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Reviving Economics

Dedicated to dismantling the Ivory Tower and attempting, in some small way, to help revive the social science of economics.

Last Build Date: Mon, 22 Jan 2018 02:49:05 +0000


Where's This Inflation, Professor?

Mon, 05 Jan 2015 23:22:00 +0000

So about a year ago the chair of the econ department said he would not remove a question from the common final that I viewed to be wrong  (because it is - about the Fed controlling money supply and causing inflation) and gave the example of now where the Fed has expanded its balance sheet beyond reason, but lending did not get out of hand (because in reality lending happens first) and we've seen no rise in inflation even as the economy has improved dramatically... to which he responded essentially that "it's just a matter of time."

Anyway, it's been a year.  I'm waiting for all this inflation.    Inflation, where are you!

Sorry to any student of Intro Macro that missed that question.  Chances are you missed it because you are grounded in reality and not some made up textbook fantasy land.

PS I'm going to kickstart this blog again I think.  I took a long hiatus.

Purpose of Taxation

Wed, 16 Apr 2014 03:03:00 +0000

My own personal feelings on budgets as it relates to government is more nuanced than the traditional conservative (I hate government spending and taxes) versus liberal (I love - or at least support - government spending and taxes). I generally lean slightly conservative when it comes to my own personal budget.  I've never been one to use a credit card much or to hold a large balance (I once did that, but I learned my lesson).   I spend within my means.   My means being my take home income.   My means would be nearly infinite of course if I had a printing press and could otherwise create "Garth bucks" and get people to accept those as currency.  But alas I don't have that power.  States, like my home state of Indiana, are in similar boats.   Indiana is quite a bit larger than me though financially speaking and has a lower credit risk and it can issue its own bonds for funding in times where taxes may not be strong enough to support government spending, but long-term, State governments have to balance their books (either by statute, or out of necessity because they have limited credit availability).  Like me, Indiana can't create and issue its own "Indiana bucks."   Because of this, I generally prefer my State to be a bit conservative when it comes to its spending habits.   Then there is the federal government.  The federal government is massive - it's a fifth of our entire economy (give or take).  It makes spending decisions, but almost always runs a deficit.  And it can do so into perpetuity.   Like States, it issues bonds, but unlike a State the US government has its own monopoly control of its currency that it itself issues, which has a significant demand on the market because it is accepted as currency - the most powerful currency on Earth.   Because of this monopoly control of its own currency, the Federal government does not need to "fund" its spending via taxation.   In fact, in general, the decision to spend federal funds is made independently from the decision to tax.   That may sound odd to people that think that our taxes go directly to 'fund' our federal spending, but that's the way it is.   The use of taxes to fund spending is an optical illusion that gets perpetuated in the media - liberal or otherwise.  So what purpose does taxation at the federal level serve?  Well, largely it's to modulate private spending demand.   (I would argue a secondary but significant purpose is income redistribution to regulate economic inequality)  When taxes rise, resources are taken from me, Indiana, and other entities that have limited funding sources because we don't control our own currency.   Because of that, our spending demand shrinks.  Contrarily, when taxes fall, resources are given to me, you, and Indiana, and our demand to spend some or all of that money rises.  The fact that the government has changed the taxation level at the federal level need not have any bearing whatsoever on the federal decision to spend - it effects the private decision to spend greatly however, and in that way, regulates spending demand and inflation.   This is a fundamental difference between the US government compared to individuals and States (and even the European Union countries like Greece that also do not have control of their own individual currency).   I feel like many of our political disagreements would be better served by understanding these nuances as it relates to taxation.  My fear is that the media and political extremists have made it virtually impossible to have an honest examination on the different role of taxes at different entity levels.   It's just all black and white to them.   Taxes are good or evil depending on the political persuasion, and that unfortunately does nobody any good at the end of the day. [...]

History of Jobs Guarantee Program

Sun, 23 Feb 2014 15:13:00 +0000

The idea that a buffer stock of employed citizens be created by the government as a kind of 'employer of last resort' is not a new concept but I've been wondering exactly how old an idea it is.  I at the same time was reading exerts from my copy of Thomas Paine's "Rights of Man" 1791 for a completely unrelated reason, and came across this section which sketches an outline of what such a program might look like (at his time). I know of no other such outline (be they from a political persuasion as below or an economic persuasion) written earlier than this (consider this a challenge!): 

Many a youth comes up to London full of expectations, and little or no money,
and unless he gets employment he is already half undone; and boys
bred up in London without any means of livelihood, and, as it often
happens, of dissolute parents, are in a still worse condition, and servants
long out of place are not much better off. In short, a world of little
cases is continually arising, which busy or affluent life knows not of, to
open the first door to distress. Hunger is not among the postponable
wants, and a day, even a few hours, in such a condition, is often the
crisis of a life of ruin. These circumstances, which are the general
cause of the little thefts and pilferings that lead to greater, may be

The plan then will be: First, to erect two or more buildings, or take
some already erected, capable of containing at least six thousand persons,
and to have in each of these places as many kinds of employment
as can be contrived, so that every person who shall come, may find
something which he or she can do. Secondly, to receive all who shall
come, without inquiry who or what they are. The only condition to be,
that for so much or so many hours work, each person shall receive so
many meals of wholesome food, and a warm lodging, at least as good
as a barrack. That a certain portion of what each person’s work shall be
worth shall be reserved, and given to him, or her, on their going away;
and that each person shall stay as long, or as short time, or come as often
as he chooses on these conditions.

If each person staid three months, it would assist by rotation twenty four
thousand persons annually, though the real number, at all times,
would be but six thousand. By establishing an asylum of this kind, such
persons, to whom temporary distresses occur, would have an opportunity
to recruit themselves, and be enabled to look out for better employment.
Allowing that their labor paid but one-half the expense of supporting
them, after reserving a portion of their earnings for themselves,
the sum of forty thousand pounds additional would defray all other
charges for even a greater number than six thousand.

Frosty The Snowman Exemplifies Exogenous Money

Sat, 07 Dec 2013 01:52:00 +0000

Frosty the Snowman was on TV tonight.  So of course I watched it.   One of my favorite lines in this Christmas classic is in the following clip:

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Frosty's logic is as follows:
1. I see the thermometer rising and getting red
2. That causes me to get all hot and sweaty
3  The thermometer is my demise

Similarly, neoclassical misconception of how money works goes something like this:
1. I see the Fed adding reserves to the banking system
2. That causes the economy to lend and borrow
3. The Fed is the economy's demise (or savior)

Obamacare: Biggest Issue is Monopoly Power

Sun, 10 Nov 2013 15:46:00 +0000

Obamacare:  I have no interest in the political rhetoric.   Yes, the website sucks now.  Yes, Obama either did not know or knowingly lied about the effect of millions of Americans losing their coverage.   Equally however, there are some obvious positives of the legislation which have little to do with the IT, and have much to do with millions more Americans that will now have access to care they never had access before.   At the end of the day, only time will tell if the policy is a success or failure.

My big concern is something that has been known since the beginning and that is, Obamacare does nothing to erode the existing monopolies of health insurance in many states.  The biggest issue with Obamacare in my view remains the fact that the so-called marketplace doesn't really create a true market.  The fact is, plans cannot be bought and sold across jurisdictional lines.  Obamacare may actually serve to simply consolidate monopoly or oligopoly power - which may in fact keep prices higher than they otherwise should be.   The ironic thing is that we probably would be better off if the government just created its own monopoly power and moved us to a single-payer system.   That way, the government could have more control over prices.  Under this private monopoly system though, that can't happen.  I, living in Marion, Co. Indiana cannot buy a plan from an insurer in Illinois that may offer cheap rates.   What choices do people like me in Indiana have:  not much of one.    "Would you like Anthem, Anthem, or Anthem?"

Crowding Out And Its Relation To Bullshit

Wed, 23 Oct 2013 21:09:00 +0000

A topic I've been hearing from some of my conservative friends is a refrain often found in mainstream macroeconomic textbooks - crowding out.  Crowding out is the theoretical idea that there is a fixed pot of gold from which to finance investment, so if the government all of a sudden wants to draw from that pool, it must mean it has to take funds from the private sector (because there's only so much gold to go around). So a few things are wrong with this idea:1. We are not on the gold standard anymore.2. In our economy there are funds that are just lying around because no one is using them.3. Even if the economy was better and the private sector were not hoarding cash and if they were instead fully utilizing all resources, there is no fixed 'pot of gold'.   The amount of funds in circulation are completely driven by demand.  So, if the government wants to spend more money, they don't 'take it' from the private sector.   They just spend the money and US bonds are issued - with no effect on the amount of resources whatsoever.But people don't seem to get this.  Especially conservatives.But as I've been trying to convince people for years, the reason that conservatives don't get it is because mainstream economists don't get it, and they keep teaching bullshit... like crowding out.  I keep teaching bullshit like crowding out too, because I'm virtually forced to - but I also try my best to say in a very professional way, "this is bullshit". And then the brainiacs at the Congressional Budget Office say things like this (from 2009):"ARRA's [Obama stimulus] long-run impact on the economy will stem primarily from the resulting increase in government debt. To the extent that people hold their wealth in government securities rather than in a form that can be used to finance private investment, the increased debt tends to reduce the stock of productive private capital."I have bolded that last sentence for you.  What it is saying is that crowding out will happen, but what it also implies is that crowding out will happen only under certain assumptions: "To the extent that people hold their wealth in government securities rather than in a form...." implies that there is an either/or situation.   The CBO is making this assumption, which I just told you is false - and that every central banker will tell you, is false.   There is not either/or situation between bonds or savings that businesses can use.   Businesses don't finance their investment from some fixed pool of money.   Can you imagine if a business went to a bank for a loan, made the business case for the loan (which was a good one), but then the bank says, "Oh I'm so sorry sir, but we've plum run out of money.  I mean, we had some, but unfortunately the government sold so many treasury bonds that we now have none left."   I mean - seriously?   Has this ever happened? No, it hasn't.  Do you know why it hasn't?  Because loans are not made from some fixed pot of gold. Loans are made based on risk and return and the business case, and that's it.   Banks never 'run out of money'.   That's what the Federal Reserve does - ensures that banks have the money they need to do business.  Having said all this, is it possible that in some cases government spending influences business incentives to a degree that might cause less private investment.   Yes, probably.  But, that's not what the mainstream theory says.  The mainstream theory is crowding out occurs because there is a fixed pot of gold so banks won't have resources to make loans, and interest rates will rise so businesses won't want to borrow, and taxes will rise in the future so that the average Joe will hoard his cash that would otherwise go to US businesses.    All of that theory was born at a time when we actually did [...]

The True US Debt Burden

Fri, 18 Oct 2013 00:07:00 +0000

In macroeconomics, it is often taught that that the US debt burden (ie., the metric we should gauge how concerned we should be about the national debt) is the amount of interest paid on said debt divided by the measure of GDP during the same time period.   This makes sense.   We can roll over the principal of our debt and we can just use some of our growing economy to 'pay for' the interest we owe and it's 100% sustainable forever with no real cost to anyone.   As long as the growth in the interest we have to pay to the bondholders does not exceed our economic growth (it would have to be decades for it to really matter that much), we are right as rain. But then, many textbooks, including the one I use to teach my macro class go on to say the best 'rule of thumb' therefore is to try to keep a constant or shrinking debt to GDP ratio - not interest on the debt, just debt.  This I have a big problem with. The problem with using that as a rule of thumb is that it is not very useful, mainly, because it assumes that interest rates paid on the debt remain constant.  But as we all know, interest rates are anything but constant and in fact real interest rates have drifted negative in the past few years in some cases to the point that the government actually can theoretically earn money by going in to debt.  Even if that is not the case right now, the fact remains that real interest rates have dropped dramatically (thanks to the Fed) in the past 6 years.   This means that any new government debt is dirt cheap.   IE., interest/GDP aka the debt burden cannot be nor should be approximated by using debt/GDP as a measure.   If what you care about is the debt burden, and as long as the government collects such information, why would you need another measure of approximation anyway?   I mean, unless you are trying to scare people:The CBO, as an aside, believe the debt/GDP ratio will fall for the next decade or so before it starts rising again, but it's also important to note that the rise precludes any assumptions about the investments we are putting in to the economy today.   So, really, predicting this sort of thing a decade out is a fools errand anyway. But, why scare people, when you can present reality:The reality is we aren't paying anything more on interest to our debt really now than we were back pre-9-11.   IE., thanks to a recovering economy and falling interest rates, despite our increased debt values, the debt burden is actually falling and really has been since the 1990s if you take a longer-term view largely due to the tech boom, the end of the cold-war, etc., which despite the bust, still has aided our long-term economy to this day:Say it with my tea-publicans:  the economy drives the debt burden, not the other way around. [...]

How Classical Economics Misleads On "Government Debt"

Thu, 10 Oct 2013 17:40:00 +0000

The classical model is mandatory reading for most macroeconomics classes.  I teach it because I have to, but I teach it in a way that the caveats and assumptions are front and center.   It's apparent to me that the profession of economics perhaps has not drawn enough attention to those assumptions (or perhaps exacerbated the view that they are unimportant), since it seems a significant chunk of the American public is hyper-concerned about the debt, when perhaps such concern is not warranted compared to all our other problems du jour.  The classical economic model is a ‘pot of gold’ model, where an economy has a certain fixed amount of resources by which it creates productive capacity.   The classical model assumes markets are perfect in the sense that there is 100% utilization of resources at market determined costs of those resources.  This means that at market given wage and interest rates, we have ‘full employment’ (not counting a certain amount of unemployment that may exist just due normal movements between jobs, etc.) of both labor and physical capital (buildings are staffed, machines are manned, etc.).  So, now, in this classical world the government comes in to an economy that is already using 100% of the resources and says, “I want to spend $1B more and give everyone healthcare.”   In our classical world, there are no more resources to devote to this new policy so the government has to take it from the existing ‘pot of gold’.  In other words, they have to take resources that are currently being (presumably productively) used in the private sector (by businesses).   In this world, at a minimum, the healthcare spending does nothing for growing the economy and at worst it does one of two things (or some combination):  (1) severely harms economic growth by taking some of the existing ‘gold’ necessary for the private sector to do its thing – either by increasing taxes or some other mechanism, and/or (2) in the case where the government starts up the printing press and starts manually artificially creating more 'gold' to fund its spending, inflation will ensue.   Neither of these is pretty.    In either case, the classical model further assumes that when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth.  But, the real world doesn’t look anything like the above classical ‘pot of gold’ scenario.  In the real world, economies are subject to bouts of booms and busts for varying reasons: sometimes there’s an asset bubble that bursts (housing, stocks), sometimes there is an oil crisis that causes prices of all business activity to raise thereby stunting growth, and sometimes there is a large degree of uncertainty and other more ‘soft’ things that create pessimism in markets – reducing the revenues businesses need to operate and grow effectively.  In the real world, therefore, economies often are not operating at ‘full employment’.  Perhaps a significant chunk of the labor force is out of work.   Perhaps perfectly usable buildings are sitting empty for months.   Perhaps banks aren’t lending and perhaps businesses are just sitting unproductively on their assets.   This seems like common sense reality, but it’s this common sense fact that changes the outcome of the government wanting to “spend $1B and give everyone healthcare.”   Now, the government can enter into a deficit situation not by taking from the private sector but simply by starting up the printing press and creating more funds.  They could do this in the classical world too but unlike the classical world this will not result in inflation because the increas[...]

"Gender Gap"

Wed, 25 Sep 2013 16:01:00 +0000

The gap exists, but is it a problem?  Women make 20+% less than men depending on what study you point to.  Ok.  So what.   Just saying it, doesn't make it a problem.  Black men make less than white men.  People with college degrees make more than those with high school degrees only.  Do we need to 'fix' those issues too?

The Indianapolis Star obviously isn't interested in the actual research - just more interested in assuming the gap is something that needs 'fixing' (without of course explicitly stating how, though implicity suggesting employers just need to pay more to women).

The fact that the author dismisses the anger from those that think the wage gap is something that needs fixing is unfortunate.  There is anger because the wage gap, while not a myth itself, perpetuates the myth that by itself it is a problem that needs solving.

Economists have studied this for years and a main reason a gap exists is because women self-select into lower paying jobs than men.  Also, many of these gap studies only focus on basic wages and salaries and ignore the benefits side of the equation which for many employers is 30+% of labor cost.  Additionally, women tend to work fewer hours than men.  Due to child-rearing norms, women tend to have less workforce attachment than men.  Education levels, training, and work experience differences have also been found to be factors.    That is why they get paid less for the most part.  Is sexism part of it?  I'm sure it is, but to imply that the entire gap of 20+% is sexism that needs to be 'fixed' is ridiculous.

The anger comes from the fact that many people don't think that gap should be 'fixed' - because it's either not really that broken or the part that might need fixing itself is much lower that it is purported to be.   In other words, they are angry because they feel there are erroneous assumptions being made.  The St. Louis Federal Reserve estimates that the gap, just after adjusting for benefits and job characteristics, may be less than 5%.   This is not to mention any of the other points I mention above.  Or, if you do think it needs fixing, perhaps folks should focus on why these differences exist from a sociological perspective, as opposed to just looking at this as a quick fix that means 'employers need to pay women more'.   Should we pay women more if the reason they are getting a lower wage is due to their own job choice, or due to their education/training/job attachment, or due to the fact that they get more in benefits...?  If so perhaps we need to start paying blacks more.  Perhaps we need to start paying high school drop-outs more.   Perhaps we need to start paying the less experienced more.  I don't suggest the answer is one way or the other to any of these. But to ignore these deeper issues is to ignore the statistics.

Krugman - Still pacing the halls of his ignorant tower.

Sun, 25 Aug 2013 23:38:00 +0000

Rather that me attempting to write a long post about Paul Krugman's lack of understanding endogenous money, I'll let Naked Capitalism do it for me:

"Price Gouging": Both Sides Get It Wrong

Wed, 05 Jun 2013 18:05:00 +0000

I was reading my facebook feed recently and someone mentioned something about how firms that price gouge (like gas stations) are shameful, etc. etc. etc.  This reminded me that the topic is one of my favorite microeconomics topics.  So I thought I'd write about it.  Price gouging is defined differently by the various State laws covering the term, but generally it is a situation in which a firm raises prices of a necessity good(s) (like gasoline) during a short-term shock (emergency - like a weather disaster) that is not easily justified by the cost of producing or exchanging said good. To most conservatives or economists the very term "price gouging" is misleading and far from being a 'bad' thing, it is a necessary component to capitalism.   IE, it's just supply and demand.   When a hurricane hits, supply of gasoline falls, demand rises, so profit-maximizing firms raise their prices.   It's not outside of supply and demand - it IS supply and demand.  [the example/link given by the way is just an example and is not what I would technically define as a true price gouging situation unless you view bullets to be a necessity ;)]Nevertheless, laws were put in place to protect consumers: to block price increases for situations when otherwise prices would increase based on reasons that cannot be explained by supply.  In other words - to prevent firms from increasing prices based on a demand spike (caused by people trying to flee a disaster).   The intentions are obvious and mostly on moral grounds.   The idea is that people are already suffering enough, it is not right to hit them financially during these times in life. Consumerists have it correct that there is something morally amiss about jacking up prices during emergencies on necessity goods.  But their solutions are inelegant and target the wrong problem: unfairly targeting businesses.   Essentially they are telling profit-maximizing firms to temporarily stop profit-maximizing and to somehow only increase prices based on supply and not demand pressures, as if that is a simple napkin calculation during such times.   And if they don't comply, they could be fined.Conservatives/Economists have it correct that it is all just supply and demand but they err in assuming that 'efficiency' (as defined in economics) is something society values or should value in time of emergency.   Consider an emergency where everyone is trying to fill up their tanks to leave the site.  The 'efficient' way to allocate resources is via the price mechanism - using supply and demand.   In other words 'price gouging' is efficient.  But the problem there (or at least a problem) is that only the well off are then able to flee, leaving the poorer members of society to suffer.   The rich full up their tanks and the top 5% flees while the 95% dies.  Whereas, in a disaster, sometimes it makes more sense to ration or do something less 'efficient' to ensure safety and fairness.   (So instead of the rich filling up, everyone fills up just enough to escape).  Demand, remember, is about the willingness AND ability to buy a good.   In other words, efficiency is not always welfare-enhancing or moral. But here is why both groups, the conservatives/economists and the consumerists talk past each other.  In short, they both are correct, but missing the main problem.  The main problem is that we, as a society, don't like capitalism in all situations.  We particularly don't like it during emergencies.  (And many of us don't like it with regards to necessity goods in general - think health care).  But instead of altering our system to accommodate such emergencies (or even attempting to do so) we[...]

Part Time for Economics Reasons: Hardly Obamacare

Fri, 03 May 2013 22:10:00 +0000

The quacks are out in force suggesting that our economy is undergoing a transformation whereby we have less full-time workers and more people forced to work part-time.   That part is true.   The part that isn't true is the reason often given as the main cause:  Obamacare and the uncertainty of regulations. 

The truth is something different.  As you can see, the issue of part-time employment taking the place of full-time employment became an issue well before the health care legislation ever even become a law. 

In fact, since Obamacare was signed into law the overall number of part-time employed for economic reasons has fallen a bit, just as our unemployment rate overall has been slowly falling. 

Despite the obvious evidence that the phenomenon is almost solely attributable to the financial crisis and resulting recession, it hasn't stopped some economists and conservatives from blaming Obamacare (which by the way I don't disagree that Obamacare is being rolled out poorly, but to blame the entire employment situation on it is counter to the evidence):
here and here, for example.

Never-mind the fact that employment numbers have been revised upward and the unemployment rate continues to drop at a steady, albeit slow pace.   Consumer confidence continues to rise along with the stock markets.   The naysayers still insist that Obamacare is dragging everything down.

And it may yet be true that it might....but the data presently shows that it is the continuing effects of the crisis that are dragging us down.   Anyone who suggests otherwise is likely talking more out of politics than economics.  Yes, U-6 did tick up ever so slightly (unemployment rate including part-timers that would rather work full-time and discouraged workers) but as I've said before on this blog, you should never take one month's report and assume it is a new trend.   It is likely Obamacare will cause a slightly further shift to part time employment but only marginally, and for my money, we should be concerned about the mountain, not the mole hill.

Continuing Evidence: Mainstream Economists are Just Politicians in Disguise

Wed, 01 May 2013 16:02:00 +0000

On the right


On the left

The point of disagreement is disguised as being a disagreement over the Keynesian multiplier:  is it 1, is it less than 1, is it greater than 1 (recall the multiplier is simply the effect of a $1 cut or increase in spending on GDP)....

But really, economists' views on the multiplier have almost nothing to do with scientific inquiry and have almost everything to do with where they lie on the political spectrum.   Mankiw, being a Republican thinks the multiplier is small (big surprise) and that therefore the cuts won't hurt GDP or employment much.   Goolsbee (for example) being a Democrat thinks the multiplier is bigger - and that the cuts may in fact take a noticeable chunk out of GDP and employment.

The point is, all these economists pretend their differences are a matter of math and science, when they really are almost soley a  difference of politics.  

[Not to mention that both sides are ignoring that the Keynesian multiplier says nothing about employment - it only says what the effect of spending cuts on GDP is.   To the degree that GDP and employment are not 100% correlated (which of course they aren't), the multiplier itself says very little about employment.]

From Keynes' General Theory, Chapter 20:
"It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand ... is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent."

Dear NRA....

Sat, 23 Feb 2013 16:07:00 +0000

Economics Not the Problem in Egypt, Freedom Maybe

Wed, 30 Jan 2013 17:50:00 +0000

Many in the media make the claim that Egypt's original uprising and continued discontent has more to do with economics than anything else (poverty, income inequality, etc).

However, something I stress in my macro class, is that statistics don't seem to bare a lot of that out - particularly when you compare Egypt to the Untied States (where there is no US Spring).

Egypt has less income inequality as measured by GINI (the data is a decade or two old but I don't think that affects the analysis much):
The Egyptian economy, additionally, has grown by 25% as measured by GDP per capita from 2000-2008 - before the Arab Spring.   During this same time, the US has grown by a measly 9%.  

The unemployment rate in Egypt in 2009 leading up to the Arab Spring was 9%, which was actually less than the unemployment rate in the United States during the same time-frame.  Even looking at just youth unemployment - the rates in Egypt are not really that out of line compared to its neighbors or even the United States.

So, I for one simply don't buy into the fact that the Egypt uprising is economic.   It is far more likely that it is more about political freedoms than anything else.   I think that that is supported by the new uprisings taking place - which are stemming from the government failing to create legitimacy among the people.  

Either that or this begs the question - why aren't WE in uprising?

Average Joe Doesn't Understand Economics

Wed, 09 Jan 2013 14:21:00 +0000

The press flowing (and comments made from that press) from the 'new' idea of the US Treasury minting a new $1 Trillion coin has made me come to the unfortunate conclusion that the press and the average Joe commenter doesn't really understand economics.  This is despite the fact that I'm sure many of them took macroeconomics in school.  Actually, it's probably because of it.Things that people don't understand:First, in neoclassical macro texts, teachers tell students how there is a limited supply of funds and that if the government spends it must be taking real resources out of the private economy.  This ignores the fact of course that our 'funds' (ie. money) can be created at will by the US. government as the sovereign controller of its own fiat money.  Fiat meaning that the money is backed by faith, not by any commodity like gold, silver or platinum.  In the real world, the only reason the government borrows money at all is purely due to institutional constraints to the treasury and Fed.   Presently, when the government spends money, it needs to issue bonds.  So the treasury issues bonds, floats them on the private market, and 'borrows' from private citizens or other governments etc.  The US then has an obligation to pay interest on those bonds, but it can always do so, because again, the money can simply be created by the government   But the system need not be set up in such a confusing way.   Were it not for this constraint, there would be no reason the treasury can't just make the funds appear out of thin air, walk over to the Fed, and use that coin to pay for it's spending.   Public 'debt' can be wiped out with a click of a keyboard - no bonds needed. Enter the $1 Trillion coin!There is a loophole that says the treasury can mint and use platinum coinage at its discretion and there is no limit to the amount of dollars that coin can represent.  This is a kind of power that the treasury doesn't typically have.   Here comes thing #2 that people don't get about economics.  We are not on the gold standard anymore.   Our money doesn't have to be or be backed by equal value of a commodity.  One platinum trillion dollar coin does not have to be made by or backed by $1 trillion worth of platinum.  It can be a simple small coin the size of a dime, with $1 trillion etched on it - for the very same reason that our $100 bill is not made out of $100 worth of paper and ink.   So, shame on NBC.  And the sheep.  But particularly, all real blame goes to the economics profession for failing these people!But won't that cause inflation?Here is thing #3 people don't understand: money doesn't cause inflation.   Demand (spending) pressure exceeding supply pressure (production / productive capacity) causes inflation.   When demand exceeds supply, people start circulating more and more money around the system, but for a given level of real output, all that does is raise prices.  The misunderstanding here is that most neoclassical mainstream economic textbooks assume that the more money the government makes, the more borrowing and spending that happens.  But that is ridiculous.   One need only see the massive amount of money the government has put into the banks to see that banks don't loan more money just because it's there.   This is classic chicken / egg problem.   Textbooks say more money means more spending.  Reality says more spending means more money.   Spending over our means is a problem - but not one in our present depressed ec[...]

Government Should Borrow More, Not Tax More

Fri, 04 Jan 2013 18:25:00 +0000

Fiscal Cliff has been averted, at least for two more months where we will have an even bigger cliff to hurdle. Of course, I never liked the term 'fiscal cliff' since it implied there's some sort of inherent government insolvency issue even though that was never the issue.   It has been and will continue to be a political cliff - caused and created solely by inept politicians (congress). Our present national public debt stands at around $12 trillion (76% of GDP roughly).  That number sounds big, but since the debt essentially represents money we owe ourselves, the number itself is relatively meaningless unless compared to other things.   This point is something radical (read: mainstream) Republicans don't seem to grasp.   The bill to avert the fiscal cliff for now passed but no thanks to 100+ of these mainstream radicals that are more concerned about this meaningless number than the ability of our fragile economy to continue to grow.So, what should the number be compared to?  Well, if the government is racking up 'too much debt', interest rates will tend to rise and inflation will spiral out of control.   Interest rates, however, today, maintain themselves at all-time lows and inflation is tame and stable.   And, interestingly, if any real person in the market thought inflation posed a problem in the future, we'd see interest rates start to rise accordingly, but they aren't so that is why we know that neither are problems at all.   What about all that money the Fed pumped into the economy - won't that add to inflation?   No.   That money has been largely doing what it has been doing for the better part of 4 years - sitting there not being lent or borrowed as 'excess' bank reserves. Surely as the economy picks up, more of this money will be floated into the broader economy, but that's ok - because along with this money increase will be an increase in production and economic output - which will act to tame any inflation. So, Republicans continue their airless rhetoric about 'imposing costs on future generations' and all that nonsense which has absolutely nothing to do with reality. Democrats aren't much better - allowing significant back-breaking tax increases not just on the rich but on the average Joe.  We could have avoided not just the taxes on those making >$400K, but also the 2% social security payroll tax increase that hit most Americans' paychecks this week.  Both of these tax increases, it is estimated, may reduce the output of our fragile economy by nearly a whole 1% point of GDP in the coming year.  The better alternative would just have been to continue to do what America does best: borrow.  There's never been a better time to do so in a market with record low interest rates after all!  Everyone wants our bonds as it is what with China continuing to be shaky and Europe still very much in a crisis.   Borrowing, at the end of the day is simply issuing US-denominated bonds for US currency, both of which can be converted into each other - hence the reason why government borrowing is like borrowing from oneself - the US controls its own currency after all.  There are certain technical political restrictions which make the intersection of our fiscal and monetary policy a bit convoluted at present, but there are those in congress and in academia advocating for a most realistic change to our system to accommodate the simple fact that 'debt' by the federal government is not really 'debt' at all.  [...]

Policy Thought for Veterans Day

Sat, 10 Nov 2012 14:49:00 +0000

The present unemployment rate is 7.9%.   But as Iraq War veterans have been flooding back home and Afghanistan War veterans are expected to be coming home in droves over the next 2 years, some are having a tough time adjusting to the cruel ways of market capitalism - the onus is on them to find a job in this tough economy.   There are institutions out there that try to make it easier for vets to transition.   But these aren't widely marketed and don't guarantee anything other than an increased access to a chance to be hired.   That's not the same thing as a job. Meanwhile, the unemployment rate of recent US veterans is 2% higher than the national average.    And for some categories of recent vets (women, 2001-present), it's almost 2X higher: 15.5% and this is projected to rise rapidly as the surge of vets finally come home. What is our country to do to support these men and women?   We could continue our current track of offering lip service, or we could work to enact a real policy change that could have a real positive effect.  The only way to directly solve this problem is to enact a thoroughly non-mainstream economic policy (albeit on a smaller scale): jobs guarantee specific to our returning vets.   A jobs guarantee program is exactly what it sounds like.  Instead of trying to indirectly get people back to work by stimulating demand/spending, or by providing more opportunities for interviews etc, the government literally guarantees a public job potentially offering a laundry list of positions including: beautification, public works, counseling service to fellow vets, etc.  In the past I've expressed concern about enacting a nationwide jobs guarantee program, and I still have those concerns:  creating another unproven permanent government bureaucracy with the potential to increase beyond its initial scope, promoting potentially nontransferable job skills, disrupting the private labor market, creating a moral hazard of labor, etc.   But, when we are talking about creating this on a much smaller scale, and for a specific segment: for recent veterans, most of those concerns become minuscule compared to the potential benefit - the necessary sacrifice we owe our returning soldiers.  The least we can do is guarantee them a minimum wage paying job while they are undergoing private sector job-search.  This point of this program would not be to give a solider a permanent job - but to give them temporary work, to more fully employ their expertise and resource, until they can find a better higher paying private sector job.It's time to do this.  Stop wasting money on all these government services that don't get vets jobs - they maybe just get them in the door.   That's not good enough.  In the meantime, we waste precious expertise, talent and labor resource that could be adding to our GDP, and our tax revenue.   The other added benefit of this program is that it can act as a small-scale trial / test for a more broadened nationwide program.  Maybe it will prove the skeptics, like me, wrong.  And if it doesn't, if it does have unintended consequences, the scale of it means the costs are small relative to the potential debt we owe our soldiers. [...]

Capital Gains Vs. Net Wealth

Thu, 08 Nov 2012 16:51:00 +0000

Yesterday stocks plummeted by the biggest % all year.   No one knows exactly why, but most think it's from a combination of things including the fact that Wall Street doesn't like our status quo politics, and they particularly don't like the looming fiscal cliff: the series of tax hikes and government spending cuts scheduled to kick in in a couple months. It may be that investors are worried about what Obama might make them pay as he continually hammered during the election that people like Mitt Romney and Warren Buffet actually pay less in taxes relative to their income compared to a typical worker because their incomes are largely earned by capital gains.   Are capital gains tax increases destined to be part of any cliff negotiations ?Classical economists (conservatives) generally don't like taxes on capital gains because it essentially acts as a negative incentive to save money.  Keynesians don't fret as much about that since in their view investment often leads the savings and wealth creation and investment decisions by firms are partially benefited by furthering demand (consumption).  Say's Law is rather outdated!I'm against capital gains hikes personally much as I also dislike income tax hikes (or income taxes in general).  For one thing they are taxes on flows not stocks.  That is, you are taxed based on an annual increase or decrease in wealth via capital gains (or income).   Well I could be a billionaire but have one bad year in terms of my income and thus owe nothing to the government despite my wealth.  In fact, that was the case for many firms during the recession.   They had net operating losses and owed $0 to Uncle Sam.   Or, you could be a recent college grad making mad bank and therefore paying big taxes even though you are still young, have no wealth to speak of, have $0 in your 401K and have $100K in student loans.  Income taxes are stupid.Similarly regarding capital gains, if the stock market takes a dive and they make no capital gains, then they don't pay the taxes.  If we care about distribution of wealth (and most conservatives don't, but I do) then we should care about this inherent loophole.  Another reason I don't like capital gains tax is that it creates a perverse incentive: it makes people want to save less for their futures.  If we want a populace that cares about its future and how it's going to pay for their golden years, then we should care about not promoting the next car purchase over the next Roth IRA purchase.   Notice this is not the same argument classical economists make.  Classical economists are pathological, and don't give a shit about you personally.Some European countries use a net wealth tax, which to me is much more preferable (though perhaps not at the exorbitant rates as some of those countries) - it compares your assets minus your liabilities (stock variables) and the more you have, the more you are taxed.  Simple, efficient, dynamic.   So if I'm an average Joe, I won't feel queasy about saving for my future.  I might feel a little queasy if I'm a billionaire in terms of net wealth: if I have a McMansion on the hill, 10 porches, and private jet... but frankly, if you are a billionaire and you are queasy about giving back to society that has helped you so much to get where you are, then you are an asshole and I don't particularly care. [...]

Get Out the Vote: A Scourge of Modern Politics

Tue, 23 Oct 2012 17:22:00 +0000

Many polls are open early across this country.   And everyone from celebrities, to Super PACs to special interest groups to politicians are pleading with the American people to get out and vote.  It's every American's civic duty, they say.Even though most don't know what galaxy you are living in, Americans are told to vote on matters of domestic policy you likely know or care little about.Even though a third don't know who the current Supreme Court Justice is, Americans are asked to decide the fate of judicial branch with your vote. Even though half don't care to follow whether Obamacare was ruled constitutional or not, Americans are asked to decide the fate of it.Even when one in ten think our sitting president is Muslim, they are asked to decide on the role of religion in our discourse. Even though nearly half think that China is a greater economic power than the US, Americans are asked to decide the outcome of our foreign and economic policies.Even though that scientists say that all the stupid Americans are dooming us with  voting, many will listen, and will cast uninformed biased votes based on what your friends, celebrities tell you, or what your gut feelings say to you, or the fact that your skin color matches the candidate....   These are not reasons to vote.  These are reasons to do your real civic duty and abstain from your vote.  The saving grace for our country is that due to the corrupt nature of our modern political process, most votes likely will not count anyway.   Unless you live in Ohio or Florida or one of the few 'battleground' states, one should have no incentive to vote other than as a symbol.   Most of you that vote anyway, whether you are stupid or not, will use your vote to symbolize your belonging to either the Democrats or Republicans.   The rest will be disenfranchised - locked out from the process.  We will continue to have 2 overly-powerful parties beholden to their Super PACs and special interest deciding the fate of the future with little to no hope for process changes to how congress or our electoral system could operate more effectively. My friends may not agree with me now on this broader point, but in time I hope they do.   The only solution is to demand real change from outside the system.   So I urge every American not to get out and vote, but to boycott our political system - shock it into changing.   Only when we eliminate the legitimacy of the system can we fix it.   We must sacrifice any individual gains via party-support for true long-run gains for our country.[...]

Keen Connects to MMT

Thu, 04 Oct 2012 15:55:00 +0000

Continues to interest me:

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or for a more encompassing version of lesser quality (sound):
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Keen has a unique definition of Aggregate expenditure (closed economy):
=C + I + NetAssets + (G-T)

....he didn't explain that enough for me to fully understand what he's saying here.  But here is my take (updated since I previously mentioned I too was confused) since many bloggers are just outright calling Keen's work nonsense.  This is partly Keen's fault for not clearly defining things.

He goes on to say that:
Income + Change in Debt = Output + Net Asset Turnover

...which suggests to me he thinks that changes in assets (prices bubbles)are a result of changes in debt (a la Minsky, which makes sense).

From what I understand, what Keen means by Net asset turnover is speculative and ponzi financing.  That is, financing of financial instruments that do NOT have a backing of a physical good or service and therefore are not expected to fully repay the principal and interest of the financing absent bubble formation.

In this way, Keen income and debt partially financing real goods and services, but also partially financing speculative and ponzi investments (the value of which is not based in real output).

In this view, neoclassical economics ignores this new class in the usual Y = C + I + G formation.  The real question to me is then, why does he include G-T instead of just G in his above formula.  That is still unclear to me.

UPDATE: had a brief back and forth with Prof. Keen about why he nets out taxes in his effective demand function.  Not very insightful.   He just said it's "cash flow."....hope he describes his re-formulation of the usual demand function in a more user-friendly way in the future.... Maybe he's too in-the-weeds.

Indiana Gov Race: Pence v. Gregg

Sat, 15 Sep 2012 13:51:00 +0000

Having recently attended the Fall 2012 session of the Indiana Economic Development Conference, I had the chance to hear Sue Ellspermann (Mike Pence's (R) running mate) and John Gregg (D) give their thoughts regarding how to improve Indiana's economy.  Below I will outline what I heard, and give my opinion on who has the better direction:Highlights from Sue Ellspermann for Mike Pence:In regards to labor force and education, Ellspermann indicated that the Pence campaign wants to strengthen vocational and technical schools by working with high school and employers throughout the State.    They want to eliminate the stigma of these schools and slowly get people to realize that 4-year colleges aren't for everyone and not necessary for many high-paying careers.  While I don't think this focus would work for every State, I do think it's the right one for Indiana given the kind of labor pool and demand we have.  This is in some sense an extension of the what the Daniel's administration has already started, so no marks for originality.  Unlike the Gregg campaign, the Pence campaign wants to reduce education costs mostly by incentivizing students to graduate early or at least on-time by basically paying them to do so.  I don't know how I feel about that.  To me, there's usually a good reason students don't graduate on time.  I'd rather see some of that money being spent on high schools to do a better job of helping students figure out their likes, dislikes, strengths etc.... Grade: B-In regards to government operations, the campaign wants to have a "moratorium on regulations."  Sue (I'm tired of typing her complicated last name) didn't give any specifics on this, and I consider this to be a throw away item that every politician says.... Grade: FAnd of course the Pence campaign wants to support Veterans.  Sue mentioned that the existing unemployment rate is about 15% for Veterans (twice the national average nearly).  She gave no specifics other than wanting to put a Veteran on the IEDC Board.  All in all, I don't see the point of that and consider this to be another throw-away political stance:... Grade: FOf course, Sue wouldn't be a Republican if the main part of the platform weren't about cutting taxes.  So, the Pence group wants to cut income taxes over 2 years by 10%.   And again, like most Republicans, there was no mention of how this would be paid for (see regulations above).  So, Grade: DSue talked about the need to increase exports, particularly with ag.  She went on to talk entrepreneurship and partnering with universities, creating an Indiana jobs cabinet that can be movers and shakers that can spread the word about Indiana's strong business climate, and also talked about hosting a national site selector conference.   Some of this seems like it might be beneficial, but she was a bit vague on specifics, so I'll go with a B-Regarding energy, the Pence campaign supports an all-the-above strategy - which is the best any politician can do in coal grade on this.Overall, I was impressed with Sue Ellspermann's presentation (if not a majority of the content) and it is refreshing that she actually has an econ dev background (which I'm sure is why Pence sent her) but it's also disheartening that Pence didn't show up himself - just further exemplifies the fact that he is all social-issues, which is concerning to me.  [...]

Dangerous Precedent: Patenting Cool

Sat, 25 Aug 2012 15:08:00 +0000

Apple vs. Samsung proves that we don't have anywhere close to a free market economy.   We have an economy that has a lot of the negative elements of one: greed and corruption, and an economy that has taken away the ability to have the positive elements: namely, competition.

When you can patent a look, a feel, a size dimension... it erodes competition.   You are eliminating the rights of companies to learn and imitate, which in reality is a much more powerful force than to innovate.   Innovations are a once in a generation find most of the time.   And the catalyst for them are usually not monetary gain - but passion.  Jobs and Wozniak innovated because they were passionate.  Imitation allows companies to learn from each other, and to pass that learning on the customers in the form of lower prices.   Imitation is not just a sufficient condition for competition, it is a necessary one.   When the system takes even the most basic form of imitation away from companies, it takes away the positive power of markets.

If you own Apple stock, you should be happy, but if you own stock in the American dream, you should be very afraid.

Reason over Vitriol

Thu, 02 Aug 2012 12:35:00 +0000

If we truly believe that business institutions are not 'people', then we shouldn't be attacking them for their leader's beliefs.  And if you do believe businesses should be treated like coherent organisms, why stab the heart if it's the head that hurts.

If they break the law or there is evidence of systematic actual job discrimination or customer discrimination / abuse, then that's a different story.   But what we have here is a misdirected attack on an independently operated chain.

And as for the whole Chick-fil-a supports killings gays argument, which seems to be the strongest argument for all the hateful words on this issue, it again is misdirected and has so many degrees of separation that it's nonsensical.

Chick-fil-a leaders decide to provide some profit to a separate non-profit arm WinShape.  WinShape then takes some of its money and donates to the Family Research Council.  FRC then takes some of its money and lobbies the US congress not to denounce Uganda's 'kill the gay' bill - no money is actually directly supporting Uganda's bill - it's being used to not support US denouncement of the bill.  If you even believe that's what the FRC's goal was in the first place....

That is a lot farther and a lot different than "Chick-fil-a supports killing gays."