Friday, July 15, 2011

More on Debt Ceiling Fight From MSNBC

MSNBC's First Read has this tonight:

"In addition, McConnell said the hope is to also include spending cuts agreed upon by the White House and House Republicans. He said that is the key. Will the White House agree to enough cuts to pass the House."

So this is the key bit I was mistaken about. In addition to creating another catfood commission, the plan will include actual spending cuts that have already been agreed to in principle by the White House and the House Republicans.

So the main questions are whether those cuts will in fact be included in the Senate bill, and if so whether it can pass the House. I'm still hoping No on the first and Doesn't Matter on the second, but it seems we just don't know yet.

Wait A Minute, Is This Thing Over?

Is this debt ceiling fight over and nobody told me?

I'm hearing from Republican contacts that the current state of play is that the GOP has essentially punted after a falling out between Boehner and Cantor about whether or not the GOP could marshal the votes in time for a passage of a Grand Bargain-type legislative package.

Harry Reid and Mitch McConnell then stepped in and fashioned a compromise, which compromise involves Obama submitting a bill full of cuts at some point in the future which will almost definitely not be passed by Congress. In exchange for this "concession" Obama gets control over the debt ceiling until the end of FY2012, a provision that will presumably be extended in an election year without much fuss.

Is that right? I don't get the sense at all from liberal blogs and commentators that the Democrats have won, but I get that sense from the Republicans I'm talking to. What gives?


So, here's the bare bones of the Reid/McConnell plan, via The Hill:

The proposal McConnell introduced would authorize President Obama to raise the debt limit by $2.5 trillion in three requests.

Under the plan, Obama would have to make three requests to Congress which lawmakers could block only through a resolution of disapproval. It gives Obama nearly unilateral authority to raise the debt limit because it would require only 34 votes in the Senate or 146 votes in the House to sustain a veto of a disapproval resolution.

Reid is talking with McConnell about adding $1 trillion to $1.5 trillion in spending cuts to the authorizing legislation.

Now what I heard, which I'm still trying to find evidence for, is that the cuts aren't even part of the actual legislation, that they are a sort of floater that requires an up or down vote on a slate of Obama cuts. That's not what this piece says so that bit may be wrong. I'll continue to update as I have more information.

Thursday, July 14, 2011

ECB Could Just Print the Money

I admit I got this via Atrios, but he didn't really add much so I'll just cheekily link to the original post at CEPR pointing out that the European Central Bank can solve the debt crisis any time it wants to by creating money and granting it to member states to pay their bills.

The European Central Bank (ECB) can just print euros which can be used to address any potential default risk among its member countries. There would be little obvious economic downside to this policy since most European counties have large amounts of unemployment and excess capacity due to inadequate demand.

If this were done as a per capita grant to all Eurozone members, it wouldn't cause a race to the bottom - in fact it could be contingent upon following certain budgeting guidelines, if you're into that sort of thing.

There's no technical reason it can't happen, only political reasons.

Wednesday, July 13, 2011

Yglesias At It Again

After I praise a post of Matt's he usually turns around and posts something that's wildly mistaken. Today is no exception":

Banks penalized for holding excess reserves will presumably lend to someone. Make the penalty large enough, and banks may even lend money at negative rates. Alternatively, they’ll just go out and get fancier office furniture. Either way, money gets spent.

This exposes Matt's fundamental misunderstanding of how banking works. Banks cannot use their reserve accounts to go out and buy office furniture. They park those dollars in Fed deposits, Treasury securities, and other more complicated financial instruments as a way of maximizing their interest income. They cannot spend it on office furniture or ANY real goods and services.


And of course Sweden did not do what Matt says they did. I really wish I could get him to pay attention on this, it's just really embarrassing.

Balance Sheet Recession

Everybody's talking about the balance sheet recession today, as we find Paul Krugman, Brad DeLong and Matthew Yglesias discussing William Galston's piece for The New Republic.

Delong and Krugman are both ticked off that Galston seems to have called out liberal economists for not saying something that both of them in fact said several times, starting a good while ago - that the US and the world are suffering from a "Balance Sheet Recession."

So what is a balance sheet recession? In plain English, a balance sheet recession is when households suddenly become unable to continue spending money because they owe too much money against too few assets.

The reason I want to highlight this is because this is intimately connected with the discussion we've been having at Yglesias' place about monetary policy. As I've noted before, banks always lend when they can find creditworthy borrowers at prevailing interest rates and never otherwise. You can increase the supply of creditworthy borrowers by lowering the interest rate, but you can't increase it beyond a certain point because households that have strained balance sheets aren't creditworthy at ANY positive interest rate.

To fix a balance sheet recesssion, you have to fix household balance sheets. You can do that in a lot of ways. One way is directly, via mortgage modification which would work immediately, another is by deficit spending which operates on a bit of a lag.

At current rates, as Galston notes, at the current rate of deleveraging it's going to be a LONG time before we're back to normal levels of household indebtedness. That means a long recession. If you want to jumpstart the recovery you have to repair those balance sheets faster. Regardless of who said what when, maybe now we can all agree that this is the current situation and start discussing how to approach it.

Matt actually gets us started:

[T]he best resolution would be to set a higher Nominal GDP growth target and clarify that the Fed is willing to accommodate Reagan-era levels of inflation if that’s what’s necessary to achieve it.

I don't actually think that would work (the Fed can set whatever target inflation rate it wants, but it can't actually cause that inflation to happen), but bravo to Matt for pointing us in the right direction - toward solving the problem instead of arguing over who diagnosed it first.

In my view the best resolution would be to send everyone a $500 check every month until we get back to a normal level of household indebtedness. This program would cost 150 billion dollars a month. That's a lot! It wouldn't pay for itself. It would increase the deficit! It might even cause INFLATION!!!!!!one!1! It would also repair the balance sheets, and the economy.

Not the best sales pitch, I know. But it has the advantage of being completely accurate.

Tuesday, July 12, 2011

Sweden Again

So, the otherwise good Matt Yglesias is at it again, hyping Sweden's famous "negative interest rate" experiment.

As I've noted before, this entire story is the result of a misunderstanding and nothing that Matt has said on the subject is true.

To recap:

1) Sweden never paid a negative interest rate on overnight reserves, and in fact they never stopped paying positive interest rates on overnight reserves.

2) Paying interest on reserves does not cause banks to "hoard reserves" and refuse to loan them out because banks do not loan their reserves to the public. Ever.

Wednesday, March 30, 2011

Austerity and Household Debt

Economics as a discipline has a lot of problems owing to its relative newness, but one thing that's nice about it is that it's backed by another discipline where all the science is known - accounting.

Dig deep enough into the accounting side of a bad economic policy and you'll always find something alarming. In the case of the UK's disastrous plan to cut government deficits during a deep recession, the accounting problem comes in the form of household debt projections, which Krugman brings us today via Yves Smith (whose charts are always awesome).

Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap — and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt.

Why is that? Can't households theoretically make more money? No. Since US deficit spending is the only source of net US dollars, households as a class cannot gain dollars unless the government provides them via deficit spending. The only way they can increase their spending power in the face of falling deficits is to borrow.

We don't need more consumer debt - we need less.

Wednesday, March 23, 2011

Schumpeter and Clean Energy Research

There's a bit of an off-topic debate over at Yglesias' place - the post itself is about Martians but commenter njorl had a very good comment about so-called Cap and Trade:

People don't like carbon emissions, rather, they like energy which has a byproduct of carbon emissions. By taxing carbon emissions, you squeeze energy production from CO2-producing fuels to non-CO2-producing fuels.

This is a good description of what cap and trade COULD accomplish. However, we need to be realistic about the fact that what makes Cap and Trade necessary is that we have underprioritized clean energy research as a nation for far too long.

If we had known in advance that fossil fuels would damage the ecology of the planet, which of course we didn't for most of the 20th century, we could have chosen to put research dollars into clean energy and possibly develop those technologies to the point where they could compete with fossil fuels now, in 2011.

We didn't do that. Too bad! So now we need to intervene in the market to slow the environmental damage from overconsumption of fossil fuels. As economic conservatives will always (correctly!) point out, such interventions often have unforeseen and chaotic effects.

These interventions are necessary in the short and probably even the medium term. But long-term the task remains the same - we MUST prioritize clean energy research much more highly than we currently do, and undertake the long-term, serious and difficult process of finding the technologies that will provide for the energy needs of the 21st century.

The bit of cap n trade/carbon tax triumphalism I object to is the idea that it will somehow magically force the nation to develop clean energy technology. It won't. It will incent the use of existing clean energy technology. It's tempting to think that this would increase the basic research being done in that field, but in fact there is no market mechanism by which that can happen. Basic research in clean energy, like ALL basic research, must necessarily be a policy choice.

As Schumpeter pointed out many decades ago, capitalist markets chronically underinvest in basic research because its commercial benefits are too far in the future. A dynamic actor such as the state is able to correct this over the long term, but for the last 50 years we have focused almost all of our significant nonmedical high-tech research efforts on developing weapons, and we are now reaping the whilwind of that disastrous miscalculation in the form of an antiquated energy production system.

Tuesday, March 8, 2011

The Annoying, Barking Mad Genius of Morgan Warstler

As many who read this blog (if any section of this blog's readership can be usefully called "many") probably already know, there is a person out in Internet-land who calls himself Morgan Warstler.

He's a blogger for the odd, ugly, and mostly useless righty politics site Big Government (full name: "Andrew Breitbart presents Big Government featuring editor in chief Mike Flynn," and no I am not making that up). He's a gadfly on several well-known economics blogs including Scott Sumner's The Money Illusion, but most of my dealings with him have been at Yglesias' place over at ThinkProgress.

All in all, the guy is a nutcase, and I really don't recommend listening to him, reading him, or talking to him at all. It will just make you angry and confused.

That said, the Warstler may well be a genius. He's fallen in with the wrong people and has couched his policy recommendations in politically toxic, morally bankrupt packages. But the man is onto something.

I know, I know. Forty-two loyal Yglesias fans (the entire readership of this blog, sadly) just threw up a little in their mouths.

But Morgan's Guaranteed Income plan is sort of on to something. I'll explain later. Just wanted to warn you, sort of an econ version of the "trigger warnings" on sites that focus on social issues. I will be taking up a lukewarm defense of Warstler this week. Consider yourself on notice.

Back from Vacation: Theory vs Fact

One very strange* and ubiquitous problem in economics is people's tenndency to skip over operational fact on their way to making their theoretical analysis.

Take by analogy this account of my trip home from my parents' house this afternoon.

I was driving home from my parents' house this afternoon and I was pulled over by a police officer and given a ticket. (Thankfully this last bit did not actually happen. At least, it did not happen today.)

The ticket was for speeding. I will now have to appear in court or pay a fine.

All these things are observations that illustrate operational facts about the relationship between a certain member of the public (me) and certain institutions of government.

If a police officer sees me driving over a certain speed, she will stop me and give me a ticket that will result in my having certain liabilities toward the government.

I may try to come up with some ideas, based on my experience, how I can avoid getting a ticket in the future. Any such analysis should be based on the operational facts above. If I am unaware as to the operational reason I incurred these liabilities I will be in trouble.

What does this have to do with macroeconomics? Well, a commentator on Yglesias' blog called halfkidding said recently:

So-called monetary policy with all its tools and mechanisms is used to do one thing. That is to increase or decrease the amount of credit in the system.

It's fine to believe, as many fine economists do, the theoretical assertion that monetary policy can increase or decrease the amount of credit in the banking system. However, it's crucial to retain the knowledge that in operational fact what the central bank is doing is setting the interest rate. There are various theoretical mechanisms by which this can increase or decrease the amount of lending in the system, but the magic Fed lever controls the PRICE of funds, not the AMOUNT of funds.

As a matter of operational fact banks determine the amount of credit (thus money) in the system by their lending decisions, which are influenced by the prevailing interest rate but also by the availability of creditworthy borrowers.

*At least I think it's strange. Researchers of other disciplines could probably say better than I can.

Sunday, March 6, 2011

Innes: What is Money?

studentee pointed out in comments that Innes' "What is Money?" is a good introduction to these ideas and his articles on the topic are the foundation for much of modern thinking about currency.

Worth reading if you can get past the density of the prose.

Saturday, March 5, 2011

The Origins of Money

The conception of the origin of money I alluded to in my earlier post about liberalism is not, of course, the one with which most people are familiar.

In the standard telling, originally people used a barter economy, where (to oversimplify the story a bit) a chicken farmer would carry some eggs to market and exchange them for other things he needed, like sugar or flour.

Eventually certain commodities, especially precious metals but also fishhooks and other oddities, became accepted as the standard medium of exchange, leading eventually to paper currency that was "backed" by some commodity.

It's not clear exactly who originated this story, but it's been disproven for some time by anthropological research. The details of the story are interesting (if you like that sort of thing) but kind of involved, so if you really want to know the ins and outs of how money originated you can check out L Randall Wray's Understanding Modern Money. Thankfully the relevant portion is currently available on Google Books' preview so you can read it without finding a copy of the book.

The key point, though, is that money never really derived its value from any commodity, and did not evolve as a lubricant to the barter system (which never really existed.) Attempts have been made from time to time to peg the value of a currency to the price of a certain commodity (especially gold) but the value of money comes from its status as TWINTOPT - That Which Is Needed To Pay Taxes.

Friday, March 4, 2011

Money, Taxes, and Property Rights

This post over at Bleeding Heart Libertarians got me thinking about the monetary system (surprise!) and the fact that while I don't really care that much about these meta-theory type questions ("are you a classical liberal or a high liberal?") I'm glad people are out there writing about them because it can really give you some useful terminology and frameworks for thinking about things in a straightforward way.

For example, Brennan explains that

One way to distinguish among kinds of liberalism is by their differing conceptions of economic liberty. Classical liberals and libertarians affirm what we might call a thick conception of economic liberty; high liberals, a thin conception.

Brennan goes on to explain what these terms mean, and it's interesting, but what jumps out at me even at this early point in his discussion is the way this question about the character and importance of economic liberty relates to the battle lines that get drawn in real-world political fights over economic policy.

According to anthropologic research (much of it done in France) the human monetary system was conceived as a response to a specific situation - an entrenched overclass who participated in a "gift economy" that was closed to the majority of the population (the underclass.)

The government (this was at the dawn of democracy) created a system by which they would pay out tokens to the population and levy a tax on real property, compelling the owners of the real property to participate in the private economy in order to acquire these coins.

Thus money became was a way for the people to compel the property-owning overclass to employ their considerable resources (chiefly land and the associated raw materials) to produce value not only for themselves and their friends but also for the benefit of the public at large.

Now, this development was not welcomed by the overclass by any means, but it was such an ingenious system that it stuck around (with some hiccups over the centuries, to be sure) to the present day.

Thus we would expect libertarianism, accurately characterized in Brennan's excellent post as being close to absolutist in its conception of individual property rights, to be hostile to the very idea of the human monetary system wherein the government levies taxes on property in an effort to compel property owners to produce value towards the public good.

Despite libertarian claims to love "the free market" we see libertarianism's true colors in the foundational myth of modern libertarianism, "Atlas Shrugged."

John Galt objects to the very idea that he should be compelled to use his property for the public good. In the myth he is attacked for "producing too much" but of course the underlying philosophy (also reflected in Heinlein's seminal libertarian/militarist fantasy "The Moon is a Harsh Mistress") clearly abhors the fact that the world's Atlases are being forced to produce value for the undeserving masses.

The reason the system persists is that while rightists love to rhetorically conflate taxation with the stealing of physical property, in actual practice property owners who would never tolerate having their physical property seized by the government will in fact submit willingly to turning over some government tokens a few times a year in exchange for the right to go on being wealthy property owners.

Thus what the overclass is left with is to do their best to install people sympathetic to their interests at the levers of power, so that the system can be tuned to allow them the maximum advantage despite the persistence of the basic structure that forces them to produce for the public good. In a democracy, of course, this tends to work only in fits and starts, since politicians who prevent the system from working properly tend to get voted out of office.

It's a fascinating and elegant design, at least compared to the available alternatives. Not perfect by any means, but at least we can agree preferable to the lot of an ancient Greek slave or a Medieval serf.

For some reason the discourse on liberalism reminded me of my favorite quote from Machiavelli:

"It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. The innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new."

With that I'll leave you alone. G'night.

Straight Talk on the Rumble in the Jungle!

Two things I can't resist are political philosophy and Muhammad Ali. Today Ezra Klein comes through with two great tastes that go great together!

The post is about the silliness of political conspiracy theories that require extraordinary planning and crisp execution - anyone who works in government knows that these things are basically impossible when the group of "conspirators" grows beyond about four people.

But the part that caught my eye was Klein's highlighting of something George Foreman said about Ali's famous "Rope-a-Dope" strategy in the Rumble in the Jungle. Foreman apparently said "that Muhammad Ali had fired an arrow into a barn and then walked over afterward and painted a bull's-eye around it."

I haven't read that particular Foreman quote, but I know from other sources it's correct. Ali's strategy of sitting on the ropes waiting for Foreman to punch himself out was not something he came into the fight with; it was a strategy that evolved after Ali was unable to evade Foreman in the first two rounds due to Foreman's excellent footwork and the unexpectedly soft ring canvas (which degraged Ali's footspeed.)

Because Ali won the early rounds, and controlled the fight from then on, it's generally assumed that it was all part of some big grand plan. However, in reality Ali realized that despite having won the first few rounds, he was putting himself in harm's way too much and was likely to get knocked out once he became too tired to dance around.

In the third round he noticed that when Foreman had him on the ropes he was throwing wild punches and missing a lot. Ali decided to stay on the ropes and see if Foreman would continue making mistakes and tiring himself out unnecessarily. It worked.

This is a crucial corrolary to Klein's point about how we sometimes assume our opponents are ruthless, unstoppable and efficient. In fact you must always be alert to the potential that your opponent is making a mistake. Most victories are the result of realizing when an opponent's plan is a mistake, and then letting him execute that plan.

Joe Frazier, sitting at ringside, recognized what was going on. At the end of the third round he lamented "George is rushing himself too much... he's not being calm." Five rounds later, Foreman ran out of gas and got knocked out. Not because Ali had a master plan, but because he recognized that Foreman's plan couldn't work, and stood around while George beat himself.

Killing the Recovery

Mark Thoma at Economist's View highlights today's Paul Krugman column in the NYT called "How to Kill a Recovery."

Here's the bit that scares me:

Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As I like to put it, they believe that the Confidence Fairy will make everything all right.

This type of pre-Machiavellian superstitious thinking is exactly what led the British to institute austerity measures, and the results were disastrous. Business confidence is a function of economic conditions, not of politicians projecting certain classical values like prudence or responsibility in some abstract sense.

Unfortunately Republicans are in control of the House, so they're likely to get their way on some of this stuff. But Obama should not be out in public conceding the argument that we have to cut the budget and reduce the deficit. The right way to reduce the medium-term deficit is to spend much more - disburse funds to the states on a per capita basis to allow them to close their budget gaps without laying off workers, and to institute a federal hiring program to employ workers who are willing and able to work but not able to find work.

A Reminder on Jobs

Steve Benen reminds us today on the occasion of our first decent overall jobs report that in fact private sector jobs have been gaining FOR AN ENTIRE YEAR. That's right, the private sector started adding jobs in January of 2010 and has added jobs every month since then.

What that means is that for the last year, the continued high rate of unemployment has been entirely a matter of public policy. The government has been firing people when it should be hiring them. A disgrace and a tragedy.

Those unworked hours can never be regained - they are squandered forever.

They Know It's Bad

Yglesias today throws some cold water on the idea that congressional leaders are failing to authorize additional stimulus measures because they don't realize how bad the economy is.

The argument is that since the legislators live in DC, they are insulated from a lot of the economic devastation that's happening across the country. That may be true in a visceral sense, but take a look at Calculated Risk today:

The current employment recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

This isn't arcane or difficult to understand. The problem isn't that politicians don't understand that the economy is in bad shape, it's that they don't understand that reducing deficits and cutting public sector pay in the middle of the worst recession in modern history is terrible policy.

The answer is to keep telling them. Will it work? We don't know. But we have to keep at it.

Thursday, March 3, 2011

Pre-Machiavellian Politics

Nowadays Machiavelli's name is primarily associated with a crudely selfish set of ethics, and his book The Prince isn't read very much.

If people actually did read the book they might be surprised to find that what Machiavelli offered was an alternative to the prevailing political ideas of the time, which essentially called for rulers to adhere to certain classical values, in the hope that fortune would smile upon them for abstract and essentially superstitious reasons.

Machiavelli pointed out that the correct way to govern is to study the actual effects of policies and actions that the ruler undertakes, and make decisions based on the likely results of those policies. We style this as "the ends justify the means" but the phrase would probably be easier to grasp in a slightly less loaded form, like "consider the results to determine the policy."

Despite Machiavelli's blackened reputation, he won the argument. For the most part we no longer govern by trying to project classical values like steadfastness, honesty, or loyalty. Yet when the topic is macroeconomics all too often these old ideas seem to seep in.

Krugman today points out a recent case: economists' belief that Great Britain's "austerity" would inspire "confidence" in business leaders, leading to robust private sector investment and growth. It didn't work! Apparently business leaders aren't impressed by 14th-century European political superstitions masquerading as sound finance policy.

There is absolutely no operational reason to believe that decreasing the amount of money flowing from the public sector to the private sector should increase business confidence. The only explanation for this widespread misconception is the belief that "austerity" is a sign of "seriousness" and "prudence" and other wonderful classical values that, if our leaders can merely project them strongly enough, will cause fortune to smile upon our humble economy.

This is no way to run a country, be it on this side of the Atlantic or the other. Public deficits are contributing to increased savings rates, which are in turn improving the creditworthiness of potential borrowers and leading banks to lend to the public. Cutting those deficits will cut savings rates, and before long dissavings will cause people to exhaust their ability to borrow and we'll be right back where we started.

That sounds pretty austere, all right. But it doesn't sound like good policy.

Sweden and Negative Interest Rates

Today Matthew Yglesias is hyping Sweden's recent rosy economic data in a post titled "Unorthodox Monetary Policy Worked Nicely In Sweden; Will Anyone Notice?"

He's referring to the fact that in 2009 there was a wave of articles claiming that Sweden's central bank, the Riksbank, would be charging a negative interest rate on reserves held as cash at the central bank in an attempt to get banks to lend more.

As I noted yesterday, this idea is hogwash - banks don't lend their reserves to the public and interest on reserves doesn't have any direct effect on banks lending behavior. Indeed, the New York Times corrected the record on Carter Dougherty's economics blog just a few weeks after the initial erroneous reports in an article called "Negative Interest Rates in Sweden?"

The truth is, Sweden never charged banks a negative interest rate on overnight deposits; that's the significant interest rate on bank reserves. They actually paid a positive interest rate on reserves, just as most central banks now do.

Sweden's monetary policy was aggressive for sure! Proponents of more aggressive central bank policy would do well to learn about what the Riksbank actually did, and how it worked. There's a document called The Lower Limit of the Riksbank's Repo Rateavailable online that allows anyone to do just that.

But no one is helped when we try to do analysis based on hype instead of facts. Press reports often get technical details wrong; it pays to follow up with people who know what they are talking about.

Wednesday, March 2, 2011

Don't Take It From Me

Warren Mosler unearths a good quote from Vitor Constancio, a Vice President at the European Central Bank:

“The level of bank reserves hardly figures in banks lending decisions; the supply of credit outstanding is determined by banks’ perceptions of risk/reward trade-offs and demand for credit”.

This is an extraordinarily important point that economists and journalists get wrong ALL THE TIME. Remember it the next time you read someone saying that we need to inject money into the banking system so that banks will make more loans to the public. It doesn't work that way. Banks ALWAYS loan when they have profitable lending opportunities at prevailing interest rates, and NEVER otherwise.

Tuesday, March 1, 2011

Oil Prices and Foreign Policy

In part because of the centrality of street protests to the public image of the prewar opposition to the Iraq invasion, war supporters found it fairly easy to caricature leftist critiques of foreign policy as "No Blood for Oil" sanctimoniousness.

Today Matthew Yglesias (who was himself a war supporter who has since reformed) puts the argument much more subtly:

The goal of much of America’s terrorgenic policies is to secure our economic interests in the face of oil price shocks, but this holds up to very little cost-benefit scrutiny.

It is an operational fact of our foreign policy that US military support for Saudi Arabia and other autocratic Middle Eastern governments is motivated at least in part by a desire to control global oil prices. It is also an operational fact that US military spending in this region contributes not just to "anti-American sentiment" but to actual identifiable attacks on US personnel stationed abroad.

It's possible the tradeoff - increased economic security, decreased physical security - is worth it, but no one seems to be able to demonstrate this, and it runs counter to our stated goal to prioritize the physical security of Americans over other foreign policy concerns.

Obama and the State of Economic Policy

One of the really wonderful things about casting a vote for Barack Obama in 2008 was the belief that he would be a more curious, a more interested, and a more studious president than had been George W. Bush.

It was not a high bar to clear. Yet to look at the wasteland of economic policy over the course of Obama's first term in office, one wonders whether anyone on the Obama team has really read or understood anything about economics in the last 20 years.

It's not as if one has to go off the beaten path to find pertinent analysis that might address the economic malaise in which we find ourselves. One of the foremost students of Japan's long stagnation in the 1990's is Paul Krugman, who also happens to be one of the most famous economists alive.

What did Krugman recommend at the beginning of the Obama presidency? A bigger stimulus, gambling that reducing unemployment would prove to be more important to the economy than fighting inflation.

Today inflation stands at record lows while unemployment remains stubbornly stuck at its highest rate in over a generation. No one today could argue that Krugman was wrong in his diagnosis, yet very few of his critics have bothered to notice that he was right.

If it were only theory on which our leaders were ill-informed, we might forgive them. After all, it is the executive's job to run the government, not pontificate about it. Yet key members of the Obama team, including the President himself, sound vague and confused on the basic operational details of the economic institutions they control.

In 1998 L. Randall Wray, a brilliant young economist at the University of Missouri, published a book called Understanding Modern Money. It is not a work of theory; it is a textbook description of the operational details of the modern currency system, backed by economic, historical, and anthropological research.

Based on the administration's policies and public utterances, it would be surprising if a single member of the Obama economic team had ever read this book. Wray had a diagnosis and prescription in 2009 as well - bigger deficits and a laserlike focus on full employment of the entire work force, with price stability protected by structural changes in the government's participation in the labor economy rather than by union-busting and threatened shutdowns of vital services.

Unfortunately Obama and the Democrats can't go back in time and follow this prescription before losing the House, their Senate supermajority, and Obama's sky-high postelection approval ratings. Those advantages are already squandered.

But forgive me if I continue naively to hope that someone in the Obama White House might pick up a book and thumb through it to see if they can get some kind of clue about how to steer this ship. We've been a long time at sea, and we could use a course correction.

Saturday, February 5, 2011

Distribution and Allocation

On the off chance that this blog attracts readers who haven't read a lot about economics before, I thought I'd try, at least once a day, to do a post about the terms I'll be using on the blog.

Two big ones that sometimes confuse people (even those pretty well versed in economics) are the concepts of Distribution vs. Allocation.

Though I don't generally recommend that people get information about economics from wikipedia (there is a huge amount of false or misleading information on wikipedia economics pages) the wikipedia entries on Distribution(economics) and Allocation of Resources do a decent job of explaining what these concepts mean.

If you want the Short version, allocation has to do with economic inputs (production), while distribution has to do with economics outputs (consumption.)

Take yourself, for example. If you are like most people, your input into the economic system primarily takes the form of your labor (if you work full time, that's about 2000 hours of labor per year). The price system directs you (though it does not force you) towards jobs that pay more.

Meanwhile, you use the pay you get from your inputs to purchase economic outputs like food, clothes and shelter - that's the distribution side.

In this way the price system ensures that the outputs you extract from the economic system are similar to your inputs. Not exactly the same, though... but that's a discussion for a future post.

Losing the Tevatron

Warren Mosler noted earlier in the week one of the recent casualties of US budget cutting - the Tevatron collider in Illinois is being shut down due to a lack of funding.

If the project is being shut down because it's not a good idea (the article notes that there's a superior collider operating in Geneva), then while it's sad for the physicists that work on the project it's actually a good thing in the long run - the government shouldn't fund projects that aren't a good idea, and those physicists should be working on something else.

If, as I suspect, the project is being shut because of a perceived need to "trim the fat" and stop spending so much money... that's foolish, counterproductive, and wrong. We'll pay for it in the form of less innovation, worse physics programs, and ultimately lower living standards.

All because of a quaint fear that the US government can run out of dollars. Sad.

Social Security and Medicare - A Question of Distribution and Allocation

Over at Matthew Yglesias' place I've gotten into a lot of really good discussions with various commentators about economics and politics. I still read and comment there, but recently I've gotten the feeling I'd like to have a smaller pond of people so that we could get into a more involved discussion. The idea is that I'll take quotes from comments and use them to create further posts, creating a moderated front-page discussion without actually having to curtail the freedom of people to post what they want on the comment threads.

I don't know whether I'll be able to attract the folks I'm after (primarily thinking of DMonteith, studentee, Stephen Eldridge, and my MMT brethren like beowulf et al, but all are welcome) or whether this will just continue to be a sandbox for me to flesh out my ideas. But I thought I'd start with an issue that comes up a lot in both progressive and conservative circles - Social Security, Medicare, and "entitlements" generally.

The problem with Social Security and Medicare is often described as one of pure finance. We are spending X number of dollars on old people; thus we need to take X number of dollars away from young people. Sounds intuitive enough, but if you're reading this blog you probably already know that at the federal level it doesn't work that way.

In actuality the problem of Social Security is almost entirely one of distribution - that is, we have decided that it's within the authority of the federal government to set some minimum level of consumption for retired people that's (mostly) independent of their past or current production. When the population is older, we'll have to spend more resources meeting this standard, but there's no reason to believe this will create a problem. Old people don't actually consume that many resources (with an exception that we'll get to in a minute) so it would take a REALLY large population of elderly people to outstrip our ability to easily produce the consumer goods we need. The current dire-looking projections don't come anywhere close to that - the economy can easily meet the needs of a very large retired population.

The problem, as always, is not primarily with this distributive question. We can answer the question "what standard of living should old people be entitled to?" create a program to pay for it, and then we can provide the goods and services through the private market. Our system is very, very good at that - that's the reason that while communism prides itself on egalitarianism, the lot of the poor and working classes in a big, rich capitalist country is generally better than what they would get living in a big, rich communist country.

There is a real problem, though - old people do consume a very large share of one type of resource. That resource is medical care. As it happens, the price system does not do a good job of allocating medical resources - shortages, runaway costs, and low (even negative) marginal utility are the norm in our medical system*.

Thus our aging population will put even more strain on this system which is already under a lot of pressure. That's not good! But it's not primarily a finance problem. The problem is that our medical system doesn't work properly, and the inefficiency this failure creates is going to increase as our population gets older. You can't fix that with tax policy - you have to fix the medical system.

* You'll notice I never use the term "health care" if I can avoid it. I don't like the term as I think the concept of "health" encompasses a lot of things that don't really have much to do with the medical system. For my purposes the medical system is the system we use to deliver doctor's services to the public. It doesn't include other types of health-related consumption and production.