Asymptosis

There’s been a running discussion of this on various blogs (sorry if I missed linking some!), inflated simultaneously by Krugman and by magisterial and mysterious commenter JKH’s “paradigm riff,” here.

That discussion has brought me to the following conclusions.

Assuming you have a coherent and accurately representative System of National Accounts*:

• Accounting, and accounting identities, do (or should) impose a constraint on our economic reasoning and predictions.

• If some piece of economic reasoning predicts something that simply can’t happen according to the accounting (things don’t add up, balance), that reasoning/prediction is wrong.

• Accounting can’t tell us whether a piece of economic reasoning is right. It can only tell us if it’s wrong.

• Accounting won’t necessarily tell us that a piece of economic reasoning is wrong. There are plenty of economic ideas out there — behavioral notions about how people (will) respond to incentives and constraints – that conform to accounting identities and balances, but are nevertheless wrong.

• Accounting tells us exactly nothing about how people will behave, nor can it cause or constrain that behavior. It can only tell us that that it’s logically impossible for them (all) to behave in a given way.

Takeaway: Conformance to the rules and balances of accounting is a necessary but not sufficient condition for economic reasoning and predictions to be correct.

Or to put it another way: Accounting is a constraint on economics, not economies.

Simple example: if somebody suggests that all countries should/can get out of depression by increasing their net exports, it’s false/bad reasoning. Because global imports equals global exports; the books can’t add up that way.

Or suppose someone says:

1. We should reduce government debt.

2. There’s not much we can do about net imports, the trade imbalance. (Exports are determined largely by international demand, and we don’t want to use trade policy to deny our people the benefits of cheap imported goods.)

3. People should save more.

This is impossible, by accounting identity. The only way to increase private savings (the stock of net financial assets) without changing imports is to increase exports or run government deficits.

People, institutions, and policy makers could certainly try to achieve these mutually incompatible goals. They could even believe that it’s possible to achieve them all. But the arithmetic of stock-and-flow accounting tells us that they will fail — and that if they believe they will succeed, they’re wrong.

That’s all.

* Even though I have real qualms about the conceptual structure of the current system — I find it much easier to do good thinking using Wynne Godley’s modification of that system — the current system is coherent and accurately/usefully representative. It’s coherent in that all the stocks and flows balance out, and representative in that it covers most of the important stocks and flows. No system could be perfectly representative, of course; the map is not the territory. In both systems there’s a great deal that’s not considered — nonremunerated work, for instance. But that doesn’t discredit, is peripheral to, the logical thrust of this post.

Cross-posted at Angry Bear.

Why have I never posted about Yasha Levine over at The Exiled? They’re the ones that first broke this story about Koch luring Hayek to America with Social Security, and I make a point to put down my coffee when reading Yasha, to avoid expensive and embarrassing spit-takes.

Just a week ago he gave us this:

More Great Moments In Libertarian History: Ancient Sumerian Word For “Libertarian” Was “Deadbeat”, “Freeloader”

… If you go onto one of the Liberty Fund’s project websites, the Library for Economics & Liberty, you’ll find this ancient cuneiform symbol at the footer of the home page:

The Liberty Fund-backed website goes on to explain that the significance of the amagi symbol goes deeper than just the word “liberty.” It represents the first popular struggle against big government tyranny

Except it doesn’t (emphasis mine):

What the history-failures at Liberty Fund hilariously mistranslated was that the term “return to mother” is Sumerian-speak for “jubilee”–as in “debt forgiveness” or “freedom from debt.”

Here’s how David Graeber explains it in his brilliant book Debt: The First 5,000 Years:

…Sumerian word amargi, the first recorded word for “freedom” in any known human language, literally means “return to mother”—since this is what freed debt-peons were finally allowed to do.

So in other words, amagi’s not about “freedom” from government interference at all–it’s about welching on your debts and sending Sumerian deadbeats back home to mooch off mommy. “Moochers,” “deadbeats,” “debt welchers”–Now that sounds more like the true face of libertarianism!

Despite the misunderstanding—or maybe because of it—the amagi symbol has become all the rage with baggertarian youngins’ all across the USA, many of whom have been known to get their pasty white hides branded with “deadbeat 4-ever” tats en masse at Koch-sponsored Free State campouts.

So does this make them moocher-bashing moochers? Or maybe closet-freeloader freeloaderphobes?

We’d like to thank Koch operative Peter Eyre for taking the time to maintain an up-to-date bagtard tat page, which includes a big collection of Sumerian deadbeat tats, as well as a nice range of other freemarket groupie ink. Eyre’s got himself branded a “deadbeat” in 2007, back before it was considered cool:

Cross-posted at Asymptosis.

• Since Social Security started it has always brought in more money than was spent. It contributes a surplus to the total federal budget. That’s true today and will continue for quite some time.

• The extra revenue needed to make SS solid far beyond the foreseeable future (75 years) is tiny: 0.6% of GDP.

• A 0.6% revenue increase would not be a big burden. The U.S. has been taxing about 28% of GDP for decades, compared to 30-50% in other rich countries (average: 40%).

• Coincidentally, Scrapping the Cap on SS contributions — so high earners paid payroll tax above $110K — would deliver … 0.6% of GDP.

Worried about our fiscal future? It’s the health care costs, stupid. What providers charge.

U.S. providers charge two to five times what they charge in other countries, and it’s rising faster — and faster than wages, GDP, inflation.

If you’re not talking about that, you have nothing useful to say about our fiscal future:

Cross-posted at Angry Bear.

I haven’t posted on Nick Hanauer and Eric Liu’s stuff, and I should have, long ago. Nick, along with Bill Gates Senior, was one of the big proponents of the Washington State high-earner income tax initiative a while back (which failed utterly, I’m sad to say). As was I, in my little way.

I think this new Bloomberg piece says what they’re trying to say better than I could, so I’ll just say “go read it.” It’s short.

Economies Need a Gardener’s Invisible Hand: Hanauer and Liu – Bloomberg

Cross-posted at Angry Bear.

I think (after a lot of effort) that I’ve internalized Nick Rowe’s modeling of this question (follow links from here) pretty well conceptually.  His answer is Yes.

There have been thousands of posts and comments across the blogosphere since Nick took Krugman to task on the issue a couple of weeks ago, and Nick has been remarkably generous with his time in helping people understand his thinking. (A kudos also to Bob Murphy.) And it’s worth pointing out that Krugman hasn’t really responded to the core argument head-on. Feel free to follow the threads.

Here’s Nick’s model in brief, in my words:

Government borrowing/bond issuance today — considering only its costs, not the potential up/downsides of the associated spending — propagates incentives into the future, like waves are propagated when you throw a rock in a pool. Those incentives cause the old people in every period to consume more than the young people. In each future period, parents will eat some of their kids’ lunch.

Each generation consumes the same amount as they would have otherwise (because first you’re young, then you’re old, first you’re a child, then you’re a parent). But if government eventually has to tax to pay back the debt, the young people in that period are forced to consume less over their lifetimes, because they don’t get to eat their kids’ lunch.

(Nick acknowledges the point that Jamie Galbraith and others have been making for years: if the future GDP growth rate is higher than the interest rate, on average, the taxation never needs to happen, so the burden is never imposed.)

Here’s why I haven’t updated my priors much based on this thinking:

1. The wave model of propagated old/young bond-buying/spending patterns, extending to eternity, doesn’t seem plausible to me intuitively. It seems like the rock-in-the-pool ripples would probably flatten as they spread through time — maybe (?), as discussed in various posts and comment threads, because over the generations a certain percentage of parents bequeath their bonds to their children. That leaves us with “we’ll have to tax to pay for it eventually, so somebody will have to consume less,” which is pretty much where we started.

2. I wonder whether a real agent-based dynamic simulation modeling of Nick’s scenario, with continuous time and using differential equations, would give the same results. I’m not enough of a mathie to even guess, but I wouldn’t be surprised to see very different patterns and/or results.

3. The huge majority of government bonds are bought and traded not by people but by institutions (many of which — this seems significant — are licensed to create credit money and associated debt ex nihilo, and use government bonds as debt collateral in that process). Those institutions don’t have generations — birth/death, parents/children — and they don’t consume real goods (much). Again, my intuition tells me that these facts would bring complex dynamic interaction effects into play. While it might suffice to simplify by modeling things “as if” children were buying bonds from their parents, I don’t feel confident that that’s true.

4. The question Krugman was really asking, underlying his “is debt a future burden” locution, was: A. should we be taxing more or less? and B. should we be spending more or less? (Hence, should we be borrowing more or less?) Since I’d expect to see complex interaction effects from any of the four sources/uses choice combinations, isolating the question in this way seems like a questionable analytical technique. It’s kind of (not wanting to offend, can’t resist the word) petifogging. I’m not at all sure it provides useful information when divorced from the relevant context.

5. Semantics: assuming the model’s right, that we’re forcing a future generation of people to pay for their parents’ (our?) extra consumption — but not changing the amount that all future people will consume in toto — should we call that “a burden on future generations”? I’ll leave that to the philosophers.

I may (still) be displaying an inadequate understanding of the model in some points here, but I think there’s enough of merit above to discourage certainty — to question the ultimate utility of the model.

In short, if I was running a business of any size (yes: I have done so), with any decent amount of money on the line, I would 1. not give a huge amount of weight to the results of this model, and/or 2. be asking for a much more sophisticated analysis.

Which (#2) leaves us again where we were, wrestling with many/most of the big questions of growth macro.

So when Nick says “I thought we all had this debt burden stuff sorted out 30 years ago,” I agree. The answer was “maybe.” (Especially given the long-term historical reality of the Galbraithian scenario described above.) And in my mind it still is — with a little more weight on the “burden” side.

Cross-posted at Angry Bear.

Let’s start with the basics:

Increased inflation results in (in a sense, is) a wealth transfer from creditors to debtors.

Debtors get to pay off their loans in less-valuable dollars — dollars that can’t buy as much real-world stuff, stuff that humans can consume, that they value.

If you’re holding a hundred million dollars in bonds — you’ve lent out hundred million dollars — and bananas are going for a dollar apiece, an extra percent of inflation means that a year from now, you can only buy 99 million bananas. The people who borrowed the money from you get the other million bananas. If inflation stays up and the loan remains outstanding, they get another million bananas next year. You don’t.

You can start to see why creditors might be inflation-averse.

How big is this wealth-transfer effect? Here’s a quite conservative back-of-the-envelope calc.

Figure that there are somewhere north of $50 trillion dollars in private “credit market instruments” out there in the U.S. as of Q3 2011 ($120 trillion in total liabilities).

Do the math: 1% of $50 trillion is 500 billion dollars. One extra percent of inflation transfers that much wealth — buying power — from creditors to debtors. Every year.

This is probably an overstatement — many people/businesses are both creditors and debtors, so part of the transfer is from them to themselves. But still: let’s cut the number in half. An extra point of inflation transfers a quarter of a trillion dollars per year in buying power — real wealth — from creditors to debtors.

Because this effect impacts the huge existing stock of financial assets, 1. it is a permanent , and 2. its scale utterly dwarfs the relatively measly (and multidirectional) effects on flows — often second- or third-order effects — that (neoclassical) economists tend to go on about when discussing inflation. (“Money illusion,” “neutrality of money,” etc.)

And there are far fewer creditors than there are debtors. The effects of the transfer are concentrated on one side, diffused on the other. (See: Mancur Olson).

I’ll have a lot more to say about this in future posts, but keeping this short, I’ll bring it back to the the title of this post:

The Fed is run by creditors. And I’ve heard it said that financial incentives matter. The Fed governors have a huge incentive to keep inflation low, and ignore the other side of their dual mandate: employment.

We tend to talk in very big numbers these days, but a quarter of a trillion dollars a year seems like it’s still enough to get people’s attention.

Cross-posted at Angry Bear.

Just a note to my gentle readers to let you know that in future I’ll also be blogging at Angry Bear, where I’ve done a couple of guest posts over the years. It’s a great blog that I’ve been following for a long time, and I’m honored to have been invited to join the Clan of the Angry Bear.

My first post as a Bear is here. I expect to put most of my posts up on both blogs, but on occasion — especially when I’m reprising material from here — I might post to only one or only the other.

But in any case I encourage you to add Angry Bear to your reader. I’ve gotten many remarkable insights from the experts there, and from the excellent community of commenters.

Economists’ Statement In Support of Occupy Wall Street

Thinking more about Steedman’s point, that how much people (don’t) enjoy their work has a massive effect on their “utility” and welfare, I wonder this:

Wouldn’t the market for higher-end jobs — which tend to deliver more job satisfaction, hence utility, hence welfare — display much lower elasticity of supply?

In other words, wouldn’t changes in salaries (or taxes on those salaries) have much less effect on workers in those high-end jobs than on workers in shitty jobs?

Do any of the supposedly micro-based DSGE models — or any economic models that you know of — incorporate this effect?

…”and might start running against them too.”

What a nightmare that would be.

This from the a sales pitch by lobbyist/strategy firm Clark Lytle Geduldig & Cranford to the American Bankers Association, trying to sell them on a $850,000 deal to plan the bankers’ response to OWS.

HT: Barry Ritholtz