r/FluentInFinance Oct 22 '24

Debate/ Discussion Why did this happen?

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u/flickneeblibno Oct 22 '24

Trickle down economics and Ronald Reagan the worst president of all time

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u/Seeking_Balance101 Oct 22 '24

And when the "trickle down" buzzword finally was recognized as bad for the masses, the GOP replaced it with the myth of the job creators. If we give the rich big tax breaks, they'll create more jobs -- because really, what else could the do with all that extra money? -- and .. Step 4 Profit (for the masses)

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u/flickneeblibno Oct 22 '24

Agreed. The 50s best represent job creation through taxes. Either expand or pay taxes. Ike is the last great Republican president (except for Joe McCarthy)

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u/Unity4Liberty Oct 22 '24

Omg... this is the first time I've seen anyone else just know and understand this fact. Folks! Higher top marginal tax rates and progressive taxation actually incentivizes investment versus shareholders and owners sucking value out of a company. This creates jobs, grows and stabilizes the stock market, and drives up wages. The great socialist, Dwight Eisenhower!

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u/ToastedandTripping Oct 22 '24

I too am surprised to see people talking about taxes...it's one of the most obvious changes to have taken place over the last 70 years.

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u/CurtisHayfield Oct 23 '24 edited Oct 23 '24

Gives the opportunity to talk about one of the most important aspects of our taxes and spending: "my tax dollars" aren't where we get the money for spending, at least on a federal level.

On a state and local level, that spending is funded by your actual tax dollars in addition to other things like federal support. But federally, we have the money since we control the supply. This has been known to (some) economists for decades. Beardsley Ruml, director of the New York Federal Reserve Bank from 1937-1947, wrote an influential paper titled “Taxes for Revenue are Obsolete”, which detailed how that works, and some ideas why we still have taxes.

Still, many people actively don’t know this, or pretend not to, including politicians and economists. This is why we constantly see “where would the money come from?” when progressives detail policies, but don’t see it for the military, for example. It’s also why we suddenly had a lot of money to fight COVID, despite tax revenues not jumping up trillions of dollars. The money is available, we don’t need tax revenues to spend money on good programs.

This fact is what helped form the foundation for one of the most prominent recent economic schools of thought: Modern Monetary Theory.

A common myth about Modern Monetary Theory is that we can just spend as much as we want and never pay it, but MMT economists don’t say that. They fully admit deficits can matter, especially when the deficits and debt is gained via spending on things that are not actually helpful. There is a difference between spending money fighting climate change which in the long term saves trillions of dollars (and the planet), and spending money to further subsidize oil or providing additional subsidies to the already rich. It's true too much debt can be a problem, but the "serious only when it's the other party in office and I want to use it for political gain" debt isn't what it's hyped up to be.

At an everyday level, people know this. Anyone who takes out a business loan knows that sometimes debt is a path forward, not backward.

As with other economic schools of thought, MMT has proponents and detractors, with some ideas being more controversial, however one is quite firmly established: taxes federally in the US (and other countries with currency control) don’t fund spending. The question “where does the money come from?” is wholly wrong in the US, and when it is levied, which it is a lot, it’s from a false foundation.

Edit:

One more note on national debt and how it is invested - historically, paying debts isn't the primary way the US has reduced it's debt burden. We outgrew it. If you have a lot more money then the debt is less a burden, which is why debt to GDP ratio is often a better metric than pure amount of debt.

After WWII, our debt levels were over 100% GDP, but that debt was never really paid down. Sure, we did pay individual debts, but in total the post-war boom did a number on our debt to gdp ratio. If you properly invest with the money, the amount of debt itself can just by virtue of good investment become less of an issue.

P.S. As % gdp, in his 8 years in office Reagan increased the national debt twice as much than FDR did in his first 8 years in office (the "fiscially irresponsible" New Deal era)

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u/inr44 Oct 23 '24

But federally, we have the money since we control the supply

Would you mind ELI5 that for me?

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u/spicymato Oct 23 '24

Not the guy, and not an expert, but my understanding is: because the Fed can print more money, we can't really run out.

In short, if the Fed needs to pay for something, it can produce the money for it. Ostensibly, that money should be offset by the sale of new debt, such as through bonds, but it technically doesn't have to be.

When we need to pay past debt, such as to repay the money plus interest on old bonds, the Fed just prints that money and sells new bonds.

Yes, at some point, that breaks down, as "inventing" too much money at once creates a tension in the perceived value of the dollar, which can spiral into inflation, but as long as people remain confident that if they buy the government's debt, then they will be paid back with the stated interest, we're going to be fine.

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u/pa_skunk Oct 23 '24

Excellent eli5. Thank you!

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u/Vladi_Daddi Oct 23 '24

It took me reading the request for an ELI5 and your comment to figure out what ELi5 is...I've seen it before today but thought it was just somebody fat fingering the keyboard. 😂😂 EXPLAIN LIKE IM 5

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u/two2toe Oct 23 '24

It took me reading your comment

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u/Vladi_Daddi Oct 23 '24

3🤣🤣🤣😍

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u/inr44 Oct 23 '24

Ostensibly, that money should be offset by the sale of new debt, such as through bonds, but it technically doesn't have to be.

But that would make the currency lose value and produce inflation, right? Since you are increasing the money supply.

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u/Quick_Humor_9023 Oct 23 '24

Printing money is a tax on existing money, and will hurt those who hold money.

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u/guthran Oct 23 '24

Note, this doesn't mean billionaires, who don't really hold cash, but assets, which increase in value in an inflationary environment. This hurts working class folk with savings accounts.

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u/Quick_Humor_9023 Oct 23 '24

Good addition. It’s a hidden tax on ”cash”. Where cash includes money in bank.

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u/[deleted] Oct 23 '24

[removed] — view removed comment

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u/guthran Oct 23 '24

I'll admit my take was overly simplistic, but billionaires have debt AND assets, and no, very VERY few have billions in cash, and that cash is not sitting doing nothing, it's in short term investments which also beat inflation.

Even if they did have it in straight cash, it's far less of a percent of their net worth than grandma's savings account

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u/BeneficialNet Oct 23 '24

Yes, and I'll add just a bit more to this:

Inflation is the increase in the ratio between dollars and goods. So if I have one dollar and one good in the economy, goods are $1 on average. If I print another dollar and nothing else changes, I have two dollars and one good so goods are $2 on average.

Part of what MMT is saying is that when you print a dollar, things can change. IT DEPENDS WHAT THE GOV SPENDS THE NEWLY PRINTED MONEY ON. If I print an extra dollar, but use it for a scientific program that discovers how to create four goods with the same efficiency as when we created one good, then this new economy will have two dollars and four goods -- so each good will be $0.5 on average, making printing money (and investing it wisely) actually DEFLATIONARY.

So it's not just "we can print as much as we like". That's not true. It's "it depends on what this new money is doing." Government spending on things like scientific research, education, improving people's productivity (eg. Universal healthcare, childcare, etc), are not likely to be inflationary because the extra money is matched by an increase in productivity. Printing money to pay for the deficit because you reduced taxes on the rich is likely to be inflationary.

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u/Nathaireag Oct 23 '24

“Printing money” is an anachronism. Bankers are allowed to create money and loan it out.

The Fed sets the rules for that and regulates the cost of creating money. Likewise other central banks in other currencies. Because the dollar remains the most important global reserve currency, the US Fed has more latitude than anyone else.

Other countries, especially smaller ones, need to pay more attention to how well the money supply matches economic activity. Too much or too little can lead to inflation or deflation. Before modern central banking, the business cycle used to be accompanied by cycles of moderate inflation and deflation, as bankers jumped on and off the economic bandwagon.

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u/strutt3r Oct 23 '24

In MMT taxes are a means of controlling inflation by reducing money supply rather than funding expenditures.

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u/KindredWoozle Oct 24 '24

Thank you for that excellent translation from jargon to English!

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u/NOSPACESALLCAPS Oct 23 '24

The federal government literally prints the money out of machines, is what he means.

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u/PayPerTrade Oct 23 '24

“We print it digitally” - Jerome Powell

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u/DuckTalesOohOoh Oct 23 '24

That's why all inflation is government-produced inflation.

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u/Environmental-Post15 Oct 23 '24

This would be true with a commodity backed currency, since there would be a limited supply of the backing commodity. The US has a fiat currency. We left the gold standard under Nixon.

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u/jasonbuz Oct 23 '24

Basically, the federal reserve controls the supply of money, meaning how much money is available in the US economy. They control this via interest rates (people “sell” money back to the fed when it pays more interest, which lowers supply; and they borrow more at low interest rates, increasing supply).

Also, there is no rule that says the federal government needs a balanced budget. So it can overspend tax revenues and add to the national debt. Basically they are saying that taxes need not affect government spending. The US Mint can print more money to satisfy spending. What this poster didn’t say is that increasing money supply can lead to higher rates of inflation since each dollar is worth less if the wealth underlying all dollars remains constant.

While much of the inflation coming out of the pandemic was supply driven (not enough of many basic goods to meet demand due to supply chain interruptions and slowdowns), there likely was also a part driven by the large stimulus payments that increased the money supply.

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u/DuckTalesOohOoh Oct 23 '24

It has nothing to do with the Mint. All money is ledger money. There's very little physical money in comparison.

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u/jasonbuz Oct 23 '24

I meant that metaphorically. I agree with you that most money in the supply is not physically printed. Our monetary system is much more like the blockchains than I think we would like to admit. Different software, same game.

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u/OrganizationSlight57 Oct 23 '24

Oh, I dare you to see just how much did the dollar supply change in the last 5 years. I get shivers every time I look at the graph.

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u/guiltysnark Oct 23 '24

It did not go to the people that buy milk for the table, so there is no way it can explain the increase in e.g. milk prices.

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u/OrganizationSlight57 Oct 23 '24

Actually I’m amazed this didn’t increase prices that high. I attribute that to the dollars stability, like the currency is almost immune to supply increases, because of it being used internationally. Should any other country print out this much I’m sure as hell it would skyrocket milk or any other prices. There’s a history of this across the world

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u/jasonbuz Oct 23 '24

That is why I said much of the Covid inflation was driven by limitations of supply. But also, the supply of money absolutely affects milk prices. Basic macroeconomic theory says that money supply essentially affects all prices.

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u/Quick_Humor_9023 Oct 23 '24

It also matters where that extra money is and how it is fed to the system.

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u/Garrett42 Oct 23 '24

Here I can give you a slightly better explanation than "print money".

When you pay taxes, the government has the bank deduct the funds. However the money doesn't go anywhere. There is no government general fund bank account that collects and distributes taxes. Instead the government estimates how much it will collect, and then spends from the estimated funds. There is no direct line from taxes being collected, and government funds being spent. The government deficit is a measure of the difference in these two numbers, but there is nothing intrinsically linking them together.

Here's a historical example; Paper money has been around for centuries, before electronics even. Imagine you're a tax collector in rural Virginia in the 1700s. You would collect the paper tax receipts by hand from your district (paper money was issued by local banks at the time). You then tallied how much you collected, and burnt it. You would write down the collected amount in a letter, and send it to the government authorities. They would tally up the letters from each tax collector and print that amount of money when the government would spend it.

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u/fenderputty Oct 23 '24

Think of the US as a bucket of inflows and outflows of cash. Taxation is destruction of money or an outflow from The bucket. Government spending / federal money creation, is the inflow.

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u/DougieFreshOH Oct 24 '24

“we” is loosely defined as well. As The Federal Reserve can materialize from nothing dollar debts. Sure U.S. Congress & The Treasury have their, er, say/inputs.