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How We Reduce Poverty, and How “The Market” Doesn’t

August 1st, 2014 1 comment

Matt Bruenig gives us a great breakdown of what poverty would look like if we relied on the market to solve it (as we did almost exclusively for thousands of years before the emergence of enlightened modern welfare states over the last two centuries).

The poverty rate among the elderly would be > 45%. (Old folks with long memories: sound familiar?)

Thanks to Social Security, Medicare, etc., it’s 9%.

Here are Matt’s numbers in graphical form for easy digestion:

Screen shot 2014-08-01 at 8.46.54 AM

Read the whole thing.

Cross-posted at Angry Bear.

The Reagan Revolution, In One Graph

July 30th, 2014 No comments

Policy Prefs: I’m Right at the Peak of America’s Bell Curve. Where Are You?

July 29th, 2014 No comments

The idea of democracy is to give the people what they want, right?

Ezra Klein points us to a great study by Ray LaRaja and Brian Schnaffer examining policy preferences by political donors (5% of the population) vs. non-donors (95%).

Here’s my rendition of the results:

Screen shot 2014-07-29 at 10.48.43 AM

Whose preferences would you say are embodied in our current government?

Non-donors as a group are pretty coherent, and seem to give a good representation of what Americans want.

Donors, perceived as an entity, not so much — the group is downright schizophrenic, in particular due to that anomalous bulge at the right. And that 5% or .5% determines what we get — not the 95%. (Money? Pernicious? Feh.)

Now: ask yourself where the self-professed liberals and conservatives that you know land on the left-hand graph.

Just sayin’.

Cross-posted at Angry Bear.

The New Synthesis? Market Monetarists Meet New (and Post?) Keynesians on Helicopter Drops

July 27th, 2014 No comments

A a year or so back I highlighted David Beckworth’s great post on Helicopter Drops. And the world’s best econoblogger, Steve Randy Waldman, did as well. (A “fantastic post,” he said.)

I’ve been pinging ever since to see a response to that post from Market Monetarist opinion-leader Scott Sumner. (AS SRW said, what we’d gotten from him was largely “quibbles.”)

I won’t rehash it all here but rather point you to Nick Rowe’s wonderfully successful effort to bring it all to conclusion, synthesizing Market Monetarist and New Keynesian thinking into support for a policy proposal that I think Post-Keynesians and MMTers would also jump on with gusto. (Also read the comments to Nick’s post, including one from Scott Sumner.)

I feel quite sure that Democrats/Liberals would embrace the policy wholeheartedly. Republicans/Conservatives, unfortunately, would consider it to be heresy and apostasy (often-sensible but utterly toothless Reformocons nothwithstanding).

Which pretty much clarifies where the problem lies…

Cross-posted at Angry Bear.

Nassim Taleb: Two Myths About Rivalry, Scarcity, Competition, and Cooperation

June 28th, 2014 2 comments

I’m delighted to find that someone with the necessary statistical chops has answered a question I’ve been asking for a while: Have any of the 130+ evolution scientists who’ve savaged Wilson and Nowak’s Eusociality paper (and Wilson’s Social Conquest of Earth) gone deep into the maths of their model (laid out in their technical appendix)? I check periodically, but don’t follow the field carefully.

According to this Taleb Facebook post, the answer’s still no, almost four years after the paper was published.

Emphasis mine, links in the post:

There are two myths that prevail in academic circles (hence the general zeitgeist) because of mental contagion and confirmatory effects (simply from the way researchers look at data and the way it is disseminated): 

1) That people are overly concerned by hierarchy (and pecking order), and that hierarchy plays a real role in life, a belief generalized from the fact that *some* people care about hierarchy *most the time* (most people may care about hierarchy *some of the time* but it does not mean hierarchy is a driver). The problem is hierarchy plays a large role zero-sum environments like academia and corrupt economic regimes (meaning someone wins at the expense of others) so academics find it natural so they tend to see it in real life and environments where if may not be prevalentMany many people don’t care and there is no need to pathologize them as “not motivated” –academics who publish tend to be “competitive” and “competitive” in a zero-sum environment is deadly. I haven’t seen any study looking at things the other way.

2) That “competition” plays a large role compared to *cooperation* in evolutionary settings –of course if you want ruthless competition you will find examples and can model it with bad math. The latter point is extremely controversial, Wilson and Nowak have been savagely attacked for their papers (with >130 signatures contesting it) and, what is curious NOBODY was able to debunk the math (very very very rigorous backup material). If Nowak/Wilson were wrong someone would have shown where, and in spite of the outpour of words nobody did.

I’d condense my thinking on the subject as follows:

1) People mistake rivalry for scarcity. If one tribe excludes all the others from a water source, forces them to do their will to get water, there’s obviously scarcity, right? Wrong.

Don’t get me started on the sacralization of (largely inherited) “property rights,” ownership — the right to exclude others.

2) They don’t understand that competition’s only virtue is increasing and improving cooperation. Cooperation — non-kin altruism, eusociality, etc. — is the thing that got us to the top of the food chain. Cooperation is what wins the battle against scarcity.

Competition fetishists think that competition is always good because it sometimes improves cooperation, even though it frequently does the exact opposite.

Think: trade wars. Or just…wars.

Cross-posted at Angry Bear.

The Pernicious Prison of the Price Theory Paradigm

June 5th, 2014 3 comments

Steve Randy Waldman has utterly pre-empted the need for this post, cut to the core of the thing, in the opening line of his latest (collect the whole series!):

When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness. 

But I’ll try to help a little. What that means:

In the mid 20th century, economists decided:

It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini.

So we’re simply going to punt, and only talk about ‘preferences’. For our discipline, in its scientific impartiality, absolute utility — because we can’t measure it — will effectively not exist.

Inside our hermetic logical construct, we not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.

And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)

The effects? Economic analysts must assume, prima facie, that a billionaire buying a third or fourth Lamborghini delivers the same value as buying a college education for your kid or a heart bypass for your mom.

Who are we to second-guess preferences? They’re all the same price, right?

The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter. For economists who aren’t willing to tear open the prison door (at serious risk to tenure and employment), they can’t matter.

Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.

Cross-posted at Angry Bear.

The Five Best Nonfiction Books

June 2nd, 2014 11 comments

Okay fine, not the best. (Click bait!) But for me, the most important — the five books that, more than any others, taught me how to think about the world.

A friend in my “classics” book group asked me for nonfiction book recommendations. Here’s what I wrote:

The NF books that wow me, get me all excited, have me thinking for years or decades, are ones that are comprehensible to mortals but that transform their fields, become the essential touchstones and springboards for whole disciplines and realms of thought. Writing for two such disparate audiences is insanely hard, and the fact that these books succeed is a big part of what makes them brilliant.

Also books that cut to the core of what we (humans) are, how we know. (So, there’s much science tilt here, but far bigger than arid “science.”)

“I don’t know how I thought about the world before I read this.”

Or:

“Yes! That’s exactly what I’ve been kinda sorta thinking, in a vague and muddled way. THANK YOU for figuring out what I think.”

These books let you sit in on, even “participate,” in discussions at the cutting edge of human understanding. They make you (or me, at least) feel incredibly smart.

And they’re fun to read — at least for those with a certain…bent…

Probably have to start with Dawkins’ The Selfish Gene. When it came out in ’76 it crystallized how everybody thought about evolution, hence life and humanity. The amazing Dawkins, amazingly to me, has become kind of hidebound and reactionary in response to new developments since then (group/multilevel selection, inheritance of acquired characteristics), but the new information and new thinking that make parts of this book wrong, couldn’t exist without the thinking so beautifully condensed in this book. Might not need to read the whole thing, but it’s pretty short and you might not be able to resist. Very engaging writer and full of fascinating facts about different species and humans. Also the place where the word “memes” was coined.

Steven Pinker. The Blank Slate: The Modern Denial of Human Nature. The most important book I’ve read in decades. Philosophy meets science meets sociology, anthropology, psychology, politics, law… Pinker’s core expertise is in language acquisition, how two-year-olds accomplish the spectacularly complex task of learning language (see: The Language Instinct: How the Mind Creates Language.). He has a love-affair with verbs, in particular. Just loves those fuzzy little things. But his knowledge is encyclopedic and his mind is vast. And he’s laugh-out-loud funny on every other page. Also incredibly warm and human. I have such a bro-crush on this guy. (Also: everything else he’s ever written, including at least some chunks of his latest, The Better Angels of Our Nature: Why Violence Has Declined.)

Daniel Kahneman, Thinking Fast, and Slow. Kahneman and his lifelong cohort Amos Tversky (sadly deceased) are psychologists who won the 2002 Nobel Prize — in Economics! — for their 1979 work on “Prospect Theory.” (Fucking economists have been largely ignoring their work ever since, but that’s another subject…) About “Type 1″ and “Type 2″ thinking: the first is instantaneous, evolved heuristics that let us, e.g., read a person’s expression in a microsecond from a block away. The second is what we think of as “thinking” — slow, tiring, and…crucial to what makes us human. Interestingly, in interviews Kahneman says that he almost didn’t write this book, thought it would fail, for the very reason that it’s so great: it addresses both mortals and the field’s cutting-edge practitioners, brilliantly. The book’s discussions of his lifelong friendship and collaboration with Tversky are incredibly touching.

E. O. Wilson, The Social Conquest of Earth. Q: How did we end up at the top of — utterly dominating — the world food chain? A: “Eusociality”: roughly, non-kin altruism. Wilson knows more about the other hugely successful social species — insects and especially ants — than any other human. He basically founded the field of evolutionary psychology with his ’76 book, Sociobiology. As with the others, this is deep, profound, wide-ranging, and incredibly warm and human in its insights into what humanity is, what humans are. Those things that are wrong in The Selfish Gene? Here’s where you’ll find them.

Michael Sandel, Justice: What’s the Right Thing to Do? Philosophy. It draws on some scientific findings, but mainly this is very careful step-by-step thinking through a subject, a construct, that is not uniquely human, but close. (Elephants, apes, etc. do seem to care about justice, sort of.) I find it especially engaging and important because it addresses and untangles the central political arguments of recent times — is it “just” to make everyone better off by taking from the rich and giving to the poor? Should individual “liberty” trump individual rights? What rights? Etc. This book did much to help me comb out my muddled thinking on this stuff.

Morton Davis, Game Theory, a Nontechnical Introduction. Stands out on this list cause it’s not one of those “big” books. Available in a shitty little $10 Dover edition. But it’s an incredibly engaging walk through the subject, full of surprising anecdotes and insights. And he does all the algebra for you! The stuff in here makes all the other books above, better, cause they’re all using some aspects of this thinking. Here’s an Aha! example I wrote up: Humans are Pathologically Nuts: Proof Positive.

Okay, you noticed there are six books here. Did I mention click bait?

Cross-posted at Angry Bear.

Wealth Is Not Capital: The Brilliant Seth Ackerman Explains It All 4 U

May 30th, 2014 No comments

I’m stunned by how good the new Jacobin piece by Seth Ackerman is: “Piketty’s Fair-Weather Friends.” It gives what I find to be the best understanding so far of the whole Piketty “think space.”

It’s so good that I can’t encapsulate it, so I’ll just share some of the passages I’m most taken with, with my highlights for your skimming pleasure. RTWT.

it’s increasingly doubtful whether (or how) [Capital's] arguments can be reconciled with the MIT-style economic paradigm to which Piketty’s most ardent American promoters — liberal economists like Joseph Stiglitz, Paul Krugman, Brad DeLong — swear allegiance.

For [Paul Krugman], the lesson of Capital in the Twenty-First Century is that mainstream theory has shown its worth: “You really don’t need to reject standard economics either to explain high inequality or to consider it a bad thing.”

At the heart of the neoclassical apparatus lie the twin concepts of marginal productivity and the aggregate production function (more on these below), and as Thomas Palley has written, when it comes to these totems, “you are either in or out.” Thus, as soon as an economist who aspires to theoretical originality wishes to investigate the dynamics of income distribution, she’s liable to find herself swiftly tangled in a conservative straightjacket.

Now that the book’s arguments are being digested, the same liberal, MIT-style economists who did so much to thrust Piketty’s book into the spotlight are expressing serious doubts — and the reason goes back to marginal productivity theory. That theory might end up resembling less a wall that Piketty could circumvent than a maze in which he will find himself trapped.

Marginal productivity theory … makes up something like neoclassical economics’ “operating system” — the language in which almost every proposition must be embedded in order to work.

Popular attempts to recount [the Cambridge Capital] debate tend to get needlessly bogged down in the abstract. They typically focus on the brain-teaser question of whether it’s possible to quantify the “amount” of capital in the economy, given that this capital stock is made up of a vast number of heterogeneous goods, from jackhammers to hard drives. And that was, in fact, the issue that first got the debate started.

But what the argument was fundamentally about was whether the marginal productivity theory of income distribution — marginalism — is a logically coherent theory.

In the Cambridge capital debate, this textbook theory was advanced by neither side. It’s a fairy tale told to undergraduates.

the leading mid-century neoclassicals, they had long disavowed any claim that this story could logically explain the income distribution, for a simple reason: whether or not such marginal products actually exist in the real world is an entirely empirical question, and the answer is that they generally don’t.

Today, empirical studies of manufacturing industries are unanimous in finding that per-worker productivity is constant, not diminishing, as more are put to work in a factory; while even in fast food joints (as this riveting online tutorial for McDonalds managers makes clear) the volume of sales per worker does not depend on how busy the store is, except maybe during the graveyard shift, due to a residuum of fixed labor costs.

it would be irrational for a firm to lay off some workers just because, say, a strike or a minimum wage law hiked up their wage. The employer would get the worst of both worlds: a lower profit margin on every unit of output produced (because of the higher wage) and fewer units produced (because of the laid-off workers). Rather, her best option would be to keep producing as much as she can manage to sell while simply accepting the lower profit rate, assuming profits are still being made. Analyzed in this way, there’s no necessary reason why the platitude “when the price goes up, less is bought” ought to apply to human labor.

But the neoclassical economists on the MIT side of the Cambridge debate already knew all that. They were defending a more sophisticated version of marginal productivity theory that was subtler and, in a way, simpler.

It argued as follows: when the wage is hiked up …consumers switch their purchases from labor-intensive to capital-intensive goods, while firms and entrepreneurs building new lines of business choose more capital-intensive, rather than labor-intensive, techniques. … they are exerting demand for labor or capital through their purchases

And this was the argument that the Cambridge University side defeated

it becomes clear that a rise in the wage does not necessarily make labor-intensive goods relatively more costly to produce, as the neoclassicals had assumed. …it all depends on the complex pattern of input-output relations in the economy as a whole — how many units of good A it takes to produce good B, how many of good B to produce good C, etc., for all the millions of goods in the economy.

Once this neoclassical story — where the relative demands for labor and capital are dependent on their relative prices — is “debunked,” to use Paul Samuelson’s contrite term [he admitted that he lost the argument --SFR], the competitive market economy no longer contains any necessary mechanism pushing the various wage rates or the profit rate to any determinate level.

Rather, history and custom, as well as politics, laws and struggle, will determine who gets what. It’s a system of grab what you can.

Or in my words: the distribution of income, and supermanager compensation, is determined not by scarcity, but by rivalry. The prize goes not to those who put resources to best use, but to those who control who gets them.

it’s unsurprising we should find marginal productivity to be the point where Piketty’s sweeping vision of modern inequality would run into trouble with the economics mainstream.

marginal productivity theory sees a rise in the capital-output ratio as an increase in the “supply of capital,” which, in classic supply-and-demand logic, ought to bring about a reduction in its “price” — that is, a fall in r. According to the theory, this should neutralize the effect on the r-g gap.

[Piketty] contended that as growth slows and the capital-output ratio rises, r might decline (as theory predicts) but the magnitude of the decline might still be small enough to permit a net widening in the g gap.

The technical term for the quantitative relationship involved (that is, between the size of a change in the capital-output ratio and the size of the change in r that supposedly results, or vice versa) is the elasticity of substitution: the higher the elasticity, the smaller the “response” of r to a given change in the volume of capital.

Piketty’s estimate of the elasticity of substitution can’t really be compared with those in the literature. … his pertain to all private wealth, while the literature focuses narrowly on production capital. These are very different concepts.

To interject: this is exactly what I’ve been trying to say, folks. Returns on financial wealth (in the form of money/financial assets/dollars) have only the vaguest and most tenuous relationship to returns (in the form of real output) on real capital — even over very long periods. That’ the crucial lesson of the Cambridge Capital Controversy.

Money matters, and money doesn’t only appear due to the creation of real assets. It appears when real assets are indebted (particularly or generally).

Wealth is (financial assets, including deeds, are) claims on real capital — both particular claims on particular assets, and generalized claims on the stock of real assets. The relationship between wealth and capital remains almost entirely untheorized by economists.

Wealth is not an input to production. Capital is. The creation of wealth in the form of financial assets requires no inputs to production, or any real production at all. Capital does.

Even Piketty fails here; he uses “wealth” and “capital” synonymously, thereby walking right into the rhetorical mind-trap that is marginal productivity theory.

Ackerman says it perfectly:

the elasticity of substitution simply cannot be regarded as a meaningful measure of an economy’s technology (or anything else), or as providing any clue to its future.

What’s essential, rather, is Piketty’s empirical demonstration that the rate of return on wealth has been remarkably stable over centuries — and, contra Summers, with no visible tendency to vary in any consistent way against the “supply of capital.”

And that brings us to a lacuna in Piketty’s analysis that Paul Krugman and other reviewers of Capital have rightly pointed to. The skyrocketing of top-end income inequality we’ve actually witnessed so far in the English-speaking world has mainly come in the form of inflated “labor” earnings, rather than pure capital income.

Which brings us back to marginal productivity theory. Manacled to that concept as their “baseline” theory of income distribution, most liberal economists have done no better than Piketty in their efforts to account for the elephantine growth of these managerial incomes. They’ve had to depict that growth as the result of “rents,”

The problem with these arguments is that neither financiers nor public company executives have led the swelling of high-end incomes over the past several decades. Rather, the single largest contributor has been the income growth of managers in closely-held corporations outside the finance sector  — that is, firms with only a few shareholders, where the controlling owners are almost always the managers themselves, usually family members.

the incomes of supermanagers are in fact an inseparable blend of “labor” and “capital” income.

resurgent capitalists in the 1970s and 1980s, emboldened by a weakened working class, drafted managers tightly into their ranks using the tools and personnel of Wall Street, and reshaped the economic landscape.

Capital has used extraordinary compensation schemes to conscript top management into their ultimate project: ensuring that all possible surplus from production goes to them.

Which prompts me to share this perfect encapsulation of our current situation, from an Albert Wenger post that you should also read in full:

Unskilled labor has been pushed to its reservation price, skilled labor is receiving its marginal product, and all the value creation [the surplus from production] is being split between top management and capital.

I’d say that pretty much nails it.

Cross-posted at Angry Bear.

Answering Brad DeLong’s “Deep Question”: Productivity vs. Power

May 24th, 2014 No comments

As a naive young noodler on economic topics I always wondered: Why are players in the financial industry — which produces very few real, human, consumable goods and services that people value in their lives — so well-paid?

I figured it out pretty quickly: it’s because they are able to control who gets that real stuff. Sure: the financial industry is necessary to our ongoing assault on scarcity — increased productivity and production, yadda yadda yadda. But that’s not really why they get the big bucks. It’s because they’re playing the rivalry game. Anyone who doesn’t use their services (or become one of those players) loses that game.

Which brings me to an answer to Brad DeLong’s excellent question.

What is it, precisely, about Apple technology and today’s economy that gives it much more of a winner-take-all nature than Eastman-Kodak technology? And why was the same true of Andrew Carnegie-age technology and organization, but not of Alfred P. Sloan-age technology and organization? Deep questions.

I do like deep questions. My answer:

There are new technologies that produce more/better consumables (and methods to produce consumables with less human effort), and ones that give control over who gets to do the consumption (and take the leisure).

Computer technology is more like double-entry accounting and limited-liability corporations in that respect, and proportionally less like steam engines and electric motors.

Cross-posted at Angry Bear.

(Modern) Monetarist Thoughts on Wealth and Spending: Volume or Velocity?

May 21st, 2014 2 comments

I’ve bruited the notion in the past that “money” should be technically defined, as a term of art, as “the exchange value embodied in financial assets.”

In this definition, counterintuitively relative to the vernacular, dollar bills aren’t money. They’re embodiments of money, as are checking-account balances, stocks, bonds, etc. etc. Money and currency aren’t the same thing, and economists’ conceptual confution of “money” with “currency-like things” is central to the difficulties economics faces in understanding how economies work.

If this definition is safe, then the stock of money (I hate the term “money supply,” which suggests a flow) equals the total value of financial assets. Forget the endless wrangling about monetary base, M1, M2, divisias, and all that. Add up the value of all financial assets, and that’s the money stock. (There are certainly difficult measurement issues to discuss, but I won’t wrangle with those here.) Update: for this to make sense, deeds must be viewed as financial assets — claims on real assets.

People can exchange various financial assets for currency-like financial assets when they need to buy real stuff, but that’s largely mechanical.

In this definition “money” comes from two (or three) places:

1. Deficit spending.

• By government (federal — the sovereign “currency” issuer).

• By private individuals and businesses (using loans from banks, which are chartered by government to create new money for lending).

The second is of much greater magnitude overall, but it is also subject to big and fast periodic downswings (burning instead of printing money, when loans are paid or written off), which is much less true of the first.

2. Animal spirits, a.k.a. confident optimism. When the market thinks that the total value of financial assets under-represents the value of the real assets they’re claims against, prices of financial assets are bid up, and there’s more “money.”

You could call this the wealth effect, and at least in the short- to medium-term — because it can happen so fast — the magnitude of its effects can overwhelm the first method. This change can go in either direction, of course — either creating or destroying huge amounts of money very quickly.

Jesse Livermore explains this mechanism elegantly and simply based on portfolio preferences. If the market wants 60% of its portfolio in stocks and 40% in bonds/cash, and more bonds/cash are issued, the only way for a rebalance to happen is if stock prices are bid up. (He’s got a great graph showing that very little new corporate equity is issued relative to the existing stock, often a negative amount for years on end.) If animal spirits decline (less confident optimism), the market wants less stocks and more bonds; the price of stocks — hence the stock of money — declines.

3. Trade surpluses. This doesn’t actually create money in the world (or an imaginary closed economy) the way the first two do. But if a country exports more goods than it imports, the payments for those net exports bring more money into the country. Trade deficits, the reverse. (U.S. trade deficits of $30-70 billion a year are pretty small change compared to the first two money mechanisms. Correction: That is a monthly figure, so the total is quite significant — 3-5% of GDP.)

The first two methods create money — exchangeable credits, or claims — “out of thin air.” And they destroy it when the debt from that deficit spending is paid back, or markets decide that underlying real assets aren’t so valuable after all. The government, the banks, and the stock market have both printing presses and furnaces.

And it doesn’t much matter how much of that money is embodied in currency-like things. If people want to spend more of their money one year (on newly produced goods and services, the stuff of GDP), the Fed will always accommodate their need for transaction cash; it must do so, or it can’t control the Fed Funds Rate because banks will be scrambling for cash and will bid up the rate. People don’t spend more because there’s a higher proportion of currency-like stuff around. If they want to spend more, there will be more currency-like stuff around; the Fed will ensure it. (At this point there’s a massive superfluity of such stuff, so the Fed controls that rate via its interest-on-reserves rate.)

Which all brings me to a simplified version of the monetarists’ equation of exchange:

(M)oney * V(elocity) = GDP (often designated as Y)

(Forget about PT or PQ; both T and Q are designated in imaginary, circularly-defined “units” of output whose logical coherence was thoroughly eviscerated in the Cambridge Capital Controversy. See the last paragraph of this section.)

If there’s more money around and velocity stays the same (i.e. people spend a certain percentage of their wealth each year), GDP goes up.

We see this clearly when we look at recessions and the year-over-year change in real (inflation-adjusted) household assets — a measure of households’ total claims on real assets, and a proxy for the “money stock” in this definition. (Note that in this measure the net worth of corporations is imputed to households who own their stock.)

Every recession (GDP downturn) since the sixties was preceded by a decline in this measure of the money stock, and every decline in this measure since the sixties preceded a recession (with one exception/false positive: 2011).

When people have less money, they spend less, and GDP declines, or grows more slowly. That is hardly a counterintuitive conclusion.

But what about V(elocity)? How has that played out over the years?

Another of those early-80s inflection points: velocity has declined from about 26% annual turnover of the mony stock, down to the high teens. If you’re looking for an explanation of that, you probably don’t have to look much farther than the spectacular concentration of wealth over the last three decades. Rich people spend a smaller proportion of their wealth each year than poorer people. So if wealth is more concentrated, velocity is lower. Arithmetic.

But there is another, related effect at play as well. A greater proportion of our real assets have been “financialized” (read: indebted monetarily) over the decades. The runup in student debt is an obvious example — whereby students have capitalized/financialized/indebted their most valuable real asset, their future ability to work and produce. They (in cooperation with their lenders) have created money — financial claims – based on those real assets (and given it to colleges).

This effect is very hard to measure because it’s essentially impossible to measure (in dollars) the value of our most valuable real assets — knowledge, ability, skill, organizational setups, legal structures, natural resources, etc. The relationship between total financial asset values and total real asset values is irredeemably opaque.

Bottom line: if GDP (and more importantly, GDP/capita) is to go up, either M or V has to increase.

Increasing M is problematic because either you increase debt (which obviously has its problems) or you (somehow) ignite animal spirits.

How do you increase V? It’s pretty straightforward: reduce the concentration of wealth so it’s more widely held, by those who turn over their wealth more quickly. Like, raise the minimum wage. Or institute a tax regime that actually is progressive, and use that money to provide for the general well-being by increasing funding for a plethora of well-designed programs like the Earned Income Tax Credit, jobs programs, wage subsidies, infrastructure and research spending, or guaranteed basic income.

At the very least, the goal should be to reverse the rampant radical upward distribution of the last thirty years, and the extreme decline in money velocity that has been the direct result.

Cross-posted at Angry Bear.