TPS

Did I say that? I said this, And I've stated enough times for even you to know that I believe the current level of government is too large. I agree with you guys on the need to reduce government and lower taxes. You are so blinded that you want to read into my comments what you want to believe. It is a fact that a larger government sector and activist fiscal policies have reduced the severity of downturns. THAT DOES NOT MEAN THAT I BELIEVE GOVERNMENT CAN SOLVE EVERYTHING OR THAT WE NEED MORE GOVERMENT. THE SIZE OF GOVERNMENT HAS GONE PASSED WHAT'S NECESSARY TO BE A STABILIZING INFLUENCE. When i argue about marginal tax cuts and revenues, I argue against the supply side belief that tax cuts increase revenues. THAT DOES NOT MEAN I AM AGAINST TAX CUTS. I AM FOR REDUCED GOVERNMENT AND TAX CUTS THAT HELP THE MAJORITY OF AMERICANS. REDUCE PROPERTY TAXES PLEASE. I hope this is clear enough for you.

Huh? The value judgement I made on S&D? I said the government can correct a supply side shock? Where am I?

Speaking of patterns, yours is always to insult without adding anything to the discussion. You used to try a little harder. Complimented? I was referring to your comment about me. And thanks for the reminder I'm not part of the club. I'm so disappointed...boo hoo...

Gee, I always wondered what it would feel like to be DC Tom... AD, of course you can't reduce an explanation to one general answer, but there is typically one major influence. In this case, activist fiscal (increased government) and monetary policies have reduced the amplitude of Business Cycles. I certainly didn't come up with this; it's accepted by the majority of "the profession." The major change since the GD has been the size of Govt relative to gdp, and fiscal policies to prevent recessions from becoming depressions. DC, pass the salt.

Your first sentence is wrong, the second has pretty much been discredited, but the rest are correct. The FED can control short term interest rates, which influences credit expansion and the money supply. When I say the "mark up is determined by the degree of competition in an industry" that is the influence of S&D conditions. When markets become more competitive, it becomes more difficult to "pass along costs" into higher prices, so, yes, firms will have to pursue other strategies like outsourcing production (longer term) or reduce their margins (short term). Reading the paper this morning DOW chemical is going to raise prices by 20% due to rising energy costs. Is that S&D, or are they passing increased costs along in to higher prices? You have causality backwards, obviously because you believe the "Uncle Miltie" line. Friedman's "helicopter argument" makes for a good story to persuade people like you, but the Fed does not own helicopters. The Fed influences banks' reserves and money is created when banks make loans. Banks and the FED can't directly influence people to borrow however. Inflation occurs from either too much demand (relative to supply) or a supply-side cost shock. If there was some way that people's money incomes were doubled over night, then the helicopter story could work; but money doesn't grow on trees nor is it dropped from helicopters. Friedman and Monetarism was discredited in the 1980s. I've saved quotes from him in the WSJ and Business Week. Each one goes something like this: Money supply growth is greater than potential real growth, so inflation will be higher next year. Each time he was wrong. Inflation was "tamed" in the 1980s because Volker raised interest rates to unprecendented levels causing the most severe recession since the GD with unempolyment reaching 10%. Labor lost its bargaining power (Reagan helped too by breaking the air controllers union). Combine that with increased global competition and low oil prices, and you get lower costs and less ability to mark up prices. Increased global competition has forced firms to constantly try to keep their costs down, and if they can't do it in the US, then they outsource. This is why Greenspan's fed could let the unemployment rate go below 5% in the 1990s--labor's ability to bargain for higher wages has declined. We are currently in a very interesting situation. Global demand is pushing up commodity prices, with oil prices rising from "other factors" as well as demand, while, at the same time, the US is (almost) in a recession (hence the low interest rates). The FED can't control those kinds of cost influences. Conclusion: prices are rising because of REAL factors, not the FED dropping money from helicopters. Corn (and all grain) prices are rising because of ethanol production; global commodities being pushed up by demand from Chine, India and other emerging economies; and oil prices from demand, speculation, and the depreciation of the $. DC, pass the popcorn...

No. The Fed can allow or accomodate inflation, they don't cause it--not unless they are handing money to the average joe consumer or business. I don't know anyone who can go to a federal reserve bank and get a loan or a cash handout. Inflation is a general rise in prices. First question: how are prices set? Businesses add a mark up (some %) over their avereage total costs. The mark up is governed by the degree of competition in an industry. Costs are mainly made up of wages (including salaries and benefits), raw materials, and energy (especially for manufacturers). To keep it simple (so AD can understand it), as costs increase, prices increase. And, given the increased costs, there's an increased demand for working capital, and therefore the need to borrow, by firms. Borrowing, or loans, is how money is created. For the most part, the banking system makes the loans, and the Fed governs the cost of loans by setting a target Fed Funds interest rate (FFR), which is essentially the banks' borrowing cost. The Prime interest rate is a mark up over the FFR. In a fast growing economy costs eventually begin to increase due to increased demand for resources, low unemployment giving workers more bargaining power, some industries hitting capacity before others, etc. Rising costs means increased borrowing by firms, and loans are how money is created. In addition, workers (consumers) with their higher incomes or even more people working are taking out loans. At this point, the FED has to decide whether or not to let the growth continue or not. If it lets it go, it could cause an inflationary spiral. Higher wages (due to labor's better bargaining position) leads to higher costs, which lead to higher prices. Or, it can decide to put the brakes on by raising its FFR target. The Fed almost always chooses this course of action. End of story.

Which is why the other side of the policy coin is being used too. The government, with one hand, is pushing its housing rescue through and handing out checks with the other hand. If the Fed and Govt can stave off the collapse of asset values, and the economy recovers, they can always start siphoning off the liquidity when things improve. The late economist Hyman Minsky wrote an article titled "Can 'IT' Happen Again?" By 'IT' he meant another depression. He believed IT could be prevented through the policy options available to the FED and Government. The current conditions are such that I believe IT would happen now, but policy makers are using everything at their disposal to try to prevent IT. That doesn't mean IT won't.... As for China and the $, I think most people here already know my view (similar to yours). I think I wrote elsewhere in this thread about my views on the $-oil linkage.

This'll take a bit more time than I have right now, but here's a quick response. Some inflation isn't bad; in fact prices rise as a signal of scarcity (either from increased demand or reduced supply), and we all (businesses and consumers) react to those price changes. Rampant inflation is not good because it distorts the price-rationing mechanism, and can therefore destroy a market economy. Who does inflation hurt then? Anyone without the ability to bargain for higher wages/income, and people/institutions who hold financial assets that pay a fixed return. I'd say that bondholders, banks, and other financial institutions are a pretty powerful force. One might look at inflation as a "conflict of interests." Pun intended. If you are a consumer with a 30-year mortgage or a business with a 10-year fixed-interest debt obligation, you won't mind a little (more) inflation, especially if you have the ability to increase your income to the price index, or a firm that can increase its price as its costs rise.

I'm not talking about the ability to obtain financing; I'm talking about the willingness to spend. It's demand that drives the economy. Downswings occur because spending (demand) slows down--either businessess, consumers, or both reduce spending. Government spending never slows down, and in fact speeds up during a downturn. The scope of capital availability means nothing if businesses and consumers "hunker down" and stop spending in a risky environment. In 1929 government spending relative to gdp was 1.2%; it's now almost 20%. Large government has stabilized demand; that's the reason for less severe downturns.

The Fed is never "out of jack," since they supply a fiat currency. Most, if not all, of what they are doing is trying to prevent further asset deflation because that is what can transfer over to the real sector and bring the economy down. The fed can't directly cause inflation unless they started handing out money to those who spend on goods and services--that's the government's job with its tax rebate. The fed can control credit conditions (in the financial sector), but it can't make businesses and consumers borrow and spend.

That contradicts the experience of the last hundred years or so. I'm not justifying the current size and scope of government, but since WWII, as the size of government (relative to gdp) has increased, the severity of downturns has decreased. The downturns aren't severe because there is "more capital in private hands," they are less severe because government spending is a stable source of demand regardless of the "current state of risk" in the economy, and it also goes up when an economy slows down. Private capital, on the other hand, tends to "get liquid" when the "current state of risk" increases--that is, businesses are less willing to spend to expand, and finance is also less willing to lend. Much like the current state of affairs.

That's not the dollar-oil connection. The majority of oil traded around the globe is priced and sold in $s. Since oil is priced in $s, a decline in the value of the $ doesn't impact the price of oil directly. What the declining value of the $ does is reduce the purchasing power of revenues earned by oil exporting countries. One way to counter that is to reduce production and increase the $ price of oil. Another way would be to switch pricing and sales of oil from the $ to the euro.

Will the company need to hire another accountant? Or will they increase executive compensation?

If you are talking about small businesses, especially individually owned, I'd totally agree. On the other hand, large corporations are a different story. Two things: one, the majority of funds invested in markets come from non-taxed sources--pension funds, and other institutional investors; two, if a US corporation borrows $100 million then decides to build a factory in Indonesia, how does that increase American jobs?

Isn't that the entire point, that the relatively recent infusion of money from speculators (in unregulated markets, where there are no contract limits) has caused the price to rise by some 10-30% higher than they should be?

I guess the Fed's interest rate cuts, bail out, and flooding the markets with liquidity have nothing to do with trying to prevent the recession?

One can't guess what the next "event" will be, but I would add that if government(s) do something to regulate the "dark markets," then we'll see a "correction" as well. $4/gal is also radically changing habits in this country, so an unexpected(?) decline in US demand could trigger as well. Btw, be careful about suggesting I might know what I'm talking about, you could get blacklisted around here...

Once you make the statement that it's a long term argument, one can't prove it or disprove it because no one can "prove" what factors caused the ensuing growth. I've showed in a previous post (long ago) that gdp growth has averaged about 3% per year over time regardless of what has happened with marginal tax rates. Btw, how long is "long term?" You gave credit to Bush2's tax cuts for stimulating growth several years after them; what about now?

Here's a little primer for you: http://www.investopedia.com/university/futures/futures2.asp Specifically this part, "Now that you see that a futures contract is really more like a financial position, you can also see that the two parties in the wheat futures contract discussed above could be two speculators rather than a farmer and a bread maker. In such a case, the short speculator would simply have lost $5,000 while the long speculator would have gained that amount. In other words, neither would have to go to the cash market to buy or sell the commodity after the contract expires.) "

I assume this is supposed to counter the point made in the article I posted? If so, I'm a bit shocked that an article in The Economist could have such a glaring error. Futures speculators do not take delivery, nor do they have to "sell" to someone who will. They "close" their position by taking an opposite position in the same contract. The majority of futures contracts are not "delivered."

I think the true test of his argument is if we see the speculative bubble burst in the next 6 months or so. Speculators are betting on the continued rise, and as long as they can find others to make that bet, the game continues. No different than speculation on any other asset.

Thanks for making my point. Care to share with us how much more income those making over $200k earned in 2005 vs. 2000? And what their average tax rate was? You also misunderstand my point. I am in agreement with anyone who believes tax rates are too high for all Americans and government spending is out of control. My argument is focused on the dubious supply side econ claim that tax cuts lead to an increases in tax revenues. Tax revenues fall in the year of tax cuts, then as long as gdp increases, next year's revenues will be higher than the previous year's revenues, but more than likely not higher than the year prior to the tax cut. Simply look at personal federal tax revenues prior to Bush's tax cuts, during, and after at www.cbo.gov. We are over-taxed and spending is out of control, which is why I won't vote repub or dem. I'm on your side on this issue. Where I am not is my focus on the question "do cuts in marginal tax rates increase or decrease tax revenues?" I've answered that in the paragraph above.

Which is why they can also sit back and say, "Gee, it's supply and demand...don't blame us..."

unregulated markets Interesting piece on how unregulated futures markets are contributing to rising oil prices. Regulated markets have a cap on the amount of contracts any single buyer can purchase to prevent speculators from doing exactly what they're doing now in the unregulated markets. As Keynes said, "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."

SD, It is true that the top 20%'s share of income taxes paid has increased even though their marginal rates have been lowered. But it's one of those "other issues" I said the analysis ignores. The share of income received by the top 20% has increased from 41.1% in 1980 to 48.5% in 2006 (actually, almost the entire gain was made by the top 5%). Personal income (nominal) in 2006 was $11.6 trillion. The changing distribution of income meant that the top 20% received $1.2 trillion more income in 2006 than if their share remained at 41.1%. The so-called rich (top 20%) pay most of the federal INCOME taxes because they "earn" 50% of all income. Again, this is only one part of the picture painted in that article. First, SS revenues have been the most stable source for the government at roughly 6.5% of gdp since the Reagan tax increase. Second, when marginal rates have been lowered, federal income tax revenues are initially lowered; however, over time, as the distribution changes, of course income tax revenues increase again.