Archive for January, 2012

Ironies Never Cease: Great Moments In Libertarian History

January 31st, 2012 2 comments

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.

If you haven’t read Graeber, run don’t walk. In the meantime, read Yasha (too much good copy to highlight; read it all):

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.

Full-Reserve Banking, the “Right” to Earn Interest, and “Financial Repression”

January 30th, 2012 4 comments

Nick Rowe replies to Richard Williamson re: full-reserve banking (emphasis mine):

The key reading here (even though it appears to be about a different subject) is Milton Friedman’s “The optimum quantity of money”.

Foregone nominal interest payments is a tax on holding currency…. 100% required reserves mean you impose the same tax on chequing accounts …

My reply, edited and links added:

Nick, just because people (“the market”) want risk-free long-term holdings that pay interest does not in any way imply what seems to be the unstated assumption here: that the government is obligated to provide them, or that failing to provide them is a “tax” — a “taking” of something that they own or deserve by some natural right.

The government could issue dollar bills instead of t-bills without violating anyone’s rights.

This is no different from saying that foregone transfer payments to the poor constitute a “tax” on the poor.

You could call either (as in Carmen Reinhart’s “pity the poh’ bondholders” perorarations) “financial repression” — though the charge seems sadly misplaced in one of the two contexts. (This locution is the most egregious example I’ve seen of economists shilling for creditors. Witness its widespread repetition by said creditors, their congressional toadies, and their money-media water carriers.)

You could certainly say that either of these “foregoings” creates incentives similar (identical?) to those created by taxes. As long as it’s presented as such — which it decidedly is not in Friedman — it can serve as a useful pedagogical conceit. But the implicit, undeniable normative baggage must be ditched and explicitly disclaimed.

As for checking accounts, full-reserve banking might indeed result in account holders paying banks a fee to hold their money for them securely and conveniently.

And banks would be in the surprisingly novel situation of earning a living by providing a service to individuals in return for fees paid by those individuals.

It’s not immediately clear to me how that constitutes a “tax” on checking accounts.

Cross-posted at Angry Bear.

Full-Reserve Banking and Loanable Funds

January 30th, 2012 3 comments

Richard Williamson asks a sensible and straightforward question: If, as Modern Monetary Theorists propose, banks’ reserve levels put no significant constraints on their lending, why don’t we have 100%-reserve banking — and presumably no runs on banks as a result?

First an explanation — I hope simple, clear, and generally accurate (if simplified):

Say you start your own bank. You take in $100 in checking-account deposits and lend it all out, holding no reserves. That’s not safe or even workable. You need some buffer so your depositor’s checks will clear.

So there’s a rule: you can only lend $90, and you leave $10 sitting in your “reserve account” at the Fed — essentially your bank’s checking account. When everybody’s checks clear each night through the Fed’s system, reserves get transferred between banks, and you’ve got enough on deposit so nothing bounces.

If the Fed says you need to hold 12% reserves instead of 10%, that means you can lend $88 instead of $90 — not exactly the massive asphyxiation of the “money multiplier” that many people imagine.

That multiplier is actually related not to your reserves, but to your bank’s capital — the money that you and others have invested (Update: plus profits that haven’t been distributed to owners). That capital is your bank’s buffer against losses from making bad loans. It’s your “skin in the game.”

The amount of capital limits how much you can lend (irrespective of 90%-lent deposits). If the allowed capital-to-loans ratio is 10%,  you can lend $10 for every dollar in capital. Now that’s a money multiplier.

The reserve ratio and the capital ratio are completely different things.

So back to Richard’s question: if the Fed required 100% reserves, the banks couldn’t lend out all those checking-account deposits. The quantity of “loanable funds” would decline. But banks could still lend, 10-to-1 (or so), against their capital.

What do those numbers look like in practice? U.S. checking and savings deposits total about $6 trillion right now.

Circa 90% of that would be removed from the loanable funds market.  Call it $5 trillion — sounds like a lot.

But total credit market debt outstanding is about $55 trillion.

That makes $5 trillion sound…not insignificant (and profound at the margin), but less onerous.

Which raises my question, one that I’m not knowledgeable enough to answer: Would 100%-reserve banking result in there being more bank capital available — more equity investments in banks — which via its money-multiplying power would offset or more than offset the otherwise decline in loanable funds?

Would we end up with roughly the same amount of credit market debt outstanding?

The answer, it seems to me, would depend on a whole lot of complex and interacting incentive effects. Anyone care to take a stab?

P.S. Like me, you’ve no doubt noticed that debt outstanding is in fact about ten times bank deposits. Does this put the big-picture lie to the MMTers’ claim that lending is not reserve-constrained? Is it just a coincidence? Other?

Cross-posted at Angry Bear.

Social Security: The Elevator Pitch

January 29th, 2012 8 comments

• 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.

Why This Time Is Different

January 27th, 2012 22 comments

A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:

We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic). The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation on what Steve Keen’s been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Angry Bear.

Economies Need a Gardener’s Invisible Hand

January 27th, 2012 Comments off

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.


Does Government Debt Impose a Burden on Future Generations/Periods/People? #12,143

January 26th, 2012 3 comments

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.

Financial Markets Are the Real Barter Economy

January 24th, 2012 9 comments

As (mis)conceived by most economists, money (which they confute here with currency) emerged as a solution to the time problem of barter economies: my spinach is ready now, but your apples won’t be ripe for months. How can we trade? Answer: you give me money for my spinach, and I give it back to you later for your apples.

That armchair-sourced fairy tale has been resoundingly debunked — that’s not how money (or even currency) emerged, and the Adam Smithian butcher/baker barter-exchange economy has never existed. Credit money — first embodied in tally marks on clay tablets — emerged and was in widespread use a couple of thousand years before coinage was invented (the latter largely to pay soldiers, whose itinerancy makes other methods problematic).

But the notion of barter economies lives on.

The whole system of national accounts (the NIPAs), in fact, was constructed by Simon Kuznets and company in the 30s as if we lived in a barter economy — with money being merely a time-shifting convenience, and with no accounting for financial assets at all. That accounting was only added a decade or so later, with publication of the Fed Flow of Funds accounts.

I’d like to suggest that this barter model for the real economy results in a great deal of confusion — including (especially?) among economists — largely because the NIPAs don’t usefully model the distinction between saving wheat (which can be consumed) and “saving” money (which can’t). By “useful” I mean “conceptually tractable, subject to consideration without logical error.”

I’m asserting that the barter model of the real economy results in lots of confusion and logical error. Viz: careful economic thinkers like Nick Rowe, Scott Sumner, and Andy Harless feeling the need/inclination to write lengthy think-pieces on that nature of “S.” Or the widespread misconception that “saving” (by whatever definition) “creates” “loanable funds.”

I’d even go so far as to say that those barter-model-induced logical errors pervade most thinking about economies and economics, both among economists and among the laity.

However: If you want to see a market that does operate as a barter economy, look no further than the market for financial assets. In this market, you trade your checking-account or money-market deposits for shares of Apple stock. Somebody else makes the opposite trade. The transaction is mutual and (effectively) instantaneous and simultaneous. It’s a barter.

In a very real and very counterintuitive sense, there is no money exchange in the financial markets. There are just barter swaps of financial assets.

A proleptic response to inevitable objections, and a definition of terms:

1. By “financial asset” I mean something that has exchange value — somebody will give you something in exchange for it — but that cannot be consumed (directly or through use or time/natural decay/obsolescence), providing actual human value — “utility” — in the process. (Things that can be so consumed, and do provide human utility — and derive their perceived value from that utility — are real goods/assets.)

2. “Money,” then, would be that exchange value as embodied (or metaphorically “stored”) in financial assets. Money cannot, in fact, even exist except as it is so embodied. Financial assets are money’s sines qua non — the things without which it does not exist.

Those financial assets (and the money they embody) can be tallied — represented — on clay tablets or in electronic accounting systems, in mental accounting ledgers (“You owe me”), or in physically exchangeable representations of those ledger tallies, such as dollar bills or stock certificates.

By this definition, a dollar bill or a deposit in a checking account is a financial asset, just as much as a share of stock or a government bond is. Which means that all exchanges of financial assets are swaps. Trades. Barters.

Exchanges for real goods, however, are different. When you buy or sell a real good, money (embodied in a financial asset) moves from one account to another, and — this is key — doesn’t disappear. It keeps getting passed on, exchanged. Real goods move the other way, and do disappear. You’re trading something that only has exchange value for something that can — will — be consumed. Conceptually: Financial assets travel in circles. Real goods travel in one direction only: from birth to death, production to consumption.

A physical metaphor may help: think of the financial system (including physical currency transactions) as a giant wheel, pushing along a conveyor belt of real goods.

But economists try to think about/model these very different situations as identical — as if “money” were being exchanged for bonds (and implicitly, as if those bonds will eventually be “consumed”). Since (mental) models for barter economies must be structured very differently from models for monetary economies,* modeling both of these as the same is problematic, confusing, and productive of logical errors — and perhaps even just plain wrong.

The gist of this thinking is not new — much of it reflects ideas floated long ago by circuitists, chartalists, modern monetary theorists, and other such (g)ists. But I’m hoping the formulation as presented here may be useful to others, as it is to me, in 1. forming mental/conceptual models of how economies work, and 2. evaluating the models bruited by others — notably the inherent validity of their underlying and often unstated assumptions.

I would point out in particular that as with my discussion here, the accounting-based modeling approach of Wynne Godley (and his predecessors, successors, collaborators, and parallel travelers) begins not where Kuznets did — with the interchange of real goods and services — but with the nuts and bolts of financial accounting. This approach imposes logical constraints on economists’ reasoning, constraints that seem sadly lacking in much barter-economy thinking.

As Godley says in the conclusion to his seminal paper:

In contrast to the standard textbook methodology, which starts by making very strong behavioural assumptions based on no empirical evidence at all (for example regarding the shape and role of an aggregate neo-classical production function), [this methodology suggests that] a different paradigm is indicated in which knowledge is gradually built up by empirical study, within the formidable constraints imposed by double entry accounting.

I’m not saying it’s impossible to think logically and coherently using the NIPA/Flow of Funds economic model, with the (confusing) barter and savings models embodied in the NIPAs. I’m saying it’s very difficult — especially since economists aren’t trained in financial accounting — and that as a result logical failures are widespread.

* Nick Rowe quoting Clower: “Hang on. In a Walrasian economy there is one big market where all n goods are exchanged; in a barter economy there are (n-1)n/2 markets where 2 goods are exchanged; and in a monetary economy there are (n-1) markets where 2 goods are exchanged, one of which is money.”

Cross-posted at Angry Bear.

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January 19th, 2012 1 comment

Saving Equals … Inventory?

January 17th, 2012 44 comments

I’ve noticed that many others, like me, are puzzled by the mechanics of the Saving=Investment accounting identity. How do household savings get instantly and perfectly intermediated, in a period, into investment spending — the purchase/creation of long-term productive fixed assets?

An Aha! for me: According to Krugman’s textbook, they don’t (click for larger):

First a correction: “The savings[sic]-investment identity is a fact of [the] accounting [methods developed in the 30s by Kuznets and company to model production of goods and services the national economy].”

But that aside.

If people spend less than producers expect in a given year, the producers create too much product, and it builds up their inventories. That’s easy to understand. (It’s easier if you think about the producers instead of the car-dealer intermediaries that Krugman talks about.)

In the NIPA model, that inventory is counted as “investment.” This makes sense as far as it goes — that inventory is stored real value, stuff that can be consumed/sold for consumption in future periods. As Mankiw explains it in his textbook:

But this explanation also pretty much obliterates the widespread and sloppy notion that increased saving (“not spending”) results in — causes — more productive “fixed investment.” The increased “investment” resulting from increased personal savings just expands inventory. The causations/incentives driving fixed investment are utterly other.

This also makes sense: when people are spending less (are “saving” more), does that spur producers to invest more in their businesses — to buy/create more fixed assets?

Both recent and immemorial history suggest quite the opposite.

Cross-posted at Angry Bear.