[Politics] Economic Schools Debates

[Ancient History]

That's the housing bubble, man. People were projecting and promised very high interest rates on investment. People poured their money into investments, and then when things started to fall apart, they scrambled to pull their money out - when they could - and the investments themselves collapsed, which is where the line crossed. That and the lowered interest rates made people leery of investment.

[Parthenon]

Yeah, I know that was the housing bubble, but I was wondering if there was something more generic. If the investment is way lower than savings then the economy is stagnant which is bad, but if the investment is way higher than savings then...?

That individual period was bad because the investment was in really shitty and dangerous places. But if you had lots of good solid investments and the investments were much higher than savings would that be bad in any way?

[Ancient History]

Investment is a trade-off between liquidity and growth, with the risk, interest rate, and duration as the main qualities people look at from an economic standpoint. Savings, on the other hand, have zero or negative growth (based on the interest rate), absolute (or near infinite) liquidity in a given mark, and zero risk. So when you don't balance your savings and your investments, you run into problems with growth (stagnation) or risk (bubble). If you have runaway investment and no savings, you're taking on a lot of risk, and if (when) something fails, the assets aren't there to settle debts.

Okay, think junk bonds. Junk bonds are bad investments with little chance of being redeemed; to compensate for the additional risk they offer very high rates, which can make them attractive to investors - like playing your numbers for the lottery. The problem comes when you get a junk bond spiral - people buy these investments with artificially high interest rates, so to compete other junk bond makers raise their rates, and more people buy junk bonds, and so on and so forth - until a bond fails to deliver the expected returns, and people stop buying junk bonds, and suddenly a lot of people have pissed away their savings for these relatively worthless investments, which can fail and then the person is left with less savings and less investments than when they started.

Even the best investment has some sort of risk attached to it. Keeping your money in a savings account has a certain amount of risk to it, though with the Federal insurance not so much these days. But investments fail all the time, and that's okay as long as the majority can still pay off their debts - it's the cascade of failing payments which tends to cripple businesses, industries, regions, and entire economies, even those that are only tangentially related to the business.

Case in point, most toy stores make their bank during the winter holidays, between Christmas and New Year's. To buy all the new toys from the toy manufacturers, toy stores generally receive the toys on credit with the promise to pay it back to the toy company later (accounts receivable). The toy company, then, is acting as a banker to all these toy stores - it has a lot of its assets in investments rather than savings. By operating this way, the toy company has more business (and profit) than it would if it operated on a strictly cash basis (because fewer stores would be able to afford its toys), but takes on a lot of risk. If for whatever reason enough toy stores don't repay their debts on time, the toy company itself will not be able to pay its debts, and may go into bankruptcy, and the factories may close, and people will be out of work, and without income will start to draw on their savings, which go down, and the banks will have less money to lend out to new businesses - and that can be the start of a depression.

[Username17]

Economists, especially conservative economists, like to bandy around the "identity" that "S=I". That is, that Savings and Investment are always equal. As you can see though, that's not actually true. Most especially, if demand for savings exceeds demand for investment the saved money can just sit there in piles while no one invests it in anything.

But it is true that every dollar invested has to actually come from somewhere. And where most of it comes from is peoples' savings. You put your money in a "bank" (that "bank" could be a literal bank or any investment institution like a mutual fund), the bank lends the money to a capitalist, the capitalist invests it in producing goods or services for the market. But if demand for investment is high relative to demand for savings, then investment moneys can come from elsewhere. And where it can come from are basically three things:

• People investing their wages directly. This is often caused by gold rush situations.
• Banks over leveraging. Essentially, banks lending out and "investing" considerably more money than they actually have in deposits.
• Foreign investment. If your country is more attractive for investment than other countries, your investment could come not from saved dollars, but from saved Yen or saved Euros.

So basically what is happening if Investment is rising above domestic savings is that either foreigners are gaining an increasingly large interest in your productive capacity or the country is saddling itself with asymmetric risk. In the latter parts of the oughts, the US was doing all of it. Banks were taking on too much risk, people were privately investing into real estate and taking on too much risk, and the Chinese were owning a larger share of our stuff.

For a rich and powerful country like the US, investment rising above savings should have been a giant red warning light that sent interest rates up and provoked regulatory crackdowns and shit. Unfortunately, it came at a time of low overall growth and large deficits, so the calculated interest rate was still super small and no one went to Bush and said "Dude, you're fucking up everything! I mean everything!" But if your country is best described as a "shit hole", then getting foreign investment may be an explicit economic goal.

So if Uganda says that they have Investment above Savings, that indicates that they are getting foreign investment and growing more rapidly than they could on their own. That's good. If the United States notices that they have Investment above Savings, that indicates that they are acquiring structural weakness that opens them up to calamity. That's bad.

-Username17

[Parthenon]

Thanks, that makes sense.

[Lago PARANOIA]

What do MMTers believe about the Permanent Income Hypothesis?

If they believe that it exists, wouldn't the 'best' policy (economically speaking) be to tax the upper quintiles further -- you want to do this anyway, because income inequality creates problems outside of economics, but for this particular purpose you're also doing it to: -- so that you destroy enough money to to make an inflation buffer, then hand enough checks out to the quintiles who end up spending most of their money?

Hell, why couldn't you just wave paychecks at the other countries and tell them that any foreigner with wanted skills that sets up shop here (either in college or a private job) gets a big fat check? Like, they don't even have to become naturalized citizens or anything, as long as they're setting up shop they get a big fat check for no reason?

[Lago PARANOIA]

Okay, sorry, I stealth-conflated a point. Here's what I was trying to get at.

1.) Government spending is not limited by deficits. It's limited by inflation.
2.) Taxes destroy currency.
3.) Destroying currency curbs inflation.

So even though taxing the rich won't directly increase the amount of money that the government can 'spend', it destroys enough currency such that you are further away from the inflation ceiling. Because of this:

4.) You can spend even more money on the 99% than you could have before because your monetary base is artificially but temporarily depressed.

Therefore:

5.) Taxing the rich gives us more money (or rather, lets us create more money without consequences, which I feel is indistinguishable), which can be used on other economy-growing / wealth distribution pursuits.

[Username17]

What do MMTers believe about the Permanent Income Hypothesis?

I think they reject it out of hand. Empirically, people accept lower interest rates for shorter term investments. Therefore people value income now more than they value income later and the Permanent Income Hypothesis is wrong. If people didn't plan to spend more of their current income, they wouldn't care whether money came in now or farther in the future and long term investments wouldn't have to offer incentives other than security.

The Permanent Income Hypothesis comes with a "proof", but that same proof tells us that if we lower taxes and raise interest rates that GDP will rise. Except you know: that is empirically not true.

Edit:

5.) Taxing the rich gives us more money (or rather, lets us create more money without consequences, which I feel is indistinguishable), which can be used on other economy-growing / wealth distribution pursuits.

MMT suggests taxing the rich because they spend a lower percentage of their income than poor people. Permanent Income Hypothesis actually would lead you to the same conclusion, yes (albeit with completely different assumptions and reasoning). But I'm absolutely positive that Fresh Water types have some sort of workaround to show that not taxing the wealthy somehow wouldn't slow monetary velocity even though it obviously would and does.

-Username17

[Lago PARANOIA]

What all weird intersections/contradictions of economic policies and sociological policies can you think of?

A permanently growing economy vs. a sustainable economy goes to mind. I mean, it's not a bad assumption that as technology increases people will be able to use the resources more efficiently (or even create more of them) and technology increases faster as GDP increases. Of course, that's reliant on the assumption that you couldn't employ researchers (which will be a finite segment of the population, since not everyone can graduate high school) to research the technology while causing recessions. And it's also based on an assumption that technology will continue to increase. Maybe sometime in the next ten years we hit a hard limit on human ability and we have to make do with the civilization we have.

Also, sometimes I get the feeling that Fresh Water MMTers don't realize that the labor market is not uniform, hence their resistance to an ELR. That is, while you wouldn't want a scientist or a doctor to be picking up trash on the side of the road, it's (usually) not the scientists and doctors that have trouble finding jobs. It's the unskilled labor market like coffee baristas and janitors and skilled segments of the labor market who have been made permanently obsolete -- like librarians.

You could just give them checks and let them be picked up by the increase in demand and expansion of the economy. But that would just leave them at the mercy of the employer who decides that they would rather have a kick-ass economy AND not have to pay people. And it's the bottom half of the labor market that's first to go, even in good economies.

[sabs]

You cannot have a successful Post Modern Society, if you maintain the dog-eat-dog, fuck the little guy attitudes of Capitalism.

Eventually, if you want to move forward you need to do the following:
provide a decent standard of living for everyone.
power, food, education(up to any level they desire) need to be free, for everyone. And honestly, we need to do this globally. It's not good enough to shift the hell-jobs, survival living to 3rd world countries. We basically need a new and exciting paradigm for how people live their lives, and how we fund those. We want to get rid of as many menial crap jobs as possible, by modernizing them away. It's happening. Librarians, for example, should really be what they used to be. Knowledge subject matter experts. And not, Book organizers.

Given then longevity shift that's happening, we need to do one of two things:
keep young people out of the workforce longer (preferably to 25+) and keep old people in until 70 or so. Or, flip side, make it viable for old people to leave the workforce at 63, and still live another 20-30 years.

[RobbyPants]

2.) Taxes destroy currency.

What do you mean by this?

[Ancient History]

Back in the day when governments relied on non-fiat currencies, there were very limited means of controlling the money supply and, for the government, raising money. Taxes, tariffs, and fines were the primary means of reducing cash in circulation and increasing government reserves, right next to mining more gold and silver, selling land, or recoining at different rates.

That all changed with the introduction of fiat currency. Now the restriction is not on "how much gold can we mine and coin?", it is "how do we keep the inflation at a reasonable level?" You see this very clearly in, of all places, MMO economies - in a game where currency is essentially infinite, and a free market like an auction house is allowed, prices for items will skyrocket because there is tons of money available. Game companies manage their virtual economies by creating money sinks - places/shops/etc. which exist to drain excess money out of the game, so no one ends up paying millions of gold pieces for a mount or something and discouraging new players.

Taxes are basically real-world money sinks, since they reduce the amount of currency in circulation. This is a necessary thing, because otherwise credit and loaning could cause inflation to go out of control. The actual amount of money "destroyed" by the process varies, because money from taxes is used by the government for different things - but in principle it's the same thing.

[Username17]

Also, sometimes I get the feeling that Fresh Water MMTers don't realize...

I'm going to cut you off there. What? Who?

MMT is not compatible with Fresh Water Economics. It's just not even on the same plane of existence. Fresh Water Economics basically claims that as long as enough money exists, that markets will clear, and that therefore the government cannot do anything by spending money except distort the economy. That is a dollar the government spends is a dollar the private sector doesn't spend because it has to be taxed. MMT regards a dollar spent by the government as having been printed, creating real demand.

The intermediate position is Neo-Keynesianism. So like Krugman or Brad DeLong. They believe that government spending creates demand (like MMT) and they believe that spending has to come from past or future taxes (like a Market Monetarist). So Neo-Keynesians believe that spending is a valid thing to do if and only if the government can increase the velocity of money relative to what the private sector is doing.

The Freshwater/Saltwater divide is the divide between the monetarists and the Neo-Keynesians. The disagreement is basically about whether the government is capable of increasing GDP through fiscal means. MMT falls completely on the side of Neo-Keynesians in that disagreement, making them always and in all ways Salt Water people. That there are other things involving deficit realities and the role of Government Created Money that they disagree with Keynes about does not in any way make them Freshwater.

-Username17

[Username17]

Specifically, this is what the Freshwater people believe:

if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder -- the guys who work on the bridge -- then it's just a wash. It has no first-starter effect. There's no reason to expect any stimulation. And, in some sense, there's nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you've got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn't going to help, we know that...

If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This form of “crowding out” is just accounting, and doesn't rest on any perceptions or behavioral assumptions…

Note, this doesn't even properly qualify as Monetarism anymore. Even Milton acknowledged that the government could increase GDP. He just thought that you could achieve the same overall result by having the central bank print money and give it to rich people and that it was morally superior to do so. Because market success equals moral righteousness. Yes, he really believed that.

• Total aside: the fact that the central bank did greatly increase the monetary base and we had the Great Recession anyway is essentially proof that Milton Friedman's theory of recessions was wrong and that monetary base expansion is not sufficient to keep the economy from ever falling below capacity. But that's neither here nor there in a discussion of what these groups believe.

Actual Monetarists are just Keynesians who claim that monetary policy can replicate anything you'd ever want to do with fiscal policy through the magic of the invisible hand. The Freshwater schools have become way more of an obscurantic cult than that. They currently hold to Real Business Cycle and Efficient Market Hypothesis and increasingly arcane patches on that - which holds that basically you can't stop economic downturns from happening and all there is to do is give money to rich people and hope morning in america comes soon.

In contrast, MMTers are basically Keynesians who believe that government creates and monopolizes money and that therefore all monetary policy is really just fiscal policy.

-Username17

[fectin]

I'm pretty sure no economic school has ever advocated "giving money to rich people". There are things various people/schools have advocated with that end result (most notably Krugman's bailout advocacy), but that's a side effect, not a course of action.

[mean_liar]

1.) Why do MMTers think that liquidity traps are irrelevant?

Roughly, because in most cases the government can print fiat currency sufficient to overwhelm any desire to save.

Mind you that it plays chicken with the bond market.

[erik]

I'm pretty sure no economic school has ever advocated "giving money to rich people". There are things various people/schools have advocated with that end result (most notably Krugman's bailout advocacy), but that's a side effect, not a course of action.

Trickle down economics? Cutting taxes on the rich so that we can enjoy their table scraps sounds just like that. It might not be a school but damn if it has not been popular among an American political party.

[Lago PARANOIA]

When deficit chickenhawks pull out the 'payments of interest on the national debt to foreign countries!' trump card, what's the proper response you should give to them? Punchy sound bites, please, not a reasoned essay.

[fectin]

The easy answer is ask for a concrete plan (essentially "if you're so smart, why ain't you rich?"). Anyone complaint about foreign creditors specifically is probably either posturing or hazy on the details. in the first case they'll have to actually discuss it, in the second they'll either shut up or wave their ignorance around.

There's all kinds of reasons to spend less, or to want to be less in debt. Foreign debt is not currently one of them.

As to trickle down economics, It's hard to make a case that "take a slightly smaller dump on the minority it's socially acceptable to hate" is less damaging than "remove the risk from high risk/reward investments with enough money behind them".

[Lago PARANOIA]

So. If you wank to the nation-state theory and believe that money represents demand and money creation is only limited by inflation:

1.) What's the difference between debt/deficit and more money? That is, as long as that money is going to something non-destructive (so centrifugal bumble puppies are okay, but cigarettes or Osama Bin Laden's war chest are not), doesn't an increase in debt/deficit that doesn't come with an increase in inflation mean that more people are getting richer?

2.) If the government isn't printing as much money as it can without creating inflation, isn't that the same as the government destroying productivity?

3.) Again, assuming you wank to the idea of nation-states, why aren't countries with fiat money running as high trade deficits as possible to steal other countries' resources and repurpose said resources in such a way to give themselves a crushing advantage if worse came to worse? I mean, yes, when the flow is working okay it's a wash because they can use your in-demand money to buy resources right back in a circular trade, but when the game of musical chairs end wouldn't you rather be the one with the lumber yards and warehouses of rare earth metals and water stocks?

4.) If you do have a trade deficit with high unemployment and you're not in some catastrophic situation like a widespread disease or civil war which would set your inflation ceiling artificially low, why can't you just print money and have a larger trade deficit along with high employment? Sort of like how having a $10,000 student loan debt as a freshman who isn't sure if they're going to complete college ( for an in-demand major that will stay in demand) is actually in more shit than having a $100,000 student loan debt as a senior of same major.

5.) Why do we care whether money is going into the hands of for-profit corporations or government at all, as long as it belongs to citizens or is at least not giving the money to the Hitlers and Milosevics of the world? It seems like the most efficient communism/socialism/capitalist economics all have the same goals and remedies; we're just talking about who owns what.

[mean_liar]

When deficit chickenhawks pull out the 'payments of interest on the national debt to foreign countries!' trump card, what's the proper response you should give to them? Punchy sound bites, please, not a reasoned essay.

If you mean that interest payments are onerous, they're not: 2010 had $176.3B (constant 2005 dollars) of interest payments against $3T in expenses, slightly less than 6% of the budget.

Now, in absolute terms I can come up with a lot of things to spend $176B on. Relatively, however, the interest payments are marginal.

If you really want to get into US budget issues, I suggest cozying up with the historical budget tables ( http://www.whitehouse.gov/sites/default ... s/hist.pdf ) and start dumping it into spreadsheets and toying with it.

[mean_liar]

At some point, printing money means that the bond market is going to tell you to fuck yourself. At some point, basically, people are going to wise up to the fact that money is no longer scarce and therefore is worthless, and they'll move to a different currency.

There's a reason chartalism has such a poo-poo'd reputation.

[Lago PARANOIA]

At some point, printing money means that the bond market is going to tell you to fuck yourself.

Assuming that this wasn't causing excessive inflation (meaning that you weren't increasing your risk of default that much, you were just catching bond-holders with their pants down) why would these countries care at all that no one is buying the bonds? Why not just retire it and print (or rather, update the computer stocks of) more money and give it to banks?

At some point, basically, people are going to wise up to the fact that money is no longer scarce and therefore is worthless, and they'll move to a different currency.

Scarce compared to what?

[mean_liar]

Currency is, at least in relation to this discussion, just another commodity. As soon as the market decides, arbitrarily or based on reality, that the commodity is worth less, it magically is. Currency is denominated: the moment you hand someone US$1 after the US just got done printing a few trillion/adding some zeroes here and there, your counterparty is going to chuckle and ask you to convert that into Swiss francs first because its only the scarcity of money that gives it value, and at that point inflation starts to get out of control.

[Lago PARANOIA]

As soon as the market decides, arbitrarily or based on reality, that the commodity is worth less, it magically is.

I agree, but you're not exactly proposing a convincing causative mechanism. It's just 'at some point, people are going to realize that money is no longer scarce'. Well, what's the trigger? If productivity didn't go down and there's no catastrophic event like a civil war or epidemic, if you're not going past the point of inflation caused by full employment then what made people go 'OMG this currency is no longer scarce?'

I like the arbitrarily exception BTW. It's a nice escape hatch. Too bad that can apply to any economic philosophy.