Archive for October, 2011

Occupy Wall Street Trouncing Tea Party, 54% to 27%

October 14th, 2011 Comments off

View Very or Somewhat Favorably:

Tea Party (Q8): 27%
Occupy Wall Street (Q11): 54%

Not that I think this “proves” anything. Hell 60% of Americans (say they) believe in angels.

Just sayin’: Go Team!

Topline Results of Oct. 9-10, 2011, TIME Poll | Swampland |

Scott Sumner: “The 2009 stimulus was sabotaged.” By the Fed.

October 14th, 2011 3 comments

Not everyone (notably including me) has time to read everything Scott Sumner writes. But you really should — even if you don’t believe or agree with it all (like, his conventional notions about not taxing earnings and gains on financial assets).

This — on the interacting dynamics of fiscal and monetary policy — is a don’t-miss:

…if you look at how the Fed actually behaves, rather than what Bernanke says or “really” believes, then you are forced to conclude that the 2009 stimulus was sabotaged. That stimulus was not enough to create a robust recovery, even with unconventional Fed moves.  If they hadn’t done that stimulus, it looks like the Fed would have done a more aggressive stimulus, as they seem determined to keep core inflation in the 0.6% to 2.0% range.  And thus if we’d never done the 2009 fiscal stimulus, we’d probably be about where we are now–9.1% unemployment and 2% core inflation.  But with a much smaller national debt.

Not sure how much I’m adding to what is I think an important insight into stimulus dynamics, but it’s interesting to think about this MMT-style, with the Treasury and the Fed as a consolidated entity.

In the factual (with fiscal stimulus), Treasury issued more debt, and the Fed bought/retired (at least temporarily) less of it (than it would have otherwise).

In the counterfactual, Treasury would have issued less debt, and the Fed would have bought/retired more of it.

So in that consolidated view of things, fiscal stimulus also resulted in the Fed multiplying Treasury’s increased debt issuance.

Am I missing something here, probably having to do with reserves?

Palin: “Only by empowering the individual will our economies be rescued.”

October 12th, 2011 Comments off

“When cronyism thrives, innovation, prosperity, and freedom suffer because small innovative firms get shoved outside,” she said. “Only by empowering the individual will our economies be rescued.”

Funny that she doesn’t mention the opposite alternative — disempowering the cronies (politically and financially). Could that possibly be because she are one?

via Slovakia rejects Euro bailout expansion plan – as it happened | Business |

Is the Elasticity of Labor Demand at Zero?

October 10th, 2011 7 comments

I’m reminded of the joke about two ladies meeting at the races at Ascot.

“Oh dahling,” says the first, “what a wonderful hat. Where did you get it?”

The second, looking down her nose condescendingly and slightly embarrassed, sneers, “Dear, we have our hats.”

Do American employers have all the workers they need or want given the current state of the economy?

Do the supply and demand curves for labor (or at least lower-wage labor) look like this?

Now matter how much labor costs go down (widespread wage increases certainly aren’t in the cards), employers won’t increase the number of workers demanded; they don’t need them. (And you know: workers have all these pesky expectations and demands).

Recent trends suggest that for employers, investment in equipment and software is a preferable substitute for hiring. And substitution, of course, is the sine qua non of demand curves.

If this is the case, the only way to increase employment is to shift the demand curve to the right — making employers want more workers.

Which would undoubtedly have something to do with increasing demand for employers’ products and services. It’s hard to see how any shifts in the supply curve (i.e. workers caving and letting go of their sticky wage demands — the supply curve shifting right) could affect quantity in the scenario pictured above.

Savings Equals Investment Equals … Zero?

October 9th, 2011 20 comments

Update: See a follow-up post to this post and the comments, here.

Randall Wray bills this image — in wonkish humor that I know many of my Modern Monetary Theory (MMT)-savvy readers will get — as “The Most Subversive Sign Seen at the ‘Occupy Wall Street’ Protest.” Love it!

Which prompts me to finally publish this post, one I’ve been sitting on for months for fear of revealing myself to be the internet econocrank that I am. But here goes.

I’ve spent a lot of time over recent years deep in the national accounts (in the U.S., the National Income and Product Accounts — NIPAs), puzzling out how they work and what they tell us. In particular I’ve been puzzling about the S=I identity. I’ve read a lot of Kuznets (the guy who in the 1930s created the system, now used by [almost?] every country in the world), plus several of the leading economics textbooks, plus of course endless Wikipedia articles and academic papers, a tall pile of academic and popular books, and etc.

Why? Because the S=I identity has never made any sense to me, conceptually or theoretically, and it doesn’t seem to represent reality.

Clearly, private savings as we understand them — the amount individuals and businesses sock away, or the increase in individuals’ and businesses’ holdings of financial assets — don’t equal private fixed investment spending. Not even close. Ever.

The MMT crowd has helped greatly by pointing out what’s implied in the protestors’ sign:

Government surplus/deficit spending = Change in the stock of private financial assets (the right side of the equation being a pretty good definition of private “savings”).

That’s a real aha! insight into the national accounts, one with important conceptual, practical, normative, and political implications — far more useful (and accurate) implications than those associated with the S=I identity. More on those implications below.

But even the MMTers (that I’ve read) haven’t dealt with the accounting problem of real investment spending in the national accounts, and that pesky S=I identity. Since the identity is obviously not true, there must be something wrong with the national accounts.

I can’t believe that it’s taken me so long to figure it out. It’s obvious:

Savings is defined as equalling Income – Consumption Spending

But isn’t Savings, by any reasonable definition, Income – Spending? (Plus/minus price changes in financial asset values?)

And Spending = Consumption Spending + Investment Spending. (This is a sensible and accurate definition, though the line between consumption and investment spending is blurry.)


Spending = Income

Spending = Consumption + Investment

Income  = Consumption + Investment

Savings = Income – Spending

Savings = (Consumption + Investment) – (Consumption + Investment)

Savings = Zero

So if Savings = Investment, Investment = Zero

Something is really wrong here.

What’s wrong is the definition of Savings.

Understand: “Accounting identities” are not immutable laws engraved on stone tablets, handed down from some eternal and ethereal realm where All Truth Resides (as they’re often portrayed in the textbooks). They’re just definitions of terms, statements of accounting methodologies. Nothing more. (And — getting meta — this paragraph is a definition of terms regarding definitions of terms.)

Likewise: The national accounts are nothing more than a model or map of the economy, necessarily with defined terms and methodologies — with a great deal of effort expended to plug estimated numbers into the model.

And at the very heart of the system of national accounts, we have a patently false definition. How did this happen?

My explanation:

When Kuznets and company got together in the 30s to create the system, they were (necessarily) working from an understanding of the economy rooted in classical economics — an understanding that in this regard remains largely unchanged today. (In large part, in my opinion, because that understanding was codified into the system of national accounts itself; the understanding became unimpeachable. “These are accounting identities! They’re just true.”)

In that classical understanding, there is no (clear, regular, agreed, or even coherent) distinction between or understanding of the relationship between financial capital and real capital. (Marx is a complete conceptual mess, and the rest aren’t any better.) You constantly hear “capital” spoken of as a single undifferentiated lump.

Classical economics has never explained why the quantities of financial assets, and their prices, and their aggregate value, can plunge and skyrocket, while the real assets whose value they supposedly represent remain largely unchanged. (Aside from Keynes’ “animal spirits.” Thanks, John, for that incredibly useful analytical tool.) Yeah: financial and real asset values rise roughly together over the course of decades, but that does nothing to explain or address the stuff economics actually needs to deal with all the time: those very long moments (cf: our present and recent past) where the relation between real and financial asset values is completely out of whack, and wildly variable.

So Kuznets and company…punted: they built their economic model as if we lived in a barter economy. Money (as anything more than a transparent exchange medium like Monopoly money), credit, debt, financial holdings, and wealth accumulations were excluded from — left external to — their model of the economy, as if those things (and their distributions, and the changes in those distributions) were immaterial to the real economy, utterly without import or effect.

They had to do this, because:

1. They wanted to measure and model production of real goods and services, and financial transactions do not generally “produce” anything. But it makes for a problematic model of the economy given that flow of financial transactions dwarfs the real flows in the NIPAs by at least 40 to 1.

2. They had no workable way to think about changes in the quantities and prices of financial assets vis a vis the values of real assets. They didn’t understand money and money-like things. (And in my opinion most or quite possibly all economists still don’t — though I think the MMTers are getting close.)

Given these goals and constraints, how did the Kuznets consortium pull off this feat of modeling/accounting legerdemain? They assumed that S=I — that all the money surpluses generated in a given period are plowed, instantly (or at least within the period), into real investment spending. Even though they’re not. They maintained (and sanctified, codified) the “capital” confution.

And to do that, they had to define Savings not as Income minus Spending, but as Income minus Consumption Spending.

Problem solved. The books balance.

Given the NIPA’s definition of “Savings,” it’s no surprise that “Savings equals Investment.” They set it up that way.

S=I is an ex-ante assumption, adopted by necessity to achieve a particular modeling goal (modeling a barter economy) and work around a particular modeling problem (modeling a financialized monetary economy) — not an a priori Law of Nature.

Update 11/14: I finally crystalized the problem during discussion in comments to this post:

According to the NIPAs, fixed investment is spending, and it is also saving. Contradictory? If I take ten thousand dollars out of the bank to buy ten computers for my employees, is that “saving”?

This is why, in the national accounts, so-called “Savings” is calculated as a residual; it’s not counted/estimated. Estimate Income (using either the Expenditure or Income approach). Subtract Consumption Spending. Voilá! Let’s call that “Savings.”

This is also why both “Income” and “Savings” in the national accounts are unaffected by changes in financial-asset prices — capital gains and losses — and by money/credit/debt/equity issuance and retirement: those are outside the NIPA’s purview, not part of the economy as modeled.

These “money” items are estimated in the Fed Flow of Funds accounts. But even at the Fed, their predictive model includes only one variable (PDF) modeling all these changing concentrations and flows: interest rates.

We can see this definition problem in all the authoritative sources, from Wikipedia to all the textbooks. Here, Krugman:

“They can spend it on consumption,” but spending equals consumption plus investment. Which is right? People can’t spend their income on investment? Does spending include investment spending, or doesn’t it?

Likewise Nick Rowe:

1. Y = C + I + G + X – M

On the left hand side of we’ve got sales of (Canadian) newly-produced final goods (and services) Y. On the right hand side we’ve got purchases of (Canadian) newly-produced final goods (and services), divided up into various categories. ConsumptionInvestment, Government expenditure, eXports, and iMports.

2. S = Y – T – C

This is a definition of Saving as income from the sale of newly-produced goods minus Taxes (net of transfers, which are like negative taxes because the government gives you money instead of taking it away) minus Consumption.

In 1., purchases (spending) includes investment spending. But in 2., investment spending is not part of spending; it’s not subtracted from sales to calculate savings. Is investment in real assets “spending,” or isn’t it? If a business buys a thousand computers for its employees, doesn’t that diminish its savings for the year?

Bill Mitchell, MMTer extraordinaire, shares the same construct:

GDP = C + S + T

which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.

Households can’t invest? When businesses invest, it doesn’t reduce their savings?

The apparent assumption behind all this: people only consume (they don’t invest — for instance by building or remodeling homes or starting businesses), and only people save (undistributed business profits are not savings). But that’s certainly not how things are represented in the national accounts. They tally undistributed business profits as savings, and they tally investment by individuals as investment. To me, at least, this is self-contradiction.

I know where some of you are going, by the way: No — business surpluses/profits do not all flow back to households. “Undistributed business profits,” have ranged between 17% and 41% of profits since 1998. (Remember: the NIPAs ignore capital gains.)

In the end you’re faced with this definitional conundrum:

Kuznets says (wisely) that “the real savings of the nation” is real capital — the tangible and intangible stuff that we use to create stuff in the future. — Capital in the American Economy, p. 391.

Wikipedia tells us that national savings is “the amount of remaining money [income] that is not consumed.”

First, money can’t be “consumed” the way goods and services can. They mean “spent on — transferred to others in order to buy — consumption goods and services.” But which is it? Does “national savings” during a period consist of the net flow of money into financial assets (or the net change in the stock of financial assets, including financial-asset market revaluation), or does it consist of money spent to purchase/create real assets? They’re not the same. Really, not even close.

In future posts I’ll be contrasting the Kuznets model to that of ur-MMTer Wynne Godley, and discussing some of the conceptual, practical, political, and normative implications that flow from those models. For the moment I’ll just make the following bald statement:

While this it may not have been Kuznets’ (conscious) intention, the false S=I identity — touted as an unarguable truth — is perhaps the strongest existing intellectual prop for supply-side/trickle-down/Reaganomics/austerian/primacy-of-“capital” economic ideology. Coupled with the faith-based (and also false) notion that the available supply of investment funds is an important constraint on business growth, it’s the crucial foundation for much of the rhetorical infrastructure supporting those ideologies. Those ideologies are built on quicksand — or less charitably, bullshit.



October 7th, 2011 5 comments

I’m actually not going where you might think based on this post’s title. I’ve been there often enough. Instead:

In response to my post of this on Facebook, a friend of mine (yes, a real-world friend) writes:

I am one of those people who has been severely affected by the job crisis. I am educated and skilled and have worked since I was 10 years old picking berries for school clothes money. For the very first time in my life after having been laid off at the age of 49… I can’t get a job. I am working for myself… making very little “hit and miss” money. I am living at friends’ houses/ I have not had health insurance for the past 2.5 years. It makes my blood boil when the super wealthy call themselves “Job Creators” … I have ONE question for those people. WHERE THE FUCK ARE ALL THE JOBS YOU’RE SUPPOSED TO BE CREATING??

(She’s also quite a bit smarter than the average bear, by the way.) She told me a while back about one job she interviewed for, as a property manager for apartment buildings. (She’s done this for multiple buildings over the years.) They wanted her to be on call pretty much 24/7, and to work pretty much all the time on all weekends. She provides the vehicle, no mileage compensation. Plus some other onerous requirements. No benefits. And they wanted to pay her $12.50 an hour.

Her response — which makes all the sense in the world to me, and I think will make a lot of sense to my gentle readers who are capable of imaging themselves in her situation (there but for the grace of god…): FUCK THAT.

She can have a better life just getting by this way and that.

Which brought me to thinking about the right-wing economic mantra that you hear so often:

If we had lower wages/compensation, more people would be working!

Theory: Employers would be willing to hire more labor if it was less expensive. (This assumes, of course, that they need more labor to meet current demand. Questionable.)

But doesn’t “textbook economic theory” and simple sense tell us that if you offer less for something, you won’t be able to buy as much of it? Sellers won’t sell. In the case of labor sellers (income “buyers”), they’ll find substitutes for that money, find other ways to get by — paring expenses to the bone, working hit and miss in the informal economy, living with (and spending more time with) friends and family, enjoying inexpensive or free leisure pursuits. (Is this how you build a thriving economy?)

We have rock-solid explanations for the human FUCK THAT response — courtesy of experiments in The Dictator game.

There’s $100. Two people. John says, “I’ll give you $X.” Jane can say Yes, or No. If she says No, she gets nothing, he keeps it all.

In the Ultimatum game variation, if she says No, neither person gets anything.

It’s a one-time game.

If Jane is one of those mythical “rational optimizers” that (right wing) economists love to talk about, she’ll say Yes to any offer. Some money is better than none, right?

But humans don’t do that. If the offer’s too low, they say FUCK THAT. They forego free money to enforce their sense of fairness.

My friend was not being offered free money — not even close — so her response is even more understandable. It’s both rational, and eminently understandable as an innately human response. (She wasn’t actually offered the job, BTW. She never even went that far.)

There’s a huge body of research and knowledge related to this human sense of fairness, and how humans enforce it, which I find fascinating but won’t go into here. Just to say that it is a fundamental, hard-coded aspect of human nature. We all feel it, and we all act on it — enforce it — in various ways.

Economists ignore it at our peril.

Quasi/Market Monetarists: Will You Tell Me a Story?

October 5th, 2011 3 comments

I was poking around in data as is my wont, sussing things out, and put the following graph together. It quite caught my eye. The five-year averages make it a lot easier to see the big picture.

At first glance this looks like a profound secular shift in the economy. (Tyler Cowen: Wow, that is a big drop in innovation!) And a political hack/Reaganomics basher like me can’t help but point out that the peak is in ’81.

But of course there’s a big inflation story that’s not told here. A simple version: the Fed lost control of inflation, then it regained control.

But still: is there a story having to do with the Fed’s diminished expectations here? Was it reasonable to lower those expectations (so far)? Why? Any woulda shoulda couldas?

Other stories? I’d love to hear thoughts from some of those smart people in the Scott Sumner NGDP-level-targeting cabal.

What would Scott Sumner (have) do(ne)?

A Brief History of Corporate Whining

October 3rd, 2011 Comments off

Pretty much says it all…

Regulatory uncertainty is killing business investment: ya right

October 2nd, 2011 3 comments

Compared to, for instance, the Bush years, that hotbed of slashed regulations and rising business investment? Oh, wait.

But hey: don’t let facts interfere with your fondest fantasies. Here’s the fairy story:

…employment growth is sluggish because firms are turning down … opportunities to make goods and services that are profitable today (current sales are very profitable) because they fear regulations will not allow these sales opportunities to be as profitable in the future and they fear making the longer-term commitment  of hiring permanent workers.

Yeah that makes sense: they’re investing more in equipment and software — which is a permanent sunk cost — than in any recent recession, but they won’t hire workers, who they can fire if necessary?

And this behavior by businesses has nothing to do with the Republicans doing everything in their power to drive us back into recession to make Obama look bad. It’s because there are some new regulations pending. Makes all the sense in the world.

Regulatory uncertainty: A phony explanation for our jobs problem | Economic Policy Institute.

Koch Brother Lures Hayek to America With…Social Security!

October 2nd, 2011 2 comments

Yes, the depths of conservative hypocrisy are bottomless, but this really takes all.

From The Nation (ht Brad Delong, emphasis mine):

Koch invited Hayek to serve as the institute’s “distinguished senior scholar” …

Hayek initially declined Koch’s offerHayek explains that he underwent gall bladder surgery in Austria earlier that year, which only heightened his fear of “the problems (and costs) of falling ill away from home.” (Thanks to waves of progressive reforms, postwar Austria had near universal healthcare and robust social insurance plans that Hayek would have been eligible for.)

IHS vice president George Pearson (who later became a top Koch Industries executive) responded … that “social security was passed at the University of Chicago while you [Hayek] were there in 1951. You had an option of being in the program. If you so elected at that time, you may be entitled to coverage now.”

Professor Hayek had indeed opted into Social Security while he was teaching at Chicago and had paid into the program for ten years. He was eligible for benefits. …

Koch writes: “… you are entitled to Social Security payments while living anywhere in the Free World. Also, at any time you are in the United States, you are automatically entitled to hospital coverage. … For your further information, I am enclosing a pamphlet on Social Security.

The letter is here.

Charles Koch to Friedrich Hayek: Use Social Security! | The Nation.