Friday, November 21, 2014
94

Orphan Ideas

CHICAGO – Since the United States Supreme Court’s “Citizens United” decision, which prohibited the government from restricting independent political expenditures by corporations and unions, concern about business interests’ influence over US elections has been growing. But political contributions are only one reason why business interests have so much power. When it comes to lobbying, money is not everything: ideas play a big role, too. Unfortunately, rather than leveling the playing field, the battle of ideas may skew US politics even further in favor of big business.

The importance of ideas can be seen from the simplest things. Congressional bills aimed at benefiting powerful constituencies are generally given appealing (and misleading) names. For example, a tax holiday to repatriate foreign earnings was called the “American Job Creation Act.” It is easier to sell a bill that (allegedly) benefits everyone in society, not just a small group of its most privileged members.

More importantly, the lobbying of the quasi-governmental mortgage lenders Fannie Mae and Freddie Mac would not have been so successful without the idea of the “ownership society.” How could anyone oppose turning every American into an owner? It is precisely the appeal of such ideas that can make them so dangerous politically.

If ideas are like weapons in lobbying, it is important to appreciate the possible distortions in the market for their creation and diffusion. New ideas are like new drugs. While some pharmacologists dedicate their lives to searching for the cure for cancer, regardless of any monetary incentives, many are driven by the hope of securing a lucrative patent.

Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account profitability. That is why we have so-called “orphan drugs,” from which not enough money can be made because they cure rare diseases or diseases (like malaria) that affect people who cannot afford to pay for them.

The process of creating new economic ideas (or new evidence about old ideas) is not that different. Researchers do not get patents, but they get citations, recognition, and promotions. While some researchers dedicate their lives to the search for truth, regardless of any personal gain, many are driven by the hope of academic stardom and the money that comes with it.

Even if researchers themselves are motivated by only the noblest of goals, their need for funding forces them to take into account the demand for ideas. And, if funding is not a major issue, the mechanism of amplification of an idea (and thus its ultimate diffusion) nonetheless depends upon how appealing it is to some lobbying effort.

Consider a great researcher in my field, Michael Jensen. In 1990, he co-wrote a paper about executive pay, arguing that it was not sufficiently linked to performance. Although the authors used an untenable benchmark to determine that the sensitivity of pay to performance was too low, the article was published in a top economic journal, prominently discussed in the Harvard Business Review, and is one of the most cited papers in economics. Fifteen years later, Jensen wrote a paper about the costs of excessive sensitivity of pay to performance. The paper was published in a minor journal and is not very well cited. Why?

Business loved the first paper, because it shifted the conversation from how much executives were paid (a very controversial topic) to how they should be paid (a more technical and less contentious issue). And, since companies cannot make executives pay out of their pockets for bad performance, the shift in focus ended up justifying an increase in pay. There was no similar love for the second paper, which languishes almost unknown, despite its important insights. Jensen, a researcher of the highest integrity and fame, is free to write on both sides of this issue. But the two papers’ asymmetric citation payoff is a warning for young scholars: if they want to get ahead professionally, the position that they should take is clear.

From venture capital to telecommunications, from the construction industry to teachers’ unions, there is plenty of demand for evidence that celebrates the benefits of these industries and justifies (implicitly or explicitly) government subsidies to them. There is no equally organized and active demand for evidence that all of these subsidies are distortionary, waste money, and make companies less rather than more competitive.

Here is perhaps the biggest orphan idea: pro-market does not necessarily mean pro-business. A pro-business agenda aims at maximizing the profits of existing firms; a pro-market agenda, by contrast, seeks to encourage the best business conditions for everyone. Who benefits from evidence that an industry is too concentrated, its profit margins are too high, and consumers are being ripped off?

As with malaria drugs, millions of people would benefit from such an idea, but their ability to pay is limited. And, sure enough, in most of what we economists write – and, more important, in what we teach in business schools – it is hard to tell the difference between being pro-market and being pro-business. The battle against crony capitalism starts in the classroom, and we professors are inevitably implicated. If we are not part of the solution, we are part of the problem.

  • Contact us to secure rights

     

  • Hide Comments Hide Comments Read Comments (94)

    Please login or register to post a comment

    1. CommentedProcyon Mukherjee

      Sorry, that I am late on this brilliant article, which had been wrongfully eclipsed by a charade of commentaries (on subjects no way connectd with the wonderful ideas in the article) that could better be orchestrated on personal e-mail IDs, rather than saving them in a precious public space.

      The message of this article has a very unique proposition that ideas have ceased to have intrinsic value that stems from the inherent logical positions that could be verified or falsified (which is the very foundation of scientific enquiry).

      Instead ideas have been largely monetized to deliver the purpose that is most suitable to the highest bidder. This is a very alarming denouement of the current times. I find it odd that 'creative destruction' of ideas cannot be based on the confines of a narrow objective function of maximizing gains of the highest bidder, while we justify claims that democracy allows freedom of expression of ideas to be able to compete in the same space regardless of the relative power of the constituencies.

      Procyon Mukherjee

    2. CommentedGary Marshall

      Hello Thomas,

      I disagree with your claim. I have stated why repeatedly. Clearly nothing penetrates that thick skull of yours.

      What have I said repeatedly before about banks? Do you have a memory? This seems just like the movie Memento. Maybe you should write everything down before you go to sleep because those slumbers seem to destroy whatever memories appeared after your 'accident', whatever that was.

      How do banks achieve this great feat? How do corporations achieve this great feat? How do so many individuals achieve this great feat?

      How are so many able to borrow and borrow without paying the amounts borrowed back? Borrowers may pay back the individual lenders, but the amounts owed just grow and grow. Banks substitute one lender for another in adding to its stock of lenders. They never pay down their debts. the debts of most corporations just grow over time.

      Secondly, the government has no assets. The government pays for nothing and it pays back nothing. It has not the means to do this. Its not like its a Sears with a showroom full of products to sell. That is why it confiscates the wealth of others. The source of the government's money in Taxation will be the same as it is in borrowing, and it will not be government. But don't let this impress anything on that prized skull of yours.

      What are government's supposedly bottomless reserves in a system of Taxation? Is it not the Taxpayer?

      And why does the government borrow now? Why does it not just raise taxes to pay for all of its government expenditures? Why run a deficit?

      People like you are very helpful. If one can devise a set of instructions for the simplest or dullest of people, then those instructions will satisfy the needs of everyone. Well brother, you are one of nature's exemplars in foolishness. You are a genius in failing to grasp the simplest of meanings or premises. What a prize!

      You have no financial benefit for Taxation to offer against its countless and incredible costs, other than borrowing won't work. This is statement that would make a dunce blush. Sorry if I sound abusive, but pal you earned it. I give praise where praise is due.


        CommentedGary Marshall

        Hello Thomas,

        I only become abusive when the subject of the post merits it. And how you merit it. Nothing penetrates and it never will. It took you 3 weeks and many posts to even understand that which you described as the simpleton's proof. And you still have not fully completed the simple task of understanding something about 15 sentences in total.

        You were asked to produce all these great financial benefits of Taxation. And again all you can say is that government borrowing won't work. It work's every other time, but no more because you declare it so.

        The impossibility of government borrowing is the great benefit of Taxation. This is what overrides all its inherent and massive costs in deterrence and squander. The twit has an opinion it won't work, but he has nothing to offer in terms of financial benefits that he formerly claimed were near infinite.

        You say banks don't borrow and borrow, and then you admit in the next sentence that they in fact do borrow and borrow. That is what I call and have called a person of singular stupidity.

        GM

        CommentedThomas Quimby

        Gary, mostly you are just being abusive. However numerous and awesome you think government's borrowing plan will be, the infeasibility of government's plan to get sufficient funds this way IS something that would cause the whole structure to come tumbling down. Evaluate the conclusive claim on the argument leading up to it, not on its absurdity for daring to contradict your perfect scheme. To do otherwise is putting the cart before the horse.

        What have I said to you repeatedly, whenever you mention this idea that government will just substitute another lender to repay the debt from previous loans, just like banks? I've said that banks don't do this; they invest in such a way that their assets outweigh their liabilities, and given the time to recover the money that it has loaned out to other people, it has the means to repay every single debt to depositers. Since you've never answered this counterpoint with a reason why it's wrong or invalid, I have tended to assume that the criticism has managed to hit the target, that you understood the meaning of this criticism in the first place. If contemporary businesses don't get by by 'just substituting one lender for another', then it's in no way valid to claim that government could do this because of the precedent set by actual businesses in real life.

        I don't really know where this "government has no assets or liabilities" and schtick came from. For one thing it seems to contradict the terms of your proof itself, where you refer to government liability due to the bond. Even more worrying, though, is the way that you flout ordinary use of the language. When I borrow money from someone, I acquire a financial liability in exchange for recieving the cash asset. That liability is the obligation to pay the money back. It's no different when government is the one borrowing. Government acquires financial assets through the process of collecting revenue, and has liabilities due to its various financial obligations: loans and other accounts payable, such as employee salaries. It may be the case that government doesn't sell commodities like a store or produce and sell commodities like a factory, but I fail to see how that's relevant to the question at hand.

        Government borrows now and runs a high deficit now for the same sort of reason that people borrow. The U.S. government is prioritizing debt-based financing right now, because it really prefers to have money right now, even though it's incurring the obligation to pay in the future and placing a restriction on available funds in the future. In short, it's prioritizing the present over the future, largely on the theory that it needs extra funds now to stabilize a shaky economy and to prevent disastrous geopolitical outcomes from its recent wars.

        The other thing is that I could use the example of government activity as a precedent of the opposite point:

        Why does government tax right now, and why has government always taxed? Surely this shows the wisdom of taxation. Surely the times when government has run a surplus show the wisdom of not running a deficit.

        And if you think that taxation is a fact of government's foolishness, then you can't use the mere fact that government does something as a precedent for your idea. You need criteria for judging when government is being wise and its example is to be followed, and when it is being foolish; and these criteria need to be agreeable, and should not provide a merely circular justification for your ideas about what sort of government policy would be wise.

    3. CommentedThomas Quimby

      I.

      Ok, Gary. Ultimately I can't negotiate with you, since you're set up as your own judge and jury. Arguing the opposite thesis overwhelmingly, it is.
      Anyway, you remember this post?

      ^^^^^^^^^^^^^^^^^^^^^^^^
      Hello Thomas,

      Do banks when they offer rates on bonds to prospective lenders review the rate of GDP growth and act accordingly? I don’t think so. I understand what you are getting at, but this has more to do with the expected rate of return rather than growth in GDP. Similarly with the nation.

      The Government has no assets and liabilities. It is merely the agent for the nation. It conducts the nation’s public business for the benefit of that nation. The Government has no assets because it pays for nothing. It has no debts because it contributes nothing to paying off those debts. It’s the people and firms of a nation that have all the assets and assume all the liabilities.

      I really do not understand why people continue to speak of an entity that contributes nothing to paying its bills and settling its debts as being in some way sovereign and independent. A government is not. Any government is not. So in terms of public debts, you really should stop speaking about the government. Its the nation that satisfies those debts, not the government.

      So when you say none will lend to the government, you are correct because none have ever lent to the government. They have lent to the nation, its people and firms, their combined worth, for their benefit and at their cost.

      When the government borrows, it is not making a profit on those loans. The people and firms throughout the nation are making the profit. They are the ones in receipt of the returns on the building of new roads, better schools, better public health services, lower government expenditures, lower regulations, assistance to the unemployed, police, courts, the protection of property, and general lawfulness.

      So if a better road, lower costs in damage to vehicles and speedier times of transit, which lowers the costs or time in transporting people and goods, making the community wealthier, were built, one would have to estimate the costs in construction and debt to the community against the accruing returns on that road. If cost is 5% on capital invested and return is 8%, then the community is wealthier if the road is built. Government, the nation’s agent, does not yet perform this function because it takes the money and spends it badly. With such cost and benefit analysis imposed by the borrowing rate, all shall change.

      If the return is 5% on a bond to a lender through the nation’s agent, the government, and if it is 5% through IBM, why would people tend to lend to the nation rather than IBM? Because the assets backing the loan offered by Government are just so much greater than those backing a loan to IBM, wouldn’t you agree? A lender will have a claim on the combined wealth of a nation soon to get wealthier with this road, and not just on the combined wealth of a company that forms a part of the wealth of the nation.

      Would you choose the limited wealth of IBM over the far greater wealth of the US for a commensurate return of 5%?

      On an individual level, if one lives in an area of general lawlessness in which the protection of property and life is futile, would not the funding and construction of a new police station provide some relief? A bond is offered at 5% for a loan of $10 million for a year’s worth of police. Criminals are arrested. The courts get busy. People are incarcerated. A general lawfulness comes to the community. People buy homes and refurbish existing ones. People move into the community. Insurance rates drop. Businesses invest more. The community becomes far wealthier.

      Cost and benefit analysis. The community lends to itself at 5% for police and generates returns of 10% or more. Who wouldn’t lend in such a scenario? Protection of life and property for a limited few of means, or for everyone.

      When you add an asset to your financial picture, say a business worth $50,000, and a debt to the same of $50,000, would you explain to me how you are better or worse off? And if you sell that business for the extent of the debts incurred, would you tell me how you are better or worse off?

      Do you still want my $50,000?

      GM

      ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

      And do you also remember the sequence of posts before that developed my argument? Mostly I was arguing that competitors can come in and steal marketshare away from government, by offering a better financial return. There are projects of the tragedy-of-the commons type, and even when you localize it to the city level as you do, there are still tragedy of the commons issues. A donation to start up the city police (assuming it actually does so) benefits the entire city community more or less equally. This means that in situations where the community profit multiplies the value of donations by much less than the entire population of the community, the consequences of the donation look unprofitable to the donor and practically no one will donate, even if there's a distribution of obligatory donation that would get massive profits to the community, in terms of total community return on total community investment.

      When government takes on extra expenses (due to funding public works as well as the normal expenses of running the business) relative to the competition that could appear, it has to offer poorer financial returns than the competition could in order to remain in the black. If the competetion arrives on the scene and offers these superior financial returns, it's clear from the standpoint of profit to the individual rational investor that a loan given to government is essentially like giving a slightly smaller loan to the competitor and donating a little bit directly to the government public works account, no strings attached. If they'd prefer not to donate, then they'll prefer just to invest in the competitor to government. Because we assumed that the free market ideal obtains – you and I agreed on some underlying assumptions, there -- this type of competition can come into being no matter what government's business plan is, and if people choose the better financial returns, government will lose marketshare to the competing business; practically all marketshare if the motivation to donate to government is negligable.

      Since many of the basic services that government provides are of the type that provide returns to individual community members based on the total amount of community funding available and not on the amount of funding provided by that individual specifically, I assume this tragedy-of-the-commons situation will apply and that government will not be able to fund these projects anywhere near their optimal levels. Since things like a military system or a public road system or a public legal system -- including not just your example of local police, but the funding of courts and the reliable enforcement of contracts on which business tends to depend today – since these sorts of things are relatively basic institutions, I assume that there will be dire consequences if they are drastically underfunded. If government in a competitive marketplace can't fund such projects without resorting to the charitable impulses of the people, I assume this means that these government projects will be drastically underfunded and that the dire consequences will eventually follow.

      This is all assuming that government tries to stay in the black over the long run, in the way that a normal business does; if you'd be losing money over the long run, you wouldn't want to operate the business. So if government runs in the red over the long term it may have a business model that no rational business will want to implement, and thus face no competition. We can discuss that case if you are ready to move onto it from this one, where government maintains a non-negative cashflow over the long term but faces competition in the efficient marketplace as a consequence.

      II.

      And again, note that banks do not normally arrange to have a negative cashflow over the long run, nor do they try to do so. A bank may hold a bunch of liability in the debt which they owe to depositors but it holds a bunch of assets in the loans that it offers to individual creditors, and banks seek to arrange things so that the assets outweigh the liabilities and their total worth grows over time, leaving a gross profit that can be used to pay the operating expenses and return a profit to any people with an ownership stake in the bank. But if a company actually plans that for some time it will put itself in an unprofitable position where the corporate liabilities outweigh the assets, then we need to consider whether the corporation is good on the debt.

      If government declares that ultimately its only collateral is its ability to secure more loans from different people as the economy grows, government has declared a policy of running in the red over the long term and we need to investigate whether such a plan is actually feasible and look at the size of the economic base for supplying those new loans when they are needed.

      III.

      Lastly, as relates to your comment about government assets and liabilities:

      I fully agree with you that we can think of government here as an agent of the community and that hopefully it has the 'community good' in mind, where the good of the community is defined in a suitably democratic way. My point is that the individual investors in the market do not simply pursue the community good; they pursue the portion of the community good that matters to them specifically, and may well be willing to see others take a loss so long as it benefits themselves.Thus the individual investors can have a conflict of interest with the community good as embodied by government policy. When I agree to loan money to government, I'm demanding that it make good on the loan to me, personally; it has a contractual obligation to provide money to me, and that's the liability that it has in exchange for the asset I gave it when I handed over my money. The government is responsible for getting money to me later (i.e, it owes money) which can be spent according to my personal interests, and in exchange for that, I've given it money now to use according to its interest in pursuing the community good.

      Specifically, when I give a loan to government, I try compare the situation where I give the loan, and the situation where I don't give the loan, and judge which one leaves me better off; I compare the loan with the best alternative use of the money. This is why the loan has to be read as an obligation for government to get me extra money of the contracted amount and why the money to pay for the loan has to come from someone other than myself. This is also why government can't easily plan to do sneaky things to pay for people's loans, like printing extra money. If I knew beforehand that government plans to do this sort of thing, I can predict that inflation will be higher as it resolves more debt and that in effect I will be getting somewhat less than the stated return on the bond. Deliberate inflation is a tax by other means, in other words, and I know that I will bear some part of the effective tax burden.

        CommentedThomas Quimby

        Gary, first off, the vitriol on your part is now so unabated that you are clearly the seven year old at present, or worse. At least the seven year old is forgivable as he is, because of our certainty that he will continue to mature with time.

        Second, you still need to look before you leap when typing a bit more. Last post you said "Only a moron would argue that an accruing debt should be paid off when the cost of paying it off is massive and the return is zero". and you are absolutely correct if you are talking about the perspective of the borrower. But if the lender knows that the borrower can behave this way without penalty and intends to do so, the borrower won't loan the money because he knows it won't be paid back; only a moron would do that.

        And note that in a liberal (I mean this in the classical sense) democracy such as the U.S. we tend to be able to assume that people can learn about the government's policy regarding the repayment of debt. If we don't learn of it initially through analysis of congressional debates or whatever, we eventually catch on to the way government is behaving because of the expectations around the people's right to know. Government is obliged to tell the people about its budget, to be open about how it's getting and using resources, and to not limit free speech. Democracy and markets go together, as they often say; generally we assume that information flows freely.

        You'll have to introduce me to the people who just borrow and borrow as much as they want and never reach a point where they can borrow no more. Credit card companies may not have the oracular means to predict which of their many customers will default, but they're not stupid, and they adapt their policy depending on how the person behaves with respect to paying off the debt. Credit scores, right?

        Third, you may be misunderstanding what I mean when I say that government does indeed pay for things. Yes, contemporary governments do tax and that counts as 'not paying' for what they get. But then government takes what it has in the treasury, completely at its disposal, and hands it over to other people for them to do with as they please, and it does this in exchange for something that these people provide for the sake of government; this activity is known as 'paying'. Government can stop taxing, can stop confiscating property, but it can't stop this other step of paying people -- not if it wants to have employees, at least.

        And if you still think otherwise, please do tell me where the police officer's salary will come from if government abolishes taxation. Since you are maintaining rather steadfastly that government services will not have to suffer because of a non-taxing policy, you owe me that kind of explanation in support of your position.

        Fourth, it's not all about you. We should be able to have a reasoned discussion aiming to get at the truth without either party thinking that this is a brutal contest for dominance and ego. I'm really concerned that it may be the case that you view everything I've said so far as a personal attack. It's not just that I don't think that that's what I was really trying to do, but also that if your ego is so fully bound up in being correct on these matters that you are unwilling to really consider criticisim or admit to mistakes, you won't be able to reflect critically on your own ideas about economics and government, much less those of others, and you won't be able to grow.

        Honestly, if it is just about you, I do think that your money would be better spent if you just registered for a few courses in economics. Nothing decides whether you are a dotard or not more than your willingness to learn something, especially something about what other people think and why they think it, even if you are distrustful of what they believe -- your willingness to build the tools required to communicate your ideas effectively before the people that matter.


        Respectfully,
        Tom

        CommentedThomas Quimby

        Gary, I've provided you the claim and I've provided you reasoning in support of that claim. Please do reread my argument and address the reasoning.. Simply asserting that it's absurd to claim that government will have problems getting ENOUGH loans to indefinitely sustain a program of spending when it relies only on borrowing in a competetive marketplace is not a good reason. However counterintuitive the result may seem to you, you are obliged to accept it if the reasoning in support of it is sound. So attack my reasoning, please. If you like I can repeat it. It will mostly be a matter of copying and pasting.

        I do claim that it's absurd to government can
        A) rely on loans as its only source of revenue for spending
        B) rely on loans as its only source of revenue for repaying its old loans when the come to term, and
        C) expect to sustain this policy indefinitely, getting loans from willing investors in a competetive market for loans.

        Nor for that matter, can ANY entity expect to do things A, B, and C.

        Do you agree or disagree with this claim?

        This one claim is more or less one entire branch of my argument. Do you accept the idea or do you not, and why?



        Your reasoning about stuff to confiscate doesn't really make much sense to me. A government that declares that it has no right to tax has declared that it won't do that type of confiscation from private citizens, and if private citizens confiscate government properties such as the road system or the capitol building, government will be unable to function. Government does not have bottomless reserves in its actual property holdings, which is why it continually draws revenue through taxation or some other profit-making means; something that adds more assets to the government account than liabilities.

        CommentedGary Marshall

        Hello Thomas,

        So all those benefits of Taxation that you keep speaking of, the ones that overwhelm all the costs of Taxation, have just poured out in your posts, have they?

        And who is acting like a 7 year old boy?

        You have provided nothing in benefits, save one insipid claim. I gave you numerous opportunities to advance the argument that will send my proof down the rabbit hole, turn me into a dotard, crush every point I have made. And what does the great debater provide us with? A big fat zero. Nil. Nothing. A goose egg.

        What a great surprise!

        You say the Treasury pays the government's bills. And where does the Treasury get its money? It confiscates it from the people and firms of this nation. The source of the government's money is exactly the same in my system as it is in yours. However, in my system the government's take will be far less, and there will be thus a lot more stuff to confiscate should the need ever arise.

        You argue that government can only borrow if at the same time it taxes. I never said the government cannot tax. The government in my system is free to institute a tax at any time it should please. So your one big benefit is nothing but a spurious and ridiculous contention that amounts to nothing.

        I have only said that if Taxation comes with such detrimental costs and no financial benefit, why would any nation choose Taxation over Borrowing? Only a moron would argue that an accruing debt should be paid off when the cost of paying it off is massive and the return is zero. But that is what you are in effect arguing.

        So there goes your argument.

        GM

        CommentedThomas Quimby

        Government has funds under its control. Bank accounts, Fort Knox, those kinds of things. Government pays government employees from these resources that are at its disposal. Government replenishes these accounts somehow, for instance by selling bonds or taxing. When it sells bonds it acquires debt; the treasury is obligated to pay back money to the holder of the bond according to the terms of that bond.

        Government may have a dandy time selling lots of bonds now, but they wouldn't if they didn't have some form of collateral. Government right now has the power to tax in order to repay its debt; its collateral is in principle about as big as the size of the economy itself because it has the ability to draw from private assets to the extent that policy demands, when push finally comes to shove. U.S. government bonds sell because the U.S. has a record for not defaulting, and because it's a wealthy nation with a large collateral reserve. Some countries at some point in history haven't been able to sell much in bonds, even if they really wanted this sort of ouctcome.

        A government that doesn't tax does not have the same sort of access to private funds, and thus does not have the same level of collateral, and thus cannot expect to borrow as freely.

        And don't give me this bullshit about producing the benefits for you. I've already done this at length. Item I was there as a summary of the position that I had been arguing; the benefit of taxation is the ability to ensure sufficient funding of desirable programs. Do I need to make you reread my argument and summarize it in your own words? You did the same to me, recall...

        And when you do bring up a point and intimate that it somehow invalidates my argument, I have a right to address that point. If you think that the point is not relevant to my argument then don't represent it as such.

        Respectfully...

        CommentedGary Marshall

        Hello Thomas,

        This is a pretty simple matter.

        You have said that there are benefits to Taxation that surpass all its costs in collection, deterrence and government squander.

        Now what the hell are those benefits, financial or otherwise?

        To say that a system of borrowing does not work is no answer is a fatuous thing to say. Especially, when governments can borrow very easily, even in the worst of financial circumstances.

        So get to work and produce these elusive benefits.

        And by the way, how does government pay for stuff?

        CommentedThomas Quimby

        Gary, are you deliberately being obtuse, or are you just flailing at everything in sight without trying to check that your own ideas are reasonable?

        Let's address one point at a time. I don't heed your "admonishment" that government has no assets or liabiilities because under a normal description of government activity, you are flat out wrong. Government is an agent of the community, yes, but it's also an agent that operates within the community and interacts with other agents that have different goals. It's a participent in the economy, and yes, I'd say that it does pay for stuff. When government implements a government project, it arranges financial compensation for the people supplying resources and services that further the project. The police draw their paycheck from someone, right?

        CommentedGary Marshall

        Hello Thomas,

        What exactly are you doing?

        You are supposed to come up with the financial benefits of Taxation. And what is it that you give me?

        I see no benefits, financial or otherwise. I see an absurd series of assertions that a nation cannot borrow from itself.

        We now see the nation's bonds garnering the lowest rates of interest in history when the wealth of the nation is under assault. Yet in a nation far wealthier, productive, and industrious, with government participation in the economy reduced to a fraction, with far less demands on the financial resources of the nation, you argue that bonds shall go begging for buyers.

        This is your benefit of Taxation. Everyone will lend to a poorer nation burdened by excessive Taxation and government domination of the economy, but none will lend to a far wealthier nation unburdened by Taxation, with government a small shade of its former self.

        Incredible!

        Then you repeat an error without heeding my admonishment.

        "The Government has no assets and liabilities. It is merely the agent for the nation. It conducts the nation’s public business for the benefit of that nation. The Government has no assets because it pays for nothing. It has no debts because it contributes nothing to paying off those debts. It’s the people and firms of a nation that have all the assets and assume all the liabilities."

        So stop talking as if it were the government borrowing funds for public expenditures. It is the nation. Get it right!

        So this imagined inability to borrow in the financial markets 50% or less of those funds formerly plundered by the government for worthy purposes free from squander and without the deterrent effect of Taxation is the foundation of your argument.

        A singularly pathetic and erroneous argument it is.

        GM

    4. CommentedGary Marshall

      Hello Thomas,

      You may say what you like. That is not what I said. If you are in some confusion about this, go back and re-read the proof.

      Where throughout this entire discussion did I say that the costs of Taxation are nil? Is there something wrong with you?

      I said there is no financial benefit for a nation using Taxation to fund public enterprise, however there are great costs with Taxation that borrowing does not have.

      If the financial benefit of Taxation is zero and the costs are incredibly high, then why Tax?

      GM

        CommentedGary Marshall

        Hello Thomas,

        Its up to you to demonstrate that the benefits of Taxation, financial or otherwise, outweigh its immense costs.

        My proof falls apart if the financial benefits of Taxation are greater than the financial costs of Taxation. I have proven that the financial benefit of Taxation is zero because the cost of Borrowing for a nation is zero. I didn't have to reach that far, but I did. None have ever been able to shake this claim. They have never been able to demonstrate that this burden, this penalty on the nation, which comes with monstrous costs, has a benefit financial or otherwise for a nation. Perhaps for a brutish despot. Perhaps for a murderous tyrant. Perhaps for the leaders of a hellish recess. But not a democratic, civilized and prospering nation.

        You have had that opportunity for some time now. And yet the financial benefits of Taxation that you claim exist seem elusive.

        So where are they? Now is the time to put up or shut up!

        GM

        CommentedThomas Quimby

        Gary, from the standpoint of deductive proof that you seemed to start out with -- offering money to anyone who can find the flaw -- I don't really need to offer a proof of the opposite claim to show that your proof is wrong. There can be incorrect proofs of claims that are nonetheless true.

        If it's by the criteria of deductive proof then I'd say that I've already won -- that is, unless you are prepared to clearly exhibit a set of nonobjectionable premises, a set of nonobjectionable and consistent rules for operating on the premises to make new premises, and a sequence of steps where you apply the rules onto the premises to get new premises, until you've produced the desired claim -- and to identify this as your $50,000 proof. As long as the assumptions and the rules are acceptable and they are consistent -- meaning, you can't use them to prove that something is both true and false -- then you're golden.

        As much as I'd like to in some sense, I don't see it as fair to try to hold you to that kind of deductive standard, however. It may not be what you meant by proof, and if it's not what you meant then I can't hold you to it.

        But if we go away from pure deduction and into a less rigorous realm of 'proof', I expect that the standards for deciding whether your proof is or isn't correct should be fair. If we want to hinge it on the weight of costs versus benefits, then I only need to plausibly demonstrate that there are at least equally 'immense' costs involved in trying to fund exclusively through borrowing, using roughly comparable standards of plausibility and immensity as you use in your argument in pointing to costs associated with taxation.

        I'd argue that as in the deductive case, I don't really need to show that your claim is false, only that the path to it is not sufficiently reliable. According to a certain standard of 'immense', you argue that the scales comparing the costs and benefits of a governmental taxation policy vs. a government borrowing policy are immensely imbalanced, AND that they are imbalanced in favor of borrowing. I don't necessarily need to add weight to the balance so that it's overwhelmingly in favor of taxing, though obviously I'll try to add as much weight as is plausibly possible; I only need to add equal weight to taxation so that the scales are approximately balanced and we're unsure which way it tips. Then it cannot be proven beyond reasonable doubt taxation policy is unilaterally worse than borrowing policy.

        Does this sort of standard seem reasonable to you? I'm not necessarily 'proving' that your claim is demonstrably false -- least of all in the sense of deductive proof; I'm 'proving' at least one significant and plausible flaw in your argument: some major oversight, such as an inadequate accounting of the benefits of taxation.

        CommentedGary Marshall

        Hello Thomas,

        I didn't get sidetracked. You seem incapable of admitting to anything.

        There are no financial benefits or qualitative benefits to Taxation. Now you say that there are, yet you provide nothing of substance. So provide something of substance. Explain how funding by Taxation, which makes a nation grossly poorer, ensures a supply of funds whilst borrowing, which makes a nation so much wealthier, does not?

        If you make a potent argument, and you confirm that these supposed financial or qualitative benefits far surpass Taxation's massive costs, then you win.

        So argue away.

        GM

        CommentedThomas Quimby

        Your argument so far doesn't eliminate the possibility of benefits that outweigh the costs. I think we're agreed on that at this point.

        My top-level complaint, remember, is that your 'proof' is not legitimately something that could be called a proof. You're not really making much of an effort to produce something that starts with indisputable premises and proceeds by the application of indisputable rules (such as those of mathematics and logic) to its conclusion. Therefore the argument is open to dispute on either the premises, the way conclusions are drawn, or both.

        Were you with me when I was trying to articulate the benefits to you? Namely, that taxation ensures sufficient funding while a system of competing for loans in an efficient free market cannot? We got sidetracked because of your concerns that somehow I was failing to understand your arithmetic or something.

        You made two monstrous posts and the recent batch of conversation was in response to the second one. Are we ready to resume that discussion about what the hell the benefits are? I understand it's been a while so I can give a brief summary of the argumentative path before proceeding if you like; that may be a good idea, regardless.

        CommentedGary Marshall

        Okay Thomas, whose proof is this? Yours or mine?

        How old are you?

        Right now we are talking about financial costs of Taxation. You have argued that I pretty much said 'there are no financial costs/benefits either way."

        I never said that. Your argument is wrong. So are there costs to Taxation? The answer is a big fat yes. Just in collection alone there are massive costs. The IRS is everywhere for a reason.

        So if the costs are great and the financial benefits are nil, then why Tax?

        You argue that Taxation has benefits. Well, what the hell are they? What are the financial benefits of Taxation? What are the qualitative benefits of Taxation?

        I know of none.

        GM

        CommentedThomas Quimby

        Because the benefits that you fail to account for in a complete analysis of the economy can outweigh the costs.

    5. CommentedThomas Quimby

      Did a double-inversion there, my mistake.

      You say that there are no financial benefits of taxation over non-taxation.

      I'd also say that you mean that there are no financial costs/benefits either way. If the analysis with situations 1 and 2 is sufficient to show that there are no additional financial costs to the community when the government borrows T, it works just as well in saying that there is nothing worse about taxing, at least with respect to the community finances.

      A) still doesn't logically follow.

    6. CommentedThomas Quimby

      This is the structure of your argument in the first post. I assume that everything that follows is meant to be part of the proof:

      You say, consider two situations:

      1) Government taxes an amount T from the citizens and spends it. T goes from the citizenry to the government, and from thence according to government's spending plan.

      2) People buy government bonds of amount T. As before, T goes from the citizenry to the government, and from thence according to government's spending plan. Also, government holds bond liabilities and the citizens hold a total in bond assets of equal and opposite value to the government's liabilities. These bond assets and liabilities sum to zero, and the other assets and liabilities are the same as in situation 1) Therefore the sum of assets and liabilities should not change if we substitute the transactions of 2) for those of 1)
      Put succinctly, when we look at the financial transactions in the nation, the nation is effectively borrowing and lending, taxing and being taxed by itself: it doesn't lose anything because it's merely giving things to itself from itself.

      But, you say, taxing results in additional costs in situation 1), for example by disincentivizing productivity, so therefore we should change government policy by abolishing Taxation, effectively switching from situation 1) to situation 2)

      Is this acceptable to you? I don't really see any need to point out that in theory government might be able to instate a tax that will pay off accumulated debt because your conclusion specifies that government should never ever tax. If we take your advice seriously and abolish taxes forever, then we can't consider instituting a debt-paying tax as a real possibility any longer.

        CommentedGary Marshall

        Hello Thomas,

        Where did I say in the proof that the financial costs of Taxation are nil?

        GM

        CommentedThomas Quimby

        Your conclusion,

        A) For any relevant nation, the nation's Community will generally benefit by abolishing taxation.

        does not logically follow from the supporting premises, that:

        B) The financial costs of taxation are nil.

        and

        C) There are costs of quality associated with taxation.

        You aren't really able to prove something, here, with just these supporting ideas. You probably aiming at a supporting claim that people would probably accept as logically equivalent to your conclusion:

        A2) For any relevant National Community, the total costs of taxing outweigh the total benefits of taxing.

        The problem is that people aren't necessarily willing to accept that idea as a premise, a true statement about the world. You are trying to justify this premise, to convince people to accept this sort of statement as true, right?

        CommentedGary Marshall

        Hello Thomas,

        I am going to make a distinction here because I know how quickly and how far off the rails you can go if you should misunderstand even 1 little item.

        The issuer of the bonds is the Community, not the government. The government is merely the agent, appointed by the Community to perform its bidding. So they are municipal bonds, of which the obligation is to be settled by the Community, specifically its members.

        The Community incurs a debt through the issuance of the bonds. The Community acquires an asset because certain members of that community now hold the bonds issued.

        With Taxation, there is a transfer without the creation of a community asset or liability.

        With Borrowing, there is a transfer with the creation of a community liability in bonds issued and equivalent community asset in bonds held.

        If at some point in the future a theoretical, meaning never to happen and only mentioned to illustrate a point, settlement of all outstanding debts were to occur, the government would collect all the money owed by the community from its varied members. The community members' bank accounts would go down while the Government's went up. The Government would then transfer the money back to the community members, its bondholders, leaving the Government's account down and the community members' bank accounts back up.

        This little exercise is only to illustrate that there will be no change in the amounts in the community members' bank accounts in the aggregate, and all bonds, assets and liabilities, shall perish.

        What the result of this theoretical transfer means is that there is no financial benefit in using Taxation. The 2 methods for raising funds are equivalent in terms of outcome. In both instances, $10 million goes into the government's account, and the assets and liabilities sum to zero. 0 and 0 for Taxation. x+y and x+y for borrowing.

        So why tax when you can borrow for nothing? On the face of it, one can do both.

        The costs of borrowing in terms of the administration of public debt will be negligible.

        However, the costs of Taxation are enormous through government squander and collection, as well as through Taxation's punitive effect upon the Community's economy.

        You got most of that except for the purpose of the theoretical transfer and the entity actually issuing the debt.

        What in this proof do you agree with and what do you disagree with?

        Don't ask me about a comet or the nation's money supply. That's not in the proof.

        And if you say that I abolished Taxation and then re-introduced it, then you completely missed the point of that exercise.

        GM

    7. CommentedThomas Quimby

      Gary, it's nil in the sense that you've outlined it and in the way that you've defined the 'financial position' of the nation. I dispute however that 'financial position' as the sum total of the value of everyone's money, loans, bonds, etc to each other means anything in particular about the actual wealth of the nation.

      In other words, it's not the arithmetic that is wrong but the conclusions that you draw in interpreting the meaning of that sum in regards to the efficacy of government policy. The financial transactions sum to zero only because they are transactions; they account for how wealth is shifted around within the economy, but not for the processes by which wealth is created or destroyed. B's spending is a place where wealth is potentially created or destroyed, but you pooh-poohed that away...

      Do you really want to belabor this point? You are making a fool of yourself if you are asking me to find a reference to the idea that the total sum of bond assets and bond liabilities held by every entity in a closed economy is zero.

        CommentedGary Marshall

        Hello Thomas,

        No. Not even now do you understand the simpleton's proof. Good God!

        Maybe you should stop the tongue wagging while understanding is still elusive.

        Let me repeat it for you for the 1500th time. The financial benefit of Taxation is nil. Why? Because the cost of borrowing for a Nation is nil if it borrows in a certain way.

        How old are you? Have you graduated from high school yet?

        What you should do is go and read through the simpleton's proof. Do it slowly, very slowly, and do it a number of times. 5 times may not be enough. In fact, try and memorize it. That way you won't keep looking like the back end of a donkey.

        There are no financial benefits to Taxation. You argue that it may possess some advantages of quality. I really doubt it. Well, it may have certain of those advantages were one a dictator or an ignorant brute. You may very well be correct in regards to them.

        GM

        CommentedThomas Quimby

        And Gary, it's rather, um, projective of you to accuse me of holding an opinion that no one else seems to share...

        The fact is that many people DO share my general opinion that there are some benefits to taxation, and also our mutual opinion that taxation has some costs associated with it.

        If the fact that I alluded to earlier parts of my argument didn't tip you off, I only stated my raw claim, a quick summary of the benefits of taxation; I'm getting tired of rephrasing the argument against what seems to be a bullet-spray of largely irrelevant ounterclaims, so am holding off for the moment until you want to proceed with the body of the argument.

        CommentedThomas Quimby

        Taxation has immense costs, you say, but clearly you can't mean that these are financial costs, because you've shown that the financial costs/benefits are nil. If you've admitted that there are non-financial costs to a policy of taxation, don't we then need to consider the possiblity of non-financial benefits of a policy of taxation?

        CommentedGary Marshall

        Thomas,

        If the financial cost for a nation borrowing from itself is nil, then Taxation has no financial benefit.

        You earlier said this,

        ###
        If it's the arithmetic and the idea that financial contracts create paper assets and paper liabilities that sum to zero, then the conversation is over. That idea is completely trivial, and I would have accepted such a basic observation about bookkeeping without proof, in no small part because accountants are generally already aware of it. It hardly seems worthy of proof.
        ###

        And this

        ####
        If the corporation is only interested in the market value of the assets held, and it regards the accounts of A, B, etc equally as assets, then...

        On transferring wealth between A and B, there's no change.
        Similarly if it's a change of contracts for wealth (loans and lending), there's no change.
        ####

        So we have a situation in which you have agreed that if the Nation or the Corp borrows from its own, then there is really no cost to that nation because as you say the assets and liabilities add to zero.

        You have admitted to the conclusions as stated in the proof. That is clear from above.

        Taxation has no financial benefit. So what is your problem now?

        Do you claim that the result is different for one corporation and not another? That this simpleton's arithmetic applies to every situation save those involving public corporations?

        When you get your head straight on this simpleton's arithmetic, come back and see me.

        I'll answer it for you. Of course Taxation has immense costs. Jesus, how many plants do not get built or are built elsewhere because of the differing rates of Taxation. Taxation by its very nature is a penalty. And one imposes penalties to deter, to punish. So if one is punished for earning, consuming, investing and saving, then one does less of them, none of them, or does them elsewhere.

        And because government can just take money by force of law and do as it pleases, there are a host of very costly programs, regulations, and much mercenary behaviour that do great harm to the wealth of citizens and corporations.

        There are massive costs in Taxation. That is why there is an IRS. That is why their are tax attorneys and accountants. That is why there are Swiss bank accounts. That is why there are large sums of money, the foreign profits of US corporations already taxed in those nations, sitting idle in foreign bank accounts because they will be taxed again on entering the US. That is why there are tax enforcers and collectors. That is why there are tax courts and jails. A tax revolt is what the US was founded upon. Ask the British what the loss of the US cost them on the matter of Taxation. That is why there is a massive underground economy in which many firms and people have left the tax system and operate without it.

        So if the benefits of Taxation are nil, and the costs of Taxation are immense, then a nation to enrich itself immensely should borrow.

        But the simpleton's arithmetic doesn't work for a public corporation, does it Thomas? But the fact of the immense costs of Taxation does not register, does it Thomas?

        No. We must have Taxation because it has unseen benefits, which only Thomas seems aware of, that far outweigh its detrimental influence on wealth.

        Grow up, will you!

        GM

        CommentedThomas Quimby

        Gary, I was asking to clarify the terms describing what we've supposedly 'proven' so far before proceeding: you said that we've proven that the financial costs of taxation to the nation are nil, and I wanted to clarify that we're on the same page about what we mean by the nation's finances before continuing . It's perfectly reasonable to do this, especially since you don't seem to be knowledgable about the language of economic theory, and thus seem liable to understand the words that you use in an idiosyncratic way that is NOT clear. You are supposed to be the prover, to have it all ready in your head and ready to explain to the experts. Be rigorous about using your terms precisely; part of that is explaining what you mean by your key terms when asked.

        It's fallacious to assume that because taxation has costs, taxation should be abolished. If taxation brings some benefits over the alternative, the benefits can outweigh the costs. I assumed that you were aware of this need to weigh both costs and benefits of taxation and that you were not mired in the falllacy, so when you reiterated the demand to explain what the costs of taxation are I assumed you understood that only the net costs are important and went on to describing the sort of benefit that a system of taxation can bring. A bit presumptive of me, and I apologize.

        But do you agree with this idea? If there are benefits to taxation which outweigh the costs associated with corruption and tax collection that you've done an excellent job of mentioning, would taxation then be beneficial?

        CommentedGary Marshall

        Hello Thomas,

        That is not an answer to the questions posed. You again have chosen to move completely off topic. You are right back to defending Taxation. I do not care about your opinion on the supposed benefits of Taxation. What you say is debatable and quite wrong. Governments at this time are borrowing great sums of money for the most worthless projects going.

        So I urge you to go back and review the questions on the costs of Taxation. Then provide a few answers. Show a bit of maturity here.

        GM

        CommentedThomas Quimby

        There are benefits to having a government that can coerce money out of the market.
        Government can implement worthy projects that the market would not voluntarily fund. To forgo these benefits by abolishing taxes and relying only on the voluntary funding of goverment is costly.

        Have you been following my line of argument at all? We are back to the original ground.

        CommentedGary Marshall

        Thomas,

        Its a very simple series of questions.

        I don't care about the nation's finances at this point, or comets, or the wealth of Leprechaun land. I want to know what the costs of Taxation are. We know the benefits are nil because the Nation can borrow from itself without cost. This you have admitted as something every simpleton must know. If Taxation has costs, then the nation is poorer by using Taxation, and there will be no need for any further discussion.

        Now answer the questions in my previous post regarding the costs of Taxation. Then I shall be more than happy to answer yours.

        GM

        CommentedThomas Quimby

        Define 'national finances' for me and tell me what could cause them to go up or down. I'm still concerned that you are conflating to separate ideas under the same phrase.

        I can contexualize this with a question if you like: suppose for instance that a comet strikes the planet and destroys a substantial part of the industrial infrastucture.

        A) have the national finances changed as a result of this?
        B) has the wealth of the nation changed?

        CommentedGary Marshall

        Hello Thomas,

        So there is no paper that has outlined this scenario in public finance, as far as you know, besides this one perhaps. There is no general agreement among economists that the financial benefits of Taxation are nil. All you have is a series of assets and liabilities that sum to zero.

        Fine.

        So we have a proof that the financial benefits of Taxation are nil. There is no difference to a nation's finances if it borrows or it taxes. Is this correct?

        Now, I really don't want you running off here into all sorts of irrelevant or secondary issues. I just want you to stay on track here. Okay Thomas.

        Now if the proof is correct and you admit so, then I would like to know what the financial costs of Taxation are. Because if the costs of Taxation are any more than zero, then why would a nation Tax to fund public expenditures when it can borrow from itself for nothing?

        So what are the costs of Taxation?

        I allude to two general costs. Firstly, deterrence. Secondly, government waste, corruption, intrusiveness, etc.

        Is there deterrence? And is there squander, under which I include corruption, needless regulations, tax collection, etc?

        The ball is in your court.

        GM

    8. CommentedThomas Quimby

      There's paper money or nominal wealth, Gary, and then there's the actual wealth that it brings: the actual goods and services that the money can buy. Loans don't alter the total amount of wealth in terms of bookkeeping or the paper money supply, but like any financial transaction, they may lead to good or ill for the nation. The actual wealth of the nation is not formally neutral about the way in which the money is spent, or about the quantity of funding supplied through loaning to fund a given project, though in terms of nominal currency or accounting it may not matter.

      Give me a clear correspondance between A, B, etc and the nation and its citizens. In the A,B, etc situation we made some stipulations simply as part of defining the situation. I don't necessarily agree that we can make those assumptions about the analogous parts of the nation, and if you can't make them then your attempt at analogic reasoning is invalid.

        CommentedGary Marshall

        Hello Thomas,

        No. First thing's first. Where did you find out so long ago that the financial benefit of Taxation is nil for a nation? Just cite the paper that exposed all this information. This will be great news for all those current economics practitioners and thinkers. It will also be news to peoples the world over. They thought they had to pay tax to fund government expenditures. No one ever told them that Taxation carries no financial benefit.

        So please do enlighten us, Thomas. Tell us where you found this idea. Not even Keynes or Adam Smith admitted such a possibility. But this ancient idea must have come from somewhere.

        Here I am going on at people trying to prove something that has already been proven.

        Then I shall continue on with your absolutely absurd idea that given a choice people would rather pay tax to fund government.

        GM

    9. CommentedGary Marshall

      Hello Thomas,

      I said previously,

      ###
      A agrees to give B the money. A is out $50,000, B is up $50,000. Has the financial position of the corporation changed? Is it worth less than it was before?
      ###

      Now you admit there has been no change in the financial position of the corp if the money remains with A. True. So on this one transaction, you admit that nothing has changed.

      Now B is going to spend the money and it will leave its bank account to pay for goods worth $50,000. The corp will pay out $50000 to acquire goods of $50,000 -- a different transaction altogether and one I am not interested in. I am only interested in the financial transfer from A to B. On are we agreed that nothing has changed in the corp's financial position? Yes or No?

      ####
      Now lets say that A agrees to give the money to B, but as a loan at some rate of interest. The money transfers from A to B. A registers an asset of $50,000 plus accruing interest. B registers a debt of $50,000 plus accruing interest.
      ####

      Has the financial position of the corporation changed?

      B will spend the money taking in good worth $50,000 for the $50,000 paid out -- again a different transaction that does not interest me.

      I only wish to know if the financial position of the corp has changed with the dealings of A and B. Is the answer Yes or No?

      ####
      If B subsequently goes out and collects the amount of the outstanding debt, say $75,000, from all of the other bank accounts in the corporation and transfers it to its own, has the financial position of the corporation changed? Yes or No?
      ####

      ####
      If B pays out A the $75000, erasing the debt of B and simultaneously the asset held by A, has the financial position of the corporation changed? Yes or No?
      ####

      If you answer yes to all the above, then you agree with my proof. If you answer with one or more nos, then you do not.

      So, how many affirmatives?

      GM

        CommentedGary Marshall

        Hello Thomas,

        I just caught the end of your post there in which you now admit quite freely to something that I have had to literally drag out of you. You know that little accounting measure everyone knows wherein the financial benefits of Taxation are nil.

        Did you say tat any point in the past that you admitted to the proof? I don't recall you ever doing so. Would you just point up the admission so I don't think myself bordering on some mental illness. Just point out where you said the proof was valid?

        So I take it you now admit that in regards to my proof, the costs of borrowing are nil for a nation if it borrows from its own citizens. Great.

        Now you have said that people would rather pay a penalty or give a portion of their property rather than lend money to the government for a return of both principal and accrued interest. Is this correct? Is it correct that people would rather give away large fractions of their income, consumption, and savings to an organization rather than keep it for themselves?

        Yes or no, Thomas?

        GM



        Now we can move on to whether or not this is actually feasible.

        CommentedGary Marshall

        Hello Thomas,

        No. I asked you to follow the arithmetic. Now, on the matter of A, B, and the Corp, you followed it quite well. In fact, you said

        ###
        On transferring wealth between A and B, there's no change.
        Similarly if it's a change of contracts for wealth (loans and lending), there's no change.
        ###

        When I changed the names of A, B, and the Corp somewhat, you fell apart. You start introducing all sorts of extraneous factors like total amount of money in circulation and the like. You start bringing in terms like the real world and the like, as if it is so different from what I have presented.

        What happened to you, Thomas. So close and yet so far.

        What a shame. When you man up to the scenario, then perhaps we shall talk again. Until then, there is little to be said.

        GM

        CommentedThomas Quimby

        Gary, I didn't agree with every step. You didn't fill out your assumptions completely about what the 'financial position' of the company is supposed to be, so I had to fill them in for you. In that scenario there are assumptions made that don't automatically apply when you are considering nations and best policy.

        Perhaps you've demonstrated something like this: if the 'financial position' of a country is defined as the total amount of money in circulation, and you compare a scenario in which someone borrows money and spends it on something and somehow succesfully takes money away from other people and then repays the loan with that money, then there's no change in the 'financial position' of the country; provided of course that this sequence of events doesn't cause government to change the money supply. What you've proven is so trivial and constrained with assumptions that it's not worthy of the sort of claims you make for it:
        A) it's not an astounding new fact that has never been thought of before
        B) it has almost no application to the real world.

        When you say "There is no difference financially for a nation if it borrows or it taxes to fund government expenditures," I'm inclined to interpret the terms so that they apply meaningfully to the world. The people in the nation can decide whether government taxes or borrows to get $X, I guess, but only in the trivial sense that that scenario can be built by specifying certain choices of the people: the people in government choose to change policy in such-and-such a way so that government stops taxing and starts selling more bonds, and the right number of people step in to buy the bonds which fund the given expenditure The financial position doesn't change in the sense that the total value of IOUs plus UOIs remains constant but this is a very trivial notion of financial position that is somehow only concerned with constancy of the money supply, rather than the actual wealth and welfare of the nation.

        I really THOUGHT you were trying to prove something reasonably novel and of meaning to the world. I thought that the claim that you sought to prove was that it would be effective policy in a free market economy for government to abolish taxation and rely on the market to supply loans in order to fund its expenditures, that such a maneuver would be beneficial to the people in the nation, on the whole; that there's nothing that a tax-funded government can't do that a market-funded government can't do better.

        And I of course have been busily arguing against that claim, the one that seems to have actual implications for the world we live in.

        To really argue something interesting about government policy you need to analyze the market as a market. This means that you can't assume that people make whatever choices you want them to make; they only make the choices that are rational to them. Government, in deciding its policy in a free country, does not have unlimited ability to decide how people will respond to that policy in the marketplace. Therefore the success or failure of government policy depends in part on what the market response to that policy is. Government may predict the market response if it has the right expertise and it may decide what government policy will be, but it can't decide what the market response to a given policy will be.

        So are you taking the high road or the low road? Were you trying to convince people that abolishing taxation was sound policy and so convinced of your idea that you were willing to offer cash to anyone who can reasonably discredit such a policy -- or are you proving something completely trivial, and disconnected from reasonable efforts to predict something about the behavior of the nation in response to a change in government policy?

        If it's the arithmetic and the idea that financial contracts create paper assets and paper liabilities that sum to zero, then the conversation is over. That idea is completely trivial, and I would have accepted such a basic observation about bookkeeping without proof, in no small part because accountants are generally already aware of it. It hardly seems worthy of proof.

        CommentedGary Marshall

        And Thomas, don't forget to provide your reasons for the failure of the arithmetic. Show me where accruing liabilities fail to match accruing assets.

        GM

        CommentedGary Marshall

        I see. So we work through the entire scenario with lettered entities, and you agree to every step. When I change the names of the entities, you agree to every step but the last.

        So the proof fails because you offer an opinion that such a scheme cannot work. I didn't ask you your opinion as to whether the scheme was feasible for a nation. I asked you whether or not there is a difference financially for a nation if it borrows or taxes to fund its public expenditures based purely on the arithmetic.

        So what is your answer?

        GM

        CommentedThomas Quimby

        Can't even agree with that claim, Gary. Any reasonably atruistic nation cares about more than the total amount of money available. It cares at least about economic size. Unlike the hypothesized scenario that you give with A, B, C, etc and a company, government cannot automaticaly rely on getting the loans that it needs to maintain cashflow on worthy projects.

        CommentedGary Marshall

        Hello Thomas,

        So, you then agree that the proof that I have offered time and again on this site is correct. There is no difference financially for a nation if it borrows or it taxes to fund government expenditures.

        Do you agree?

        Then I can deal with the rest of your argument.

        GM

        CommentedThomas Quimby

        Nations, when they tax legitimately, tax for a few reasons. One is as an extention of police power; government may decide that it's more efficient to discourage such-and-such an activity by fining it or by levying a tax, rather than directly spending money on causing misery to the person doing the bad thing.

        The other reason why government will tax is as a matter of gaining revenue. The government has a spending project in mind and it can prove that it will result in benefits greater than the costs, but if this is a communal project of the tragedy of the commons sort, people don't see their own personal sacrifice of resources in the name of the project as beneficial to themselves, only everyone else's. If people are asked to volunteer to pay for part of the project, practically no one will. Government can come up with a tax plan that would pay for the project and result in benefits for each person that outweigh the costs in taxes that that person pays in, and because this tax scenario benefits each person more than the no tax scenario in which no one gets to enjoy the benefits of the project, no person would prefer this tax scenario to the no tax scenario; in other words, people are willing to voluntarily pay their part of the tax plan ONLY IF doing so compels other people to pay their part.

        Individual citizens will have different preferences for the tax plan; the rich will want lower taxes for the rich and for the middle and lower classes to pay higher tax rates; people with children tend to prefer tax credits for having children, and so on and so forth. There are potentially many tax plans which would give each person benefits outweighing the cost in taxes, and it would take some additional procedure in government for deciding which of these tax plans is 'fairest' for the nation as a whole. But compared to no tax plan at all, each person will accept whatever tax government decides on that meets these conditions of leading to a better outcome than the voluntary situation in which none volunteer.

        CommentedGary Marshall

        Hello Thomas,

        So there is no financial change between the bank accounts in the corporation involving these financial transactions. Great.

        I am not interested in the subsequent transactions that B undertakes. They do not form part of my proof.

        Now if we let B be the Government and its financial account. And we let A be a joint account of all taxpayers, or citizens and corporations. And we shall let the combined assets and liabilities of all be the corporation known as the Nation, then explain to me how any of this is different from the previous explanation.

        B, the Gov, wishes to raise capital for public expenditures. It can tax or take the money from A, the citizens and corporations, or it can borrow from them.

        If the Gov taxes or takes the money, then A is poorer by X and the Gov is richer by X, leaving no change in the Nation's finances.

        If the Gov borrows the money from A, then A holds a bond for the amount borrowed by the Gov with accruing interest. The Nation incurs a debt in the amount borrowed with accruing interest. A is poorer by the amount borrowed and the Gov is richer by the amount, which leaves no change in the nation's finances.

        If at some point in the future the nation decides to settle its debts, all the debt and accruing interest is collected by the Gov from A and then handed back to A. The bonds, asset for the lenders and liability for the nation, perish.

        Have the nation's finances changed in the aggregate? The Nation's bonds, assets and liabilities, annihilate each other. A suffers a loss at the same time it suffers a gain, leaving them no better or worse off.

        Don't bring in irrelevant issues about what the Gov did with the money, my friend. That portion of public finance does not yet interest me. This is a revenue question, not an expenditure question. I am only interested in how the government fills up its money bag, not how it empties it. What you are attempting to introduce are transactions that have no effect on what has occurred just now between A and the Gov with respect to raising funds for public expenditure.

        If you agree that there has been no change in the nation's finances, then you must agree that borrowing by the Gov from A will not alter the nation's finances in any way. Pick a point at any time in the future, and the nation's accruing assets will always equal the nation's accruing liabilities.

        So if borrowing does not alter the nation's finances at all, why do nations tax?

        GM

        CommentedThomas Quimby

        If the corporation is only interested in the market value of the assets held, and it regards the accounts of A, B, etc equally as assets, then...

        On transferring wealth between A and B, there's no change.
        Similarly if it's a change of contracts for wealth (loans and lending), there's no change.
        But when B goes and spends the money... there can be a change. Not everything is a financial investment that grows and grows financially, my friend; very important things such as food are simply consumed. You can assume that B only gets capital investments of equivalent value to the $50000, but then you are potentially preventing it from getting certain types of very worthy things.
        If B manages to collect money from accounts C, D, etc (how does it manage to do this?) and puts it into account B, then again, no change in assets held 'overall'.
        B pays back the current value of the loan obligation to A, in exchange for ending the obligation of the loan: again this is just a financial transfer within the company: no change from the company's point of view.

        Maybe you didn't see the question from the bottom of the previous 'segment' but could you please clarify the exact claim that you are trying to prove? Probably just an indicative sentence or two would be sufficient.

        CommentedGary Marshall

        Sorry Thomas,

        In the second paragraph the sentence should be,

        ###
        there has been no change in the financial position of the corp if the money remains with B
        ###

        and not 'A'.

        GM

    10. CommentedThomas Quimby

      Gary, I'll withhold from commenting on your first response until we're clear on the second. It's easy to check that these maneuvers (assuming that they are actually possible) only transfer money from account to account, so they don't directly affect the total amount that the corporation holds in the accounts. Assuming that these are the only transactions, and that B, for instance, does not withdraw the money in order to spend it...then yes, it's reasonable to say that the corporation has not changed it's overall financial position.

      More precisely, comparing the trasfers that you describe with a situation in which A, B, etc, don't touch their accounts, the total amount in the accounts will not change. At each step of the process where a transfer of money takes place between one account and another, the total corporate holdings don't change; they wouldn't change if A simply forgave B's debt, either.

    11. CommentedGary Marshall

      Sorry. I saw that you did answer my question about government financing its debts.

      So, if you are correct, government liabilities decline over time. And when have government liabilities ever declined over time?

      Well, Thomas, they never have. The US government like them all always counts on selling more bonds to replace those retiring. It is one gigantic and perpetual rolling over of old debts.

      I asked you before. Why do you wish government to perform some feat that it has never performed before?

      GM

        CommentedThomas Quimby

        Gary, what exactly were you claiming to prove in the first place, then? Could you be precise?

        CommentedGary Marshall

        Thomas,

        I am going to put this into the simplest terms possible. All you have to do is answer yes or no.

        Suppose you have a corporation with many bank accounts. In one bank account, say A,there is $50,000. In another bank account, say B, there is nothing.

        A agrees to give B the money. A is out $50,000, B is up $50,000. Has the financial position of the corporation changed? Is it worth less than it was before?

        Now lets say that A agrees to give the money to B, but as a loan at some rate of interest. The money transfers from A to B. A registers an asset of $50,000 plus accruing interest. B registers a debt of $50,000 plus accruing interest.

        Has the financial position of the corporation changed?

        If B goes out and collects the amount of the outstanding debt, say $75,000, from all of the other bank accounts in the corporation and transfers it to its own, has the financial position of the corporation changed?

        If B pays out A the $75000, erasing the debt of B and simultaneously the asset held by A, has the financial position of the corporation changed?

        Now don't start telling me that B could never have borrowed from A because B is just not worthy enough, or that it can't justify the loan, or A doesn't like B. I am not interested. I just wish to know if the arithmetic adds up.

        If the arithmetic adds up, then that is all that I have said in my proof.

        GM

        CommentedGary Marshall

        Hello Thomas,

        Do banks when they offer rates on bonds to prospective lenders review the rate of GDP growth and act accordingly? I don’t think so. I understand what you are getting at, but this has more to do with the expected rate of return rather than growth in GDP. Similarly with the nation.

        The Government has no assets and liabilities. It is merely the agent for the nation. It conducts the nation’s public business for the benefit of that nation. The Government has no assets because it pays for nothing. It has no debts because it contributes nothing to paying off those debts. It’s the people and firms of a nation that have all the assets and assume all the liabilities.

        I really do not understand why people continue to speak of an entity that contributes nothing to paying its bills and settling its debts as being in some way sovereign and independent. A government is not. Any government is not. So in terms of public debts, you really should stop speaking about the government. Its the nation that satisfies those debts, not the government.

        So when you say none will lend to the government, you are correct because none have ever lent to the government. They have lent to the nation, its people and firms, their combined worth, for their benefit and at their cost.

        When the government borrows, it is not making a profit on those loans. The people and firms throughout the nation are making the profit. They are the ones in receipt of the returns on the building of new roads, better schools, better public health services, lower government expenditures, lower regulations, assistance to the unemployed, police, courts, the protection of property, and general lawfulness.

        So if a better road, lower costs in damage to vehicles and speedier times of transit, which lowers the costs or time in transporting people and goods, making the community wealthier, were built, one would have to estimate the costs in construction and debt to the community against the accruing returns on that road. If cost is 5% on capital invested and return is 8%, then the community is wealthier if the road is built. Government, the nation’s agent, does not yet perform this function because it takes the money and spends it badly. With such cost and benefit analysis imposed by the borrowing rate, all shall change.

        If the return is 5% on a bond to a lender through the nation’s agent, the government, and if it is 5% through IBM, why would people tend to lend to the nation rather than IBM? Because the assets backing the loan offered by Government are just so much greater than those backing a loan to IBM, wouldn’t you agree? A lender will have a claim on the combined wealth of a nation soon to get wealthier with this road, and not just on the combined wealth of a company that forms a part of the wealth of the nation.

        Would you choose the limited wealth of IBM over the far greater wealth of the US for a commensurate return of 5%?

        On an individual level, if one lives in an area of general lawlessness in which the protection of property and life is futile, would not the funding and construction of a new police station provide some relief? A bond is offered at 5% for a loan of $10 million for a year’s worth of police. Criminals are arrested. The courts get busy. People are incarcerated. A general lawfulness comes to the community. People buy homes and refurbish existing ones. People move into the community. Insurance rates drop. Businesses invest more. The community becomes far wealthier.

        Cost and benefit analysis. The community lends to itself at 5% for police and generates returns of 10% or more. Who wouldn’t lend in such a scenario? Protection of life and property for a limited few of means, or for everyone.

        When you add an asset to your financial picture, say a business worth $50,000, and a debt to the same of $50,000, would you explain to me how you are better or worse off? And if you sell that business for the extent of the debts incurred, would you tell me how you are better or worse off?

        Do you still want my $50,000?

        GM

        CommentedThomas Quimby

        erratum: When saying "Ay% each year" I should really clarify that this is only the amount payed in the first year. As the value of the account with the competitor increases to A+A(x+y)%-Ay% =A(100+x)% in the next year, the excess interest for that year is y% of the remaining balance. A(1+x%)y%. and the remaining x% interest stays in the account with the competitor; and so on and so forth. So the excess interest increases exponentially with time as the account balance grows.

        CommentedThomas Quimby

        So, assuming you accept that reasoning, the argument can continue. From what you’ve said I assume that you are having government offer interest rates less than the expected growth of GDP. This means that government has no problem in principle with making a profit on the money that it borrows, so has no real problem taking on debt; like a bank, it can invest its borrowed money at a higher rate of return and profitably support its expenses, provided that it gets enough borrowers. The problem is whether government can actually get people to loan it money in a competitive marketplace, because businesses like banks can compete with government, offering the same sorts of loans. Government could offer better interest rates or some other financial incentive if it slashed spending on programs. We assume government’s business model is no secret and other companies can emulate it; if not you are departing from the free market ideal as part of your model of government and are opening up a whole new can of worms.

        So consider a business that competes with government and adopts the government’s business model with the slashed spending policy. You can think of it as a special kind of bank or something; banks don’t ordinarily spend money to construct publicly usable road systems and so forth, so tend to have fewer expenses than the typical government. This ‘bank’ can offer better financial returns to its borrowers. If people chose who to loan money to on the basis of expected financial returns, they’d not choose government over this kind of competition, and by our assumption of highly efficient competition in the marketplace, government will capture no loans at all and will thus have no funding available.

        So if government is to have funding at all, it must win out against this sort of competition. This means that people can’t be choosing solely on the basis of expected financial return on their loan. Nor can it really be something about the risk profile of the loan as an investment; the competitor can have the same sort of risk profile, as part of its ability to replicate the investments of government. It has to be something about the nature of the projects that government implements through spending, but the proposed competition does not. Well, the projects themselves result in economic benefits of some kind, right? Perhaps we just consider those and the total profit of investment in government will be better.

        This is where the tragedy of the commons comes into our reasoning. Most government projects as we know them are not profitable investments on an individual basis, because the benefits tend to go to everyone, independently of who pays for them. Even if the project can be beneficial for the whole, it's unprofitable for the individual because the individual doesn't receive the benefits of the whole, only part of them. Government would be more competitive in terms of economic benefit to the lenders if it did not engage in such projects and gave direct financial incentives on the bonds, instead. Pretty much any project where the benefits to a person depend upon the total amount of money allocated and not on the amount of money that a person pays in will have to either be struck from government's budget, or modified drastically to something like a fee-based model, where the economic benefits to you depend more or less exclusively on the amount that you pay in. And again, I don't know that we want fee-based law enforcement or fee-based elections, and something like fee-based military defense seems almost impossible to implement.

        So what's left? Basically, the non-economic benefits associated with paying in to the projects: charity, basically. Either that or we relax some of the assumptions about the market being competitive and free in order to give government some sort of intrinsic monopoly power in its money-making side of the business, but as I said before, that's opening a whole new can of worms. To the extent that people are willing to forgo superior economic returns to themselves personally (what the competitors to government offer, compared to government) and invest in something that uses part of the investment to benefit the nation as a whole, government will get some amount of loans. It's rather doubtful though to simply assume that it will be enough to cover all necessary or collectively beneficial government projects; the world as it is has some charity, but far far more money is spent on personal or family use. And investing in government when it gives inferior returns compared to the competition is indeed charity, to the extent that the investor misses out on personal economic benefits; if government offers x% on its bonds and the proposed competition offers (x+y)% , then buying A in bonds from government is financially equivalent to buying A in bonds from the competitor, and giving over the excess interest Ay% each year to the government, as a pure donation; and government would have essentially the same average cashflow, if all its lenders adopted such an alternative practice.

        Again, I don't think that you state your original post as a purely logical argument, where you state your assumptions clearly and rigorously deduce your conclusion. So in a strictly logical sense I can't prove you wrong because you haven't actually offered something that could be a logical proof of your claim. However there are still flaws in your reasoning, overall, in the types of assumptions that you make, perhaps without fully realizing that you make them -- indeed, you certainly must make some assumptions like them in order to make a rigorous base of assumptions for your argument, or face a charge of non sequitor.

        Based on the way that you essentially keep repeating the claim from your OP, that “the value of all community government debts when combined with all community government IOUs or bonds is zero for the community,” as if it really meant something, I tend to think that the biggest flaw in your reasoning is that this type of claim really matters as an indication that people will do what you say they will do: offering as many loans as government needs. Certainly you do need give us a plausible account of how sufficiently many people will be motivated to give out the loans. People mostly determine their behavior in a self interested manner; if the fact that there's no net financial loss to the community through a financial exchange were a sufficient reason to give out as many loans as government would ask me, it'd be a sufficient reason to simply give money away, or accept theft, for that matter; I lose my $100 and Bob gains my $100, but the $100 has simply been transferred within the community: no net loss of $100 to the community. You can't rely on this type of national-community-based thinking in people as a determinant for their actual behavior; this sort of 'one for all' assumption actually more closely resembles the totalitarian ideology of communists or fascists, where government's personnel are more or less tacitly assumed to have the nation's best interests at heart: to think and act accordingly.

        Your claims about the inefficiency and corruption of government are really a testament to the power of self interest, which is why it's so unusual that you don't analyze the individual interests of the citizenry in any depth, choosing instead to more or less assume that the people will loan government as much as it needs. You probably do have a point that government will become more efficient in some of its programs when it faces competition – this is part of why government can be justified in rolling out projects to the highest-bidding contracter; so long as the bidding process and the contract enforcement is fair, the funding tends to be used more efficiently by a competitive industry than by government directly. However the tragedy of the commons is a hard limit on the types of projects that government can expect to fund by economic self-interest alone, and you have no real justification for simply assuming that people's motivation to benefit the nation as a whole – even when it comes at some net expense to the self – is sufficient to fund the roads, the military, the clean water, the police, etc, of the nation -- a very significant and costly menu of collective projects, even under reasonable assumptions about their increased efficiency.

        Although it seems that you've become less bold about posting that bold copy-and-pasted offer to this site, let me directly answer your boldness right now with some of my own: I'd be willing to accept that $50,000, in whole or in part. I can assure you that the money would be significant in altering the course of my life for the better; it's not in any way a small portion of my current net worth. Here's my paypal address: idigo@safe-mail.net

        In any case, Gary, it's been surreal. Hopefully we've both become better because of this conversation; hopefully it's not a net waste, at least.

        Regards, TQ

        CommentedThomas Quimby

        It could do this, for instance, if it were in competition with other businesses trying to borrow money for investment. Make your offer more attractive and you're better able to capture marketshare, right?

        CommentedGary Marshall

        Hello Thomas,

        If government slashed spending, it would require far less for its own purposes.

        Why would a government borrow money at say 5% and put it into a fund? And use the money earned to reward new lenders?

        GM

        CommentedThomas Quimby

        Sorry, cut the post short with a misclick. Suppose government slashed spending. It could reroute that money into a fund, and use the proceeds to reward new lenders, for instance by offering better interest rates. This makes sense?

        CommentedThomas Quimby

        You are at the very least mostly correct about the actual behavior of real investors. I'm asking the question because there are different potential problems either way.

        In general there's some pattern of investment that actually does give an expected rate of return equal to the growth rate of the economy. Basically you just buy a small fixed percentage of each company's stock. Government has such investments available to it. Suppose government slashed spending

        CommentedGary Marshall

        Sorry. I meant to say borrower instead of lender. Why would a corporation pay back a loan upon which it pays a 5% rate of interest when it can take the money and generate assets in value 3 times its initial investment for a 300% return?

        Would you pay back a loan upon which you pay 5% interest when that money earns you 7% or more?

        GM

        CommentedGary Marshall

        Hello Thomas,

        The government offers what the market will bear.

        The government will assess each project for returns. If the return is estimated at 7%, the government may offer up to 5%. If the markets will take no less than 7%, the project is shelved until interest rates moderate.

        That is how it goes for every lender. Why borrow and invest for a 2% return when the cost of the money is 5%?

        GM

        CommentedThomas Quimby

        So to repay the loan it depends on another lender to voluntarily give it another loan?

        What interest rate does the government offer, relative to the growth rate of the nation's wealth as a whole? Is it equal or is it less?

        CommentedGary Marshall

        Hello Thomas,

        How does a government go about paying back a lender. Like any bank it substitutes another lender.

        GM

        CommentedGary Marshall

        Thomas,

        Here are some comments from below to further explain my comment just above:

        I asked you a very simple question. You did not answer that question. The answer is key to understanding everything about this idea.

        @@@@@
        Wwhen a bank takes in depositors' money and loans it out or invests in some project, what asset does it use to pay back those lenders?
        @@@@

        The answer is that banks, and governments, and corporations generally see their debts rise over time. It is rarely the case, and not for good reasons, that a corporation's debts will be less now than they were 20 years ago.

        The government depends upon the nation for its money, borrowed or taxed. If what government does generates assets among the nation greater than incurred liabilities, then the government has a greater source of funds to tap for future endeavours.

        Is a corporation with $1 million in assets and no debts in better financial shape than one with $10 million in assets and $5 million in debts?

        Is a nation with $50 million in combined assets among its citizens and no debts in better financial condition than a nation with combined wealth of $250 million and $100 million in debts?

        The government has no assets or liabilities. The nation and the combined wealth of its citizens do. The nation and its citizens supply the funds, borrowed or taxed, to pay for all government services and goods.

        GM

        CommentedThomas Quimby

        Right , good. What's its power when it can't tax? How does it go about repaying the loan? How does it transefr wealth in payment to someone who asks to redeem his bond?

        CommentedGary Marshall

        Thomas,

        The government has no assets or liabilities. The government pays for nothing. It takes from others to provide goods and services to those others. It forces those others to underwrite the obligations it incurs.

        Its source of funds is the combined wealth of the citizens of the land.

        What is the power of the government to pay off its supposed debts? The citizens of the land.

        GM

        CommentedThomas Quimby

        The total amount of government debt has increased, but government's also knows that its ability to pay off a given amount of debt quickly has increased as well; a slight increase in the tax rate makes a LOT more revenue now than it did two centuries ago. People gauge the size of the government's debt against the power of government to pay the debt off quickly through taxation or some other form of economic manipulation, and judge that things are pretty ok as they are and that an investment in bonds is still safe. That's more or less how things work right now.

    12. CommentedThomas Quimby

      Gary, here's maybe the largest issue with what you propose: in effect it will revert to taxation. Government doesn't get to postpone the paying of its debts indefinitely; the market will not be interested in buying the bonds if they have no intrinsic liquidity. So government borrows at essentially all times, spends at essentially all times, and for each moment of borrowing there's a moment some time not too far in the future when government must tax to repay that bit that it borrowed. In effect the government must continually tax, anyway; the effect of the borrowing can only postpone the stream of taxes for so long.

      So maybe government borrows for years 1-19, say, and taxes on the 20th to pay back all debts on the spot, repeating this sort of cycle over and over again. But is this really an improvement over the previous system? The bad news about funding through bonds is that it's harder to predict how much money you will get in a given year, because the bond-buying is voluntary on the part of the market, whereas the taxation is more directly under government control. Many government agencies work best with a level -- or at least predictable -- stream of funds. Budgeting tends to become more problematic for the state, and there's good reason to think that the quality of services could suffer as it becomes harder to plan financially.

        CommentedGary Marshall

        Sorry. I saw that you did answer my question about government financing its debts.

        So, if you are correct, government liabilities decline over time. And when have government liabilities ever declined over time?

        Well, Thomas, they never have. The US government like them all always counts on selling more bonds to replace those retiring. It is one gigantic and perpetual rolling over of old debts.

        I asked you before. Why do you wish government to perform some feat that it has never performed before?

        GM

        CommentedGary Marshall

        Hello Thomas,

        I know how the bank conducts business.

        I asked you a very simple question. You did not answer that question. The answer is key to understanding everything about this idea. I shall have to repeat that question.

        @@@@@
        Thomas, when a bank takes in depositors' money and loans it out or invests in some project, what asset does it use to pay back those lenders?

        What asset does government currently use to pay back its lenders?
        @@@@@

        So what is the answer?

        GM

        CommentedGary Marshall

        Thomas,

        The answer is that banks, and governments, and corporations generally see their debts rise over time. It is rarely the case, and not for good reasons, that a corporation's debts will be less now than they were 20 years ago.

        The government depends upon the nation for its money, borrowed or taxed. If what government does generates assets among the nation greater than incurred liabilities, then the government has a greater source of funds to tap for future endeavours.

        Is a corporation with $1 million in assets and no debts in better financial shape than one with $10 million in assets and $5 million in debts?

        Is a nation with $50 million in combined assets among its citizens and no debts in better financial condition than a nation with combined wealth of $250 million and $100 million in debts?

        The government has no assets or liabilities. The nation and the combined wealth of its citizens do. The nation and its citizens supply the funds, borrowed or taxed, to pay for all government services and goods.

        GM

        CommentedThomas Quimby

        Government uses a variety of mechanisms to ensure that it has enough money to pay back its bonds when they are called. The tax base is one of them. It does not simply rely on the idea that there will be enough new bonds bought this quarter to pay off the portion of old bonds that are cashed in.

        Banks generally rely on an arbitrage to make money; as a 'fee' to depositing customers it offers lower interest rates than are available on the open market. Then it invests the money it has on the open market, getting a higher rate which pays for the administrative costs of the business. Customers tolerate the lower interest rates because of the nature of the services that the bank provides in providing secure and convenient access to their money.

        CommentedGary Marshall

        Hello Thomas,

        Babbling! Thomas, when a bank takes in depositors' money and loans it out or invests in some project, what asset does it use to pay back those lenders?

        What asset does government currently use to pay back its lenders?

        GM

        CommentedThomas Quimby

        No, you are mostly just babbling. I'm asking a very specific question.

        You are postulating a government that doesn't tax and that funds itself exclusively through loaning. It takes out a loan, and spends some money on a project. What's the asset that it has in mind that it will use to repay the loan to the particular group of investors that gave it out?

        CommentedGary Marshall

        Hello Thomas,

        Well, for starters, there is the government IOU. The question is, does the IOU have value? Well, they seem to have value now even though the borrowed funds are generally squandered or expended without certifiable returns. No one seems to care. Government shall have added $6 trillion to its national debt these last 4 years. I ask for what in return? Do you?

        For example, before borrowing, government expenditure is $200 billion in a $1 trillion dollar economy. After implementing borrowing, government expenditure drops to $100 billion as squander disappears. Government now expends those funds with justified returns superior to costs.

        Deterrence costs a nation's economy say $100 billion in lost activity, either not done or done elsewhere.

        Debt $100 billion at 5% interest

        Asset $300 billion (with $100 billion earning 5%, $100 billion freed up from wasteful government expenditures invested for a return by its rightful owners, and $100 billion in additional productive activity previously squelched by Taxation, plus government investments of $100 billion earning 7% average returns or $7 billion per year.)

        The corporation is now at least $200 billion wealthier and getting wealthier with the yields on public projects, yields on funds no longer squandered, yields on additional and valued productive pursuits.

        The assets and liabilities will accrue through the years. Next year will bring another bonanza for the $200 billion public expenditure now reduced to $100 billion. And so on and so on.

        In 4 years, the nation will have about $450 billion in liabilities. It will have about $1.5 trillion or more in acquired assets, leaving wealth of more than $1 trillion to be split among the citizens.

        Before, the government just took $200 billion and offered some services worth maybe a fraction of the expended value. Now the government is taking far less and offering accounted returns on those public investment. In doing so, the nation is wealthier with less government, with returns on public expenditures, and without the deterrent upon worthy economic activity.

        Understood?

        GM

        CommentedThomas Quimby

        Ok, Gary, but let's be clear first. What is government's asset that counterbalances its debt? What claim does it have to it that makes it have real value?

        CommentedGary Marshall

        Hello Thomas,

        You say that you have 2 businesses that are identical in every way except the one has greater expenses, which are ever so murky and can only be dealt with by passing on higher prices to the consumer. I still have no idea why passing on higher costs is the only way to deal with this problem.

        I have no idea what this has to do with funding government by borrowing instead of Taxation. Perhaps you can enlighten me.

        I agree with your statement in 1. People do it now. They lend the various levels of government large sums of money based upon risk and reward assessments. Those communities on a less equal financial footing will have to offer higher rates of interest to satisfy the lenders. Why take the same amount of interest or return from an entity that has a greater chance of default? One shouldn’t.

        Now people will not make an investment that produces an inferior return on risk and reward scenarios. If the government is offering 5%, and IBM is offering 8%, then people will take 8%. If IBM is offering 5% and same with the government, they will take 5% from the government. There is no moral interest. There is no unprofitable investment. There is no charity, manipulation. There is a return based upon competition for funds in the money markets. The effects you keep introducing have no influence on the decision to lend. They do not now with governments lending the world over, and they will not with full government borrowing.

        You may wish to pay tax, but a great many people do not because government when it can take money is notorious for squandering it. No one lender will be able to influence anyone. Its not like Taxation where those can walk in and promise to remit large sums to a Democrat president in return for government contracts or loans. Under Taxation, we have endless and profound corruption. Now you are calculating that citizen lenders, who are aware of influence buying in government or with the police, will ignore this and continue merrily lending money to the government?

        As soon as any corrupt dealings came to light, there would be immediate investigations and proper penalties imposed on the guilty parties. With Taxation, the corruption will stand a far better chance of continuing because everyone must still pay their taxes.

        There is no loss of people funding government. People will continue to fund the government only with loaned funds rather than taken funds. Government operations will never become as efficient as they may be under a system of borrowing. With Taxation, the only recourse is through a rotten politician. And over the years, as government participation within the economy has grown along with taxes, squander and corruption have surged accordingly. Taxation is a failure in dealing with waste and corruption. Government works in its own interests. And the bigger the government, the better for all those state employees and their political leaders. With borrowing, the state can easily be cut off.

        Oh, so we have little empirical evidence of what occurs to a nation’s finances with tax cuts! Reagan’s and Bush’s tax cuts provided little demonstration. States with comparatively small government do not fare better than those with larger governments. Large tax increases do not harm the greater economy as even Keynes himself acknowledged.

        Here is the empirical research. Taxation is a penalty. Remove that penalty and you will have far more of the item or activity hitherto taxed. Everyone knows this. That is why they expend a great deal of money avoiding such penalties. Secondly, government waste and corruption thrives on growing tax revenues. Cut tax revenues and there will be far less squander and corruption.

        The arithmetic, my friend, demonstrates that the cost of borrowing for a nation to fund all government expenditures is nil. When you add a liability and an equivalent asset, there will be no change in an entity’s financial picture. However, there will be great financial benefits in getting rid of Taxation because all that squander and deterrence will disappear.

        If there is no financial harm in a nation borrowing for public expenditures, and great financial benefits, then one borrows. Its that simple. The arithmetical proof is above. Defeat it and you get $50,000.

        If you add a $50,000 dollar asset and a $50,000 debt to a person’s finances, have you changed their financial position?

        The answer is clearly no.

        If you add an interest component to the sums, say 5% for the asset and for the liability, has the person’s finances been altered?

        The answer is clearly no.

        After 20 years, will the situation be any different?

        The answer is clearly no.

        Deflate that!

        GM

        CommentedThomas Quimby

        Thanks, Gary

        Let's re-read point 3. The other business is identical in all other relevant respects; I assume this to mean that they offer the same thing to their customers, that if like a bank they use a profile of investments at higher rates to generate their profits, they get equal rates of return here. Similarly they share the same basic operating expenses. If at least the business without the extra expenses (call it A) is subject to the conditions of 1 and 2, it has pared its costs down to the minimal amount possible; otherwise lower-priced competitors steal the marketshare and the business has no customers at all, and cannot operate profitably. If business B could reduce the basic operating expenses, we assume the technique is no secret and A could do it too; B's basic expenses should be no smaller than A's. So B's total expenditures are greater, and there's no relevant avenue remaining for B to counterbalance the extra expenditures except by passing the costs onto the consumer somehow.

        Is this a formulation that you can accept?

        And just checking, but did you address point 1? Do you agree with this basic theoretical assumption or disagree? If you like I can justify why it's relevant to my general argument.

        I'm trying to point out that while people may well decide to make a comparatively unprofitable investment in government-as-business because they think that the government project is morally good or whatever, this is likely going to have to be the mechanism of funding for most government projects as we know them (even the ones that we think of as good) because their form is such that they are not economically profitable to the funding individual. The fullness of the government coffers will depend more on people's moral interest in funding the state than their personal stake; government is relying more on an appeal to the charity of people, or a manipulation of their ignorance through marketing to get its funds, rather than a promise to provide better economic benefits to the investor than any competition.

        I'm suggesting that these effects will be fairly strong in depressing the funding of a great many valuable government projects, because of the way these projects provide pervasive benefits, more or less independently of where the tax money came from to fund them. Moreover we want this kind of form, in many cases; a police system that provides all kinds of 'special benefits' to major financial contributers (and which heaps penalties upon those less well off) is hardly a just one. You can consider other possible effects which may counterbalance this one, but you must support your position in such a way that these effects seem larger than those opposing.

        Your claim that the people's wealth will grow much bigger to counterbalance the loss involved in people choosing not to fund the government points to one such effect; government operations can become more efficient to the extent to which it is forced to compete with other businesses on rate of return, among other things. This effect is hardly novel and is a part of the lively mainstream political debate; the idea that tax-fed government can't efficiently perform an function counts as a reason to spin it out into the private sector, perhaps with some amount of government regulation. There's some lively disagreement about the extent of this effect in the various industries, the degree to which government should privatize or deregulate compared to the current status quo. In any event you'll have to do work to convince people that the effects pro outweigh the effects con; there's no particular agreement about how big the effects are so you can't just assume that they are big enough to suit your argumentative purposes.

        Since there's little empirical evidence available that directly concerns free market economies in which all government funding is fully privatized, and extraordinary claims require extraordinary evidence, you may find it easier to produce an actual effect on the world by changing your thesis a bit to something a bit more moderate and arguing ideas with a stronger connection to the evidentiary world; arguing for instance that governments with lower taxes and higher debt tend to produce higher economic growth, and providing comprehensive data to demonstrate that trend for the extent nations of today and the connection to the purported cause. This will take hard work, but it will connect you better with the hard work of others and make it easier for your ideas to propagate.

        My main goal I guess is not to defeat your argument, but to deflate it; to show that you don't have it in your mind like an ironclad mathematical proof, that you can't really prove it by sitting in your armchair (which is why I can't technically defeat it in MY armchair). If you make it logically watertight then your assumptions are questionable and unlikely to be accepted by most reasonable people, and ultimately what you need to do is to go in search of precise assumptions that most people are willing to accept, to craft a more complex argument around those.

        Regards, TQ

        CommentedGary Marshall

        Hello Thomas,

        Yes, and I post a number of things as well that are ignored.

        If I didn't respond to some of your statements, it probably means that they are irrelevant to the matter at hand, which is the creation of a wealthier society.
        On the matter of investments, people will invest their money for a return. Define a community good. Is it a road or a school? If so, fine. The government will borrow money and provide for roads. Those funds will be borrowed from citizen lenders, who will act in every way like the people spoken of in the first sentence of this paragraph. The roads will speed the movement of goods and people, lowering costs of transportation for those goods and people, enriching retailers or consumers with lower cost goods for sale, and cutting costs of transport for individuals.

        I completely agree with your second point.

        A business in point 3 may have to charge higher prices or it may have to invest sums of money or slash costs to bring down its expenses. Or it may just absorb the lower profits by not raising prices. Raising prices is only one answer.

        Why would interest rates offered have to be lower for the business with higher expenses? That is a decision based upon the circumstances of the money markets, the financial situation of the individual firm, security for the loan, and the supply and demand for credit in the market place. If both firms are identical save on certain costs, then the less profitable firm may have to offer a higher rate of interest to attract lenders.

        In point 4, there are many reasons why people pay more for a good. Quality issues, side issues in warranty, long standing relationships, location, availability. But as you say, there are benefits in paying a higher price.

        Some people choose not to invest in certain companies because of a distaste for the manufactured products, such as weapons or cigarettes. But there are many others who will. Some people may choose not to buy government bonds. That is fine. Perhaps they do not like government, or perhaps they can earn better returns in other investments.

        The demand for money by government will shrink from what it is under Taxation owing to all the great reductions in wasteful government expenditures. There will be a lot more money available then to buy the bonds offered by government.

        I hope my answers provide some clarity.

        GM

        CommentedThomas Quimby

        Actually Gary I'm fairly dissapointed and just about ready to stop posting. The reason is that as I bring up points against the scenario you describe, you lash out at a few targets and then repeat the scenario with slightly different numbers as if THAT's going to somehow convince me. You haven't yet responded to the point about the tragedy of the commons, and based on your response to the GDP thing I'm not sure you actually have a good understanding of economic theory and the terms that it uses.

        Let's try to simplify things a bit. Which of these claims do you agree with, which do you not agree with, and why?

        1. When given a voluntary choice about investments, people choose what seems most profitable or otherwise beneficial to themselves. They may be aware of the 'community good', but they are primarily interested in the portion of that good that they get for themselves.

        2. The free and efficient market (to the extent that it's free and efficient) tends to mean that competitors will spring up to profitable businesses; if you can undercut the competition and offer lower costs per unit benefit to your customers, you tend to capture the market share of the competitors; and if you can do it, someone else can too, until supply of the better deal is enough that no one needs to buy any of the overpriced goods/services.

        3. A business with extra expenses will in general have to charge higher prices for its services in order to remain profitable, compared to one that is identical in all other relevant respects but without the extra expenses. If the business is to offer people interest, the interest rates have to be lower for the business with the extra expenses.

        4. The extra expenses may have extra benefits to the the customer as a side-effect; the customer won't tend to buy the higher-priced product unless the extra benefits (to himself) are worth as much or more as the increase in price.

        5. Under a voluntary system, there are some types of programs that no individual citizen would want to invest in, even if there's some pattern of collective investment that benefits everyone. The reason is that even if I do my part of the pattern, I can't count on other people to do theirs; but as long as other people are doing their part, it's possible that I get more benefit by not doing mine; and that conversely, it's a loss to me to do my part when other people don't. Some people will decide not to do their part and this can reduce the total benefits to the community.

        CommentedGary Marshall

        Hello Thomas,

        You’re only demand for value in public expenditures is that they increase GDP?

        Suppose you have large numbers of unemployed. The government borrows large sums of money to put them to work digging holes in the morning and filling them up in the afternoon. The government has increased the GDP. Mission accomplished and your objective is attained. Are you happy with the results? Has this contributed to the wealth of the nation? Could perhaps that money expended so badly have not been better expended to generate greater returns, probably meaning greater expected increases in GDP down the road?

        Productive people are expected to underwrite this gargantuan waste of money when it could have been better expended elsewhere. Do you think this contributes to a happier, wealthier, nation? Do you think this fleeting surge in GDP helps the economy in some way? Perhaps lowering tax rates would have achieved the same end? Perhaps by lowering the heavy burden on those that will create jobs lasting beyond the subsidy period, the unemployed and the nation would have fared so much better?

        Suppose the government invests in a public project that profitably lowers the costs to businesses and individuals of their daily routines. Say piping water into homes rather than having people and businesses spend inordinate time and money transporting water from distant lands. All those businesses and activities by individuals engaged in this transport cease to be. Is this a good thing or a bad thing? For you, it must be a bad thing because it affects GDP in the negative.

        There is something seriously wrong with your standard.

        Banks do not offer an inferior rate of interest to GDP growth. Neither shall the government. Governments will wade into the financial markets and borrow at market interest rates like any other borrower. So all your arguments based upon inferior returns on government bonds collapse.

        You admit with some conditions that government may operate as a bank. Good. Progress.

        You say people are searching for the highest rate of return. Sort of. If so, then everyone would be buying Greek bonds. It is reward given the risk. If the government offers 5% on its bonds, and a small private company offers 5%, would you not buy the government bonds, which possess a claim upon the assets of the nation rather than just those of a small company? I would take the former given the risks. The net benefit to you in lending money to the government is the return on your loaned funds. You may benefit in some way from the government expenditure that will pay for itself, but then you choose to benefit twice if you loan as well

        As the banking system can profitably manage its loan portfolios, I think the government capable of managing the nation’s finances in a similar system of borrowing.

        Banks will not fund government expenditures. The nation’s resident citizens will. And they will not be giving away money for the fun of it. The government will obtain its funds if the returns justify the expenditures. If not, the project does not go ahead. So government expenditures will decline accordingly, from those in a system in which the government can take your money and do as it please to those in which the government must justify every expenditure and return. As government will need far less money to operate than it currently does, the nation will be enriched. There will also be no deterrent effect, meaning another large source of increased wealth. With all that extra money laying about, one can certainly expect large increases in worthy economic activity and far less of the other kind. There will also be a lot more money to fund worthy and profitable public enterprises.

        So the government can make a one time investment of $1 million in some project, say the closure of an unused or little used public facility, for a reduction in costs of $10 million annually leaving a net profit of $9 million in the community. The government borrows the money from its citizen lenders at 5%. After one year, the cost of the project becomes with interest $1.05 million. As the interest was borrowed from resident lenders, the assets created by the public venture will become $10 million plus government interest of $50,000 plus the added returns on the $9 million freed from public expenditures, say at 4% annually, of $360,000.

        The nation’s finances will then look like this.

        Debt after year 1: Liability $1,050,000
        Asset $10,410,000
        Wealth $9,360,000
        Debt after year 2: Liability $1,102,500
        (interest on $1,050,00 of 5% = $52,500)
        Asset $21,226,900
        ($10,410,00 + $10 million + $52,500 +4% on $9.36 million+ 4% on $9million.
        Wealth of $20,124,400

        Every year subsequent will show assets outpacing liabilities. Even if there were no returns, the liability of $1,050,000 would be matched with a created asset of $1,050,000 leaving no change in wealth. But there will be a return because the public will demand it.

        The community is far wealthier. Its bank accounts are now much larger thanks to the fact that it no longer has to fund a decrepit public facility and its idle employees. There is now much more money in the community to fund all sorts of worthy economic activities, some of them new public expenditures. There is no need to force others through Taxation to come up with $1 million. The investment pays for itself.

        Now in a system of confiscation or Taxation, the facility will continue to operate and its employees will continue to be paid to sit idle performing work of no value. Or the money will be taken and wasted elsewhere. The cost borne by the community will be $10 million per year and doubtless rising.

        If the government had just cut the facility, then it would have harmed your precious GDP numbers, the standard by which you evaluate the benefits of public expenditures. Right? So better to keep people working at nothing and costing a community great sums than to put them to work doing something of value. That is your argument. And your argument is absurd.

        So would a community vote to pay a tax of $10 million per year indefinitely, when they could vote to not pay a tax of $10 million annually, and instead loan the government $1 million to earn a return in interest on funds loaned as well as garner the incredible accruing asset of $10 million and its wealth from not having to fund a worthless facility?

        Is this a system based upon donations? If a lender should decide that a return of 5% is no longer good enough, would the community through its government have difficulty substituting another lender to pay off the original lender? Lending rates will plunge with all that money laying about. This is a tragedy!

        So the community will not fund a police force. Well, imagine the value of property in a community that does not have a police force. A community will imperil the value of all its homes and businesses, costing each and every nearly a total loss on all property and life, because it refuses to incur a comparatively small sum for a police force to combat lawlessness. I believe that is what one is now seeing in communities with systems of Taxation in which local governments have gone bankrupt trying desperately to increase the area’s GDP at all costs in the past.

        Your objection is does not hold up to cost and benefit analysis. There will be a police force, as needed. There will be a defense with an efficient and capable military. You are confusing expenditure again with revenue. My whole program is based upon an alternate means of raising capital for public expenditures. It has little to do with how that money is spent, though there will be great changes in the method of expenditure because the people with direct control of government finances will demand those beneficial changes.

        I do hope this has been helpful.

        Regards,
        GM

        CommentedThomas Quimby

        Gary, I certainly do care about the the value of government programs for some sort of public good. One of these goods is growth of the economy as a whole; this objective, making a bigger economy, makes it easier for government to collect more taxes; more tax collection ability means it's easier to pay down debt without contracting more debt.
        And my whole point is that you can't just keep contracting real debt indefinitely, when debt is measured in terms of your real ability to pay. If you've read my posts, you know that I'm now repeating that it's possible to borrow under certain circumstances, provided that you don't let your debts grow arbitrarily large in proportion to your real assets. U.S. government debt has grown and grown in nominal terms, but as a fraction of GDP, it has fluctuated. Right now it's at some of the highest levels in a long time; there was another peak around the time of the New Deal and WWII, and in between government allowed the real debt as a fraction of real GDP to go down.
        I've already mentioned that like a bank, government could support debts by promising a lower rate of interest than the growth rate of GDP. This is an arbitrage; assuming government can get enough lenders to voluntarily supply the loans that it asks for, it's a net profit to government. The bad news is that it's a net loss for the investors, if we're analyzing in terms of expected value alone. They'd rather invest in a 'slice' of the economy as a whole, which is expected to grow at GDP rates. Banks manage to get lenders basically because competition is not 100% perfect and banks seem to be a good investment in terms of liquidity and risk: I can get my money out more or less any time I like. Banks also compete with each other in terms of services, or capture certain segments of the market because the economists' theoretical ideal of free market competition is not 100% accurate, and there are costs involved in searching for the best deal. In any case the bank with a local branch tends to capture more of the local people's accounts; they are a more convenient choice for local people. And still competition sets in – internet-only banks have stolen market share from the local branches, often with higher interest rates offered as well since overhead is less.

        So government could run a business like a bank and finance itself through this kind of arbitrage. The problem is that government will be in competition with all the other financial entities offering this sort of arbitrage, and with the people who are searching primarily for the highest expected gain in their individual investments. It gets harder to manage your income flow, because you don't know exactly how much people are willing to loan this year. The other bad news is that government is in competetion with other institutions that don't offer social services. Compare a bank that gives money away to finance government programs, with one that doesn't. Who needs the higher operating margin, all else being equal? Who offers the best deal to the investor?

        And before you start complaining to me again that I'm not accounting for the real value of government expenditures, consider this: it's true that investors will notice that their loans to government cause increased government spending and in a roundabout way trickle back as some sort of benefit to themselves. The problem is that assuming that someone funds the specified basket of government programs, through donations, loans, or otherwise, they'd prefer not to be among those doing the funding. If I invest my money instead in an index of the economy as a whole or put my money in a bank account that runs the same sort of investment as government (one tied to macroeconomic growth) but that has reduced overhead due to not spending on government projects, if I invest in the business competitors of government, then I'm going to get a better interest rate and STILL enjoy all the benefits of everyone else's loans. This is the tragedy of the commons. Unless my contribution to government spending produces a benefit TO ME DIRECTLY to sufficiently counterbalance the lost opportunity to take better interest rates, I'd prefer not to give the loan to government.

        Make sure you understand the concept, how drastically it can reduce the benefits of government. Assume a government program for cleaning the air or preventing crime or something. It costs $1M and grows the economy by $10M (all in real terms). For simplicity's sake assume the benefit accrues equally to all 100M citizens, that there's no benefit apart from this economic growth, and that while $1M gets the maximal benefit, spending less than $1M gets proportional benefits. Assume also for the sake of simplicity that taxes are flat, leveled at the same amount to each citizen. The best tax-based policy is to tax the maximal amount; the net profit to each citizen is $0.1M - $0.01M = $0.09M. But taxes are oppressive and unpleasant, right, and people could secure exactly the same benefits by switching to a voluntary system? Wrong.

        If it's a system of donations, then people will basically only evaluate the profits of their actions to themselves. Voluntary investment is unprofitable: every $1 I spend gets me back $10M/100M = $0.1 in return, for a net profit of $0.1 - $1 = -$0.9. The people of this model would in fact vote unanimously for the tax! This is not too much of a paradox. While instituting the tax does carry a direct cost to me, from my point of view, it is also forcibly collecting money from other people, money which will be used in a way that is purely profitable to me because it didn't come out of my pocket. Overall the benefits of coercing other people outweigh the costs that the coercion imposes on myself.

        You can have a system where government funds itself like a bank and offers inferior interest rates to its competition, but this is a type of donational system and the funding is severely limited by the amount that people are willing to 'donate' by loaning to government projects at below-market rates. The tragedy of the commons tends to mean that government will be sharply limited in its funding, even in projects that would be profitable to everyone under a tax-based system. Maybe this isn't a problem, right? Government has its own problems like inefficiency and corruption, and coercion has its own costs. Some of these problems could go away if we abolished taxation altogether.

        But consider what kind of world it would be. It's not profitable in general for any one citizen to donate to an impartial police system, so the tragedy of the commons tends to mean that government can't provide police. Or military defense, or other robust protections of property. It's perhaps true that in the absence of these national services that private organizations would tend to spring up to provide some of these protections; organized crime would not be an crime punishable by the government, after all; pretty much no crime would. What's the problem with these private organizations? Well, they'd be able to use what we normally think of as criminal or violent or coercive means. Even if they operated with mostly honorable intentions, if they wanted to use their coercive power to force everyone in the town to pay the fee, the existing customers would tend to approve and even aid this effort: why should some stranger get the same blanket protections as I do, when they don't pay any of the costs involved in providing it?

        This is why in even the most libertarian formulations, government taxes are sometimes justified. The IRS may be nasty and coercive, but if it funds a government that prevents even nastier coercions of private citizens against others, then the taxing is probably acceptable.

        Regards, TQ

        CommentedGary Marshall

        Hello Thomas,

        I almost forgot to add one final comment.

        The government needs $1 billion in a $20 billion no growth economy. If it borrows, it obtains $1 billion, which you think unsustainable. If it taxes, it also obtains $1 billion.

        Now we all know that Taxation is a penalty on whatever item is taxed, in this case consumption. By taxing consumption, there will be less consumption. By how much will the economy shrink in order that the government may fund those public expenditures?

        Will it now be a $19 billion dollar economy with real growth in the negative? How many shall lose their jobs with this decreased demand?

        Regards,
        Gary Marshall

        CommentedGary Marshall

        Hello Thomas,

        The idea is still the abolition of all Taxation. The transfer I spoke of is theoretical. It was simply designed to show you that if the state taxes or never taxes at all, that is borrows, the result will be the same. A debt created is an asset held. Many people lament the accumulation of national debt. Unfortunately, they fail to realize that if that debt were held by citizen lenders, the nation is no better or worse off than if there were no debts, and taxes funded government expenditures.

        An interesting note. If the money to fund public expenditures is taxed, then you care nothing for assessing the value of public expenditures. Yet when the money is borrowed, you demand value in public expenditures as ‘collateral’ against that loan. That is puzzling. On the one hand, the taxation hand, you ignore the obvious squander in public resources. Yet, on the borrowing hand, you demand valued returns in government expenditure. You do not come out and say exactly that, but you hint at it.

        Now you say that government must have the means with which to repay its debts.

        When has the government ever paid its outstanding debts? You say the government must pay its debts. Should you look through US history, you will find the US Government has never paid off the debts contracted. Once a debt is contracted, it remains forever an unpaid obligation. Strangely, you demand that the government must satisfy its debts when it never has.

        Secondly, what is the supposed source of the government’s money in repaying its debts that it never repays?

        You said, “The growth of the tax base does matter because you need to have enough real net worth in order to actually pay.”

        I take it to mean that you consider the taxpayer to be the source of the government’s revenues. So I must ask why you wish to analyze the government’s finances based upon its own precarious financial position when in fact all of its revenues come from another? Shouldn’t you analyze first the finances of those that actually pay the government’s bills to determine the health of the government’s finances and the effectiveness of the public expenditures?

        You present an example of a zero growth economy. It can happen. We have exactly that circumstance in the US. With Taxation, government is borrowing large sums of money, greatly adding to the US national debt, without any returns whatsoever in an enlarged GDP. Yet, the government has no problem in obtaining the funds it needs for its expenditures.

        You say that lending is not sustainable. Yet, contrary to what you say, it is a fact in the worst possible economic conditions. And it continues. So I think you are missing something. Those bonds trade with nearly the same facility and value as money.

        Perhaps you should perform a little more research on the matter.
        Here is a question. How does a bank repay its lenders? It borrows large sums of money and lends out large sums of money living on the margins between interest paid to its lenders and interest garnered from its borrowers. Does such an entity have the means to repay its lenders?

        Regards,
        Gary Marshall

        CommentedThomas Quimby

        Gary, the idea you originally proposed was to abolish Taxation altogether, to postpone indefinitely that final reckoning when you must tax the people to pay for your debts. Obviously over the short term you can float a loan and then pay it later, so long as you hold onto the collateral to pay the accumulated balance: it doesn't really even matter if you make a profit on your loan or not.

        The growth of the tax base does matter because you need to have enough real net worth in order to actually pay. The 'value' of the government bonds is not a real part of this net worth calculation. Citizen-creditors would not accept a tax plan that levied a tax on each of them of the amount of their individual bond holdings, for the government's purpose of paying off the debt. This amounts to simple forced forgiveness of the debt, and no lender would agree to lend knowing that that would happen. The tax has to be on the real wealth of the nation, and it has to be such that each lender makes the promised real return; the lender's profit is the amount distributed in payment of the bond minus the special 'loan-repaying' tax levied on the lender.

        And tax policies are more sustainable than credit policies. Suppose an economy which has leveled off and stopped growing in real terms. Its real GDP is $20B per year (if you like think of it as a certain fixed production of corn), and government has yearly expenditures of $1B. Interest rates on the bonds are matched to GDP growth: they are zero. Taxing is sustainable; the government extracts the $1B each year out of the $20B that is produced for consumption by the people. Lending is not; eventually the total debt far exceeds potential income of the government and lenders become unwilling and unable to lend any more; you reach a limit where the payment to the creditors-cashing-out exhausts all the earnings of the rest of the population -- the potential new lenders -- and there is literally nothing that the lenders have to loan. This happens in a growth scenario too; government's obligatory payments to the people unwilling to loan the government more money at the moment can match or exceed the real net worth of the remaining part of the population.

        It also happens that the people might support the involuntary tax that applies to everyone without exception, when no person would be reliably willing to voluntarily donate for the government service; preventing shirkers can solve many a tragedy-of-the-commons.

        CommentedGary Marshall

        Hello Thomas,

        I am somewhat confused by your demand for limitless growth.

        The object of a corporation is to build value or wealth in that corporation. The corporation in this instance would be the nation.

        Let us say that a government operates with $200 billion in expenditures, all of it taxed.

        Abolishing Taxation will create a need in the financial markets for $200 billion and funny enough a supply of $200 billion. The government borrows $200 billion from various lenders instead of taking the same from taxpayers. Let us say that the government borrows the same sum every year for 10 years. Its debt is now $2 trillion plus say accruing interest of $500 billion, making total national debt of $2.5 trillion. All lenders are resident citizens.

        The government decides to pay off its debt. It takes $2.5 trillion from its citizen taxpayers and hands it to its citizen lenders, erasing the national liability and leaving the nation no better or worse off.

        Nothing has changed. This is merely a revenue operation, not an expenditure operation. The government will make its public expenditures whether it taxes or borrows initially.

        You say that a nation must have growth to perform this borrowing operation. Well, it need really have no more growth than it did if Taxation were the primary means of funding public expenditures from start to finish.

        If you mean that lenders will be fearful of supplying loans to the government in place of taxes, then I must ask why would one prefer to pay tax when they could lend instead for an eventual return of principal and interest?

        You question that it is not sustainable if growth is limited. If not sustainable under borrowing, then it is not sustainable under Taxation, growth or no growth.

        This is more an idea founded on an increase in wealth, not necessarily growth, though I admit one often goes in hand with the other. However, it is not an invariably true.

        If government were to halve its expenditures, getting rid of its worthless expenditures whilst retaining worthy public expenditures, and offer large income tax cuts to the nation, growth in GDP may be strained for a time. However, the nation's taxpayers would be enriched.

        Those without jobs would then be forced to find something more productive to do, greatly enhancing national income and wealth, as well as growth.

        Regards,
        Gary Marshall

        CommentedThomas Quimby

        Hello again Gary,

        Again, limitless exponential real growth is not a very wise assumption. If growth ever levels off and real GDP stops growing, then the sham is up for certain; any spending at all will eventually increase the proportion of debt to GDP beyond acceptable levels.

        During phases of exponential growth, you can in principle shoulder GDP-proportional spending over an arbitrarily long term, but only if the real interest rates on government bonds are less than the real market rate, the growth rate of real GDP. Here the government is offering a security, basically; something that looks better than most investments at GDP rates because presumably the government always has the power to collect and deliver its collateral; it's "too big to fail". The difficulty with this kind of arbitrage is that it's inherently unstable; the stock market will tend to bundle transactions into something that approximates an index of the entire economy, so that they get something very close to GDP growth, better than the government, with essentially equivalent risk, since tax is essentially a 'harvest' of current GDP and the tax base will tend to boom or crash along with GDP.

        Government could eliminate any possible competition by offering GDP interest rates to its creditors, but note that this is a reversion to a zero-profit condition. Real debt will start to accumulate in proportion to GDP again, and government will get in trouble.

        CommentedGary Marshall

        Hello Thomas,

        You are correct that if a nation like any entity borrows without justifiable return, its finances will deteriorate. And it seems that with Taxation, many nations, having borrowed to the extreme, find themselves in precarious financial conditions.

        You mention that even banks fail, certainly true today, and primarily because of loans to profligate governments.

        The question is why banks fail. They fail because they hold inferior assets against liabilities. Many banks do not fail because they maintain a superiority of assets over liabilities. Same with many corporations.

        Now if governments can also operate with assets exceeding liabilities, then there should be little problem with funding a nation's public expenditures with borrowed funds.

        With Taxation abolished, government expenditures will decline drastically because government can no longer take the money and do as it pleases. They have to convince their perpetual and petulant bankers to lend. No more favoritism. No more squander. No more corruption. No more vote buying subsidies. No heavy, harmful, and unneeded regulation.

        Government expenditure will come with a capital charge. And if a project generates returns greater than the charge, fine. If not, then the project is shelved.

        Access to clean water could be accounted a worthy project with good returns. Dirty or disease laden water can cause a community grievous harm. The local hospital may be overrun with patients suffering all sorts of water borne maladies. The medical costs, lost work days, etc could be erased with a modest investment in purifying the water.

        Simple cost and benefit analysis. If the cost to the community of water borne diseases are $5 million per year, and construction costs of a water filtration plant $1 million with $1 million in annual expenditures, is this not a valued return to the community?

        The community now has $3 million per year to go and spend on other items, perhaps better healthcare, better education, a larger home.

        An idle person will cost the community or nation in welfare costs. An annuity of $10,000 would require an initial investment of $200,000 with an interest rate of 5%. If a person collects $10,000 per year, the community or nation would be better off lending funds of say $50,000 for training or education up to amend the burden.

        Cost and benefit analysis, so rarely done today because government can take your money, will become as common in government as it is in private business and private life.

        Secondly, there is no deterrent on the accumulation of wealth or on productivity. All that worthy activity currently impeded by high taxation and unneeded regulation will disappear, sending growth surging.

        These 2 primary factors will come into play and create massive increases in the nation's assets. I conservatively estimate the creation of $2 in the nation's assets, held by its citizens, for every $1 invested by the nation's agent, the Government.

        The nation will be far wealthier with the abolition of all Taxation.

        Now what lender would hesitate to put money into a corporation that generates $2 in assets for every $1 invested?

        Regards,
        GM


        CommentedThomas Quimby


        I can only add, Gary, that that's not a stable plan for the reasons that I've already highlighted. The debt which many countries hold is always a topic of concern and if the debt grows too big the government is very likely to go into default. Many countries have gone into default, unable to pay their debts when called on to do so. The current debacle with countries such as Greece in Europe is concerned with the debts that banks and governments hold but are unable to pay just now...

        Your assumption about how banks operate is a little off. First, banks do sometimes fail for lack of ability to pay their creditors. Second, banks don't just lend and borrow for the sake of lending and borrowing, or trust that they are going to get more lenders tomorrow and so think that it's ok to just spend everything right now. Banks maintain security (or government insures deposits) in an attempt to deal with any rushes and keep investors' money in their accounts, generally; by expanding the confidence of their creditors they increase their ability to hold onto people's money. Second, banks do a kind of arbitrage on the money that they get. They borrow at a low interest rate and lend at a slightly higher interest rate, making a profit in the meanwhile.

        You can't assume that real debt to real GDP declines or levels off in your scenario. Perhaps a particular instance of debt could vanish in an overall growing economy, but limitless exponential real growth is an assumption like Moore's law, which supposes limitless exponential growth in computing capacity per real cost of the computing unit; it's prudent to predict that there are limits down the line somewhere, technological or otherwise. Nor are government spendings guaranteed to raise GDP; many possible spendings are basically non-investments, making life more comfortable for the current generation but doing little to improve growth over the long term. Many African countries fell into massive default in the 80's, according to this basic pattern; skyrocketing oil prices pushed nascent industry into failure and with it the real value of the government's investment in domestic industrialization; corruption explicitly diverted government funds that might have been used for some public purpose, as well. As it became clear that the countries were in no way capable of repaying their existing debt, lending dried up, potentially useful investment for the most part ceased, and economies languished relative to the promised rate of return on the debt, which ballooned.

        Regular taxation remains a part of government's toolchest. Governments may carry debt as well, but there's a limit to the debt that they can safely carry without a very close accounting of their ability to pay. Fiscal discipline (spending in proportion to what you take in taxes) helps to maintain investor confidence that debt will not ever balloon uncontrollably in proportion to GDP, in turn helping government to float higher levels of debt relative to GDP without increasing the risk of a major default or equivalent financial meltdown. The government ultimately depends on the confidence or consent of the people, to the extent that the system is free.

        CommentedGary Marshall

        Hello Thomas,

        Once a government has contracted a debt, it never or very rarely pays it down. In the US, from $2.5 billion in 1910 to $43 billion in 1940 to $15 trillion today. The debt just keeps on growing over time.

        So it is incorrect to say that a government must pay down its debt when it never does. The debts just grow indefinitely.

        How does a bank pay back its lenders? They borrow and borrow and lend and lend. They never repay their lenders in the aggregate. And banks have no shortage of lenders.

        This is the very same way the government will pay back its lenders, by substituting another for the first lender. As people will be wealthier, debt to GDP will decline drastically over time, leaving the nation a far wealthier and more secure borrower.

        GM

    13. CommentedGary Marshall

      Hello Mr. Zingales,

      Below is an orphan idea. If anyone can find the flaw, I shall be more than happy to give him or her $50,000. I am just tired of doing this. Its not the end of the world, but a new beginning.

      ####

      The costs of borrowing for a nation to fund public expenditures, if it borrows solely from its resident citizens and in the nation's currency, is nil.

      Why? Because if, in adding a financial debt to a community, one adds an equivalent financial asset, the aggregate finances of the community will not in any way be altered. This is simple reasoning confirmed by
      simple arithmetic.

      The community is the source of the government's funds. The government taxes the community to pay for public services provided by the government.

      Cost of public services is $10 million.

      Scenario 1: The government taxes $10 million.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      No community government debt, no community
      government IOU.

      Scenario 2: The government borrows $10 million from solely community lenders at a certain interest rate.

      Community finances: minus $10 million from community bank accounts for government expenditures.
      Community government debt: $10 million;
      Community government bond: $10 million.

      At x years in the future: the asset held by the community (lenders) will be $10 million + y interest. The deferred liability claimed against the community (taxpayers) will be $10 million + y interest.

      The value of all community government debts when combined with all community government IOUs or bonds is zero for the community.

      Theoretically, at some point in the future, the government would collect taxes from the community, i.e. the taxpayers, and simply hand them back to the community, i.e. its lenders, erasing the acquired
      community government debts and assets.

      In conclusion, if a community borrows from its own citizens to fund worthy public expenditures rather than taxes those citizens, it will not alter the aggregate finances nor the wealth of the community. Adding a financial debt and an equivalent financial asset to a community will cause the elimination of both when summed.

      Whatever financial benefit Taxation possesses is nullified by the fact that borrowing instead of Taxation places no greater financial burden on the community.

      However, the costs of Taxation are immense. By ridding the nation of Taxation and instituting borrowing to fund public expenditures, the nation will shed all those costs of Taxation for the negligible fee of borrowing in the financial markets and the administration of public
      debt.

      Regards,
      Gary Marshall

    Featured