank or entity that will charge them interest.

They can decide NOT to invest in other ventures and or expansions when the government spends money.. either directly competing.. (like building a clinic), or giving grants to non profits, or giving grants, or other moneys and support to competitors which are not available to you.

Those actions, and those decisions to not expand or invest.. are not captured simply by looking at the interest rate for a treasury bond and the interest rate on a Microsoft bond.

John started making some point that the government doesn't compete with private industry and I gave him examples of when it does and how it does.

and the next you know.. he starts arguing about whether money I have available in savings to invest in another building or rental units, is really "sitting on it".

 

[Kushinator]

that's nice. then what is he arguing with me about Critter?

I have been making the point that government spending can crowd out private investment. and not simply because of "a higher cost of capital".

No, we are talking about how government, through deficit spending, can crowd out private investment. You are attacking a strawman, and trying to claim that any and all involvement, crowds out private investment.

From Wikipedia:

One channel of crowding out is a reduction in private investment that occurs because of an increase in government borrowing. If an increase in government spending and/or a decrease in tax revenues leads to a deficit that is financed by increased borrowing, then the borrowing can increase interest rates, leading to a reduction in private investment. There is some controversy in modern macroeconomics on the subject, as different schools of economic thought differ on how households and financial markets would react to more government borrowing under various circumstances.

The extent to which crowding out occurs depends on the economic situation. If the economy is at capacity or full employment, then the government suddenly increasing its budget deficit (e.g., via stimulus programs) could create competition with the private sector for scarce funds available for investment, resulting in an increase in interest rates and reduced private investment or consumption. Thus the effect of the stimulus is offset by the effect of crowding out. On the other hand, if the economy is below capacity and there is a surplus of funds available for investment, an increase in the government's deficit does not result in competition with the private sector. In this scenario, the stimulus program would be much more effective. In sum, changing the government's budget deficit has a stronger impact on GDP when the economy is below capacity. In the aftermath of the 2008 subprime mortgage crisis, the U.S. economy remained well below capacity and there was a large surplus of funds available for investment, so increasing the budget deficit put funds to use that would otherwise have been idle.[4]

The macroeconomic theory behind crowding out provides some useful intuition. What happens is that an increase in the demand for loanable funds by the government (e.g. due to a deficit) shifts the loanable funds demand curve rightwards and upwards, increasing the real interest rate. A higher real interest rate increases the opportunity cost of borrowing money, decreasing the amount of interest-sensitive expenditures such as investment and consumption. Thus, the government has "crowded out" investment.

 

[jaeger19]

:lol:

What is a 30 year treasury bond, if not liquid?



Medicine and agriculture are heavily subsidized.



The point has been explained rather clearly. Your point hinges on multi-order hypotheticals.



This statement doesn't even make sense.

Well.. there is a reason that its a 30 year treasury bond. Trading it could be at a loss.

Medicine and agriculture are heavily subsidized and that has an effect on how private industry invests in it.

the point is understood that yes.. crowding out by the government CAN occur because of the effect on interest rates and the cost of capital loans. The point was made by me.. that "crowding out" by the government also occurs in other ways..through direct competition and through selective subsidizing certain entities over others. Effects which are not captured by "whats the interest rate in a T bill, whats the interest rate on a Microsoft bond"? My point hinges on reality.

Of course the statement makes sense. How can it not? If the government builds a clinic in an area that I was planning to build in (either directly by having it built and running it.. or by subsidizing a non profit entity) . I may realize that its not worth competing with that clinic and thus I have been crowded out.

why is that so hard for you to understand?

 

[Critter7r]

...

and the next you know.. he starts arguing about whether money I have available in savings to invest in another building or rental units, is really "sitting on it".

Well, until you actually MAKE that investment, you ARE sitting on it. You cannot save and invest money at the same time. It's one or the other.

 

[Critter7r]

that's nice. then what is he arguing with me about Critter?

I have been making the point that government spending can crowd out private investment. and not simply because of "a higher cost of capital".

It'd be neat if you had some specific examples and not just, "One time, I heard about a guy that didn't build a clinic in a poor neighborhood, because government".

 

[jaeger19]

No, we are talking about how government, through deficit spending, can crowd out private investment. You are attacking a strawman, and trying to claim that any and all involvement, crowds out private investment.

From Wikipedia:

Yes we are. As I explained.. the governments effects of deficit spending on the decisions of private industry to invest or not, go beyond simply an increase in interest rates.

I don't understand why you have an issue with this. Its pretty easy to understand that when the government spends money it effects decisions of the private industry to invest or not invest.

And deficit spending is a particularly difficult animal to deal with. When a government shows a strong willingness to deficit spend.. it can really easily out compete private industry.

Say I decide to compete against a government clinic in an environment where the government is willing to deficit spend. Raising money for the government has little short term cost. In a sense it has an unlimited supply of funds.
So when I am competing with a private entity.. I might take a hit, but I can outcompete them and drive them out of business by doing things better, more efficiently.

A public entity can lose money out the wazoo and still get funded. that's hard to compete with.

 

[Kushinator]

Well.. there is a reason that its a 30 year treasury bond. Trading it could be at a loss.

Almost every bank will redeem a 30 year Treasury bond @ face value + interest accrued. Secondly, almost every brokerage firm will be able to get you the market ask for a 30 year Treasury bond, in the event that interest rates have fallen and the bond trades higher than par/face value. They are liquid; the only risk is that of interest rate and inflation, which impacts the long term duration when holding the security.

Government bonds can't trade at a loss, that's why they are called "risk free"!

the point is understood that yes.. crowding out by the government CAN occur because of the effect on interest rates and the cost of capital loans. The point was made by me.. that "crowding out" by the government also occurs in other ways..through direct competition and through selective subsidizing certain entities over others. Effects which are not captured by "whats the interest rate in a T bill, whats the interest rate on a Microsoft bond"? My point hinges on reality.

We are talking about crowding out from deficit spending. Taking your position seriously would deem all government spending as crowding out. Sorry, that's just not based on any sort of reality.

why is that so hard for you to understand?

Crowding out doesn't occur when there is an increase in capital for the private sector, which is what you wrote. Hence, it doesn't make sense.

 

[jaeger19]

It'd be neat if you had some specific examples and not just, "One time, I heard about a guy that didn't build a clinic in a poor neighborhood, because government".

Whats so hard to understand here?

The U.S. Department of Health and Human Services has awarded grants of almost $1.1 million to Progressive Community Health Centers and $541,667 to the Gerald L. Ignace Indian Health Center to help pay the costs of new clinics in Milwaukee.

The grants were among $169 million awarded to 266 community health centers in 46 states, the District of Columbia and Puerto Rico. The money for the new sites was allocated under the Affordable Care Act.

The federal government previously award $101 million for 164 new health center sites in May 2015.

 

[Kushinator]

Yes we are. As I explained.. the governments effects of deficit spending on the decisions of private industry to invest or not, go beyond simply an increase in interest rates.

I don't understand why you have an issue with this. Its pretty easy to understand that when the government spends money it effects decisions of the private industry to invest or not invest.

It is a slippery slope fallacy, as it deems all government spending as crowding out, even though this is not really based on anything other than hypotheticals.

Government spending on military crowds out military investment from the private sector. Government spending on education crowds out education investment from the private sector. Government spending on food stamps crowds out investment that would have been made in absence of the tax revenue to fund it. On and on, the slippery slope comes to the point that all government spending is crowding out. Which is nonsense.

You can only assume other investments would be made in absence of government spending. Where as measuring interest rate differentials makes no assumptions, and measures what is.

This is the difference between normative and positive economic analysis.

 

[JohnfrmClevelan]

And just a few posts before you argued that if I had money in the bank earning interest and was not investing it in building a new facility (because the government was building one that would compete with mine) .. that I was not sitting on it.

You need to take a breather and step back and stop trying to "score points". You will learn a little something if you do.

That is not even close to what I said. Here is your original post:

Oh great.. Okay.. I'll play a turn.. okay then John.. then please explain how saving is a bad thing again? If its not sitting in a mattress... then its being invested right? So companies and individuals deciding to save their money has no effect.

My points were: 1) if money is sitting in a bank, it is equivalent to sitting in a mattress, because it isn't doing anything. Banks don't loan out your savings; and 2) companies and individuals deciding to save money DOES have an effect - it reduces aggregate demand. It is income not spent on investment or consumption.

 

[Kushinator]

Whats so hard to understand here?

:lol:

This is actually an example of crowding-in private investment.

 

[jaeger19]

We are talking about crowding out from deficit spending. Taking your position seriously would deem all government spending as crowding out. Sorry, that's just not based on any sort of reality.



Crowding out doesn't occur when there is an increase in capital for the private sector, which is what you wrote. Hence, it doesn't make sense.

Well.. any government spending that provides services or products that COULD be done by private industry by definition is crowding out. I mean how could you deny that effect?

However, that effect can be mitigated by the overall effect that spending has on the economy and investment. So government spending on a health care clinic will crowd out private investment.. or spending on building low income housing.

Where government spending on a public school welding program would in one sense.. crowd out private investment (if there was a competing private welding school)... however, the overall effect might be to stimulate MORE private investment to take advantage of these welding graduates.

Crowding out doesn't occur when there is an increase in capital for the private sector, which is what you wrote. Hence, it doesn't make sense.

Not sure how you arrive at why that doesn't make sense.

If you have a business and you make 100k in profit a year.

You can invest that money.. or you can save it.

If the government has crowded out your money and you have chosen to save it.. year after year that savings builds up.. it goes unused.. How could the amount you have available to invest in your next project if you choose to do so.. NOT increase?

 

[Critter7r]

Whats so hard to understand here?

The U.S. Department of Health and Human Services has awarded grants of almost $1.1 million to Progressive Community Health Centers and $541,667 to the Gerald L. Ignace Indian Health Center to help pay the costs of new clinics in Milwaukee.

The grants were among $169 million awarded to 266 community health centers in 46 states, the District of Columbia and Puerto Rico. The money for the new sites was allocated under the Affordable Care Act.

The federal government previously award $101 million for 164 new health center sites in May 2015.

Sounds like a model of profitability. /sarcasm

"About 65% of its patients are American Indians, but the health center doesn't turn away any patients. Uninsured patients are charged based on a sliding scale tied to their income."

Ignace Indian Health Center moving to former Goldmann's building