[eganist]

> The Fed is limited in their toolset, so in order to do that they can raise the federal funds rate basically causing any loans given to have a minimum APR

The Fed is limited much the way a surgeon would be limited if they had to manage a tumor with a mallet.

The solution here would've been targeted taxes to extract the excess liquidity that pooled up in the economy after all the loans and grants, but with a deadlocked legislature this was not going to happen. So, mallet it was.

[kriskrunch]

Why is the answer often to raise taxes? Wouldn't less government spending and a higher fed rate have been even better and more efficient?

Inflation was already high when the last large spending package passed and succeeded in over stimulating the economy.

[jandrese]

Getting agreement on reducing spending is a much harder ask. What are you going to cut? The military? They're incredibly well connected, it's basically impossible. Social Security? Old people vote, it's political suicide. Social Safety Net programs? Already been cut to the bone.

It's also questionable how much of inflation is due to supply shock versus how much is just corporate profit taking. Corporate profit margins have been incredibly healthy despite what is supposedly a supplier squeeze.

[kriskrunch]

You're right, it's way easier for the government to spend money it doesn't have. The end game on that path isn't pretty.

But that's not my question or point, and maybe I didn't write my other post very well.

The post I'm replying to suggests more taxes should have been used to suck up the excess liquidity. I'm suggesting that liquidity was caused by too many large spending packages and Fed rates that were too low in the first place... Hence, it might be inefficient.

Of course I'm biased, as my spending power has gone down tremendously in the past 1.5 years. I blame the large increases in money supply and low Fed rate for causing a wild near-free money environment.

[eganist]

> Inflation was already high when the last large spending package passed and succeeded in over stimulating the economy.

The others answered you pretty well. My comment speaks instead to this recital, which is incorrect and thus undermines the rest of your argument.

Inflation in the US was averaging around 2% since 2008 (https://www.worlddata.info/america/usa/inflation-rates.php), and 2% is generally considered healthy (https://www.federalreserve.gov/faqs/5D58E72F066A4DBDA80BBA65...).

"less government spending" doesn't address the pooled-up liquidity in the economy; it just addresses government spending. Hence the need for the scalpel (finely targeted taxes)... or in the absence of such, the blunt instrument (broadly-impactful rates).

They both extract money, but one's specific to things such as luxury goods, gas-powered vehicles over a certain weight, homes over a certain size or cost relative to local income, a tax per stock trade, whatever makes sense, whereas the other... not so much. Targeted taxes without an increase in spending would result in a net reduction in the budget deficit or even potentially a budget surplus, which then is essentially how the money is removed from circulation. And without using the mallet, businesses can continue to grow in a cheap-money environment.

I'm not an economist; I've just absorbed a lot from working in FIs in the past. But there's probably an economist here who can affirm or debunk what I just put forward.

[kriskrunch]

I earned a degree in economics, business & management.. But it doesn't matter much.

Re-reading my post, it looks like I could have written it better.

I was referring to the stimulus spending, in particular the last one or two huge packages. It might have been more efficient to not do them in the first place. At the time many economists were very concerned about the overall effects on the economy. We were already running at 5+% annualized inflation, right?

I understand the general ideas behind Modern Monetary Theory, that it looks like you and the original post are referring to. Wild spending corrected by surgical taxation...

MMT sounds great in academic papers, but it runs into problems in practice. We can't just raise taxes wherever and whenever we want. There are too many problems to list with attempting to do that, from the lobbyists, to officials wanting to get reelected, to the errors of misidentifying where the taxes are to be applied. Not to mention all the existing laws around taxing.

It's expensive to send out a bunch of money, and then tax it back... I suggest that it's more efficient to spend less. But I realize there is a fat chance of that ever happening!

[eganist]

Seems you're commenting more on the feasibility of surgical taxes rather than the effectiveness of them.

Which is fine; no disagreement there from me. But I'd also posit that government spending on the administrivia is a positive - it's yet another way to keep money moving and likewise keep momentum in the economy.

I guess my point is: the ideal would've been to surgically tax money out of the system, but since we can't (for all the reasons you and I both mentioned), the alternative was rates. And while I hear your point re: cutting spending, you're arguing its merits on the likelihood of it happening, not so much whether one's better than the other. And neither spending cuts nor surgical tax hikes would happen anyway, hence...

...rates. lol

tl;dr: we're saying the same thing. You're talking about which one's more feasible, I'm talking about which one would've probably been more ideal to maintain momentum.

[coryrc]

Which party has voted for consequential spending cuts in the last two decades?

[JustSomeNobody]

> Why is the answer often to raise taxes?

Because taxing isn't a way to fund the government, it's a way to shape behavior.

[kriskrunch]

You can say the exact same thing about spending... Subsidies and stimuli shape behavior.