by Michal Kalecki
It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is 'financed' by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.
What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.
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Friday, May 8, 2009
Thursday, May 7, 2009
Those Wacky Europeans!
by the Sandwichman
EU recommends shorter working hours to prevent layoffs
Don't they know it's a lump-of-labor fallacy to think that you can fight unemployment by cutting hours? Why, it says right here in this introductory textbook...
EU recommends shorter working hours to prevent layoffs
Don't they know it's a lump-of-labor fallacy to think that you can fight unemployment by cutting hours? Why, it says right here in this introductory textbook...
Actions by Member States and social partners must aim at maintaining as many people as possible in jobs. To this end, a temporary adjustment of working hours can be an effective policy option for firms of all sizes, with the support of public funding including the European Social Fund (ESF); it can be an opportunity for re-training to facilitate internal job transfers or transitions to other companies and/or sectors in line with flexicurity.
Do We Need an "Economic Manhattan Project"?
Following a suggestion by mathematician Eric Weinstein of the Natron Group for an Economic Manhattan Project," back in December, Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose, and Lee Smolin posted "Can Science Help Solve the Economic Crisis?" weighing in favorably on Weinstein's proposal at on the edge. They criticized various assumptions of neoclassical theory and called for complexity science, agent-based models, evolutionary modles, and gauge invariance models to be used for non-equilibrium dynamics modeling, as well as analysis of policy alternatives. Criticism by Nassim Taleb, Michael Shermer, Emanual Derman, Paul Romer, and others can be found under "The Reality Club" at that link. Ronald Bailey of reason weighed in with further critiques, calling the whole thing "inane", with others commenting there as well.
On March 2, Tyler Cowen posted on "Lee Smolin on General Equilibrium Theory". This dealt with some of the related issues and dragged in me making some critical remarks, with replies by both Eric Weinstein and Lee Smolin, who is a quantum gravity theorist at the Perimeter Institute of Theoretical Physics in Waterloo, Ontario. As a result of that, I was invited to participate (and did) in a conference held May 1-4 at the Perimeter Institute on "The Economic Crisis and its Implications for the Science of Economics." The participants included some of the original critics, such as Taleb and Derman, along with a variety of people from physics, math, computer science, evolutionary biology, accounting, finance, and economics, with some of the better known others including Nouriel Roubini, Andrew Lo, Doyne Farmer, Leigh Tesfatsion, Richard Alexander, and Richard Freeman. To the best of my knowledge, no overall summary of what happened there has been posted anywhere, but it was very intense with many ideas and tough arguments going back and forth (the institute has blackboards for walls in much of it, which get a lot of use). So, attempting to go below the fold, I shall try to summarize some of it.
The conference was in two parts, a much larger public conference on May Day (for which Freeman wore a red shirt), and a much smaller workshop the next three days, with some of those speaking on the first day not participating in that ("Dr. Doom" Roubini and "Black Swan" Taleb had to go scare some finance ministers in Singapore, and Lo and Derman also departed). Also, I left after only a bit of the last day, when those still standing were trying to summarize and put forward a way to go forward (something will come out of this, but I am not sure that "Manhattan Project" will describe it). I note that the workshop included some lectures (including one by me on May 3), along with some breakout group sesssions.
Anyway, rather than a blow by blow of who said what when, let me note some major issues and positions. So, one big thing that there was a lot of agreement on was the likely superiority of agent-based modeling in some form or other for modeling non-equilibrium economic systems. A leader there for this was Leigh Tesfatsion, who maintains the main website for collecting agent-based models in economics. She called for this being done in macroeconomics to at least supplement the current DSGE models that dominate the basements of the central banks. Doyne Farmer also seconded this strongly, and is apparently building one with Robert Axtell. A curious aspect of this debate was that I learned later from Leigh that someone in attendance for part of the time was the computable general equilibrium modeler, John Whalley. However, for whatever reason, he chose not to make any comments at all on anything, and did not wear a name tag either.
A related issue, which may well be a major focus of more immediate efforts coming out of this conference, was what to do about the fact that most agent-based models are written in different languages and that it is not easy to link up between them. This is related to broader issues that had some of the computer scientists there worked up, as well as the estimable Leigh Tesfatsion, about interfacing between different computer languages in general. Also brought up in this discussion was the problem of data availabilty, with some saying that crucial data really is publicly available, but unknown by most, while others disputed this. There may be some push in these areas coming out of this.
I would note that there were several presentations of specific agent-based models in the workshop. One that was rather nice was by Alexander Outkin from before the decimalization of the stock exchanges showing that this would not necessarily stabilize things as forecast.
There were a lot of discussions of econophysics, with Doyne Farmer of the Santa Fe Institute providing a good summary of the state of play in that controversial arena. More cogent to this conference is the argument advocated by Lee Smolin, drawing on more specific work by Eric Weinstein and Pia Malaney, along with some post-docs at the Perimeter Institute, about applying gauge invariance theory to economics. Gauge invariance is an idea that floats around in some of the efforts to obtain a general unified theory of cosmology, particularly putting together general relativity with quantum mechanics, with the Perimeter Institute being a center of those who question string theory for achieving this, and Smolin a leader of this group.
Anyway, this was the matter that I had criticized, initially quite strongly, over on marginal revolution. I still hold to some of my criticisms, but also feel that I have not seen or fully understood all that there is to this argument. So, part of it seems to be a rediscovery of the wheel, in this case, the theoretical superiority of Divisia indexes for measuring values over time when relative prices and quantities are changing, with the claim being made further that this can also apply to a world of changing preferences, with the ability to chart cardinal utility over time, assuming that it is meaningful to talk about that. My problem with the former is that most economists know this, but that it is applying Divisia indexes in practice that is the problem as they assume continuous time, whereas empirical reality for actual indexes comes to us in discrete chunks not always all that close to each other. I am unsure about the utility argument.
An application was also made to financial markets by Simon Vasquez. He and Simone Severini also presented what was supposed to be a model of non-equilibrium dynamics. I would not say that this achieved something that Weinstein says can be done, which is to use gauge theory methods for measuring the curvature of fiber bundles to measure the degree of out-of-equilibriumness of a system. I think this latter would be really useful, and maybe it can be done, but I did not see this being fully achieved yet from what was presented there.
A rather looser end that I did not see the end of, as the summary from the relevant out-session was not presented before I left, was the application of biological or evolutionary ideas to all this. One disappointment was that co-organizer Stuart Kauffman did not attend, who is a biologist associated with the Santa Fe Institute, and whose work has been applied at times in economics. One presentation in the main workshop was by Kelly John Rose of PI on interpreting input-output matrices from an ecological perspective due to Robert Ulanowicz, that of ecological ascendancy, with looking at economic sectors as ecological trophic levels. He also said that gauge invariance was relevant to this, although that was not shown clearly. However, more generally, the ecological or biological arguments tended to be more on the side of this workshop.
There was more discussion of them in the main presentations the first day. So, Andrew Lo spoke of the adaptive market and how investors change their views over time in a market so as to lead to instabilities, arguably a fancier updating with neuroeconomics arguments of Minsky and Shiller. Also, the noted evolutionary biologist, Richard Alexander, spoke about various issues in the evoution of human beings and relations between kinship and sexual selection. However, he added little to the main workshop discussions, and in my private conversations with him he expressed reservations about people inappropriately using the "language of evolution" outside of more strictly biological evolution. So, while he is fine with discussing how moral systems evolved with humans over long periods of time, he was not particularly happy with people talking about firms or technologies or market forms evolving.
I am going to close this by saying that it was one of the most stimulating conferences I have been to, real clashes of serious ideas while people were willing to speak with mutual respect. I am perhaps sorry that Whalley did not speak up to defend more orthodox approaches, but, well, I do not blame him for keeping his head down. I do hope that it does lead to some further developments, and I think the critics who think this is all going to lead to proposals for central planning or whatever are barking up the wrong tree (see the discussions by Bailey and others).
On March 2, Tyler Cowen posted on "Lee Smolin on General Equilibrium Theory". This dealt with some of the related issues and dragged in me making some critical remarks, with replies by both Eric Weinstein and Lee Smolin, who is a quantum gravity theorist at the Perimeter Institute of Theoretical Physics in Waterloo, Ontario. As a result of that, I was invited to participate (and did) in a conference held May 1-4 at the Perimeter Institute on "The Economic Crisis and its Implications for the Science of Economics." The participants included some of the original critics, such as Taleb and Derman, along with a variety of people from physics, math, computer science, evolutionary biology, accounting, finance, and economics, with some of the better known others including Nouriel Roubini, Andrew Lo, Doyne Farmer, Leigh Tesfatsion, Richard Alexander, and Richard Freeman. To the best of my knowledge, no overall summary of what happened there has been posted anywhere, but it was very intense with many ideas and tough arguments going back and forth (the institute has blackboards for walls in much of it, which get a lot of use). So, attempting to go below the fold, I shall try to summarize some of it.
The conference was in two parts, a much larger public conference on May Day (for which Freeman wore a red shirt), and a much smaller workshop the next three days, with some of those speaking on the first day not participating in that ("Dr. Doom" Roubini and "Black Swan" Taleb had to go scare some finance ministers in Singapore, and Lo and Derman also departed). Also, I left after only a bit of the last day, when those still standing were trying to summarize and put forward a way to go forward (something will come out of this, but I am not sure that "Manhattan Project" will describe it). I note that the workshop included some lectures (including one by me on May 3), along with some breakout group sesssions.
Anyway, rather than a blow by blow of who said what when, let me note some major issues and positions. So, one big thing that there was a lot of agreement on was the likely superiority of agent-based modeling in some form or other for modeling non-equilibrium economic systems. A leader there for this was Leigh Tesfatsion, who maintains the main website for collecting agent-based models in economics. She called for this being done in macroeconomics to at least supplement the current DSGE models that dominate the basements of the central banks. Doyne Farmer also seconded this strongly, and is apparently building one with Robert Axtell. A curious aspect of this debate was that I learned later from Leigh that someone in attendance for part of the time was the computable general equilibrium modeler, John Whalley. However, for whatever reason, he chose not to make any comments at all on anything, and did not wear a name tag either.
A related issue, which may well be a major focus of more immediate efforts coming out of this conference, was what to do about the fact that most agent-based models are written in different languages and that it is not easy to link up between them. This is related to broader issues that had some of the computer scientists there worked up, as well as the estimable Leigh Tesfatsion, about interfacing between different computer languages in general. Also brought up in this discussion was the problem of data availabilty, with some saying that crucial data really is publicly available, but unknown by most, while others disputed this. There may be some push in these areas coming out of this.
I would note that there were several presentations of specific agent-based models in the workshop. One that was rather nice was by Alexander Outkin from before the decimalization of the stock exchanges showing that this would not necessarily stabilize things as forecast.
There were a lot of discussions of econophysics, with Doyne Farmer of the Santa Fe Institute providing a good summary of the state of play in that controversial arena. More cogent to this conference is the argument advocated by Lee Smolin, drawing on more specific work by Eric Weinstein and Pia Malaney, along with some post-docs at the Perimeter Institute, about applying gauge invariance theory to economics. Gauge invariance is an idea that floats around in some of the efforts to obtain a general unified theory of cosmology, particularly putting together general relativity with quantum mechanics, with the Perimeter Institute being a center of those who question string theory for achieving this, and Smolin a leader of this group.
Anyway, this was the matter that I had criticized, initially quite strongly, over on marginal revolution. I still hold to some of my criticisms, but also feel that I have not seen or fully understood all that there is to this argument. So, part of it seems to be a rediscovery of the wheel, in this case, the theoretical superiority of Divisia indexes for measuring values over time when relative prices and quantities are changing, with the claim being made further that this can also apply to a world of changing preferences, with the ability to chart cardinal utility over time, assuming that it is meaningful to talk about that. My problem with the former is that most economists know this, but that it is applying Divisia indexes in practice that is the problem as they assume continuous time, whereas empirical reality for actual indexes comes to us in discrete chunks not always all that close to each other. I am unsure about the utility argument.
An application was also made to financial markets by Simon Vasquez. He and Simone Severini also presented what was supposed to be a model of non-equilibrium dynamics. I would not say that this achieved something that Weinstein says can be done, which is to use gauge theory methods for measuring the curvature of fiber bundles to measure the degree of out-of-equilibriumness of a system. I think this latter would be really useful, and maybe it can be done, but I did not see this being fully achieved yet from what was presented there.
A rather looser end that I did not see the end of, as the summary from the relevant out-session was not presented before I left, was the application of biological or evolutionary ideas to all this. One disappointment was that co-organizer Stuart Kauffman did not attend, who is a biologist associated with the Santa Fe Institute, and whose work has been applied at times in economics. One presentation in the main workshop was by Kelly John Rose of PI on interpreting input-output matrices from an ecological perspective due to Robert Ulanowicz, that of ecological ascendancy, with looking at economic sectors as ecological trophic levels. He also said that gauge invariance was relevant to this, although that was not shown clearly. However, more generally, the ecological or biological arguments tended to be more on the side of this workshop.
There was more discussion of them in the main presentations the first day. So, Andrew Lo spoke of the adaptive market and how investors change their views over time in a market so as to lead to instabilities, arguably a fancier updating with neuroeconomics arguments of Minsky and Shiller. Also, the noted evolutionary biologist, Richard Alexander, spoke about various issues in the evoution of human beings and relations between kinship and sexual selection. However, he added little to the main workshop discussions, and in my private conversations with him he expressed reservations about people inappropriately using the "language of evolution" outside of more strictly biological evolution. So, while he is fine with discussing how moral systems evolved with humans over long periods of time, he was not particularly happy with people talking about firms or technologies or market forms evolving.
I am going to close this by saying that it was one of the most stimulating conferences I have been to, real clashes of serious ideas while people were willing to speak with mutual respect. I am perhaps sorry that Whalley did not speak up to defend more orthodox approaches, but, well, I do not blame him for keeping his head down. I do hope that it does lead to some further developments, and I think the critics who think this is all going to lead to proposals for central planning or whatever are barking up the wrong tree (see the discussions by Bailey and others).
Political Aspects of Full Employment I, 1.
by Michal Kalecki
A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.
If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.
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A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.
If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.
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Political Aspects of Full Employment -- Introduction
by the Sandwichman
Sixty-seven years ago, Michal Kalecki nailed it. The economics of full employment is not rocket science. It's the politics, stupid.
"That is not to say that people who advance them [politically-motivated doctrine advanced as economic arguments] do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives."
"Political Aspects of Full Employment" was published in The Political Quarterly (!) in 1943 and was based on a lecture delivered at Cambridge in the spring of 1942. Sandwichman will post it to EconoSpeak in 14 installments.
Next
Sixty-seven years ago, Michal Kalecki nailed it. The economics of full employment is not rocket science. It's the politics, stupid.
"That is not to say that people who advance them [politically-motivated doctrine advanced as economic arguments] do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives."
"Political Aspects of Full Employment" was published in The Political Quarterly (!) in 1943 and was based on a lecture delivered at Cambridge in the spring of 1942. Sandwichman will post it to EconoSpeak in 14 installments.
Next
Monday, May 4, 2009
Meltzer: Fire Keynes, Replace Him with Friedman
Readers of today’s New York Times Op-Ed page can enjoy the spectacle of two economists side-by-side, one warning of deflation, the other of inflation. The Cassandra of inflation is Allan Meltzer, a monetarist of the fundamentalist variety and founding father of the Shadow Open Market Committee, a Fed watchdog group that barks at the first glimmer of monetary loosening. On the face of it, railing against inflation in the midst of incipient debt deflation is madness, but I happen to think that Meltzer has a point, just not for the reasons given.
Meltzer goes on a long detour about the rise and fall of US inflation during the 1970s that ignores the actual economic record (growth was pretty good) and dismisses the disastrous consequences of the ensuing disinflation (especially the developing country debt debacle) in a few flippant words:
But let’s get to the point: are we setting the stage today for a massive resurgence of inflation down the road? Meltzer says yes, for three reasons: too much money creation, too much deficit spending, too little investment in productivity. None of these is actually documented; it is all anecdote and assertion, but let’s give him the benefit of the doubt.
Money creation? Well, it depends on what definition of the money supply you want to use. M1, the monetary base beloved of paleo-Friedmanites, is through the roof, but this is because of the massive buildup of excess reserves held by member banks at the Fed. A more meaningful measure is M2, which includes checkable deposits, and here the growth is in the high single-digits. Is that a lot? Apparently the velocity of money (how rapidly it turns over), which is cyclically volatile, is depressed, since nominal GDP (the value of output at current prices) is falling—which it seldom does. The Fed is leaning against this monetary friction by pushing a bit harder on the supply side. As long as its policy is reversible, it is not inflationary.
Deficit spending? The US is on track to boost its public debt to about 80% of GDP by the outer years of the (first) Obama presidency. This is in the middle of the peleton as far as industrialized countries are concerned, and well below the level reached in 1945 after fifteen years of depression and war. There is no reason to believe this debt is not sustainable. Nearly all economists agree that the US has the fiscal space to run the deficits it is programming, a luxury available to relatively few other nations.
Productivity? To begin with, it is odd for an arch conservative like Meltzer to look to the government for investments in productivity growth, but let’s follow his line of argument: is the stimulus being spent in ways that will boost future productivity? Not surprisingly, the answer is yes and no, but more yes than Meltzer is willing to acknowledge. He makes a couple of major errors:
Aside from the throw-away tone of the opening phrase, his dismissal of the productivity effects of health care investments is contradicted by a mountain of research. At both the individual and social levels, health is a significant determinant of productivity; add to this the fact that the US has a notoriously inefficient health care sector whose cost trajectory is unsustainable, and you have a clear case for productivity-enhancing investment. Meanwhile, Meltzer’s comments about energy demonstrate he is unaware of the energy efficiency gap, whose closing would be a big contribution in both economic and ecological terms.
In the end, however, I think an inflationary surge is entirely possible, for reasons that Meltzer doesn’t address. The first is the potential for a future run on the dollar once the private demand for Treasuries eases up. The low inflation environment of the last two decades was founded on an over-strong dollar; a rapid depreciation would turn this around. The second risk has to do with the unprecedented role of unconventional assets in the Fed’s balance sheet. Traditionally, the Fed conducted open market operations by buying and selling Treasury obligations—the “bonds” in your macro textbook. It could expand the money supply by buying bonds and, if it wanted to disinflate, reverse course by selling them. Under the banner of bailing out the financial system, the Fed is now injecting money by buying toxic assets, but what happens if the Fed wants to soak up money instead? It has unloaded all its stash of public debt, and the assets it holds are not marketable. This asymmetry in Fed policy should be a real source of worry for the Meltzers of this world, and even irresponsible economic populists like myself.
In a nutshell, the fiscal and monetary initiatives undertaken to support the bailout present significant inflationary risks. True, resisting deflation is the immediate task, but there are better and worse ways to do this. Using the US central bank to trade cash for trash is a dangerous path.
Meltzer goes on a long detour about the rise and fall of US inflation during the 1970s that ignores the actual economic record (growth was pretty good) and dismisses the disastrous consequences of the ensuing disinflation (especially the developing country debt debacle) in a few flippant words:
And the anti-inflation policy continued until the unemployment rate rose above 10 percent, many savings and loan institutions faced bankruptcy, and most Latin American countries defaulted on their debt. These were the unavoidable side effects of the public’s gradual adjustment to the new economic environment.
But let’s get to the point: are we setting the stage today for a massive resurgence of inflation down the road? Meltzer says yes, for three reasons: too much money creation, too much deficit spending, too little investment in productivity. None of these is actually documented; it is all anecdote and assertion, but let’s give him the benefit of the doubt.
Money creation? Well, it depends on what definition of the money supply you want to use. M1, the monetary base beloved of paleo-Friedmanites, is through the roof, but this is because of the massive buildup of excess reserves held by member banks at the Fed. A more meaningful measure is M2, which includes checkable deposits, and here the growth is in the high single-digits. Is that a lot? Apparently the velocity of money (how rapidly it turns over), which is cyclically volatile, is depressed, since nominal GDP (the value of output at current prices) is falling—which it seldom does. The Fed is leaning against this monetary friction by pushing a bit harder on the supply side. As long as its policy is reversible, it is not inflationary.
Deficit spending? The US is on track to boost its public debt to about 80% of GDP by the outer years of the (first) Obama presidency. This is in the middle of the peleton as far as industrialized countries are concerned, and well below the level reached in 1945 after fifteen years of depression and war. There is no reason to believe this debt is not sustainable. Nearly all economists agree that the US has the fiscal space to run the deficits it is programming, a luxury available to relatively few other nations.
Productivity? To begin with, it is odd for an arch conservative like Meltzer to look to the government for investments in productivity growth, but let’s follow his line of argument: is the stimulus being spent in ways that will boost future productivity? Not surprisingly, the answer is yes and no, but more yes than Meltzer is willing to acknowledge. He makes a couple of major errors:
Better health care adds to the public’s sense of well-being, but it adds only a little to productivity. Subsidizing cleaner energy projects can produce jobs, but it doesn’t add much to national productivity.
Aside from the throw-away tone of the opening phrase, his dismissal of the productivity effects of health care investments is contradicted by a mountain of research. At both the individual and social levels, health is a significant determinant of productivity; add to this the fact that the US has a notoriously inefficient health care sector whose cost trajectory is unsustainable, and you have a clear case for productivity-enhancing investment. Meanwhile, Meltzer’s comments about energy demonstrate he is unaware of the energy efficiency gap, whose closing would be a big contribution in both economic and ecological terms.
In the end, however, I think an inflationary surge is entirely possible, for reasons that Meltzer doesn’t address. The first is the potential for a future run on the dollar once the private demand for Treasuries eases up. The low inflation environment of the last two decades was founded on an over-strong dollar; a rapid depreciation would turn this around. The second risk has to do with the unprecedented role of unconventional assets in the Fed’s balance sheet. Traditionally, the Fed conducted open market operations by buying and selling Treasury obligations—the “bonds” in your macro textbook. It could expand the money supply by buying bonds and, if it wanted to disinflate, reverse course by selling them. Under the banner of bailing out the financial system, the Fed is now injecting money by buying toxic assets, but what happens if the Fed wants to soak up money instead? It has unloaded all its stash of public debt, and the assets it holds are not marketable. This asymmetry in Fed policy should be a real source of worry for the Meltzers of this world, and even irresponsible economic populists like myself.
In a nutshell, the fiscal and monetary initiatives undertaken to support the bailout present significant inflationary risks. True, resisting deflation is the immediate task, but there are better and worse ways to do this. Using the US central bank to trade cash for trash is a dangerous path.
California Fiscal Bait and Switch
I'm not an expert in fiscal policy. I don't even play one on television. With that caveat, I would like to comment on the upcoming California special election.
Prior to the ratification of Proposition 13 in 1978, Gov. Jerry Brown was building up a rainy day fund to prepare for fiscal emergencies. Republicans argued that the state had no right to hoard "the people's money."
A number of other factors are used to explain why Californians ratified Proposition 13. The most common culprit was the Serrano decision that was supposed to break the link between local property taxes and school funding, which was intended to reduce inequalities between school districts. Many people resented having to pay property taxes to support poor or minority kids. Also, there were some scandals with County tax assessors, but my recollection was that the rainy day fund rhetoric was the loudest.
Proposition 13 changed the political landscape of California. Besides limiting increases in property taxes over and above a fixed formula, this constitutional amendment required a two thirds majority of both houses of the legislature, meaning either party would be unlikely to muster enough votes to raise taxes. After a marathon of political wrangling to finally pass a very late budget, a literal handful of Republicans agreed to vote for the budget on the condition that the state put a number of awful amendments on the ballot.
Bait and switch number one: Today, California's preparing to constitutionally limit spending in order to build up a rainy day fund, which I assume will be a juicy target for future tax cutters.
Bait and switch number two: Another amendment will securitize the lottery, which was initially passed as a way to help fund education, given the constraints of Proposition 13. To make the lottery money more attractive to prospective bondholders, the link between the lottery and education will be broken.
Prior to the ratification of Proposition 13 in 1978, Gov. Jerry Brown was building up a rainy day fund to prepare for fiscal emergencies. Republicans argued that the state had no right to hoard "the people's money."
A number of other factors are used to explain why Californians ratified Proposition 13. The most common culprit was the Serrano decision that was supposed to break the link between local property taxes and school funding, which was intended to reduce inequalities between school districts. Many people resented having to pay property taxes to support poor or minority kids. Also, there were some scandals with County tax assessors, but my recollection was that the rainy day fund rhetoric was the loudest.
Proposition 13 changed the political landscape of California. Besides limiting increases in property taxes over and above a fixed formula, this constitutional amendment required a two thirds majority of both houses of the legislature, meaning either party would be unlikely to muster enough votes to raise taxes. After a marathon of political wrangling to finally pass a very late budget, a literal handful of Republicans agreed to vote for the budget on the condition that the state put a number of awful amendments on the ballot.
Bait and switch number one: Today, California's preparing to constitutionally limit spending in order to build up a rainy day fund, which I assume will be a juicy target for future tax cutters.
Bait and switch number two: Another amendment will securitize the lottery, which was initially passed as a way to help fund education, given the constraints of Proposition 13. To make the lottery money more attractive to prospective bondholders, the link between the lottery and education will be broken.
Saturday, May 2, 2009
GROAT! (it rhymes with bloat)
by the Sandwichman
The "concept of growth" concedes too much emotional appeal to a notion that is actually more about delusions of grandeur and bloating than it is about the kinds of organic processes we associate with children, grass, trees and gardens.
Economic growth becomes an oxymoron when it is orchestrated by elected officials for the sake of their incumbency with the rules of the game dictated by career investment bankers serving out their revolving-door appointments. Such a concept doesn't deserve to be called growth with all of that term's positive connotations. What's growth got to do with it, anyway?
After pondering for several days about a substitute for the word growth, I stumbled across "groat". It sounds like how growth might be pronounced in some dialects. A groat, though, is an English four-penny coin, introduced in the 13th century. Similarly named coins had been introduced earlier in the same century in Venice (grosso, meaning large or thick), Holland (groot, meaning great or large) and France (gros tournois).
The names of the coins referred to the fact that they were thick silver coins in contrast to the thin pennies or deniers already in circulation. A higher denomination coin is a response to debasement of the currency. To the extent that coins were the currency in the 13th century, economic growth became the public policy "coin of the realm" in the second half of the 20th century. And successive governments globally have predictably debased that currency by parlaying the GDP into Gross Domestic Ponzi-schemes in which debt-fueled economic growth is supposed to generate the tax revenues to perpetually service the accumulated debt.
Debasing coinage is what governments do. Gresham's law: bad money drives out good. Grass grows. Trees grow. Children grow. Governments debase money.
Another feature recommending groat as a critical terminological substitute for growth is the fact that the coin evolved into an exclusively ceremonial token, given out by the sovereign as symbolic alms to the poor each year on Maundy Thursday (and, of course, groat rhymes with bloat and with gloat).
Peter Victor's chapter on the history of the idea of economic growth relies heavily on H.W. Arndt's Rise and Fall of Economic Growth: a study in contemporary thought. A pivotal element in the evolution of thinking about economic policy was the argument put forward by R. Harrod in 1939 and E. Domar in 1946 that economic growth, defined as annual increase in national income, was indispensable to maintaining full employment.
Although Harrod's and Domar's argument is commonly misrepresented as "Keynesian", Keynes himself viewed government growth stimulus policies as only one of the possible strategies for addressing with the problem full employment and one that was only applicable for a limited period of time (Keynes estimated a best-by date on the growth stimulus policy of about 15 years after the end of the World War II). The "ultimate solution", Keynes stated in a 1943 Treasury Department memorandum and again in a 1945 letter to T.S. Eliot was "working less".
John R. Hicks – whose 1937 mathematical 'interpretation' of Keynes (featuring his famous "IS/LM curve") was crucial to Harrod's and Domar's efforts – subsequently (1975) repudiated that earlier contribution as too static and unhistorical. Similarly, Simon Kuznets, who developed the national income accounts relied on to measure economic growth, warned "The welfare of a nation can scarcely be inferred from a measurement of national income... Goals for 'more' growth should specify of what and for what."
Economic growth is thus today thoroughly debased and effaced from its original conception. To continue to call it growth is to circulate a counterfeit. Let's call it economic groat.
The "concept of growth" concedes too much emotional appeal to a notion that is actually more about delusions of grandeur and bloating than it is about the kinds of organic processes we associate with children, grass, trees and gardens.
Economic growth becomes an oxymoron when it is orchestrated by elected officials for the sake of their incumbency with the rules of the game dictated by career investment bankers serving out their revolving-door appointments. Such a concept doesn't deserve to be called growth with all of that term's positive connotations. What's growth got to do with it, anyway?
After pondering for several days about a substitute for the word growth, I stumbled across "groat". It sounds like how growth might be pronounced in some dialects. A groat, though, is an English four-penny coin, introduced in the 13th century. Similarly named coins had been introduced earlier in the same century in Venice (grosso, meaning large or thick), Holland (groot, meaning great or large) and France (gros tournois).
The names of the coins referred to the fact that they were thick silver coins in contrast to the thin pennies or deniers already in circulation. A higher denomination coin is a response to debasement of the currency. To the extent that coins were the currency in the 13th century, economic growth became the public policy "coin of the realm" in the second half of the 20th century. And successive governments globally have predictably debased that currency by parlaying the GDP into Gross Domestic Ponzi-schemes in which debt-fueled economic growth is supposed to generate the tax revenues to perpetually service the accumulated debt.
Debasing coinage is what governments do. Gresham's law: bad money drives out good. Grass grows. Trees grow. Children grow. Governments debase money.
Another feature recommending groat as a critical terminological substitute for growth is the fact that the coin evolved into an exclusively ceremonial token, given out by the sovereign as symbolic alms to the poor each year on Maundy Thursday (and, of course, groat rhymes with bloat and with gloat).
Peter Victor's chapter on the history of the idea of economic growth relies heavily on H.W. Arndt's Rise and Fall of Economic Growth: a study in contemporary thought. A pivotal element in the evolution of thinking about economic policy was the argument put forward by R. Harrod in 1939 and E. Domar in 1946 that economic growth, defined as annual increase in national income, was indispensable to maintaining full employment.
Although Harrod's and Domar's argument is commonly misrepresented as "Keynesian", Keynes himself viewed government growth stimulus policies as only one of the possible strategies for addressing with the problem full employment and one that was only applicable for a limited period of time (Keynes estimated a best-by date on the growth stimulus policy of about 15 years after the end of the World War II). The "ultimate solution", Keynes stated in a 1943 Treasury Department memorandum and again in a 1945 letter to T.S. Eliot was "working less".
John R. Hicks – whose 1937 mathematical 'interpretation' of Keynes (featuring his famous "IS/LM curve") was crucial to Harrod's and Domar's efforts – subsequently (1975) repudiated that earlier contribution as too static and unhistorical. Similarly, Simon Kuznets, who developed the national income accounts relied on to measure economic growth, warned "The welfare of a nation can scarcely be inferred from a measurement of national income... Goals for 'more' growth should specify of what and for what."
Economic growth is thus today thoroughly debased and effaced from its original conception. To continue to call it growth is to circulate a counterfeit. Let's call it economic groat.
Friday, May 1, 2009
A Krugman Contradiction on Carbon Caps
As the vast army of loyal readers of this blog knows, I’m a strong proponent of capping carbon emissions. But I also think it is extremely important to be honest and accurate about the economic burdens a cap would generate so we can minimize, accommodate and distribute them fairly. Along those lines, I am happy to see that Paul Krugman is relaying the important research message that the income effects of a carbon cap would be minimal for at least the next several decades. Opponents of forceful measures to slow down climate change want us to confuse the transfers induced by a cap (which would be large) with the economic costs (small), so we need to get the message out at every opportunity that action is affordable.
On the capital stock front, though, Krugman is missing half the story. He says
Yes but: the flip side of this new investment demand is accelerated depreciation (i.e. devaluation) of existing capital. This is not a minor matter. The capital stock we have in the present is the result of decades of systematic mispricing of scarce environmental goods, including the capacity of the global carbon cycle. If we correct those prices, many existing assets will have to be written down. The new-technology story is disingenuous: technological breakthroughs typically spur net investment because they create far more opportunities than they destroy, but the purpose of a carbon cap is above all to reduce the use of many existing technologies, and innovation is a (hopefully) mitigating byproduct. If you want a better analogy, think of what happened to the capital stock of eastern European countries in the years immediately following 1989. Suddenly their economies were open to international trade, and they were loaded with production facilities that cranked out goods that no one would buy any more. The result was a massive writeoff that plunged millions into unemployment.
It doesn’t have to be this way here. Certainly less of our capital stock is at risk from a carbon cap than in the eastern European case. Even more important is the fact that we are in a position to anticipate the problem; 1989 was a big unexpected shock. But we can’t plan ahead if we don’t see what’s coming. This is why it isn’t helpful to highlight the capital-replacing side of climate mitigation without taking note of the likely hit to existing investments. And to return to the current crisis, we should know by now that there are significant feedbacks from asset values to incomes, employment and even system stability.
On the capital stock front, though, Krugman is missing half the story. He says
Right now, the biggest problem facing our economy is plunging business investment. Businesses see no reason to invest, since they’re awash in excess capacity, thanks to the housing bust and weak consumer demand.
But suppose that Congress were to mandate gradually tightening emission limits, starting two or three years from now. This would have no immediate effect on prices. It would, however, create major incentives for new investment — investment in low-emission power plants, in energy-efficient factories and more.
To put it another way, a commitment to greenhouse gas reduction would, in the short-to-medium run, have the same economic effects as a major technological innovation: It would give businesses a reason to invest in new equipment and facilities even in the face of excess capacity. And given the current state of the economy, that’s just what the doctor ordered.
Yes but: the flip side of this new investment demand is accelerated depreciation (i.e. devaluation) of existing capital. This is not a minor matter. The capital stock we have in the present is the result of decades of systematic mispricing of scarce environmental goods, including the capacity of the global carbon cycle. If we correct those prices, many existing assets will have to be written down. The new-technology story is disingenuous: technological breakthroughs typically spur net investment because they create far more opportunities than they destroy, but the purpose of a carbon cap is above all to reduce the use of many existing technologies, and innovation is a (hopefully) mitigating byproduct. If you want a better analogy, think of what happened to the capital stock of eastern European countries in the years immediately following 1989. Suddenly their economies were open to international trade, and they were loaded with production facilities that cranked out goods that no one would buy any more. The result was a massive writeoff that plunged millions into unemployment.
It doesn’t have to be this way here. Certainly less of our capital stock is at risk from a carbon cap than in the eastern European case. Even more important is the fact that we are in a position to anticipate the problem; 1989 was a big unexpected shock. But we can’t plan ahead if we don’t see what’s coming. This is why it isn’t helpful to highlight the capital-replacing side of climate mitigation without taking note of the likely hit to existing investments. And to return to the current crisis, we should know by now that there are significant feedbacks from asset values to incomes, employment and even system stability.
Thursday, April 30, 2009
If There’s a Difference in Means Among White v. Black – Byron York Thinks the White Mean is the Actual Number
Byron York offended a lot of us with the following:
Goldberg himself was offended by the criticism noting:
No Byron – we were not offended by your noting that there is a difference between the mean responses of blacks v. whites. Let me turn the microphone over to Brad DeLong for an explanation of what offended us:
He later decides to qualify what he was trying to say with this “actually”. Maybe Mr. York should take remedial writing lessons before he is allowed to pen another op-ed.
the president and some of his policies are significantly less popular with white Americans than with black Americans, and his sky-high ratings among African-Americans make some of his positions appear a bit more popular overall than they actually are. Asked whether their opinion of the president is favorable or unfavorable, 49 percent of whites in the Times poll say they have a favorable opinion of Obama. Among blacks the number is 80 percent.
Goldberg himself was offended by the criticism noting:
It seems worthwhile to point that out that there are differences within the group -- something that is done all the time with political polls.
No Byron – we were not offended by your noting that there is a difference between the mean responses of blacks v. whites. Let me turn the microphone over to Brad DeLong for an explanation of what offended us:
For York, "actually" means "what white people think."
He later decides to qualify what he was trying to say with this “actually”. Maybe Mr. York should take remedial writing lessons before he is allowed to pen another op-ed.
Wednesday, April 29, 2009
Hail Fellow, Well Met
Oh this is more braggadocio, but what the heck. I have been invited by James Galbraith, Chair of the Board of Directors of Economists for Peace and Security to be one of their Fellows. I have accepted the invitation. They were founded in 1989 originally as Economists Against the Arms Race, with Kenneth Arrow and Lawrence Klein as their original chairs.
While I am blathering about such stuff, one of the founders and still much involved with the group is the Father of Regional Science, Walter Isard. He served on the thesis committee of my major professor, Eugene Smolensky, at Penn. The chair of that committees was the Father of Happiness Studies, Richard Easterlin. He and I have discussed our common "intellectual ancestry." So, his major prof was Simon Kuznets, whose major prof was Wesley Clair Mitchell, whose major prof was Thorstein Veblen, whom I do not mind being intellectually descended from at all. It was only quite recently that he and I sorted this out.
While I am blathering about such stuff, one of the founders and still much involved with the group is the Father of Regional Science, Walter Isard. He served on the thesis committee of my major professor, Eugene Smolensky, at Penn. The chair of that committees was the Father of Happiness Studies, Richard Easterlin. He and I have discussed our common "intellectual ancestry." So, his major prof was Simon Kuznets, whose major prof was Wesley Clair Mitchell, whose major prof was Thorstein Veblen, whom I do not mind being intellectually descended from at all. It was only quite recently that he and I sorted this out.
Final Sales of Domestic Products Fell Dramatically Too
Via Brad DeLong, CNBC gives us a bad news, good news story on the economy:
Brad similarly notes:
To their credit, Brad and CNBC also noted that BEA reported that real final sales of domestic product ,that is GDP less change in private inventories, fell by only 3.4 percent on an annualized basis during the first quarter. The decline during the previous quarter, however, was 6.2 percent. Pardon me – but I don’t see much of a silver lining or a bright sign.
The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted. The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter … But the sharp drawdown in inventories is good news as it suggests that manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels and could be instrumental in pulling the economy out of recession.
Brad similarly notes:
That means that production this spring will be a full 3.5% below what it was in the second quarter of last year, when it ought to be 3.0% above. The only bright sign is that so much of the decline was a fall in inventories.
To their credit, Brad and CNBC also noted that BEA reported that real final sales of domestic product ,that is GDP less change in private inventories, fell by only 3.4 percent on an annualized basis during the first quarter. The decline during the previous quarter, however, was 6.2 percent. Pardon me – but I don’t see much of a silver lining or a bright sign.
Tuesday, April 28, 2009
My Problem with Kornai
Actually, he seems like a very nice guy, a scholar in love with economics and with a mild social democratic inclination. As mentioned in a previous post, I have just (belatedly) read his memoirs, By Force of Thought. He went through a fascinating transformation in the years leading up to and following the revolution of 1956 (Hungary), and I’m sympathetic to many of his insights into economic theory and methodology. By any standard, he is a giant within the discipline.
Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.
Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.
In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.
It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.
Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.
Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.
In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.
It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.
Monday, April 27, 2009
Lower Manhattan Residents “Sensitive” to Planes Flying Over
I had to leave my office at 10:15 this morning and stroll around Battery Park for a while. Reuters explains why:
We are sensitive? Well yea. At least it was a nice day to take a stroll.
An Air Force fighter jet and one of President Barack Obama's official planes on Monday flew low over the Statue of Liberty in an approved photo opportunity that startled some New Yorkers who have memories of the September 11 attacks. New York City officials notified some businesses but not all city agencies or the general public. People in New York remain sensitive to such incidents in lower Manhattan, site of the 2001 attacks involving hijacked airliners that destroyed the Twin Towers of the World Trade Center.
We are sensitive? Well yea. At least it was a nice day to take a stroll.
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