Are Holding Gains “Pseudo” Income? A Response to Martin Sandbu

April 12th, 2018 2 comments

I just noticed with pleasure that Martin Sandbu, whose work I much admire, has posted a response to a thread of posts between me and Matthew Klein. Here in chronological order:

Me: Why Economists Don’t Know How to Think about Wealth (or Profits)

Matthew: The virtues and pitfalls of putting capital gains into the national accounts

Me: Wealth and the National Accounts: Response to Matthew Klein

And…

Martin: You’re not as rich as you think
Beware of treating pseudo-wealth as the real thing

I’ll start with Martin’s conclusion (emphasis mine), and reply to some of his particular statements below.

Similarly, we should talk of pseudo-saving and pseudo-income when talking about valuation changes in asset (and liability) values. “Pseudo” does not mean it does not have real effects. It is precisely because stock measures of wealth are perceptions that they have unpredictable effects on real economic activity — and that these effects can be bigger the more unwarranted the perceptions are. But it is still real economic activity — as captured by conventional national income flow measures — that we should ultimately care about.

This is basically a statement about variability. Holding gains/losses are extremely variable. And yes, that variability — at least over the short to medium term — seems to be heavily driven by perceptions, optimism, confidence …  “animal spirits.” So you, we, can’t really “(ac)count on” those holding gains being “real.” They might vanish this year or next as perceptions change.

But variability is a function of time: how much does a measure vary over X period of time, Y period, etc. Holding gains are quite variable across our arbitrary one-year accounting periods. But over decades or a lifetime — or a dynasty’s lifetime, or the lifetime of a social, economic class — they’re very reliable indeed. Over any period greater than five or ten years, at least in the U.S. since 1960, they are consistently and reliably the overwhelmingly dominant method of wealth accumulation.

J.W. Mason makes that point very well in this post commenting on Piketty, from a couple of years ago, recently and appropriately re-upped by Cameron Murray on Twitter. Holding gains are the primary way that people (and we, collectively) get “rich” in balance-sheet terms.

If valuation changes, holding gains, are pseudo income and pseudo saving, then most of our monetary wealth, our balance-sheet assets and net worth — which has accumulated overwhelmingly through holding gains — is also pseudo. Or at least you have to ask: when do those balance-sheet changes, and the accumulated monetary wealth from those changes, become “real”? At what point do you decide that perceptions have become reality?

Amazon is the poster-child example for this. Despite showing essentially zero accounting profits over a quarter of a century, it has delivered half a trillion dollars onto shareholders’ balance sheets via holding gains — notably including Jeff Bezos’ balance sheet. Was that “real” income and saving? Is it now? Is the accumulated wealth “real”? Jeff Bezos owns The Washington Post. He’s throwing rockets into space. That seems pretty darned real.

Is Jeff Bezos “not as rich as he thinks”? Are ETF-fund investors who focus on total returns just foolish mugs?

Another way to illustrate this is to consider the free (advertising-supported) online services that people enjoy. (Recently discussed in a great Twitter thread with Sri Thiruvadanthai and Brad Setser.) How do we account for those? How do they enter into GDP? (The domain of “real” income, as tallied in the NIPAs and the FFAs, with no consideration of holding gains.) Google and Facebook sure seem to be creating and delivering “value” of some kind with those services…

The short answer is, they don’t get counted. Advertising spending isn’t part of GDP; it’s counted as an intermediate input to production, so it gets “backed out” of the GDP measure. This seems like a problem; there’s surely value, consumer surplus, being produced and delivered to the household sector; shouldn’t that show up in GDP? But no accountant is going to feel comfortable posting the imputed dollar value of free cute-kitten surfing as household-sector monetary “income.”

What actually happens: The profits from those advertising revenues are posted to firms’ balance sheets, increasing their book value. (Note that Facebook, Amazon, and Google, like other techs, don’t distribute their profit as dividends; they keep it on their books.) The markets see that increased book value, and bid up the companies’ stock prices. Voila, holding gains: every holder of those companies’ equities has more assets/money.

The household sector, ultimately, owns all the equity in the firms sector, at zero or more removes. The firms sector is a wholly-owned subsidiary of the household sector. (Because households don’t issue equity; firms can’t own households — at least not yet. It’s an asymmetrical ownership relationship. The ownership-accounting buck stops at the household sector.)

So the consumer surplus from “free,” advertising-supported online services is delivered onto household balance sheets (equity-owning households, at least) — via holding gains. The surplus is hidden in those gains. But that very real surplus is invisible in GDP. Should we call those holding gains, derived from real production surplus, “real” income?

My answer: New claims from holding gains, posted to balance sheets to the tune of trillions of dollars a year, variable as they are, are real claims. They can be (are) employed to buy stuff — notably including other people’s labor. (Yes: the asset markets must be liquid, there must be enough people swapping assets for this to work in practice.)

I address this from another, wonky angle — book-value versus mark-to-market, market-cap accounting, here. (Includes empirical data!)

Replying to some particular points in Martin’s post. He characterizes my thinking as follows:

economists miss much of what goes on in the economy by focusing largely on flows of income, spending and saving rather than the stocks of wealth, assets and liabilities.

I think this misses the key question: what do we mean by a “flow”?

There are three proximate financial mechanisms that create new ab novo private-sector balance-sheet assets — monetary wealth: 1. government deficit spending, 2. bank lending, and 3. holding gains. (Plus rest of world.)

Holding gains are special, completely unlike the other two. Because while holding gains is a flow measure (measured over a period), there is no actual flow. The new assets don’t come from anywhere, from any other sector. When there’s a market runup, everybody just marks their balance-sheet assets up to market. Nobody posts any new liabilities that you could identify as a “source” or flow for those increases. This is why holding gains are (must be) invisible in the balance-to-zero circular flow of the NIPAs and the FFA matrix.

And as detailed above, that non-flow “flow” of holding gains can derive pretty explicitly from real production and surplus.

As an aside, personal saving — spending less than your income — is another of these non-flow flows. It’s a residual flow measure of two actual flows in a period — income minus expenditures. (Household expenditures are all or mostly counted as consumption expenditures; it varies across different national account tallies.) It’s a measure of what’s not spent — income that’s not transferred to others’ balance sheets, accounts. It’s “not-spending.”

A focus on “net worth” and capital gains and losses draws our attention to assets — but liabilities, and the composition of each, matter hugely as well.

I addressed this in my reply to Matthew. Short form: This is like saying that a focus on revenues (assume we’ve been ignoring, failing to measure or analyze them) draws our attention away from expenses (which we’ve been tallying and analyzing very thoroughly). No: actually paying attention to balance-sheet assets, and where they come from, doesn’t “distract us” from liabilities (which are tallied well in the FFAs, and deeply analyzed by econs).

Paying attention to assets and their accumulation, monetary wealth, just increases what we’re paying attention to.

And: “net worth,” obviously, doesn’t ignore our well-accounted-for liabilities. They’re what net worth is “net” of. But you can’t get to net worth without a tally of total assets — or change in net worth without a tally of holding gains.

“Saving” in the sense of valuation increases does not correspond to anything on the ground, as it were.

I disagree. Over the long term at least (assuming “animal spirits” ebb and flow), valuation increases are the existing-asset markets saying “Wow, it looks like the markets for newly-produced goods and services got it wrong when they priced these goods. They’re actually worth more than we thought they were. They’ll deliver more value (via consumption or as inputs and services to production of goods) than we thought they would.” That’s them looking at all the “stuff on the ground” and giving their estimate of what it’s worth. (See the accompanying post on these two accounting/estimation methods.)

an economy as a whole cannot spend out of its financial wealth without devoting more of its actual current production to consumption

I think this is a widespread error of economic thinking. “Spend out of” is the problem; it’s an error of composition. When you “spend out of your wealth” — transfer assets from your balance sheet to someone else’s — nothing “comes out of” collective wealth. The assets still exist; they’re just in different accounts, on different balance sheets.

This is another instance of the “real stuff” vs. money confusion, here confusing consumption with consumption spending. When you eat more corn — literally consume — we have less corn. If you spend more to buy corn, we have the same amount of money.

So an economy can quite easily “spend [more] out of its financial wealth,” turn that stock over more rapidly, at higher velocity, with that extra spending going to either consumption spending or investment spending. Whatever.

The consumption spending doesn’t reduce our stock of goods/stuff, because the spending doesn’t happen if equal production doesn’t happen. Produced/sold goods minus consumed/purchased goods = zero (with some inventory/buffer-stock fluctuation period to period). This especially in a 70% service economy, where most goods are produced and consumed simultaneously; in a service business, inventories don’t exist. There’s no stored “stock” of labor hours.

(Net) Investment spending (“capital formation” in the IMAs) does increase our stock of stuff, which is then collectively monetized/assetized (fitfully) via the three financial mechanisms listed above. So okay: a larger proportion of consumption vs. investment pending does forego some wealth creation via capital formation-and-monetization. But it doesn’t destroy or diminish wealth as implied in the statement here.

Quite the contrary: Faster turnover of wealth, higher velocity, causes more production, investment, and consumption (assuming price inflation is in check). There’s no “spend out of” involved.

people chose to save more in the only way they collectively can: by spending less

I think Martin means “in the only way they individually can.” Individual saving has no accounting effect on the collective stock of assets. It only affects which accounts/balance sheet hold those assets. When you don’t-spend out of income, it just means you’re holding the money/assets in your account instead of transferring them to another account (by spending). Full stop. (Household debt repayment does reduce the household sector’s, and the financial sector’s, stocks of assets, shrinking balance sheets on both sides. Liabilities also decline on both sides, though, netting to zero, so it doesn’t change private-sector net worth.)

My main point is, again, political. Income measures that don’t include holding gains, saving measures that don’t sum to changes in assets and net worth, make invisible the primary method whereby owners get rich, stay rich, and get richer (without having to work). Until recently, even the total wealth measures were unavailable or squirreled away in separate tables that are themselves reliant on yet more obscure (“Reconciliation”) tables.

Economists are deeply implicated in that politically pernicious depiction of economic reality — mostly unconsciously. That’s forgivable,  perhaps, because economists receive no formal training in accounting theory or practice. (Is that forgivable?) But the result: even a remarkable student of wealth like Thomas Piketty is unable to perceive that his own second law is accounting-incoherent. It presumes that wealth increases all come from “saving.” Which isn’t even close to true. (Again, see J.W. Mason’s great piece.)

Thanks as always to my gentle readers…

Wonky: More on Martin Sandbu’s “Pseudo” Income and Saving

April 12th, 2018 2 comments

In my previous post, I replied to Martin Sandbu’s interesting response to my (and Matthew Klein’s) previous posts on holding gains, income, saving, and wealth. Here some more (accounting-dweeby) thinking on the subject, which I post here to avoid clogging the previous and making it even more overlong.

Another way to explain this issue: I think Martin is valorizing book-value accounting over mark-to-market, market-cap accounting, as accurately depicting the “real” value of all our stuff (our “capital,” if you must…).

Book-value accounting uses the “perpetual inventory” accounting method: every year you tally up gross investment — spending to purchase long-lived goods — and subtract an estimate of depreciation or “consumption of fixed capital,” to yield net investment — that year’s increase in our “inventory,” or “capital stock.” The cumulative sum of past years’ net investment is today’s book value. It’s the markets’ (and accountants’) estimate of our stuff’s worth, based on the market prices that prevailed when those goods were bought/sold — what the markets for newly produced goods thought those goods were “worth.”

Mark-to-market accounting is also a market estimate of our stuff’s value. But a different market: today’s market for existing assets (with, by the way, much less intervention and estimation by accountants; think: depreciation tables). This estimate, looked at year to year, inevitably requires you to consider holding gains.

Econ 101 would tell you that those two measures, estimates, should move together; why would anyone pay more than a firms’ book value for its equity? And from 1960 to about 1990 (my data from the IMAs starts in 1960), they did move together, with a Tobin’s Q ratio around one. That’s very much not true since 1990.

Sorry, I haven’t assembled an equivalent to the third graph for real estate, the other big category of household holdings. Having seen similar, though, I’m quite confident you’d see the same pattern there, quite possibly far more pronounced.

These two measures of what our stuff is worth have diverged wildly from previous, and from what Econ 101 would predict.

I can think of three explanations:

1. Existing-asset markets think (correctly) that we’ve been wildly underestimating GDP. (What are the implications for measures of productivity — GDP/hours worked?)

2. Existing-asset markets are wrong about that, and the mother of all asset-price crashes is imminent.

3. The asset/wealthholding class has gotten much better at extracting value from nonwealthholders (domestic and international), and the resulting higher returns to that class are NPV-capitalized into the prices of their owned assets. Recent decades’ few percentage points increase in “capital share” would magnify hugely via that long-term discounted capitalization.

#3 suggests something that an unfortunately small number of economists have been saying for a very long time: it’s impossible to even think coherently about economics, and how economies work, if you’re not thinking about the distribution/concentration of wealth and income.

MMT and the Wealth of Nations, Revisited

March 23rd, 2018 Comments off

I just had occasion, in replying to a correspondent, to reiterate much of the thinking in my recent MMT Conference presentation. I thought it might be a useful and apprehensible form for some readers, so I’m reproducing it here.

I’ve also explained this at somewhat painful length here.

Correct me if I am wrong but what you are saying extends MMT into the private sector. The govt boosts balance sheets with stimulative fiscal policy. The private sector boosts balance sheets through asset price appreciation. Each creates “money” out of nowhere.

That’s one way of saying it. It adds a mechanism for asset (money) creation beyond “outside” (gov) and “inside” (bank) money issuance.

I’d say: MMT largely and Sectoral Balances exclusively “think inside” the incomplete flow of funds accounting matrix, which ignores cap gains (and nonfinancial assets). So it misses the biggest asset (“money”) creation mechanism there is.

To be precise:

Gov def spending adds assets to PS balance sheets. No new PS liabilities added, so +PS NW.

Bank lending (net, new) adds assets to PS balance sheets. But adds equal new PS liabilities, so no ∆NW.

Market runups (cap gains) add assets to PS balance sheets. Like gov def spending, no new PS liabilities added, so +PS NW.

Key point though: unlike gov def spending, new assets from cap gains don’t “come from” anywhere, aren’t issued by any sector. There are no new liabilities added to any other sectors’ balance sheets. That’s why cap gains aren’t included in the closed-loop, balance-to-zero flow of funds matrix.

The thing is, the economy doesn’t balance to zero. It balances to net worth. (Wealth.) That’s the bottom-line balancing item that makes balance sheets…balance. Since the flow of funds matrix is missing complete balance sheets, total assets, net worth, and cap gains, it can’t represent that.

And what is money?

People use that word in three primary ways:

1. The market-priced value of balance-sheet assets or net worth (representing the value of ownership claims), designated in a unit of account. Wealth. Ask a zillionaire, “how much money do you have?”

2. Financial instruments whose prices are institutionally pegged to the unit of account. Fixed-price instruments. (The price of a dollar bill is always $1.) eg Checking/MM-account balances and physical cash. The instruments that are tallied in monetary aggregates. Finance types often refer to this as “cash.” A subset of (1).

3. Physical currency/coins. A convenient late invention that makes it easy to transfer assets from one (implicit) balance sheet to another. A different meaning for “cash.” A subset of (2).

Note that the stock of #2 can only increase if some sector (financial or gov) issues more. Ditto its subset, #3. And, market pricing can’t affect the total stock of this subclass of money because these instruments’ prices are…fixed! The stock can only increase/decrease, these instruments can only appear/disappear, through issuance and retirement by other sectors, which post equal liabilities to their balance sheets. (That issuance/retirement is tallied in the FFA matrix — inside and outside money.)

If I have money in my pocket, I have a right to claim some portion of of the worlds’ production, be it a cup of coffee or a beach house on a tropical island.

Right. In practice, you can also claim people’s labor. Cause they need money. A balance-sheet asset is a formalized, labeled numeric representation of the value of an ownership claim (generally embodied in a financial instrument, with the claim’s asset value always designated in a unit of account), which can be exchanged for A) goods and services and B) other ownership claims.

So where does this money come from?

Ignoring #3 as a distraction, and focusing just on the two financial mechanisms that increase net worth:

A. Gov def spending. (Creates #2 hence also #1.)

B. Existing-asset market runups. (Creates #1 but not #2.)

As technological progress increases our productive capacity, so does our wealth. We become richer, so we should have more money.

Can definitely look at it that way. Wealth could be:

1. The value of our existing stock of stuff — both tangible and intangible, both consumable and productive. (To the extent that those can be distinguished; productive “capital” is “consumed” through use, decay, obsolescence…)

or

2. The capitalized net present value of what we will be able to produce in the future (thanks in large part to our existing stock of productive stuff).

Either way, I’d say:

We steadily increase our stock of real stuff. Surplus from production, all that. There are three financial mechanisms for creating new $-numerated claims on that new stuff, new balance-sheet assets. In terms of magnitude, cap gains is the dominant mechanism.

Finally, to expound on the implications of fixed-price vs variable-priced instruments/claims/assets:

When government deficit-spends, it delivers new fixed-price assets (checking/MM deposits) onto private-sector balance sheets. Assuming portfolio preferences are unchanged, the private sector is overweight “cash.”

Collectively, wealthholders can’t get rid of that cash by spending; they can only trade/swap that money around. The total stock only changes via issuance/retirement (caveat below). So they do a bunch swapping/trading of existing assets, driving up the prices of variable-priced instruments (mainly bonds, equities, and titles to real estate), with everybody marking their balance-sheet assets to market, until the market achieves its preferred portfolio balance.

The relatively fixed stock of fixed-price “money” is sort of a fulcrum around which portfolio rebalancing pivots.

So there’s some portfolio “multiplier” to government def spending. It immediately adds assets (cash) to private-sector balance sheets, but it also causes price increases in variable-priced instruments through portfolio rebalancing. Voila: even more assets.

This, by the way, is exactly how the portfolio mechanism works in the more advanced Godley-Lavoie-style models (which do encompass complete balance sheets, and include holding gains in “income.” See Haig-Simons.) Though I would suggest that the precise portfolio reaction-functions in these models might be improved.

The caveat: wealthholders can remove cash from their asset portfolios and from the private-sector balance sheet by paying down bank debt — shrinking their balance sheets, and the banks’. Likewise they can create cash by borrowing. (Again: private-sector assets and liabilities change, but net worth doesn’t.) They’re instigating the retirement/issuance of those fixed-price assets and associated bank liabilities. Think: reflux.

I hope folks find all this useful, or at least interesting.

Wealth and the National Accounts: Response to Matthew Klein

March 8th, 2018 Comments off

I’m both abashed and delighted that the truly stand-out econ writer Matthew Klein has offered wonderfully fulsome praise of one of my pieces, Why Economists Don’t Know How to Think about Wealth, and some very interesting discussion as well. Some responses here. Please excuse me if I repeat some of the points from the first article.

>His key point is that changes in net worth caused by asset prices fluctuations are just as important as standard measures of income and saving.

That’s important, but there are really three key points I’d really like to come through:

1. Wealth matters. Net worth and total assets. Those are absent from the Flow of Funds matrix, because it ignores: A. Nonfinancial assets — the (L)evels tables aren’t balance sheets — and B. Holding gains. Yes: changes in wealth measures also matter a lot (see below), and they’re of course also invisible and largely unexplained in the FFA matrix.

2. Accounting statements are economic models, based on deeply-embedded assumptions that are largely invisible except to accounting-theory adepts. The FFAs’ closed-loop construct depicts, promulgates, and validates the whole factors-of-production worldview (each according to its contribution…) which underpins travesties like Greg Mankiw’s “just deserts” claptrap. See in particular national-accounting-sage Robert Hall’s discussion of the accounts’ implicit “zero-rent economy.”

3. The dumpster fire (@noahpinion) of terminology that economists rely on to communicate — and really to think (together) — is (or should be) rigorously defined based on accounting identities. But that requires deeply understanding #2 above: what those measures and identities mean. To repeat: accounting classes don’t even count as electives for econ degrees at Harvard and U Chicago. (Really, the situation is more like the sub-basement of Fukushima Three. One word: “saving.” Many economists vaguely think that more individual saving results in some larger stock of monetary “savings.” Sheesh.)

>Roth’s presentation…is not new. Alan Greenspan wrote about these ideas back in the 1950s

Johnny-come-lately. Haig-Simons, who I refer to repeatedly, bruited their comprehensive accounting definition of income in the 20s and 30s. (Dead-cat bounce. I’m thinking the rich hate this idea. The political implications of fully revealing wealth and wealth accumulation could be…revolutionary?)

Wikipedia informs me that a German legal scholar named Georg von Schanz was on it somewhat earlier. (Modern Money Network, are you listening?)

>Roth ends up downplaying the importance of the liability side of the balance sheet.

Perhaps. At least three reasons:

1.The FFA matrix does an excellent job of accounting for (inevitably “financial”) liabilities. Nothing to complain about there. That’s where the IMAs get most or all of their liability accounting from. And economists have made very good use of that data.

2. Looking at households as the “buck stops here” balance sheet, liabilities are surprisingly (to me) small percentage of assets. Yes, a long secular trend with one big spike (not much for sample size…). Click for Fred.

3. For the economic import of (change in) assets versus liabilites, I’ll just point to one economic factoid which I find darned significant:

Post-1960s (post Bretton-Woods?), every time you see year-over-year decline in real household net worth or assets, you’re just into or about to be in a recession. (There are two bare false positives, just after the ’99 and ’08-’09 market dives; they look to me like blowback, residual turbulence, if that suffices as cogent economic terminology…)

Notice: The two measures are equally predictive; including liabilities (in net worth) adds no predictive power. These two measures move closely together. This especially makes sense for declines; asset markets dive, while liabilities are much more sticky downward. (They tend to climb together over time.)

So yeah, I’m with Roger Farmer about stock-market declines “Granger-causing” recessions, though 1. I cringe at that faux-statistical usage, and 2. at least for the GFC, I’d say the real-estate crash caused the stock-market crash. In any case, overall, it sure looks to me like wealth (asset) declines (proximate?) cause recessions. I’d say high debt levels amplify the effects when that does happen.

So yeah of course, net worth is not some kind of tell-all economic measure. You gotta deconstruct it. But it’s a bloody-well-necessary measure that economists (and national accountants) have largely ignored, like forever.

>defining “saving” as the “change in net worth”, as Roth does, is that this obscures as much as it clarifies

Note that I use a particular term for that, Comprehensive Saving, while leaving what I call Primary Saving (largely) intact. (The IMAs’ measure of primary income hence saving is after “Uses of property income (interest paid)” are deducted, which seems crazy (and politically pernicious) to me. I’ve moved it from it’s sort-of-hidden position in Sources, to appear explicitly in Uses, so my Primary Income and Primary Saving measures are a bit higher than the IMAs’.)

hh-sources-uses

Now it’s true that I relegate Primary Saving to an addendum, favoring Comprehensive Saving as the more important measure. This imparts how deeply rhetorical all accounting presentations are. But I think this privileging makes sense give the relative magnitudes we see. (Net Lending + Capital Formation here is traditional primary “saving”).

This is J.W. Mason’s recent graph, which I was delighted to see, showing the same measures (the IMAs’ ∆NW decomposition) that I’ve also graphed in the past.

>asset price appreciation generally leads to proportionally tiny increases in spending.

The linked study, like others of its kind, in my opinion gives too much weight to marginal propensities, based on one-time changes. So I question how good a guide they are to determining economic reaction functions. This is too much of a subject to address here, so I’ll only suggest that more straightforward, long-term propensity-to-consume measures by wealth/income classes might be more illuminating. Also velocity of wealth. (I’m a monetarist! As long as “money” means “wealth”…)

Whether or not you consider these figures illuminating, they are the kind of figures you can derive from a complete accounting construct that tallies total assets and net worth. Note that both are also dependent on data from Zucman/Saez/Pikkety’s magisterial Distributional National Accounts (DINAs). What I’d really like to see is Distributional IMAs (DIMAs). I corresponded with Gabriel Zucman on this a bit; he’s given me permission to quote him:

You are correct that there can be pure asset valuation effects in the long run (i.e., capital gains in excess of those mechanically caused by retained earnings). These pure valuation effects are not part of national income, hence not included in our measure of income and our distributional series. However, they could be included down the road by computing income as delta wealth + consumption (i.e., Haig-Simon income). We have wealth in our database so we’re not far from being able to do this.

To conclude on a decidedly accounting-dweeby note, here’s the key accounting identity for Haig-Simons (which I call Comprehensive) Income:

∆ Net Worth + Consumption = Primary (traditional) Income + Holding Gains (+ Other Changes in Volume)

Subtract taxes, and you’ve got Comprehensive Disposable Income. Subtract Consumption, and you’ve got Comprehensive Saving. Equals…change in Net Worth.

Accounting identi-tists, have fun!

(For those who prefer this kind of thing in slide-deck form, here’s a PDF of my presentation from the recent Modern Monetary Theory conference.)

“In the Beginning…Was the Unit of Account” – Twelve Myths About Money

November 19th, 2017 39 comments

Jan Kregel presented a great dinner speech at the recent Modern Monetary Theory Conference, touching on some of the fundamental ways we think about money and economics. (Sorry, no recording or transcript available.) I had a brief conversation with him afterwards, and we followed up with a few emails.

The quotation in the title of this post is condensed from the final line of one of his emails — a line that made me laugh out loud:

“So I guess we start from that — in the beginning was the word, and the word was the unit of account?”

Okay, yes: money-dweeb humor. But the implications are kind of profound.

The Word. LogosIndeed. I’ve written about this before — how writing in its earliest forms emerged from tally sheets, accounting. Even, that its emergence was the first step on the road to outsourcing our memory onto iPhones, maybe even (only somewhat tongue in cheek) causing human brains to shrink over millennia.

Jan’s great line, and our conversations, prompt me to set down some thoughts on this ever-vexed subject. Herewith, twelve widespread usages and conceptions that, in my experience, tie our money discussions in knots. Please assume that anything you don’t like here is mine, not Jan’s, and apologies to those who have heard some of this from me before.

(A proleptic response to an inevitable digression: I’m assuming a closed national or world economy for simplicity. The “rest of world” sector, and the exchange rate with Martian currency, are not considered.)

#1. Money was invented around 700 BCE. No. That’s when coins were invented — handy physical tokens making it easy to transfer assets from one person’s (implicit) balance sheet to another’s. Money existed on something like balance sheets — tallies of who owns what and who owes what — long before that; those tallies go back thousands or tens of thousands of years. Mentions of monetary values in written documents — designated in staters, drachms, whatever — were widespread long before anyone thought of using coins for asset transfers.

The earliest coins, by the way, may well have been badges of honors and offices issued by religious authorities. Somehow people started exchanging them, and voila: physical currency. This had little or nothing to do with butchers and bakers or convenient time-shifting of purchases. That’s a made-up armchair myth (though the convenience benefit is real). Wampum, likewise, wasn’t used for trade exchange until Europeans captured that “money” system and transformed it.

#2. Money is a “medium of account.” (Whatever “medium” means in that phrase…) Money was invented when some clever tally-keeper, totting up cows and horses and bags of grain, invented the arbitrary unit of account — a unit that allows those heterogenous goods to be tallied on a single sheet, in a common unit of value. We find price lists of assorted goods on some of the earliest Sumerian tablets, for instance, and price lists can’t exist without a unit of account. It’s hard to know, but it seems like this clever technology might have been invented multiple times over the millennia.

If this historical tale holds water, the earliest forms of money were just…the value of tallied (balance-sheet) assets, with the value designated, denominated, in a unit of account. In the beginning…

By this thinking, an “asset” is a labeled balance-sheet entry, designating the value of an ownership claim — again, designated in a unit of account. These “asset” things only exist on balance sheets. The claims themselves may be informal — you own the apple on your kitchen counter by norm, convention, and common law. Or they may be formal, inscribed in one or more legal instruments and a supporting body of law and norms. The forms and terms of these ownership-claim instruments are myriad and diverse.

Money in this sense is the UofA-designated value of an ownership claim (perhaps formally recorded in an asset entry).

Ask a real-estate zillionaire, “how much money do you have”? The answer has nothing to do with physical dollars in wallets, or any particular class of ownership claims/assets that are tallied up in “monetary aggregates.” It’s about total assets or net worth — necessarily, designated in a unit of account.

The problem arises when we confute these two common meanings of the word. Start watching: you’ll often see it happen even within a single sentence. This ubiquitous muddle — trying to talk about two different things using the same word — has engendered unending confusion.

Both uses of the word are perfectly valid and useful; they just mean completely different things.

#3. There is such a thing as non-fiat money. Nope. (A better description is “consensus” money. The consensus is usually enforced by the fiat powers of a government, temple authorities, etc.) The consensus exchange or “face” value of precious-metal coins must always be higher than the market value of the metal substrate. If the reverse were true, people would just melt them down. Outside the fiat/consensus purview of the issuer, those coins many only retain their substrate value. So they’re still valuable for far-flung trade, or if authority breaks down, because the commodity may still retain consensus value. (That security in itself can contribute to holding up their consensus face value.)

Ditto cigarettes in POW camps. There are physical things called cigarettes, but there’s also this conceptual thing that emerges when people start using them in general trade: a cigarette.” Or “the cigarette.” It’s a unit that can be used to designate the value of other things.

The consensus value of coins and currency is based on the stability of the unit of account. (See: Brazil.) The coins are just physical tokens representing a unit of exchange — an asset that can be transferred, and that’s designated in the unit of account. In the beginning…

#4. Money “is” debt. Or, “you are paying with liabilities.” Money, by any definition, is always and everywhere an asset of the holder. The $5 bill in your pocket or the five dollars in your checking account are assets on your balance sheet. Paying, spending, is transferring assets to someone else — from the lefthand side of your balance sheet to the lefthand side of theirs.

Now of  course money issuance is often associated with the creation of new balance-sheet liability entries — think government deficit spending — but those liabilities are posted to the money issuer’s balance sheet. The recipient gets an asset: the credit half of the tally stick. That’s what gets passed around in spending and payments. The debt side is generally held on the balance sheet of large, powerful creditors or institutional authorities.

This isn’t just true of “cash”; government bondholders are obviously holding assets. The debt is on the government balance sheet. “Holding debt” is a handy shorthand for finance types, but considered even briefly, it makes no literal sense at all. How could you hold or own something you owe?

Ditto “paying with liabilities.” If you transfer a liability from the righthand side of your balance sheet to the righthand side of another’s, you are unlikely to receive much thanks, or any value in return.

These usages can be useful, stylized ways of referring to particular economic, financial, and accounting relationships. Which is fine as long as users are perfectly clear on how the thinking is stylized. But on their face they don’t make sense, and they engender great confusion. Money is always an asset of the holder.

#5. People “spend out of income.” Spending, payments, always come from asset balances. That’s what payments are — asset transfers. When you write a check, you withdraw from your checking-account balance. When you buy a bag of Doritos at 7-11, the money’s coming out of your wallet. It’s impossible to “spend out of” the instantaneous event of somebody handing you a five-dollar bill. Once it’s in your hand, once it’s an asset you own, you can spend it.

“Spending out of income” is another of those common usages — a useful shorthand way to talk about spending more or less than you receive over a period. It’s an unconsidered commonplace that deeply confuses our conversations about money.

#6. There’s a difference between “inside” and “outside” money. After new money is issued, its origin is immaterial in the particular. Where did the $100 in your checking account “come from,” originally? Say I borrowed it, or got it in a tax refund, or whatever, then paid it to you. It’s impossible to say, and it doesn’t matter, where it came from.

New assets appear in account balances from 1. government deficit spending, 2. bank lending, and 3. holding gains. Then people swap them for other assets, or transfer them to pay for newly produced goods and services. Whether the money came from “inside” or “outside” sources (or holding gains), once it’s circulating among accounts, it’s just…money. As we all know, money is fungible.

Certainly, newly created liability entries associated with money issuance can be economically significant. And some particular financial instruments retain a meaningful and influential financial or economic (ultimately institutional) relationship to particular liability entries. But in the big picture once the money’s out there, it’s disconnected from its “inside” or “outside” origins.

#7. Monetary aggregates tell us how much “money” we have. The various monetary aggregates so beloved of monetarists (M0, M1, MZM…) share a common, unstated definition of “money”: financial instruments whose prices are institutionally pegged to the unit of account — physical coins and currency, checking account and money-market deposits, etc. Remember the 2008 headlines: “Money Market Fund ‘Breaks the Buck.’” The institutional powers and practices of pegging are diverse, and institutional pegging can fail.

This particular subset of assets — fixed-price, UofA-pegged financial instruments — comprise only about 9% of U. S. households’ $111 trillion in assets. They play a particular role in individual and aggregate portfolio allocation (more below), they’re quite handy for buying new goods, and they’re a necessary intermediate holding for most asset swaps. But their stock quantity is swamped by even the price-driven change in other assets; capital gains on variable-priced instruments added $7 trillion to household balance sheets in 2013 alone. Monetarists’ fetishization of these “currency-like” financial instruments, and their aggregates, is…misplaced.

#8. If people save more money, there is more money (or “savings,” or “loanable funds”). Obviously, if you save (spend less than your income over a period), you have more money. But we don’t. Just, the money’s in your account. If you spent it instead of saving it, it would be in somebody else’s account.

Spending — even spending on consumption goods that you’ll devour within the period — is not consumption. The money isn’t, can’t be, “consumed” by spending. It’s created and destroyed by other, financial, mechanisms. If you eat less corn, we have more corn. If you spend less money, we have no more money.

#9. Saving “funds” investment. Investment spending, like all spending, comes from asset balances. “Funding” from flows is harder to nail down: If a firm this year has $1M in undistributed profits (saving) and borrows $1M, spends $1M on wages and buys $1M in drill presses, which inflow “funded” which outflow? Firms borrow to make payroll all the time. (Don’t even get me started on stock repurchases.)

I can’t resist quoting one of the best financial and economic thinkers out there (read the whole thread):

Individual money-saving isn’t even really a flow; it’s a non-flow — not-spending — just an accounting residual of income minus expenditures. (Though of course it’s a flow measure: tallied over a period of time, not at a moment in time.)

#10. Portfolio allocations — and spending — are determined by “demand for money.” The relatively small stock of monetarists’ “money” — instruments whose prices are pegged to the unit of account — is sort of a fulcrum around which portfolio preferences and total asset value (wealth) adjusts. But the vague gesture toward the unmeasurable and dimensionless notion of “demand” is not illuminating. Here in more concrete terms:

Suppose government deficit-spends $1 trillion into private-sector checking accounts. The market’s portfolio is overweight cash (assuming portfolio allocation preferences are unchanged). But the market can’t get rid of those fixed-price instruments — certainly not by spending, which just transfers them — or change their aggregate value (their price is fixed, pegged to the unit of account).

So people buy variable-priced instruments — stocks, bonds, titles to real estate, etc. — bidding up their values competitively until the desired portfolio allocation is achieved. (This, by the way, is exactly how things work in the more advanced Godley/Lavoie-style, “stock-flow consistent” or SFC models.)

The economic implications of this: A trillion-dollar deficit-spend results in $1T more in private-sector assets (the “cash”), plus any asset-value runups from portfolio adjustments triggered by that cash infusion. (This is before even considering any effects on new-goods spending — the so-called “multiplier” — or the proportion of spending devoted to investment — Keynes’s particular fixation.)

Sure, if wealthholders are feeling nervous — more concerned with return of their wealth than returns on their wealth — they may prefer instruments that by their very nature guarantee stability, non-decline relative to the unit of account. They’ll sell variable-priced instruments, running down their prices until the market reaches its preferred portfolio allocation. “Liquidity preference” is one rather strained way to refer to this straightforward idea of portfolio allocation preferences.

Likewise, “demand for money” is a cute conceptual and verbal jiu-jitsu, flipping straightforward understandings of portfolio preferences on their heads. Demand is supposed to influence price and/or quantity. But it can’t influence the “price of money” or the aggregate stock of fixed-price instruments — only the prices, hence aggregate total, of variable-priced instruments. This notion does far more to confuse than to enlighten.

Takeaway: holding gains and losses — which are almost universally ignored in economic theory even though they’re the overwhelmingly dominant means of wealth accumulation — are the very mechanism of aggregate portfolio allocation. If you’re only considering “income”-related measures (which ignore cap gains), there’s no way to think coherently about how economies work.

#11. The interest rate is the “price of money.” This is like saying a car-rental fee is the price of a car. The price of a dollar (a unit of exchange) is always one, as designated in the dollar (the unit of account). The cost of borrowing is something else entirely. Like “demand for money,”  “the price of money” is just verbal and conceptual gymnastics, inverting the very meaning of the word “price,” and trying to shoehorn money-thinking into a somewhat inchoate notion of supply and demand (that’s constantly refuted by evidence). It’s not helping.

#12. Central bank asset purchases are “money printing.” Not. Sure, the Fed magically “prints” a zillion dollars in reserves to purchase bonds. But then it just swaps those reserves for bonds, which are “retired” from the private sector onto the Fed’s balance sheet. Private-sector assets/net worth are unchanged; the private sector just has a different portfolio mix: more reserves, less bonds.

Ditto when the Fed sells the bonds back (as it’s now doing and promising to do, a bit); it re-absorbs the private sector’s reserve holdings and releases bonds in return, disappearing the reserves back into its magic hole in the ground. (As Milton Friedman observed, banks have both printing presses and furnaces.) Again: no accounting effect on private-sector assets or net worth.

QE and LSAPs do have some asset-price, hence balance-sheet, effect, at least while they’re happening; the central bank has to beat market prices by a smidge to play the whale and buy all those bonds. Bond prices go up and yields go down. Which will push investors’ portfolio allocations more into equities and other “risk assets,” driving up their prices some. But the first-order accounting effect is just to change private-sector portfolio allocations.

So there: twelve conceptions about money that have made it difficult or impossible for me, at least, to think coherently about the subject. Here’s hoping these thoughts are useful to others as well.

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I’d like to end this post with the same question for my gentle readers that I went to Jan with. Units of account are very odd conceptual constructs indeed. They’re not like other units of measurement — inches, degrees centigrade, etc. — which generally have some physical objective correlative: “length” or “warmth” or suchlike. Units of account tally “value,” which basically means value to humans, a function of human desire. And human desires, of course (“preferences”), vary.

So my question: what’s a good metaphorical or figurative comparison to help us understand and explain this strange conceptual thingamabob? Is money an invention like algebra? Are there other conceptual constructs that are similar to units of account, comparable mental entities that can help us think about what these things are? I can’t think of any good analogies. It’s vexing.

Extra points question: what is “the bitcoin”?

Yes: In the beginning was the word. Words are one of the main things, maybe the main thing, that we use to think together. All thanks to my gentle readers for any help in doing that.

The Mysterious Stock of “Loanable Funds”

October 26th, 2017 5 comments

This Twitter thread between Ryan Cooper and Joe Wiesenthal prompts me to do full-spectrum explanation of some thinking that I’ve been meaning to get to for a while. (Thanks for the inspiration.)

What follows is very unorthodox thinking even among the heterodox. It’s well beyond and different from MMT’s utterly convincing takedowns of “loanable funds” notions, for instance.

So take it as the ravings of an internet econocrank, if you will. But here it is FWIW.

First off, nobody can ever point to these so-called “loanable funds,” or mostly even say if they’re talking about a stock measure or a flow measure. It’s one of those unmeasurable, actually dimensionless, concepts that econs are so fond of, like demand and supply (desire and willingness).

It’s often used synonymously with “savings” with an “s”, at least implying some stock. (The national accounts use the term “saving”; there is no stock measure labeled “savings” therein.)

The only measurable stock of “loanable savings” I can think of is wealth: balance-sheet assets, or net worth. (The national accounts, by the way, only started tallying those comprehensively a decade ago.) Household-sector assets or net worth are probably the best measures of this, because they incorporate the value, telescoped in, of the household sector’s wholly-owned subsidiary, firms.

On the idea that household saving “funds” lending and investment by providing more loanable funds: individual saving increases your assets/net worth. It doesn’t increase our assets/net worth. Your savings are just held in your account instead of — if you spend — someone else’s account. They can be intermediated into investment from either account.

Likewise “saving” by firms — retaining earnings instead of distributing them to shareholders as dividends. In either case those funds are in accounts that are intermediated (and re-re-re-“hypothecated”…) by the financial system. If a firm uses those funds for actual, real investment, that’s…spending! (“Investment spending” as opposed to “consumption spending” — the two sum to GDP.)

Individual saving doesn’t create any extra “loanable funds” — stock or flow. When you eat less corn (save), we have more corn. When you spend less money, we have no more money. Spending — even “consumption spending” — is not consumption. Transferring an asset (spending) doesn’t “consume” that asset, make it disappear. This error of composition pervades economic thinking. Think: Krugman/Eggertsson’s whole “patient savers”/”impatient borrowers” construct. Individual saving doesn’t create collective savings.

Individual saving is actually a non-flow, an accounting residual of two actual transaction flows — income minus expenditures. (Though it is a flow measure as opposed to a stock measure — it’s measured over a period, not at an instant.)

Sectoral saving actually consists of two (or three) things, as revealed by the accounting derivation in the Integrated Macroeconomic Accounts (IMAs): capital formation + net lending/borrowing + capital transfers. For households, capital transfers is mostly estate taxes; it’s a small number. Capital formation is the creation of actual new (long-lived) stuff within a sector, whose value is posted to the asset side of balance sheets. Net lending/borrowing is the accumulation of claims against other sectors’ balance-sheet assets.

These two are utterly distinct and different economic mechanisms, crammed together into a single accounting measure labeled “saving.” It’s no surprise that nobody understands saving. In the grand scheme of wealth accumulation, these two saving mechanisms are pretty small change. Here, the derivation of change in private-sector net worth, again from the IMAs.

Real investment in the creation of newly produced, long-lived (productive) stuff — capital formation, investment spending — is overwhelmingly “funded” by churn within wealthholders’ $100-trillionish portfolio. Sell treasuries, buy into an IPO or a real-estate development deal. A zillion et ceteras. The “flow” of saving is small by comparison.

At the macro-est level, that “investment impulse” is driven by collective portfolio preferences, the markets’ risk/reward/yield calculations. (“Jesse Livermore” delivered the Aha for me on this; his measure of equities as a share of outstanding financial assets on Fred here. Pace market monetarists, it sure doesn’t look the market is crowding into “safe assets.”)

Swapping checking-account deposits for Apple shares is not investment in the economic sense of paying people (spending) to create new long-lived (productive) stuff. Collectively, it’s just portfolio allocation. If people are (confidently) optimistic, they bid up risk assets, expanding the total portfolio (wealth) pie.

Monetarists’ obsession with financial instruments like checking and money-market deposits whose prices are institutionally pegged to the unit of account (“cash” — only about 5% of household assets) blinds them to that collective portfolio adjustment mechanism. If government deficit-spends $100 billion in cash onto household balance sheets, the market is overweight cash (if portfolio preferences are unchanged). It re-allocates by competitively buying variable-priced instruments (bonds, stocks, land titles), driving up their prices. There’s more cash and more other assets.

Market asset pricing doesn’t — can’t — influence the total stock of fixed-price, UofA-pegged instruments. Their prices are fixed! (That’s the thing that makes cash, cash.) They can only be created by bank lending and government deficit spending (see next para). Those instruments are largely just a pool of intermediates in portfolio churn, in any case: sell treasuries, get cash; swap cash for IPO shares. As long as there are enough “cash” instruments for transactions to clear (and the peg holds), you’re cool. The transaction system doesn’t bind up. Collective portfolio reallocation is almost all via price changes in, duh, variable-priced instruments.

There are three economic mechanisms that create new private-sector balance-sheet assets ab nihilo: government deficit spending, bank lending, and asset-market price runups/capital gains. (Bank lending creates simultaneous private-sector liabilities, so it doesn’t create new private-sector net worth; the other two do.) These mechanisms create new “loanable funds” a.k.a. wealth. (Fed asset purchases with newly-“printed” “money” — reserves — create no new private sector assets or net worth — they just swap reserves for bonds, changing the private-sector portfolio mix; the market then adjusts its portfolio allocation in response, as described above.)

Of these three ab novo asset-creation mechanisms, capital gains utterly dominates:

Especially since the 80s/90s, as revealed here in corporate equity performance (this in inflation-adjusted dollars):

Think Amazon: essentially zero profits, saving, change in book value over two decades, while delivering half a trillion dollars onto household balance sheets.

This (plus similar or larger cap gains effects in real-estate valuation) gives rise to some very perplexing trends — perplexing for me at least:

This depicts what Sri Thiruvadanthai calls a “structural break,” some kind of seeming phase shift in how markets are working, or how we perceive and report on those markets, in accounting terms. Or both. Earnings and P/E, for instance, are becoming increasingly problematic as predictors of total return. What’s the capitalized present value of future cash flows from a firm that…will never deliver any cash flows/”profits”?

The asset markets seem to think that all our stuff is worth a lot more than it sold for in the new-goods markets.* One of those markets is getting prices “wrong.” Either this is the mother of all multi-decadal asset bubbles, or we’ve been vastly understating GDP for decades. (Or something else, maybe accounting, measurement-related.)

The creation of real, long-lived goods (“capital”) is the ultimate driver of wealth accumulation. But the economic mechanisms of wealth creation and accumulation — creating new claims on all our goods and future production (claims whose market-priced value is tallied up as balance-sheet assets) — are something else entirely.

In any case I agree with Joe: within what I think is a great article, Ryan’s rather rote recitation of standard-issue “loanable funds” truisms merits some careful rethinking.

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* The national accounts don’t even come close to tallying all that “capital,” by the way, or the investment in creating it. Consider the massive, lasting productive value, for instance, of widespread knowledge, skills, and abilities imparted through education and training and deployed over lifetimes, or broadly experienced health and well-being delivered through health-care spending. Those expenditures aren’t tallied as “investment” (spending on long-lived goods), nor are the resulting “assets” depreciated as humans age, sicken, and die.

The Giant Logical Hole in Monetarist Thinking: So-Called “Spending”

May 3rd, 2017 4 comments

Ralph Musgrave, who knows a thing or two about modern economic thinking, perfectly articulates the giant logical hole in monetarist thinking in a recent comment (emphasis mine):

If the private sector’s stock of saving is what it wants at current rates of interest, then additional public spending will push savings above the latter desired level, which will result in the private sector trying to spend the surplus away (hot potato effect).

Really? People/households say to themselves, “Wow, I’ve got too many assets, too much net worth. I’d better spend more to get rid of it.”

Here’s the verbal and logical sleight of hand that monetarists pull to hide this obviously inane assertion, and that Ralph doesn’t seem to have spotted: they game the word “spending.”

When government deficit-spends, it deposits (helicopter-drops) new assets, created ab nihilo, onto private-sector balance sheets. And since that deficit spending doesn’t create new private-sector liabilities, voila: there’s more private-sector net worth.

Those new assets hit balance sheets in the form of “cash”: checking-account deposits, money-market fund balances, etc. So people might end with a higher proportion of cash in their portfolios than they would like.

But they don’t try to “spend it away” to get rid of it. They rebalance their portfolios by buying riskier/higher-return financial instruments — bonds, equities, titles to real estate. This drives up the prices of those instruments.

These market runups create new balance-sheet assets (and net worth) — while leaving the collective stock of fixed-price “cash” unchanged. (That’s pretty much the definition of “cash”: financial instruments whose price is pegged to the unit of account — the instruments that monetary aggregates try to tally up.)

With a larger percentage of bonds, stocks, etc in their portfolios, and the same amount of cash, people have the portfolio mixes they want. Full stop. No hot potato. Likewise this is no game of musical chairs; market runups create more chairs. This is how “liquidity preferences” play out in the markets.

Those purchases of riskier financial instruments are not “spending.” People aren’t “spending down” their balances on newly produced goods and services. They’re just asset swaps — cash for Apple stock (and the reverse), or whatever. Through the magic of market-makers’ bid/offer order books, these asset swaps create new assets, collectively achieving investors’ preferred or “desired” portfolio mixes.

(Note: investors could also adjust their portfolios by paying off debt, simply shrinking their individual, and the collective private sector’s, balance sheets by disappearing both assets and liabilities into a hole in the ground. As Milton Friedman said, banks have both printing presses and furnaces.)

Now you might suggest: when people bid up Apple stock, that “causes” there to be more investment spending, spending to create more long-lived goods. I’m hoping I don’t have to explain all the logical flaws in that thinking, or point out the empirical disproofs. (It’s basically a freshman error: confusing “investment” with investment.)

Sure: when people buy into IPOs and new private bond issues, or buy titles to new (spec-built?) houses, there’s a quite plausible causal link between those asset swaps and actual increased investment spending. An excess proportion of cash in investors’ portfolios could certainly drive this economic effect.

But: 1. These purchases of newly issued financial instruments constitute a tiny proportion of the portfolio rebalancing we’re talking about; the magnitude of holding gains on existing instruments swamps these measures, and 2. It has nothing to do with investors trying to “spend down” and get rid of their balances, cash or otherwise. That notion is individually implausible, and collectively incoherent.

 

Liberals Getting It Wrong on the Job Guarantee

February 25th, 2017 4 comments

I’ve been quite troubled lately by voices I’ve been hearing from my compatriots on the Left discussing the Job Guarantee — especially in relation to an alternative, Universal Basic Income. A new Jacobin article by  displays several of the aspects that make me uncomfortable.

Get the Math Right. Right off the bat, I’m troubled by the article’s flawed arithmetic — not what I would like to be seeing from left economists who need to be scrupulous in their role as authoritative voices for the left.

…we argue for a FJG that would pay a minimum annual wage of at least $23,000 (the poverty line for a family of four), rising to a mean of $32,500. … In comparison, many of the UBI proposals promise around $10,000 annually to every citizen…half the rate that would be available under the FJG.

$10K per citizen versus $23K per worker is not “half the rate.”

How do the two policies actually compare? I have no idea. This is exactly the kind of difficult calculation that we need economists to do for us (it’s way beyond our abilities), so we can evaluate different policies. Absent analysis with clearly stated parameters (Who counts as a citizen? Children? Etc.) this kind of statement carries no import or information value.

These analyses have been done by economists. I’ve seen them around. But I don’t have them to hand; they’re exactly what I’d like this article to point me to. Are these authors unaware of this work, or did they just not bother to look at it, draw on it, or cite/link to it in this article?

Perhaps most important: this kind of slipshod analysis delivers live and loaded rhetorical ammunition to the enemy. It’s an invitation to (very effective) hippie-punching.

Get outside economists’ fetishistic obsession with short-term business cycles, and with the automation versus globalization debate. We’re facing decades-long campaigns to get any JG or UBI implemented, and decades- or centuries-long technological and job-market trends. If Ray Kurzweil’s exponential productivity growth is even somewhat valid (choose your exponent), we’re facing at a world where Star Trek-style replicators can turn a pile of dirt into a skyscraper or a thousand Thanksgiving dinners — and potentially, where a small handful of people own all those replicators.

In this world, nobody would ever pay a human to produce goods. It would be stupid. Will service work deliver the kind of jobs and wages that let a worker share the fruits of that spectacular prosperity? It doesn’t seem likely. Will the highest-paying service jobs themselves be automated? It seems likely.

That’s an extreme vision, but it embodies the long-term issues these policy discussions need to address. Instead we get from the authors:

The dangers of imminent full automation are overstated…. No doubt, stable and high-paid employment opportunities are dwindling, but we shouldn’t blame the robots. Workers aren’t being replaced by automatons; they are being replaced with other workers — ones lower-paid and more precariously employed.

They’re pooh-poohing the technological future — continuing centuries of Luddite-bashing — because (quoting Dean Baker):

In the last decade, however, productivity growth has risen at a sluggish 1.4 percent annual rate. In the last two years it has limped along at a pace of less than 1 percent annually.

Issues here, in very short form: 1. Productivity and “economic capacity” measures are wildly problematic, both theoretically and empirically. The econ on this is a mess. 2. A decade, much less two years, is not even close to a trend. 3. The automation vs offshoring debate is specious; they’re inextricably intertwined, like nature and nurture. 4. They’re (I think unconsciously) buying into the whole economic worldview and conceptual infrastructure (think: “factors of production”) that delivered us unto these times.

The authors are certainly correct that:

…the balance of forces over the last few decades has been skewed so dramatically in the favor of capital. … It’s time to get the rules right

But this fairly muddled (and hidebound) depiction of the issues at hand does little or nothing to suggest what the new rules should be. We need left economists to unpack these long-term secular forces and trends far more cogently — and radically. They need to be examining the very foundations of their economic thinking and beliefs.

The “Dignity of Work.” It actually makes me squirm in discomfort to hear liberals with very cool, interesting, high-paying jobs going on about the dignity of work. I’m just like, “how dare you?” That kind of supercilious presumption arguably explains why liberals have been losing elections for decades — especially the latest one.

Here’s the full passage on this:

Conventional wisdom holds that people dislike work. Introductory economics classes will explain the disutility of labor, which is a direct trade-off with leisure. Granted, employment isn’t always fun, and many forms of employment are dangerous and exploitative. But the UBI misses the way in which employment structurally empowers workers at the point of production and has by its own merits positive dimensions.

This touches on a heated debate on the Left. But for now, there is no doubt that people want jobs, but they want good jobs that provide flexibility and opportunity. They want to contribute, to have a purpose, to participate in the economy and, most importantly, in society. Nevertheless, the private sector continues to leave millions without work, even during supposed “strong” economic times.

The workplace is social, a place where we spend a great deal of our time interacting with others. In addition to the stress associated with limited resources, the loneliness that plagues many unemployed workers can exacerbate mental health problems. Employment — especially employment that provides added social benefits like communal coffee breaks — adds to workers’ well-being and productivity. A federal job guarantee can provide workers with socially beneficial employment — providing the dignity of a job to all that seek it.

The variations on the “dignity” thing are endless. Our authors here give us:

employment structurally empowers workers at the point of production

This is clearly something that working-class workers and voters are clamoring for.

by its own merits positive dimensions

Sure: in our current system where only wage/salary work provides “dignified” income, you’re gonna see positive second- and third-order effects from employment. Does a program where government provides the income (in most implementations, channeled through private-sector employers) change that pernicious social environment?

But wait: workers get communal coffee breaks!

The whole thing actually, rather remarkably, turns Marx on his head. The alienation that he imputes to working-for-the-man, wage labor is here transformed into the sole, primary, or at least necessary source of human dignity and self-worth. It’s the only way for the working class “to contribute, to have a purpose, to participate in the economy and, most importantly, in society.” Contra David Graeber, if there’s not a money transaction involved, it’s not “valuable” or worthy.

This before even considering the freedom to innovate and thrive that arises when you don’t have to go to work. (Every startup I’ve ever been involved in — many — began with endless hours of hanging out and drinking beer with friends.)

Like so much so-called left thinking over the last half century (think: The Washington Consensus), this thinking unquestioningly, even blindly, unconsciously, adopts and is entrapped by one of conservatism’s core economic mantras: “incentives to work.”

Why in the hell do we want people to work more? We know why conservatives do: because it allows rich people to profit from that labor and grab a bigger piece of a bigger pie. But isn’t the whole point of increasing productivity (or a/the main point) to work less while having a comfortable and secure life?

What the authors dismiss as “conventional wisdom” is in fact largely correct: Most people don’t want to go to work. Or they don’t want to work nearly as much as they do. They can manage their “relationships” and social well-being just fine, thank you. Sure, they enjoy the social interaction at work, to the extent that… But they go to work because they want and need the money. Full stop.

In 1930 Keynes predicted a future of 15-hour work weeks. Sounds idyllic to me. Does anyone think workers would object? Or do we have a better handle on their wants and needs than they do?

We haven’t even come close to that future. Two-earner households are now the necessary norm, and hours worked per worker has been flat since — surprise — 1980, after a very nice decline postwar. Here’s annual hours worked per household, even as households have gotten steadily smaller:

A job guarantee as I understand it does nothing to advance that Keynesian bright future. Given the pro-work rhetoric we hear from JG enthusiasts, it might just further entrench what you see above.

So three takeaways here:

• Get the math right. Do the careful, difficult analysis for us so we can make informed judgments. Or point us to the work that’s already been done.

• Look to your theoretical and empirical fundamentals. They’re often inherited, often unconsciously. They’ve been indoctrinated and inscribed into economists’ invisible System 1 thinking. Many of them are not conceptually coherent, or morally valid.

• Just stop talking about the “dignity of work.” It’s a huge own-goal — both the policy results (more work for workers), and the electoral results of that presumption.

If we want that Keynesian utopia — comfortable, secure lives with not a lot of work required — UBI seems like a far more direct path to getting there. If you want to give people comfort, security, dignity, well-being, power, the opportunity to thrive on their own terms, and economic security…give them money.

 

My Letter to the Fed: Stop Misrepresenting the National Debt

February 14th, 2017 Comments off

The Fed data portal, Fred, just posted a blog item that I take exception to, “suggested” by Christian Zimmermann, Assistant Vice President of Research Information Services. Here’s my response.

Dear Mr. Zimmerman:

I’m pleased to see that this post focuses on the interest burden of the federal debt. It’s an important measure that doesn’t get enough attention in discussions of the subject.

But still I’m shocked by how many things are poorly represented in the post. I have no doubt you know all of this, but:

1. Public Debt is not Debt Held by the Public. (“The Public” here meaning the private sector.) Public debt includes money owed by government to itself (SS trust fund, etc.).

Almost every economist agrees that Debt Held by the Public, not “Gross Debt,” is the economically significant measure. Highlighting gross debt is not useful in educating the public on this subject. Quite the contrary.

This measure of course paints a very different (and less dire) picture:

2. This of course impacts the interest burden, and also paints a very different picture.

3. Even for Debt Held by the Public: Federal Reserve Banks are included in “the public” for this measure — even though their balance sheets and profits/losses redound to Treasury, IOW government, not “the public.”

Here’s actual Debt Held by The actual Public — only 60% of GDP:

One can discuss whether the Fed will ever shrink its balance sheet, and how it would do so, but this is the current condition.

4. Again, the interest burden: Treasury’s interest payments to Fed banks on their bond holdings cycle directly back to Treasury. So true, total government out-of-pocket interest payments:

Less than 1% of GDP.

5. Circa 50% of those interest payments are to the U.S. domestic private sector, so are in no way a drain on the U.S. domestic sector.

Interest payments to foreign entities come to less than .5% of GDP.

Probably unintentionally, this Fred post contributes to the widespread “scare tactics” that result in such economically destructive fiscal decisions by our legislators.

Thanks for listening,

Steve Roth
Publisher, Evonomics

When Did Hillary Lose the Election? In 1964.

January 13th, 2017 Comments off

The half-century story of Democrats’ abdication and decline

By Steve Roth. Publisher, Evonomics

On January 1, 1964, John F. Kennedy posthumously initiated the half-century decline of the Democratic Party, beginning its descent into this moment’s dark and backward abysm of slime. His massive tax cuts for the rich, implemented in ’64 and ’65, were the turning point and beginning of Democrats’ five-decade abandonment of its longtime winning formula: full-throated, unabashed, progressive economic populism. It was the signal moment when Democrats began to abandon the working and middle class. The working and middle class, betrayed and feeling betrayed, have now returned the favor.

Unapologetic progressive economic populism — starting really with Teddy Roosevelt’s slash-and-burn trustbusting, and turned up full-throttle in his namesake’s New Deal — had given Democrats three decades of electoral success. FDR lost two states and eight electoral votes in 1936. He got 523 out of 531. Over four campaigns, he never got less that 432. Eisenhower got a couple of terms as a very moderate Republican, really a progressive, but Democrats’ dominance of Congress and state governments seemed eternal.

Because: that economic populism also delivered success for America. The New Deal, combined with the government deficit spending of World War II, resulted in the greatest burst of widespread growth, progress, prosperity, and individual economic freedom in American history — before or since.

James Carville was certainly right: “It’s the economy, stupid.”

Democrats’ remaining progressivism under Johnson — civil-rights legislation, Medicare and Medicaid, and the wholesale movement of liberated women into the workforce — eventually pushed a hot middle-out economy into the demand-driven inflation of the 70s. That torrid growth brought government debt down from 120% of GDP in 1947, to 35% in 1980. (You know what happened after that.)

But even amidst that burst of growth and sustainable government finance, Democrats were abandoning the very source of their economic and electoral success. Kennedy’s top-tier tax cuts were a preemptive, voluntary abdication to trickle-down theory, before “trickle-down” even existed. When Reagan turned that dial to eleven, he was only occupying ideological ground that Democrats had ceded and abandoned to the enemy, long before. It was an epochal own-goal of historic proportions.

Democrats have been kicking the economic ball into their own net ever since. The obvious solution to the 70s inflation was to raise taxes, reducing government deficit spending, to drain off excess demand from a too-hot economy. Instead they acceded to the banker-industrial complex and the diktats of childish monetarism, again conceding the win to an economic belief system that is egregiously self-serving for the rich, and anathema to Democratic progressive economic populism.

That’s when the enthusiastic, progressive Democratic base stopped turning out in force. (Exception: Obama. For other reasons.) Progressive baby boomers have spent their whole lives voting against Republicans and their swingeing, destructive economic policies, not for inspiring Democrats. Think about the Democratic presidential candidates since 1964. McGovern was a true social progressive, but really a one-issue anti-war candidate. Bill Clinton did okay, within the confines of the post-Reagan economic belief system, which he never seriously challenged as FDR did. Obama didn’t either, in rhetoric or practice. His administration’s failure to prosecute a single prominent bankster is arguably the best single explanation for Hillary’s electoral meltdown.

Can you name one full-throated economic progressive Democratic candidate in the past half century? I’m not even asking for fire-eating. Here’s some help: Humphrey. Carter. Mondale. Dukakis. Gore. Kerry. (Are you still awake?) Aside from Obama, no Democratic candidates had the Democratic base flocking to the polls. (Compare: Republicans and their rabid Tea-Party base.) Add Hillary to that rather stultifying list.

Starting in the 60s, Democratic candidates stopped delivering an inspiring economic message. But the real failure was substantive. In their sellout to the enrich-the-rich supply-siders, Democrats abandoned the working and middle class, and the party’s winning legacy of widespread prosperity. The Democratic party elite bought into and helped promulgate an economic belief system (the “Washington Consensus”) in which distribution and concentration of wealth and income not only don’t matter, they can’t matter. The quite predicable results are upon us — decades of working-class wage stagnation, and wealth concentrations that are as high or higher than any period in modern world history.

It’s no wonder the Democratic base feels betrayed. They were betrayed.

Still: despite those decades of weak-kneed collaborationism, Democrats have obviously remained more economically progressive than Republicans. Clinton and Obama managed to raise taxes some, and Obama gave us Obamacare. And the economy has shown the results. Democratic presidents have delivered growth, progress, widespread prosperity, individual economic security, and true personal economic “freedom” that Republicans — the self-proclaimed “party of growth” — can only imagine in their fever dreams.

By almost any economic measure — GDP or income growth, job creation, stock-market runups, deficit reduction, people in poverty…choose your measure — Democrats’ economic performance has unfailingly beggared what Republicans have offered up. That is true for any multi-decade period you choose to look at since World War II, or over the last century for that matter. It’s true at the national, state, and local levels. Republicans constantly promise prosperity and growth. Democrats consistently deliver it (at least compared to Republicans). They’ve kicked Republicans’ economic asses, decade after decade.

Bigger pie? Raise all boats? Talk to the Democrats.

But nobody seems to know that. Did you? And Democrats never even say it — much less repeat it endlessly over decades, shouting it from the rooftops to stir up the base as Republicans would. The old saw is apparently right: “A liberal is someone who won’t take their own side in an argument.”

Perhaps that failure is a result of progressives’ fussy squeamishness about people getting rich. They don’t really like that word. But voters do. A third of Americans’ think they’ll be rich someday. Fifty percent of 18–29-year-olds do. (About 5% of Americans actually are rich, with more than couple of million dollars in net worth.) That squeamishness explains the persistent “anti-capitalist” strain of American liberalism, which is such an electoral disaster at the voting booth.

Democrats have much to atone for in their failure to hold the line on progressive economic principles, their failure to wholeheartedly champion and defend the working and middle classes, their sellout and abdication to the bankster class. But they also have much to crow about. Instead, though, they’ve stood by for decades while Republicans have falsely claimed the “party of growth” moniker, contrary to all historical evidence.

It is the economy, stupid. Voters, Democratic and Republican alike, will tell you in surveys about all the things they care about. But when they walk into the voting booth, they’re going to choose the person who they think will make them, their families, and those around them more prosperous, comfortable, and economically secure. They vote for candidates who they think will deliver better lives — starting with people having enough money to pay the bills. The Republicans realized that forty-plus years ago, and they’ve been winning based on that ever since. “I’ll cut your taxes and deliver economic growth.” Full stop, drop the mic.

Trump showed us that fire-breathing populism wins elections. While his brimstone reeked of many things, economic populism was at the core of his rhetorical fur ball. Even as he prepared to betray the working class at unheard-of levels, he channeled that betrayal straight onto his vote tally. “Audacity”? Obama should grab a stool and go to school.

And Bernie showed us the same thing. His campaign was unprecedented in American political history, funding a full-boat national campaign and outspending Hillary by 25 million dollars, almost completely with small donations. His message of economic populism brought in more than 200 million dollars in donations from 2.5 million people. And he turned out the enthusiastic base, in droves. Presumably he would have done so on election day, as well. Are Democratic political operatives finally beginning to take note?

There is a path out of the wilderness for Democrats. It’s the path they’ve trod before, with huge success. It involves (for once) coalescing around a core message that resonates with all Americans, repeated endlessly over years and decades. “Equality” and “opportunity,” important as they are, are weak beer on the campaign trail. Most Americans change the channel.  Tell them what they want to hear:

“We make America rich.”

The double meaning is fully intended.