[Politics] Economic Schools Debates

[Lago PARANOIA]

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

2.) Why do post-Keynesians reject a 'Natural Rate of Unemployment'?

[Juton]

In b4 austrian school suckz

[Username17]

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

MMTers reject the idea that government fiscal policy is only effective during a liquidity trap, because they reject the idea that government purchases have to "crowd out" equal values of private purchases. So the MMT position is that discussing whether we are in a liquidity trap or not is a waste of fucking time, because if the government spends a billion dollars that's an extra billion dollars of GDP either way.

2.) Why do post-Keynesians reject a 'Natural Rate of Unemployment'?

Hysteresis

The short answer is the experimentally, when unemployment goes up it also shifts the equilibrium so that the resting state of the economy has more unemployed people. And conversely, when unemployment goes down it also shifts the equilibrium so that the resting state of the economy has less unemployed people. So there's no actual natural rate.

The economy has unemployment inertia based on the amount of productive capacity built, but any shock that has persistent effects on the unemployment will also shift the inertial pivot. The NAIRU hypothesis as devised by Milton Friedman is therefore wrong.

-Username17

[theye1]

The economy has unemployment inertia based on the amount of productive capacity built, but any shock that has persistent effects on the unemployment will also shift the inertial pivot. The NAIRU hypothesis as devised by Milton Friedman is therefore wrong.

I'm no economist, but I thought the Natural Rate of Unemployment and NAIRU were in fact focusing on two different things, albeit which are very similar.

[Username17]

The economy has unemployment inertia based on the amount of productive capacity built, but any shock that has persistent effects on the unemployment will also shift the inertial pivot. The NAIRU hypothesis as devised by Milton Friedman is therefore wrong.

I'm no economist, but I thought the Natural Rate of Unemployment and NAIRU were in fact focusing on two different things, albeit which are very similar.

NAIRU stands for "Non Accelerating Inflation Rate of Unemployment", and is itself a patch that Milton Friedman put on his Natural Rate of Unemployment idea. See, first he put forth the idea that there was a "natural" rate of unemployment that economic equilibrium would slide towards in the absence of shocks. But empirically, that number is fucking different in different countries and also different in the same country at different times. So rather than scrap his theory (because right wing economists basically don't ever scrap a theory that has been falsified), he changed the nomenclature slightly and said that there was a rate of unemployment that did not accelerate inflation, and that this was the optimal rate of unemployment and the government shouldn't attempt to create jobs once it had been achieved.

Of course, even with this much harder to test proclamation, there is still evidence that the rate goes up and down. For fuck's sake, labor participation is almost double what it was eighty years ago, and inflation isn't spiraling out of control.

-Username17

[Lago PARANOIA]

I don't think that the idea is completely without merit, just mostly. Like I would not be surprised if there was an employment rate whereupon exceeding this would reduce overall productivity (but it's more like 99.5% instead of 94%)

Still, I do feel an unwarranted need to cling to the idea behind NAIRU. I think we do too much demonizing of the unemployed and poor as it is and it would be nice to have a statistic to shut people up.

[fectin]

Well, it's not like you can somehow directly "set" the unemployment rate either, so the question of how unemployment affects productivity is a little bit wierd to start with.
If you have 100% unemployment because labor demand is super high, that probably goes with very high productivity. If you have 100% employment because Good King Steve pays anyone without another job the median wage to count sand, you likely have fairly low productivity. (Obviously, that's a cartoon).

[Username17]

The issue is that while you'd want the Natural Rate of Unemployment to be some sort of populist message about how a certain number of people were going to not have jobs at any given time whether they were good people with relevant skills or not, thus justifying unemployment insurance and similar safety net programs - that's not what it is. What the natural rate hypothesis (and the NAIRU patch) is actually about is justifying inaction in both fiscal and monetary policy.

The train of thought runs that if there is some arbitrary amount of unemployment below which the economy becomes overheated and inflation runs amok, that if you have some amount of unemployment now (which you do), and inflation is not running amok, then the Very Serious People can have Very Serious Conversations about whether it is too risky to do something to reduce unemployment right now. That in short the NAIRU hypothesis exists entirely as a rhetorical stick to justify contractionary policy at every possible level of unemployment and inflation rate.

Indeed, the fact that the NAIRU can't be modeled as a constant number makes it even better at its actual job of allowing people to advocate immoral economic policies with a straight face. Because now VSPs can claim that the NAIRU is 8 percent or even more, thereby allowing them to pretend to be being "responsible" by advocating inflation hawkery when unemployment is double its historical average and inflation is less than half of its. That sounds like crazy-talk, but they literally do that.

-Username17

[Lago PARANOIA]

Why do conservative economics tremble with white-knuckled fear at inflation? Even if you're going to use the cynical and snarky interpretation that it's just to enrich Certain People off of interest-bearing bonds, the fact is that they could make even more money than the plebes if they just... you know... invested it. Instead of just sitting on it and watching the money pile.

[Grek]

It's a convient scapegoat: omnipresent in modern economies, scary-sounding to the layman and easily pointed at as a probable result of any policy you care to argue against.

[Parthenon]

The big thing thats scary about inflation is the idea of rapid inflation compared to what I'm used to; basically that I'll be looking the other way and suddenly find that I'd budgeted for basic bread and milk to cost £1.80, maybe with an inflation making it £1.90, and suddenly find it is £2.50. Keeping an eye on all the prices is pretty infeasible, especially with infrequent purchases, so every now and then I'm surprised by the prices, and imagine higher rates of inflation being like horror stories of post WW1 Germany or other examples of hyperinflation.

The other thing that made me worry was based on ignorance. I didn't know (until just now by looking) that the UK minimum wage has increased faster than the Retail Price Index and the Consumer Price Index (which I assume is a reasonable guide to inflation). I assumed it increased slower than the rate of inflation. Of course theres still the worry that there is rapid large inflation in November/December and have to wait until October for the minimum wage to match it again.

[Username17]

Economic uncertainty is something that everyone worries about. For the average person, uncertainty comes in three forms:

• Consumer Prices
• Home Values
• Job Availability

Because for 80% of the population, the stock prices and foreign exchange rates don't matter a fig. Of those, people do scare stories about housing markets crashing from time to time, but mostly they try to wedge in on inflation because no one knows how it works and it literally affects everyone.

Anyway, the thing about NAIRU is that it's a basically pretty stupid idea. You can get the kind of wage-price spirals with unemployment at 80%, and at times in history that has actually happened. The idea is that employed people are making more money because they are not competing with unemployed people for their jobs, so the people who have money can afford to pay more for goods and services that they receive, so prices go up, so the employed people demand even more money to compensate for the rising prices, allowing them to afford even higher prices and so on.

But in periods with the gold standard and very low literacy, there have been times when only a tiny fraction of the population had a job but none of the unemployed people could compete for the jobs that were taken (not being able to read). So the guilders could demand large chunks of metal for their services, and people who had gold could therefore afford a lot of it in order to get goods and services, so prices rose. That's exactly the NAIRU process, but you'd have to be fucking retarded to think that any economy no matter how shitty was actually incapable of employing more than one person in five.

Inflation caused by "over employment" doesn't require that over all employment is too high, it happens because there aren't enough workers for one or more industries. It basically just means that at least one industry in your economy is growing faster than the available labor supply with the skills that industry needs. So when Monetarists are calculating NAIRU levels of 8% and more, they should be going back for some heavy rethinking, because that is obviously stupid. The actual answer is that if you're seeing wage-price-spirals with an unemployment of more than 5%, that you have a tremendous structural employment problem and that the answer is to invest more in transportation and education.

-Username17

[K]

Inflation, in general, is also scary when you have wildly large savings.

Say you have 100 million in the bank. If inflation is 3%, this means it's a lot because it's like losing 3 million a year. There aren't a lot of jobs that have wages that high to keep your fortune at the same relative value, and chances are good that if you inherited 100 million, you aren't smart enough to get one of those jobs (lightning rarely strikes twice).

So the ultra-rich see inflation as the deterioration of their wealth.

Passive investment, even of the "we are a hedge fund that does legal insider trading with Congressional secrets" kind is risky and not that profitable. Even the best funds rarely see more than 6% growth with a few going as high as 15% on very good years, and you end up paying taxes on that profit.

Active investment like starting a business is very risky. You could see no profit at all or even lose your whole principle if there is a downturn or some other market fluctuation.

So look at inflation like a rich person: your 100 million is getting smaller every year, what little investment you can do requires paying taxes on the profits, and at the end of the day estate taxes are going to take a chunk too unless you hide money in a trust.

So now you know why the ultra rich hate capital-gain taxes, inflation, and the estate tax. It makes it really hard for family dynasties to stay rich when no one is working or has any talent.

[Lago PARANOIA]

Even so, why doesn't the overclass allow inflation to happen anyway while still forcing people to invest or spend their money? Yes, there will be some (many) people dropping out of the upper class as investments go bad or businesses don't pan out, but the ones that survive will end up stronger and have a greater share of the pie. And not just a greater share but a greater absolute value because wealth is being funneled back to the lower classes and redistributed away from failed competitors to further enrich themselves. You'd think that there would be enough Gates-ian or Jobs-ian Young Turk defectors that they'd force their fellow upper class members to get into an investment competition whether they like it or not.

[Whipstitch]

You sort of answered your own question in there; you certainly can get richer by aggressively chasing every opportunity and pinning everything on growth, but it's not seen as a safe, conservative option, and a lot of people will want safe, conservative options, particularly as they get older since dynamic situations are inherently more attractive to the people on the bottom than the top. I'm not saying it's entirely rational but there is a considerable portion of folk investing lore that dictates that you should be a more conservative investor the older you get and that the more money you have the harder it is to find safe investments to sock all of it away while still diversifying. Naturally, the people who believe these things really hate the shit out of inflation.

Also, in many parts of the country the only thing worse than being considered greedy is being considered poor and lazy. Being the industrious ant and maintaining the status quo is portrayed as wise and virtuous whereas being poor or overreaching and getting burnt by the market is seen getting what you deserved.

[K]

The wealthy don't care about the health of the economy of even the economic welfare of the upper classes. They care about personal wealth.

Remember, Bill Gates and Steve Jobs came from the middle-class. They have nothing in common with the family dynasties other than wealth since they didn't go to the right schools, don't live in the right places, and do derive their wealth from their own skills and not family.

The upper class actually sees people like Jobs or Gates as threats.

The focus on personal wealth is also why they keep wanting to tax the poor and give a tax cut to the rich. Maximizing personal wealth is the only goal.

[Whipstitch]

Yeah, honestly, it should be really telling that ol' Steve and Bill didn't get where they are through investing but rather by being in the disruptive technology business. Shaking things up is for the people who aren't already in a winning position.

[Username17]

The right wing sings the praises of Steve Jobs, but only now that he is dead. During his life, of course, he gave money to democrats more than 10:1 compared to all other political donations, and his political donation to the one and only republican he is on record as supporting was less than one half of one percent of his total political donations.

But since he can't talk back any more, the Right Wing trots him out as a sock puppet, pretending that they supported him and he supported them the entire time. Which is flatly untrue.

-Username17

[Lago PARANOIA]

1.) Why do post-Keynesians/MMTers support even lower taxes than conservative economics? How do they implement their policies of low taxes with full employment?

2.) What are post-Keynesians/MMTers' viewpoint on unemployment?

3.) When the Federal Reverse got a huge influx of money during the 2008 financial and made secret loans to banks, why couldn't the people have just gotten that money directly?

[Doom]

I find myself wondering if Lago is posting "Why are white people superior?" at Stormfront, and totally accepting all answers at face value.

[Username17]

1.) Why do post-Keynesians/MMTers support even lower taxes than conservative economics? How do they implement their policies of low taxes with full employment?

They don't all. The discussion in MMT terms boils down to what taxes are for, which is to redistribute wealth, to provide incentives for specific activities, and to remove money from the system to prevent inflation. So the argument boils down to three rough positions:

• We need to increase taxes on the wealthier people because the rising levels of inequality are a social problem that can be addressed through tax policy.
• We need to adjust taxes in order to discourage savings and encourage spending because we have a global savings excess.
• We need to lower taxes overall because inflation is low and unemployment is still high.

But the people who want taxes even lower than the conservatives are basically making argument 3. That the shortfall in production in the US is large enough to warrant a much lower or even negative tax rate and the resulting monetary expansion will still not be inflationary.

I am personally more persuaded by arguments 1 and 2. But I understand argument 3.

2.) What are post-Keynesians/MMTers' viewpoint on unemployment?

That with sufficiently aggressive fiscal policy you can maintain full employment under virtually any circumstances, provided that nothing actually came to blow up your industrial capacity or something.

The idea is that whatever people aren't employed by the private sector, the government could just print money in order to hire them to do something. Dig holes and fill them up again, if necessary.

The only risks to doing that are:

• If you print more money than you tax away, you will be causing monetary expansion. If there is too much monetary expansion, you can lose control of inflation.
• If you try to hire more people than actually want jobs, or if you try to hire people in industries that have labor shortages, you will create labor shortages that can cause private sector industries to collapse or runaway inflation or both.

3.) When the Federal Reverse got a huge influx of money during the 2008 financial and made secret loans to banks, why couldn't the people have just gotten that money directly?

Because the Fed is a pre-Great War dinosaur and its entire existence was predicated on a grand compromise with a group of plutocrats who up until its creation were basically allowed to print their own money and repeatedly destroy the US economy. It's basically just not in the Fed's charter to give printed money to families so that they can stimulate the economy directly. Not that it would be a bad idea, they just aren't really authorized to do that.

-Username17

[RobbyPants]

• We need to adjust taxes in order to discourage savings and encourage spending because we have a global savings excess.

What do you mean by this, exactly? Is it just that money is effectively being pulled out of the economy, which is slowing things down?

I'm assuming the risk of this, is if people start spending really quickly, that money gets reinserted and could cause a problem, right? Is this an issue with the Baby Boomers reaching retirement age and starting to cash in their retirement savings?

[Ancient History]

We're in a liquidity trap: there is a great deal of money tied up in savings accounts, because the interest rates on legitimate investment are too low to be attractive. So banks and people have lots of money to lend, but not a lot of attractive opportunities to invest their cash. If people are encouraged to buy shit - with tax rebates or lower payroll taxes - that encourages business/manufacturing to expand to produce more shit for people to buy, and that requires them to take out loans and such, and eventually we can claw our way back to more normal interest rates.

[Username17]

What AH said. Also this:



Those two numbers are supposed to equal each other, with increases and decreases of the interest rate being used to make the two lines converge. The Fed actually can't really lower interest rates at all, because they are near zero. And yet, the blue line is still almost a trillion dollars higher than the red line.

So if you consider normalizing the economy to be a priority, using tax policy and fiscal policy and government bond policy to push the two lines together is a very attractive thing.

-Username17

[Parthenon]

I've never seen a graph of that before. Fuck.

So, if they are supposed to be similar and the fact that the GPDI is way lower is bad, then what are about the 2005-2008 period when the GPDI was way higher. What are the drawbacks to that?