Asymptosis

This is utterly brilliant:

Twitter / izakaminska: Why equity is a type of privately issued currency

Steve Randy Waldman has been here before, with the idea that currency issued by government (ultimately through deficit spending) is “equity” in government, or in America. But this reverses it beautifully, with the notion that private equity issuance is also currency issuance. Google stock is currency.

I won’t recap the argument here; you really need to read it. Just some thoughts:

I think different words might help make it clearer. I would say that there are many units of exchange in the world —  dollar bills, t-bills, stock shares, etc. Financial assets. They have various characteristics, a key one being limits on what they can be exchanged for. In general when we say “currency” we mean physical tokens that can be exchanged for (small quantities of) real goods. But we confuse things by not realizing that “currency” is a somewhat vaguely defined subset of “units of exchange.”

(Key distinction: the “units” I’m talking about are not measurement units like inches, degrees, or “the dollar” — units of account. Rather, in the sense of discrete units, chunks. As when a factory produces a certain number of units, which can have their value described relative to a unit of measurement/account, such as the dollar. More on the distinction between “unit” and “medium” of account/exchange here.)

You can’t buy a car or a government bond with quarters. So are quarters currency? Likewise, you can’t buy a pack of gum with a treasury bond — but you can use it to buy Fed reserves (if you’re a bank). Is the bond currency? You decide. But both quarters and bonds (and Google shares) are units of exchange. (This is why I’m still struggling with JP Konig’s “moneyness” concept: it seems to hinge on a single axis of “liquidity,” when in fact different units of exchange are differently liquid.)

We can also call these units of exchange “financial assets.”

I do not define a “bushel of apples” as a unit of exchange or a financial asset, but as a unit of commodity. Ditto an ounce of gold. Because in my definition:

1. Units of exchange/financial assets cannot be consumed by humans to produce human utility, and

2. Their creation requires no (or vanishingly little) input to production.

Returning to a previous (excessively long) post, these units of exchange/financial assets embody exchange value — money. Hence (alert: precise definition here) money is exchange value as embodied in financial assets. Money does not, cannot exist, absent such embodiment. A bushel of apples does not embody money: That bushel has exchange value, but the value is not embodied in non-consumable, only-exchangeable form.

Not sure how much this will help others, but it’s working for me.

Cross posted at Angry Bear.

If this blog has any tiny claim to any important influence, it might be that anonymous and magisterial commenter JKH used the comments section here to first bruit his insight (both tautological and profound) that S = I + (S – I).

He revisited that construct and concept again recently, and I’ll leave it to you to explore his very interesting thinking.

But I do want to address a central issue in that discussion: the notion of “funding.”

JKH quite properly uses standard flow-of-funds accounting terminology to explain that private-sector “saving” “funds” both its “investment” (buying/creating drill-presses and such), and its acquisition of newly created financial assets.

Quite properly, but: it’s important to understand what that key accounting verb (“funds”) actually means. It describes an after-the-fact and arguably largely arbitrary accounting allocation of income streams to outflow streams.

Imagine 2011, a year in the life of BFC Corp.:

INFLOWS
Profits (revenues – expenses): $100,000
Net Borrowing (borrowing – loan payoffs): $100,000

OUTFLOWS
Investment (spending on drill presses and such): $100,000
Dividends paid to shareholders: $100,000

Looking back: Of the $200K in inflows, which part “funded” the investment spending on drill presses? What funded the dividend payout? The accountant’s allocation decision, absent any other information, is after-the-fact and completely arbitrary. Funds are fungible — especially when viewed in retrospect.

Before-the-fact conditions and restrictions might well give justification for a given after-the-fact accounting allocation decision. If BFC decided in 2010 to spend X% of profits on drill presses in 2011, and that X% came to $100,000, an accountant after the fact might quite reasonably say that the drill-press purchases were “funded” by that year’sprofits.

Alternately: Imagine BFC “set aside” $100,000 from 2010 profits for future drill-press purchases by “funding” a drill-press holding account on their books, debiting their 2010 profits to “fund” that holding account. (Maybe it even created an actual external bank account to hold and segregate those funds, though that’s not actually material to this discussion.) It then spent down that holding account in 2011 to buy drill presses. Were those purchases “funded” by 2011 profits or borrowing? The proper accounting answer here is “neither.” Looking backwards you might/could/would say that they were funded, ultimately if somewhat arbitrarilly, from 2010 profits, or from the holding account. Either is accurate, depending on how you telescope your “funding” pipeline, in both time and account-space. (This is all rather like discussions of the Social Security Trust Fund.)

When we say, in a backward-looking flow-of-funds statement, that “X funded Y,” that is an ex-post description that is informed, and arguably justified — but not fully or authoritatively determined — by knowledge of before-the-fact intentions.

So when we say that “…the marginal dollar borrowed by a nonfinancial business [post-'85] was simply handed on to shareholders, without funding any productive expenditure at all,” we are making a statement about what “funds” what. We’re saying that all the borrowing went to payouts, and all the profits went to investment. The reverse could be equally accurate, given that shareholders from ’04 to ’08 were paid about $200 billion more than their companies earned in profits.

Let’s try this on the level of national/international accounts, and sectoral flows. Here’s mythical 2011 accounting for Bandalaria:

Assume (purely for simplicity in explaining the “funding” concept) that:

1. There is no net trade surplus or deficit, and the country’s capital account balance sheet remains unchanged.

2. The central bank does not increase or decrease its holdings on net.

3. The financial system does not increase or decrease its loan book to the private sector.

That leaves two sectors, with (looking back) no accounting impact from the above:

• Federal government (Treasury)

• The nonfinancial private sector (nonfinancial firms and households)

What do Bandalaria’s net money flows look like?

From Treasury -> Private
Deficit (purchases minus taxes): $100 million

From Private -> Treasury
Treasury bond purchases : $100 million

Looking back, how would you describe these flows? Are are the bond purchases “funding” the deficit, or is the deficit spending “funding” the bond purchases?

The correct answer is “Yes.”

Likewise: when JKH says (my words actually) that saving (income – expenditure) by the private domestic nonfinancial sector “funds” both its investment spending and its net acquisition of new financial assets (including government bonds), his description is perfectly correct.

But he would equally correct if he said that government deficits (less trade deficits) “fund” some of the investment, or (all of) the acquisition of new financial assets (notably government bonds), by the private domestic nonfinancial sector (or some of each).

Obviously, the two accounting-based descriptions, both accurate, have very different rhetorical implications.

This just reiterates the point I made in the post to which JKH responded with his revelatory identity: accounting tells us nothing about economics, except that it often tells us when economic thinking doesn’t make any logical/arithmetic sense.

I guess my main point here, perhaps obvious to many, is that accounting descriptions — choices about how to describe the past in accounting-speak, especially regarding “saving” and “funding” — are, inevitably, rhetorical hence normative. Or at least, those choices of descriptions have inevitable rhetorical hence normative implications.

Or to put it simply: accounting is normative.

My impression is that many economic discussions and disagreements, especially in the “MM” worlds, are at their root disagreements about what “funds” what (frequently compounded by imprecise sector definitions with different parties using different implicit definitions), and the rhetorical hence normative implications of those competing descriptions.

Cross-posted at Angry Bear.

I’m delighted to see the U Chicago IGM Forum ask a really useful, non-softball question.

The panelists are evenly split on whether an increase to $9 would make it “noticeably harder for low-skilled workers to find employment.”

A 4:1 majority thinks that weighing the costs and benefits, “this would be a desirable policy.”

I note how many who commented bring up the EITC, suggesting that an increase in that support might be better than a minimum-wage increase.

I note further that they apparently haven’t read the very good reasoning and research suggesting that the two together very effectively address the problems of each.

But Paul Krugman has. And his surprise helps explain why the others haven’t thought about this:

Second — and this is news to me — the usual notion that minimum wages and the Earned Income Tax Credit are competing ways to help low-wage workers is wrong. On the contrary, raising the minimum wage is a way to make the EITC work better, ensuring that its benefits go to workers rather than getting shared with employers. This actually is Econ 101, but done right

Cross-posted at Angry Bear.

David Atkins succinctly nails the situation we face:

No matter what Obama does, Republicans won’t care and won’t fold

…This is what makes the poker analogy so often used to criticize the President’s negotiating tactics such a weak metaphor. Obama is often said to be the worst poker player in history, consistently bluffing then folding. But the problem with that analogy is that Republican House members aren’t playing with their own chips: they’re playing with the country’s. The Republican electoral chips are stashed safely in gerrymandered hands, and any losses over fiscal cliffs or debt ceilings only hurt the President and the nation’s perception of government. There’s no downside for the GOP in bluffing every time in the hopes that the President will fold. Why not? When you’re playing with house money, it makes sense to go all in on every hand.

When you’re playing chicken and your opponent has thrown their steering wheel out the window, the only alternative to losing is  to do likewise. Obama is justifiably reluctant to do so, because he actually cares about America and the rest of the world, and is unwilling to destroy them for electoral advantage.

For the gritty details of Republican gerrymandering and Democratic-voter disenfranchisement, see Sam Wang here and here.

The Republicans have gerrymandered a structural advantage that lets them play poker using other people’s chips. So the only only real solutions are structural and long-term. Atkins again:

The advantage Democrats have in this situation is that majority public opinion and the majority of actual American voters are on their side. The only thing that allows Republicans to take their hostages in the first place is a series of arcane rules that give the minority undue influence. Among those rules are:

• Gerrymandered Congressional districts

• Dysfunctional filibuster rules

• Disproportionate Senate representation

• Corrupt lobbying laws

• Campaign finance laws that give outsized political influence to a few billionaires

• Archaic electoral college rules

• Discriminatory workday elections

And that’s just a start. If we want a future in which we do more than simply determine which hostages to save and which ones to shoot, the American People will need to figure out how to make these and other reforms to our broken political system that disempowers rational majorities in favor of extremist ideological minorities with nothing to lose. As the Republicans continue to suffer demographic decline, their base will only become more desperate and extreme.

They’re cornered, with their backs against the seawall, and a demographic tidal wave is looming over them. That makes them very, very dangerous.

Cross-posted at Angry Bear.

The idea that contributions to the public good, for provision of public goods, should be voluntary is certainly appealing. But I was curious about the numbers. Like most things libertarian, this notion is utopian and unrealistic.

Total charitable contributions by individuals, corporations, and foundations was an estimated $298.42 billion in 2011, up 4 percent in current dollars and 0.9 percent in inflation-adjusted dollars from a revised total of $286.91 billion in 2010, according to a report from the Giving USA Foundation and the Center on Philanthropy at Indiana University.

That’s 2% of GDP. Government spending over the years has been circa 30% of GDP. If taxes were eliminated, would charitable giving increase fifteen-fold?

Would it be donated to the sexy things like road maintenance and bank regulation?

American giving.

Jim Manzi, curious as always (especially about how to evaluate government policies), tries to plumb the problem of causality. Here’s where he begins:

Consider two questions:

1. - Does A cause B?
2. - If I take action A, will it cause outcome B?

I don’t care about the first, or more precisely, I might care about it, but only as scaffolding that might ultimately help me to answer the second.

I’ll risk going Manichaean here in an effort at (simplistic) clarity: I think this encapsulates a key difference between scientists and engineers.

Scientists want to understand how something works — not just “does A cause B?” but “what is the mechanism whereby A causes B?” Successful prediction is valuable (mainly? only?) because it validates or invalidates that understanding. Their main goal is to build coherent theory and understanding. Prediction is a happy by-product and necessary corrective.

Engineers want to understand how something works so that they can predict things — and create things that capitalize on that predictive power. They’re perfectly happy if they can predict successfully without understanding why the prediction works. Coherent theory is generally necessary to achieve this — they need to understand how things work — but it’s not their ultimate goal. Theory is a necessary evil.

An assertion of causality requires both. You need to show that B follows A reliably, but to be confident of causation, you need to explain — really tell a story — about how that causality works.

Both of these approaches are necessary and proper, of course, and they’re complementary. But I’d suggest that theory — the goal of science and most scientists — is what really matters in the long run. It’s easy enough to predict that the sun will rise in the east every day. Successfully predicting that yields many happy benefits. But understanding why — heliocentrism, earth rotation, gravity, momentum, etc. — now that is really profound. That coherent theory provides engineers with their necessary evil, so they can create and capitalize on further successful predictions.

With his “I don’t care about the first,” Jim puts himself squarely in the “engineers” camp that I’ve (again simplistically) described. Don’t get me wrong: I’m quite certain that Jim Manzi is quite curious and hungry for understanding (even while he’s skeptical about our ability to understand how complex human systems work). But by putting himself in that camp, he is aligning himself with, and providing aid and comfort to, a group that actively distrusts and dislikes egghead elitist types with all their fancy theories about evolution and climate and yes, economics. He aligns himself with a group that doesn’t really care about understanding, that just wants to know “which button should I push?”

It’s a group that tends to come up with answers like “Just cut taxes.”

Cross-posted at Angry Bear.

Comes to mind: the one about the two British ladies who meet at the Ascot races.

“My dear,” says the first. “What a lovely hat. Where did you get it?”

“Oh darling,” says the second, looking somewhat pained, “don’t you know, we have our hats.”

It comes to mind as I ponder the rather grudging and tepid suggestions that you hear here and there these days — that excessive inequality might actually be a drag on economic growth and prosperity. There are some full-throated assertions of this belief out there, but in the mainstream economics community they are rare and in general quite decidedly mealy-mouthed. (No names, just initials: The Economist.)

The general failure to question the “more inequality is good for growth” mantra has deep roots, even among progressive economists. Viz, this from Paul Krugman back in December, 2008, when the highest inequality since The Great Depression was was in the process of delivering the first (at least potential) depression since…The Great Depression (bold mine):

There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people.

This seems to completely ignore marginal propensity to consume (MPC) — that poorer people spend a larger percentage of their income than rich people, so a more equal income distribution would result in higher money velocity, hence higher GDP. (I have seen no indication that Krugman’s opinion on this subject has changed since then.)

But I’d like to suggest that the problem runs deeper. Almost all the thinking about MPC seems to obsess about income, and greatly downplay the role of wealth, or net worth. The Wikipedia article on MPC, for instance, includes only one passing mention of wealth.

This failure to consider wealth is important because wealth inequality in this country (and worldwide) utterly dwarfs income inequality.

The Friedman/Modigliani rational-expectations lifecycle-hypothesis school does include wealth in their theories of marginal propensity to consume, but they assume that a great deal of people’s “wealth” actually consists of expected future income. This in turn assumes consumers’ excellent foresight decades into the future, and that people (at all income levels) are able or even likely to engage (accurately) in net-present-value calculations of their future incomes and expenditures.

There’s obviously a large literature on this subject that is ridiculously condensed above. But that aside: for thinking purposes I’d like to propose an admittedly simplified, opposite model that I have not seen discussed, in which current wealth (individual net worth) is the only determinant of (consumption) spending in a given period.

Imagine a world with eleven people in it, where we all have our wealth, and where net worth is broken out as follows.

Person 1: $1,000,000

Persons 2-11: $100,000 each

All spending comes from these stocks of wealth.

Now assume a very simple consumption function — a two-step “curve” — based on MPC (and marginal utility of consumption) thinking: propensity to consume for those holding more than $500,000 is 3% (because that satisfies their desires), while it’s 5% for those holding less than $500K.

Here’s how spending (Y, or GDP) plays out:

.05 x $100K x 10 = $50,000
+ .03 x $1 mil = $30,000
= $80,000

Now change the initial wealth setting: Persons 2-11 have $50,000 each, and Person 1 has $1.5 million.

.05 x $50K x 10 = $25,000
+ .03 x $1.5 mil = $45,000
= $70,000

By transferring half of the poorer people’s money to the richer person, we’ve cut GDP by $10,000, or 12.5%.

Then consider the change in shares of wealth from 2007-2010. Median net worth dropped by 40%, while the net worth of the top 10% went up.

Even if you accept the notion that predicted income constitutes a large portion of people’s perceived “wealth,” the implications are the same. If more of the national income (the $80K or $70K in spending) goes to the poorer people, they will have more wealth in future periods, with the salutary effects on GDP and prosperity shown above. (If they expect that distribution to continue, it will even impact their estimates of their own wealth in this period, increasing their current propensity to spend/consume.)

And this doesn’t even consider declining marginal utility of consumption (or only includes it in a display of circular logic) — that somebody with a $25,000 consumption budget gets more utility from a given (percentage or absolute) budget increase than one with a $50,000 consumption budget. So a small percentage shift in shares of wealth from the rich to the poor, or vice versa, results in quite large shifts in shares of our aggregate utility.

A supporting argument from the personal-anecdote-as-the-singular-of-”data” school of rhetoric: all this holds true for me. I put away a very nice chunk some years back, and am playing the fairly typical “will I run out first or die first?” game. (It’s hard to say which is worse. How many people spend their last dollar on the day they die?) I’ve often joked with my financial advisor that I have one Key Economic Indicator: how much money do I have? That’s what I think about when deciding whether to spend. People nearing or in retirement start paying a lot more attention to wealth than income. (Related but tangential: not surprisingly, as the future gets closer and more predictable, as the kids get up on their own feet, for instance, “the marginal propensity to consume (MPC) out of wealth increases with the age of the consumer.” PDF.) And we have an increasing number of people in or near retirement these days.

If this thinking holds any water — that the distribution/concentration of (perceived) wealth has an important impact on aggregate marginal propensity to consume — there’s a very solid and rather straightforward theoretical basis for the otherwise largely limp-wristed assertions that we’re starting to hear more glimmers of these days in the mainstream media, and in the more influential sectors of the econoblogosphere.

Equity and economic efficiency are not in conflict. Quite the contrary, in fact.

For those who prefer to look at pesky things like facts, the empirical data bears this out: at least in prosperous countries, greater wealth equality correlates with greater long-term prosperity.

For those who care to hear a personal account of how modest, widespread wealth dispersal can encourage innovation, entrepreneurship, and wealth-creation, see here.

Cross-posted at Angry Bear.

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.