Archive for March, 2012

Lending, Velocity, and Aggregate Demand

March 30th, 2012 73 comments

JKH likes this line in Keen’s response to Krugman:

The endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money.”

It struck me as an empirical question: how do those changes compare in magnitude? I didn’t know offhand.

Let’s start with MZM (money of zero maturity, the broadest definition of money), and GDP:

There’s about $10 trillion in MZM right now, and GDP (annual spending) is at about $14 trillion.* The money stock turns over about 1.4 times per year.

If money supply was unchanged — no new net lending/borrowing — but the musical chairs/logrolling game sped up so money turnover increased by 5%, because people were more optimistic — ready to take chances, consume now while worrying less about later, invest in new housing and productive capacity, etc. (“animal spirits”) — that would add $.7 trillion to aggregate demand. (5% is quite a GDP jump given no new net lending…)

Now lets look at annual net borrowing/lending — annual change in debt owed by households and nonfinancial firms:

Plus $1.6 trillion, to minus $.4 trillion. We’re looking at magnitudes far beyond what we could reasonably expect from pure animal-spirit-driven velocity changes.

Now it’s true that much of that lending/retiring might not translate directly into purchases/production/consumption of real goods. Much of it might (does) leak into changes in financial asset prices. (Keen is keenly aware of this. It’s pure Fisher/Minsky.) Yes, that portion could affect real-good transaction volumes via a second-order wealth effect, but the magnitude of that effect is unclear.

But it seems from the magnitudes that Keen’s statement is probably correct: changes in borrowing and de-borrowing have a lot more potential effect on aggregate demand, at least, than changes in velocity.

* Note that this does not include spending on intermediate goods — those that are turned into final goods within the accounting period — or used stuff. Adding these into total spending when calculating velocity might yield interesting insights. See Nick Rowe, Macroeconomics and the Celestial Emporium of Benevolent Knowledge.

Cross-posted at Angry Bear.

Keen Answers Krugman

March 28th, 2012 11 comments

The Central Flaw in Krugman’s Argument Against Keen

March 28th, 2012 26 comments

The key failing in Krugman’s response to Steve Keen’s response to Krugman’s paper (PDF) is here:

If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.

Krugman assumes here that people have to save (spend less) in order for other people to borrow. It’s actually the fundamental assumption, the sine qua non, of his paper (and of Krugman’s beloved IS-LM — the linch-pin of “New” Keynesianism — created by Hicks to subsume Keynes into neoclassicism, and later disclaimed and discredited by Hicks as a “classroom gadget”; see my post, and Phillip Pilkington here).

But that’s not how things work (and it’s the very assumption that Keen is disputing). I tried to explain this in clear and simple terms here:

Think about it:

You get $100,000 in wages. Your employers’ bank account is debited, and yours is credited. Your bank can lend against your higher balance; your employer’s bank can’t. Net zero.*

You spend $75,000. It’s transferred from your account to other people’s/businesses’ bank accounts. Their banks can lend more, yours can lend less.

Is the total stock of loanable funds affected by whether the money is on deposit at your bank, your employer’s bank, or the banks of people you bought stuff from? No.

Meantime, you don’t spend $25,000. You “save” it. The money sits there in your checking account. If the action of spending — transferring money from one account to another — doesn’t change the total stock, how could not transferring money do so? Your bank still has the money, which it can lend out. Other banks still don’t, and can’t.

So here’s how the argument plays out:

Krugman assumes that people need to save in order for others to borrow.

Keen points out that they don’t.

Krugman explains that Keen is wrong by … assuming that people need to save in order for others to borrow.

And so the world goes round.

Cross-posted at Angry Bear.

Steve Keen Flexes His Muscles

March 22nd, 2012 1 comment

Thinking About the Fed

March 20th, 2012 40 comments

JKH has magisterial post up on the recent dust-up over Saving as perceived in various sectoral models — one-sector (global, for instance, or government- and trade-balanced domestic private sector); two-sector (government and private including international); the most common MMT construct, the three-sector model (government, domestic private, and international); the rather uncommon four-sector model (government, international, domestic household, and domestic business); or even a seven-billion-plus-sector model, in which each individual (and business, and government) is represented as a sector.

His key point, I think — one I agree with profoundly — is that people need to be very clear on which model they’re assuming when they use the word Saving, or the construct “S.” (People sometimes use those two differently, with different implied sectoral models, sometimes within a single discussion or even a single sentence.) In most cases the different constructs of saving and S that people throw around are absolutely valid within their (implicit) sectoral models. The problem arises when people are talking about different sectoral consolidations within the same discussion, without themselves and/or their interlocutors being (fully) aware of it.

I’ve left a few glancing comments over there, but it’s prompted me to write up some thinking here that’s conceptually related.

How do we think about the central bank, and actually the nature of money and the monetary system? I see a lot of people talking past each other because they’re talking about different levels of accounting consolidation. Here are four ways to look at the Fed:

1. It’s an independent institution, separate from Treasury and the reserve-holding banks.

2. It’s part of “government” — a consolidated entity comprised of Treasury and the Fed.

3. It’s part of the private sector monetary system — a consolidated entity consisting of the Fed and all the banks holding reserves at the Fed.

4. It’s part of a fully consolidated monetary system consisting of Treasury, the Fed, and all the reserve-holding banks.

I’m not going to explore all these fully — there’s a book (or several) there — but here are some thoughts on each that might illuminate how the thinking is very different depending on which you adopt, perhaps showing how quite a lot of unecessary confusion and cross-discussion might be avoided.

1. It’s an independent institution, separate from Treasury and the reserve-holding banks.

Even though this is the “reality” of our monetary system (as a result of legislative diktat), thinking about it this way results in an odd conceptual situation. We end up with a sovereign currency issuer (Treasury) that (like a household or business) has to borrow in order to spend, and a bank (the Fed) that can issue unlimited funds ex nihilo to purchase assets. This seems exactly the opposite of how one would imagine things would work.

2. It’s part of “government” — a consolidated entity comprised of Treasury and the Fed.

This is a preferred MMT construct, and it has much conceptual appeal. “Government” issues new money through Treasury spending, and Fed open-market and QE operations are basically fiddling around the edges of the money “supply,” largely for the purpose of interest-rate management. Yes, the Fed actually issues the money, but in this consolidated view “government” is doing the issuing through deficit spending, crediting people’s bank accounts with newly-created money.

3. It’s part of the private sector monetary system — a consolidated entity consisting of the Fed and all the banks holding reserves at the fed.

This makes conceptual sense, because all deposits ultimately resolve, consolidate, back to reserves at the Fed. In this construct, all the banks (including the Fed) are issuing private money as licensees of of the Fed, which ultimately derives its licensing authority from “government” (Treasury).

4. It’s part of a consolidated monetary system consisting of Treasury, the Fed, and all the reserve-holding banks.

Looked at this way, we could conceive of it all as a single big national bank, with deposits resolving back to reserves, which ultimately resolve back to the full faith and credit of the government (Treasury).

These are fairly sloppy characterizations. I know the JKHs and SRWs, Ramanans, Vimothys et. al could (and I hope will) express them more cogently and accurately. But I wanted to keep them brief to highlight my central point:

Different views, consolidations, of these entitites result if very different understandings of “how the monetary system works.” Each (properly presented, unlike here) is valid within its own construction, and each imparts an important understanding of how things work. The problem arises, as with Saving and “S,” when a person, or people in discussion, confute and confuse these different views, or switch among them during thinking and discussions.

Cross-posted at Angry Bear.

It’s a Spending Problem, Right?

March 17th, 2012 4 comments

When Do Humans Want to Share the Wealth?

March 16th, 2012 1 comment

Jonathan Haidt reports an interesting experimental result:

Two three-year-olds walk up to a marble-delivery machine that has two bins. Each stands in front of one bin. Three scenarios:

1. One bin has three marbles in it, the other has one: the winner is unlikely to share to equalize the takings.

2. There are two ropes to pull; one delivers one marble, the other three: the winner is unlikely to share to equalize the takings.

3. Two ropes, but both must be pulled together to deliver the one/three marbles: the winner is likely (75%!) to share to equalize the takings. (Either spontaneously, or on request from the loser.)

If people feel that they must work together to get the goods, they also feel that they should (or even want to) share the goods.

Haidt’s take (my emphasis):

If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.

Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.

Now add this:

The losers know the game is rigged, so their innate intution tells them that the winners should share.

The winners refuse to know that the game is rigged — deny it vehemently — so they think the losers are unreasonable in their expectations of sharing.

Contributing: The American cult of individualism — the widespread belief among the successful that their success is a result of their efforts only, so they deserve their winnings — means that their natural human work-together-share-together instincts aren’t invoked. This even when they’re wrong about the relative contribution of their individual efforts.

So the winners are deluded about two things: 1. the relative contribution of their individual efforts (compared to A. luck and B. the rules/playing field), and 2. the (rigged) state of the playing field.

Here’s the problem: the losers are also deluded about #1 (because the rigged game provides the winners with the necessary resources to delude them through tens of billions of dollars of propaganda and economist-buying).

So here’s the rhetorical challenge faced by those who seek greater equality: convince the losers that much or most of the winners’ success is in fact the result of everyone pulling on ropes together (and luck), not just the winners’ industrious rope-pulling. Not an easy task, but one worth focusing on.

To add, a problem with Haidt’s analysis: if big business and big finance (and rich people) couldn’t buy big government to rig the game in their own favor, big government wouldn’t be the problem. Absent that buy, government is essentially indifferent to relative distributions — or arguably even more inclined to sharing the wealth widely to garner lots of votes — one person one vote versus one dollar one vote.

He suggests a three-way symmetry for a situation that is not symmetrical.

Cross-posted at Angry Bear.


Business Roundtable Proposes Obamacare to Restore American Competitiveness

March 6th, 2012 No comments

Or: You Just Can’t Make This Shit Up

“Health Care Costs Put U.S. at Significant Disadvantage Compared with Global Competitors”

I’ll let you read the details, but short story:




And what do they recommend?

Creating greater consumer value in the health care marketplace by using health information technology and empowering consumers with more information about good quality health care.

Providing more affordable health insurance options for all Americans by creating an open, all-inclusive private market for health insurance and replacing today’s fragmented state-by-state market with multistate markets. To ensure that insurance plans are solvent and meet certain minimum requirements, the role of individual states as the primary regulator should continue. Broader, more competitive markets will create more choices for more health care consumers.

Engaging all Americans in taking an active role in their health care. First, this means placing an obligation on all Americans to obtain health insurance either through their employer or the private market. Second, we must encourage all Americans to participate in employer- or community-based prevention, wellness and chronic care programs.

Offering health coverage and assistance to low-income, uninsured Americans that create a stable and secure public safety net. This assistance would be financed from the cost savings and efficiencies generated by a more competitive and value-driven health care system.

The Business Roundtable Health Care Value Index – Executive Summary | Business Roundtable.

Cross-posted at Angry Bear.

Note to ‘Pubs: The Demographic Tidal Wave is Hitting the Beach

March 5th, 2012 19 comments

Or: Even a Stopped Clock is Right, Eventually

For quite a while I’ve been explaining the rabid, frantic vehemence of tea partiers and Republicans in general with a single visualization:

They’ve got their backs against the seawall, and a massive, overwhelming demographic tidal wave is looming over them.

The terror that situation provokes among old, white, rich, “educated” male types is enough to mobilize a hell of a lot of political activity and influence (especially when it’s coopted and channeled by tens of billions of dollars in corporate propaganda). This goes a long way toward explaining the backlash of the 2010 election.

But desperate maneuvering can’t stop the tides.

This demographic notion got its first major airing in Judis and Teixeira’s 2002 The Emerging Democratic Majority, which seems to have been a little ahead of its time. But as Jonathan Chait suggests in “2012 or Never,” the demographic clock may finally be ticking up to high noon.

The modern GOP—the party of Nixon, Reagan, and both Bushes—is staring down its own demographic extinction.

Despite assorted and sadly wishful pooh-poohing on the right (“the Republicans will just rebrand themselves”; “second-generation Latinos will be more conservative”), the demographic reality is displayed quite starkly in two graphs from a recent Pew report (PDF; hat tip Ruy Teixeira).

Say “buh bye.”

Nevertheless, as Robert Reich reminds us: for the present, “the loony right” remains “a clear and present danger.”

Update Mar. 5: “According to the latest survey from Fox News and Latin Insights, 73 percent of Latinos approve of President Obama’s job performance, compared to 35 percent approval for Mitt Romney, 13 percent for Ron Paul, 12 percent for Newt Gingrich, and 9 percent for Rick Santorum. What’s more, in a head-to-head matchup with the president, none of the GOP candidates would win more than 14 percent of the Latino vote.

Cross-posted at Angry Bear.

Where’s the High Point on the Laffer Curve? And Where Are We?

March 3rd, 2012 7 comments

Anti-taxers love to haul out the legendary napkin-inscribed Laffer curve to demonstrate that lower taxes would yield more government revenue. But this ploy only works because they assume that we’re at or past the high point — that higher taxes would move us down the right slope. (Note the cross-marks-the-spot in the image here?)

But where are we really, relative to that high point? James Kwak gives us an answer, based on a great recent paper by Christina and David Romer (emphasis, interjections, mine):

…an [income] elasticity of 0.19 [from the Romer paper] implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.

This is obviously not to say that we should be taxing at that level — only that Laffer-curve arguments are ridiculous because we’re nowhere near the high point.

Kwak adds another key insight about the paper:

Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.

So we’re even father from the peak than suggested by the .19 elasticity.


when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes.

Hat tip Karl Smith and Mark Thoma.

Cross-posted at Angry Bear.

How Much Do Taxes Matter? | The Baseline Scenario.