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.

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.

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.

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.

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.

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.