The Democrats make no argument

This little piggy had bad policy
That little piggy had none

- Arthurian

 
The Democrats don't make an argument. The Republicans do. Republicans have tight money, balanced budgets, tax cuts for the wealthy, and deregulation. It's not the policy we need, but at least it is economic policy.

The "silent majority" of Nixon's time may not have complained, but they were not perfectly happy with the economy. As time has gone by and the economy has continued to get worse, more and more quiet, disinterested people became interested, adding their voices to the calls for solutions to our economic problems. But we have seen solutions offered only on the Republican side. The Democrats offer nothing. Indeed, Democrats' issues are interpreted (at least by Republicans) as problems requiring cultural or moral rather than economic solutions.

The Democrats offer nothing. They have nothing, so they offer nothing. The honesty is refreshing, but the lack of solutions is a problem. This came up the other day at the dinner table. I said the Dems only try to help people cope with problems, and never try to fix the problems. The wife offered Biden's plan to cancel student debt as a Democrat's economic fix. Crafty, the wife: she knows I always say debt-is-the-problem. She went for the jugular.

I think she's wrong. I don't think Biden wants to cancel debt out of concern over the harmful effects debt has on the economy. But you may say it doesn't matter: If canceling debt improves the economy then it improves the economy (you may say) and Biden's reason for canceling debt doesn't make a difference.

I don't buy that. If Biden understands that excessive private debt is the source of our economic troubles, then all of his efforts will come together around the concept, and the results will be far more economic improvement and far less debt. If I was Biden I would jump on this immediately, and fortnightly introduce a plan to reduce private sector debt as painlessly as possible in one area or another of the private sector. Then I'd sit back for a week to see how the opposition reacts, and then improve my plan. There are only 35 more fortnights before election day. Surely Biden's team can come up with 35 ways to reduce private-sector debt! That would be my whole campaign strategy, if I was him.

To find out why Biden favors student debt relief, I went looking for White House remarks on the topic. Turned up a White House Fact Sheet with the title "President Biden Announces Student Loan Relief for Borrowers Who Need It Most". Biden's plan is to provide relief for those who need it most, to help people cope with the bad economy. His plan is not to reduce debt to make a bad economy less bad. The Democrats have no economic plan. Their plan is to help people cope, while things continue to get worse.

The Fact Sheet says

The skyrocketing cumulative federal student loan debt—$1.6 trillion and rising for more than 45 million borrowers—is a significant burden on America’s middle class. Middle-class borrowers struggle with high monthly payments and ballooning balances that make it harder for them to build wealth...

They throw big numbers in there, but that is just a distraction. The numbers suggest either that we should feel really bad for a lot of people (and thus favor the Biden plan) or else be shocked by the potential cost of the Biden plan (and thus oppose it). Apparently, this is the Administration's idea of good argument.

The numbers distract us from the fact that they are saying student loan debt "is a significant burden on America’s middle class." The Fact Sheet doesn't say what it should say, that all of our debt is a significant burden on the economy: Our economy under-performs because we have so much debt. Somebody has to take a stand. Somebody has to say it. No one does. No Republican, no Democrat. No one is saying student loan relief is the first step in a multi-faceted plan to reduce debt throughout the private sector, to reduce financial cost, to reduce the size and power of the financial sector, and to begin restoring the health and vigor of the US economy. No one is even thinking such a thing.

Again, the Fact Sheet:

Today, President Biden is announcing a three-part plan to provide more breathing room to America’s working families as they continue to recover from the strains associated with the COVID-19 pandemic. This plan offers targeted debt relief as part of a comprehensive effort to address the burden of growing college costs and make the student loan system more manageable for working families. 

In other words:

• The plan is "to provide more breathing room to America’s working families" -- not to solve problems, but to help people cope with the problems.
• The plan offers "debt relief ... to address the burden of growing college costs" -- not to solve the problem of growing college costs, but to help people cope with that problem, now that it is quite certainly a problem.
  
• The Fact Sheet ignores the fact that in a better economy, more jobs and better-paying jobs would be available, and people would be better able to pay down their own debts.

The Democrats don't even acknowledge the economic problem. They attribute the need for "breathing room" to the pandemic. But student loan debt was a problem long before the first fever of the pandemic, the first cough, the first achy muscle, the first fatigue, and the first pandemic-related death. Doesn't that count for something?

I say again:

This little piggy has bad policy
That little piggy has none

An interesting fact about GVA Finance

As we saw yesterday, the Gross Value Added of Corporate Finance has grown faster than Government GVA, faster than Nonfinancial Corporate GVA, and faster than Household GVA. GVA Finance has grown faster than all three of the others, since 1947. Like, finance always grows faster than the rest.

Now we know that, you may be interested to know that GVA Finance typically runs between 2 and 3% of All Sectors debt:

Graph #1: GVA Finance as a Percent of TCMDO Debt

Never reaching as low as 1.0%, never reaching as high as 3.0%, GVA of corporate finance was always in the neighborhood of 2% of "All Sectors" debt. It did show a rising trend in the 1970s when interest rates were rising. This supports the view that high interest rates mean increasing income to Finance. (So, when the Fed raises interest rates to fight inflation, Financial income goes up. Good to know.)

And financial income did go sharply low during the financial crisis. I guess that made it all worthwhile...  Just jokin.

Relative Growth of Four Sectors GVA

GVA is like GDP by sector.

The graph shows four sectors: households, nonfinancial corporations, financial corporations, and general government. 

The graph does not show the relative sizes. The data is indexed so that all four datasets start out equal. The graph shows relative growth since 1947. For example, corporate finance grew the fastest of all four sectors, and general government grew the slowest.

Graph #1

"General" government is the sum of "Federal" plus "State and Local" government.

 

GDP is a measure of income. So we can say that GVA is a measure of income by sector. 

The largest income gains occur in finance. That is what's wrong with our economy.

The claim that policy "successfully reduced inflation" after 1980 does appear to be true

fuckers

Real GDP increased faster than prices went up, until the mid-1960s

Graph #1: Real GDP relative to the GDP Deflator

Real GDP increased faster than prices until 1966.

Prices increased faster than Real GDP from 1969 to 1982.

Real GDP increased faster than prices from 1982 to 2000.

From 2000 to 2020 they increase at about the same rate.

Two sets of books

Here, a graph showing two measures of federal deficits. Surpluses appear above the zero level. Deficits show up below zero:

Graph #1: The blue line is FRED's FYFSGDA188S showing Surplus or Deficit as Percent of GDP.
The red line shows the yearly changes in the Gross Federal Debt as Percent of GDP.
The blue line shows a surplus in the latter 1990s; the red line does not.

The annual increment of Gross Federal Debt (FYGFD) is not equal to the Federal Surplus or Deficit data I was looking at. There is a discrepancy. 

 

I should have known. I did the graph over, figuring deficits as the annual change in "Gross Federal Debt Held by the Public". It's not perfect, but there is a lot less discrepancy:

Graph #2: The blue line is the same as above, except wider so it is visible behind the red line.
The red line shows the yearly changes in "Gross Federal Debt Held by the Public" as % of GDP.

This time both the red and blue lines show surplus in the late 1990s. In other words, the claim that the budget was balanced in those years only appears to be true if you base it on "debt held by the public".

Slick trick, naming the series "Gross Federal Debt Held by the Public". 

Also, I don't like figuring the deficit this way, as the increase in a portion of the Gross Federal Debt. We could "balance" the budget every year if we move enough of the annual deficit out of the "held by the public" category.

It smells like chicanery to me, the kind of thing people do when they don't know how to fix the economy.

//

From Alex Planes at The Motley Fool, September 30, 2013:

... most of the surplus was calculated from money flowing into the Social Security trust funds ...

I think making use of Social Security funds that way is a brilliant idea. But I also think pretending it doesn't count as debt is idiotic.

After each financial crisis, economic performance declines

The jiggy red line shows the growth rate of All Sectors Debt in the US economy.

The jiggy blue line is the Real GDP growth rate.

Graph #1: Rates of growth for Real GDP (blue) and All Sectors debt (red), 1952Q4 - 2023Q1
The horizontal black lines show the average of annual rates for each period

Each crisis is an interruption in the growth of debt.

After each crisis, economic growth (as measured by GDP) is slower than before.

RGDP Growth and the Trend of Peaks

 

 

"Economic growth in the United States has been disappointing for the past two decades." - James Pethokoukis, April 2020

Graph #1  (The trend line is by eye)

After a half-hearted attempt to recover from Depression, and a full commitment to winning the second World War, the peaks of growth settled down, and down, and down some more.

Outstanding, in the post-war period are

1. the Korean war years;
2. Reagan's "Morning in America"; and
3. Biden's post-pandemic-recession peak.

That, and straight-line decline since 1950. That's all, folks!

Given the importance of cost ...

Below I re-post part of mine from 15 March 2015:

... a cost argument:

Imagine a world where there is $3.50 of debt for every dollar of spending-money. Now, gradually, over 60 years, the level of debt increases to $35.00 for every dollar of spending-money.

Graph #1: Dollars of Total (Public and Private) Debt, for Each Dollar of Spending Money

If the interest rate is fixed at one percent, then at the start debt imposes a cost of 3½ cents on every dollar of spending-money. By the end, debt imposes a cost of 35 cents on every dollar.

If the interest rate is three percent, the interest cost is 10 cents per dollar at the start. By the end, the entire dollar is absorbed into interest. This is the cost of finance.

And you know what happened after 2007.

How we deal with deficits

I am looking at "Options for Reducing the Deficit" by Phill Swagel, dated March 6, 2023. The link is

https://www.cbo.gov/publication/58981

The site doesn't have the level of fanciness that I expect to see at government sites, so I was a little cautious. But the URL is short, simple, and clearly comes from cbo.gov. And Phill Swagel, in a separate search, is identified as director of the CBO:

• Phillip Lee "Phill" Swagel is an American economist who is currently the director of the Congressional Budget Office. 
• Education: Harvard University, Princeton University
• Party: Republican Party 
• Swagel is a professor in international economic policy at the Maryland School of Public Policy and a non-resident scholar at the American Enterprise Institute.

So okay, apparently I'm looking at a CBO site.

 
Let me quote the first paragraph of Phill Swagel's "Options for Reducing the Deficit":

Last month, I issued a statement about the budget and economic outlook for the next decade. In that statement, I said our projections suggest that, over the long term, changes in fiscal policy would need to be made to address the rising costs of interest and mitigate other adverse consequences of high and rising debt.

In that first paragraph, Swagel says "changes in fiscal policy" need to be made. After the first four paragraphs he lists "one way" these fiscal changes can be made. The first six items on his list relate to limiting health care costs:

• Establish Caps on Federal Spending for Medicaid
• Limit State Taxes on Health Care Providers
• Reduce Federal Medicaid Matching Rates
• Increase the Premiums Paid for Medicare Part B
• Reduce Medicare Advantage Benchmarks
• Reduce Tax Subsidies for Employment-Based Health Insurance

The next three relate to Social Security cost and revenue:

• Reduce Social Security Benefits for High Earners
• Set Social Security Benefits to a Flat Amount
• Increase the Maximum Taxable Earnings That Are Subject to Social Security Payroll Taxes

There are eight additional items, three related to reduced federal spending, and five to increased taxes.

I'm not going to discuss Swagel's items. I'm just listing em so you know.

My first objection to Swagel's statement is that he says "changes in fiscal policy would need to be made" to deal with the rising federal debt. Why only fiscal policy? Why not put everything on the table? Not just fiscal policy, but all of economic policy. And it shouldn't just be "changed". It should be re-evaluated carefully, not with overly simple adages, and not without rethinking everything they think they know. And not just economic policy, but also the thinking behind policy, and the assumptions behind that thinking. 

And they should ignore the personal preferences of policymakers. We cannot design national economic policy to suit policymakers' preferences. We need to understand and respect what the economy requires, or the economy will never give us what we need from it: Ask Jane Jacobs. (And yeah, maybe I should read past page eleven in that book before I get myself in trouble, talking about things I have not read.)

I understand that Swagel is in the authority position, and he must have been thinking about this already, and he wants to get to the point. Sure. But why even bother if you're not going to offer something new? Higher taxes and lower spending, that's all he's got. 

Grab an earthworm and your bamboo pole, set a spell by your favorite stream, and you will soon catch the big one that Swagel failed to bring home.

 

The same search that turned up Swagel's statement on deficits also turned up The Causes of Budget Deficits in SaylorDotOrg's GitHub pages. Saylor says:

The budget deficit reflects two forces: the stance of fiscal policy and the state of the economy.

Swagel calls for "changes in fiscal policy". Saylor points out two forces: fiscal policy and the state of the economy. The state of the economy, that's the big one that got away from Swagel.

Right after Saylor in my search results is "Treasury Department (.gov)" saying:

The Causes of Deficits and Surpluses. The size of the national deficit or surplus is largely influenced by the health of the economy and spending and revenue policies set by Congress and the President.

The Treasury Department puts the state of the economy first, with spending and revenue and the grade school arithmetic occupying second place.

Next after Treasury in the search results is Kimberly Amodeo at The Balance, saying "Many situations can cause spending to exceed revenue." Many situations: There's more to it than spending in excess of revenue. 

Kimberly Amadeo adds:

There are only two ways to reduce a budget deficit. You must either increase revenue or decrease spending. ... Governments can only increase revenue by raising taxes or increasing economic growth.

Increasing economic growth: there it is again. Saylor knows. Treasury knows. Kimberly Amadeo knows. Even I know. But Phill Swagel doesn't mention it. It's not on the table. Not up for discussion.

The word "economy" does not occur in the Swagel essay. The word "growth" occurs only once, in the phrase "the growth of federal debt". There is no mention of economic growth, and no thought of improving economic growth.  Nor does Swagel mention debt other than federal. In the first paragraph he refers to the "economic outlook", but only to introduce the need for deficit reduction and federal spending cuts. 

What's the plan here? I mean, what the hell, our economy has been in decline for fifty years, so why worry about growth now, right?

That's the plan???

I understand, in Swagel's position as head of CBO, his role is to discuss deficit-reduction, not economic growth. I understand. But his readers may be led astray if he fails to point out that economic growth can solve the deficits problem. By avoiding the topic, Swagel confirms his readers' suspicion that economic growth is no longer an option. That a big mistake unless the plan is, you know, to "abolish government."

 

A cost problem arises from the growth of finance. We can reduce the cost problem, reduce inflation, and improve growth by reducing the accumulation of private-sector debt until until prosperity emerges.

To reduce the deficits we must solve the cost problem by reducing private sector debt and debt service. It's a simple plan, easy to keep in mind.

Private sector debt is oppressively high because policy accelerates borrowing but does not accelerate the repayment of debt. We borrow money faster than we pay it back because policy demands it. Apparently, policymakers never noticed this.

To reduce private sector debt we need policy to induce us to pay down our debt faster than we borrow. Of course, this is not "normal" -- It is the opposite of normal policy. But it is necessary, unless we have debt forgiveness on a massive scale. And that is not likely to happen.

On the cause of deficits

Definitions: debt and deficits  

I re-read the Simkhovitch paper "Rome's Fall Reconsidered" yesterday. He writes:

Social labor varies in its productivity. At all times this productivity had and has its limits. These limits of the productivity of our labor become, for society, physical conditions of existence. Within these limits our entire social life must move. These limits life must accept as mandatory and implacable; to them it must adjust itself.

... The accurate knowledge of the productivity of our labor can explain to us why things were as they were, why they became what they are and what one may expect from the future.

That passage brought to mind this statement from mine of June 6: "Spending and revenue are the arithmetic of deficits but not the economics of them, not the cause."

Paraphrasing Simkhovitch, the limits on the productivity of our labor explain why deficits were as they were, why they became what they are and what we may see in the future. More generally, it is economic conditions that determine what happens with federal deficits. So, again: Spending and revenue are the arithmetic but not the cause and not the economics of deficits.

 

Jane Jacobs, in The Nature of Economies, has Hiram saying

I'm convinced that economic life is ruled by processes and principles we didn't invent and can't transcend, whether we like that or not, and that the more we learn of these processes and the better we respect them, the better our economies will get along.

The more we respect these principles and processes, the better our economies will be.

I know you like to say that government, by spending more than it takes in, is the cause of deficits. I know. At least you have the arithmetic right. But you are leaving out everything, except what Milton Friedman might have called the proximate cause. As I see it, you cannot have an economy full of bad economic policy, turn your back on it, and rightly say excessive spending caused the deficits. That argument is bullshit. 

Anyway, in half a century of trying, the plan to cut federal spending has not come close to working. For half a century, deficits have only grown bigger. How long does a plan have to fail before we say Gee, maybe we need a better plan.

That's why the House Freedom Caucus made such a stink about the Debt Ceiling this year. The Freedom Caucus is not yet ready to say we need a better plan.

Here, a graph showing two measures of federal deficits. Surpluses appear above the zero level; deficits show up below zero:

Graph #1: The blue line is FRED's FYFSGDA188S showing Surplus or Deficit as Percent of GDP.
The red line shows the yearly changes in the Gross Federal Debt as Percent of GDP.
The blue line shows a surplus in the latter 1990s; the red line does not.

We need a better plan. Forget the math. We have to do the economics, understand the problem, and fix it. And we have to fix it before too many more Debt Ceiling crises come up, because one of these times the standoff will last just long enough that the US defaults on its debt. Then we'll be in a world of shit. You think things are bad now!

How big a problem will it be if the US defaults? We should probably all go out right now and buy enough rope to hang ourselves, because when the time comes, we'll be wishing we did. 

The Arthurian alternative is to convince all the Republicans and all the Democrats that we don't need to balance the budget, and we don't need to "set public spending always to the level required to achieve full employment, and then accept whatever deficit may result." We just need to bring private-sector debt down so that we can afford to live again.

Why? The plan is to reduce cost by reducing the size and cost of finance -- that is, by reducing the size and cost of private-sector debt. A gradual but persistent fall in household debt service payments will free up money for spending and saving. A gradual but persistent fall in business debt-service cost will allow businesses to reduce the prices they charge for their products.

If prices fall by 1.5%, and household debt service falls by 1.5% of DPI, we can buy 3% more output. This 3% gain, on top of whatever normal growth we can eke out, will boost economic growth until your jaw drops.

How? We can make this change happen if we want it. But we have to change economic policy to make it happen. We need to rely increasingly on cash -- on income -- to fund our day-to-day purchases. And we need to restrict credit growth to fight inflation. Yes, we need pretty much exactly the opposite of the policy we have had since the 1960s. After so many decades of unchanging policy, the pendulum has swung too far in favor of finance.

With a growing economy, and growing income, we will find the cost of the social safety net falling, and the federal budget moving toward balance. So you see, the deficit-cutting comes last and comes automatically and develops momentum when we respect the natural processes of our economy and make use of them, as Jane Jacobs describes, and as Vladimir Simkhovitch seems to understand as well.

"Deficits have become the norm"

"Deficits have become the norm", they say. The Peter G. Peterson Foundation makes this excellent observation:

Historically, periods with spikes in deficits and corresponding increases in the national debt have been periods associated with war or a severe economic downturn. Today, deficits have become the norm and are no longer caused by periodic spikes in wartime or recession-related spending, but rather by a long-term, structural mismatch between spending and revenues.

Deficits were not always the norm, but they are now. That's an excellent insight. But I think the overview should also point out that the deficits are getting bigger.

The problem is getting worse: from occasional deficits, to deficits as the norm, to bigger deficits as the norm. This is the kind of problem that keeps Republicans up at night, while Democrats sleep like babies.

Hey. I don't complain about the federal deficits. But if the problem is growing worse, we should probably admit that the situation has become "unsustainable" -- and that is a word that might even wake up the Democrats.

If the situation has become unsustainable, the facts have changed. So I must say: when the facts change, I change my mind. What do you do?

 

I said "the problem is getting worse" and maybe you thought I meant the deficits problem is getting worse. That's not it; as I also said, I don't complain about federal deficits. I don't think the deficits are the problem, nor the debt. I think the problem that causes the deficits is the problem. And the trouble is, that problem is getting worse. The problem that causes the deficits is getting worse -- and as a result, the deficits are now getting bigger.

So now you might think I mean government spending in excess of revenue is the problem. But again, no. The big picture is not as simple as "spending in excess of revenue". Spending and revenue are the arithmetic of deficits but not the economics of them, not the cause.

I do know that spending in excess of revenue creates deficits. But I do not accept the assumption that deficit spending is the cause of deficits. The economy is not that simple. Government revenue and government spending requirements change with changes in the economy. The true cause of deficits is their economic cause.

Imagine a cost problem.

In the days before the cost problem, as Peterson might say, there would be deficits in times of war and during economic downturns. In normal times, then, there were no deficits. But why am I going by what Peterson said? I need to see this for myself.

This graph shows the federal deficits relative to GNP for the years 1919-1955:

Graph #1: Federal Deficit (or Surplus) as a percent of GNP
Surpluses are above zero. Deficits are below zero.

I don't find GDP data for these early years, so I'm using GNP.

The graph starts with deficit for 1919, the year following the first World War. Then there is a decade of budget surpluses, small ones. After 1930 we have deficits during the "severe economic downturn" called the Great Depression, then big deficits during the second World War. After the war, budget surpluses in 1947 and '48, and a very small surplus in 1949. Then

• a deficit in 1950, recession-related,
• a surplus in 1951, despite the Korean war,
• deficits in 1952 and '53, Korean war-related, and
• deficits in 1954 and '55, probably recession-related.

In these early years, the deficits do appear to be related to war and to economic downturns, as Peterson says.

With more recent data, we can use GDP:

Graph #2: Federal Deficit (or Surplus) as a percent of GDP
Slide the scrollbar right to see more, or just click the graph

The graph begins before the Depression, with the last two of the small budget surpluses shown on the first graph, for 1929 and 1930. Then deficits during the Great Depression and the second World War, as noted above. Then we have a series of recessions, with budget surpluses in the booms, and deficits in the slumps. But this pattern barely lasts through the 1950s.

The 1960s is almost all deficits. Late in the 1960s is a bigger deficit (the bigger low of 1968) that does not have a corresponding recession: There is no recession bar on the graph at 1967. However, there was a "near recession" in 1967. Milton Friedman predicted it in 1966, in Newsweek. Rowland Evans Jr. and Robert D. Novak provide brief historical context about this "forgotten crash" in an excerpt at my old blog.

After the deficit of 1968, the federal budget was ever-so-slightly in surplus in 1969. That was the last surplus until the 1990s, if those even count.

The continuous deficits of the 1960s may have been the result of the "full employment" budgeting by the Keynesians in the JFK and LBJ administrations; it may have been a worsening of the "cost problem" that I asked you to imagine; or it may be a combination of the two.

In the 1970s the deficits were bigger than in the 1960s. I once thought these bigger deficits resulted from the inflation of the 1970s, with higher prices causing the bigger deficits. Now I'm not so sure. The graph shows the deficits as a percent of GDP. And GDP in the 1970s was also embiggened by inflation. So it isn't inflation that makes the deficits look bigger.

The deficits could be bigger in the 1970s because the government was spending more, as everyone thinks. Or the deficits could be bigger because of the growing cost problem. And you must not reject the cost problem at this stage, as it has not yet been identified.

In the 1980s the deficits were bigger than in the 1970s. All my friends blame Reagan for that. But if a Democrat had been elected instead, would he have spent any less?

You'll have to slide the scrollbar to the right to see it, but in the 1990s the deficits got smaller. The internet attributes this victory to the agreement between Bill Clinton and Newt Gingrich that ended the government shutdown. I attribute it to a change in monetary balances that reduced the financial cost of using money, improving economic performance enough to turn deficits into surpluses in the '90s.

But the 1990s introduced us to even bigger changes in federal deficits. As the Graph #2 shows, the changes in deficits, both increases and decreases, have been far bigger than even those of the 1980s. You know, yes, we had the covid, and the government response cost a lot of money. I think it was worth it, but that's not the point. The point is that the covid-related changes are the only ones that can be attributed to something other than bad policy.

Most people attribute the deficits to bad politicians. I don't. I think the politicians don't know how to fix our economy. They don't have a clue. I see people on one side saying we have to cut federal spending and people on the other side saying we need more federal spending. Both sides are wrong. What we need is less private sector debt.

The cost problem is what it costs us to use money. How much interest do we pay out of our annual income? How much debt service? We pay a lot, because we have a lot of debt. "We" being the private sector, and "a lot of debt" being the debt of the private sector.

We buy less because we pay so much debt service every year. And the things we buy are more expensive because businesses use a lot of credit and pass along the cost of it in the prices we pay. These are the facts that underlie the cost problem.

The Peterson article says we have "a long-term, structural mismatch between spending and revenues." And their next sentence:

By addressing that mismatch, policymakers can put our nation on a better path for economic growth, opportunity, and prosperity.

Yeh. But I am afraid that Peterson wants to "address the mismatch" the same way everyone else wants to address it: by cutting federal spending.

Federal spending is not the problem. We have a cost problem, a financial cost problem. We have so much debt, and we pay so much interest on it, that we can no longer afford to live. 

Everyone who points a finger, points it at us and says we did it. We borrowed too much. We spent too much. It's our fault. So they say. But we live in a world where economic policy constantly encourages the use of credit, and constantly promotes the expansion of credit availability so that we should never run out of money to borrow.

But we are running lower and lower on the money we use to pay our bills. Why? Because they use "tight money" to fight inflation. Tight money means less money. They want us to use credit instead.

What, buying stuff on borrowed money doesn't cause inflation? Of course it does. And borrowed money has the extra cost of interest, as well as repayment of principle. Every dollar of debt is a cost problem, and we have a lot of debt.

We need to use less credit, and to replace it we need money that doesn't require debt service. And since we will have more money, we should fight inflation by reducing our use of credit: by having fewer policies that encourage credit use. Plus we need a few policies that encourage us to pay down our debt faster. Policies that help us do that will fight inflation and reduce our debt for us.

The federal government runs deficits because stimulus spending no longer works. Stimulus spending no longer works because the private sector has so much debt that people can no longer afford to live. Yet every way we turn, our only option is to use more credit.

To reduce the deficits we must solve the cost problem by reducing private sector debt and debt service. It's a simple plan, easy to keep in mind.

Private sector debt is oppressively high because policy accelerates borrowing but does not accelerate the repayment of debt. We borrow money faster than we pay it back because policy demands it. Apparently, policymakers never noticed this problem.

To reduce private sector debt we need policy to induce us to pay down our debt faster than we borrow. Of course, this is not "normal" -- It is the opposite of normal policy. But it is necessary, unless we have debt forgiveness on a massive scale. And that is not likely to happen.

Deficits have become the norm because we use credit for money.

A time for action

Percent change in financial assets of the financial sector:

Graph #1: The Recent "oops" in Financial Assets of the Financial Sector

The low of Q2 2022 makes the low of Q4 2008 look like a plaything.

Silicon Valley Bank...
Signature Bank...
First Republic Bank...

oops!

Next graph shows the same financial assets, in millions of dollars:

Graph #2: Comparing the oopses

Maybe they are not "oops". Maybe they are "yikes".

I should say that on a log scale graph, the recent shock is about the same size as the 2007-08 shock. Not twice as big. So the problem this time is "only" about as serious as the problem last time, not twice as big. Lucky us. 

Still, something has to be done. Finance is too big, too costly, and too unstable to be left to its own devices. Too big, too costly, and too unstable to be managed by people who think like bankers.

And yes, I'd love to see the financial sector get smaller, and yes, that means a decrease in their financial assets. But I don't want them to take the whole economy down with them. I want a gradual transition from excessive reliance on credit (EROC) to greater reliance on money-that-doesn't-cost-interest. I want to reduce the cost of using money as a percent of the cost of living and the cost of doing business. That's how we fix the economy.

I want finance to be the size that best promotes economic growth. But we must not forget to include the cost of finance when we figure the size that best promotes growth. They must not forget.

Considering that the economy slowed in 1974, and has bounced back intermittently if at all, I think it is safe to say we need less debt now than we had in 1974. Less, relative to GDP. And a smaller financial sector than we had in 1974.

I think Minsky would say 1966, not 1974. I'm good with that. The level of debt and the size of finance that we had in the early 1960s is probably about right. We should reduce debt and finance to the size they were before things started going bad. 

But the trick is to do it before things start going bad. The way things are now, with our policies and our policymakers, we don't worry about it until the banks start failing.

The inflation is over. And there is room for prices to come down.

I'm looking at the right end of this graph, the recent end:

Graph #1: Labor Share

Since 2010, the "new normal" for Labor Share has been around the 100 level, meaning in this case about equal to its 2012 value. 

It looks like covid and the covid recession of 2020 drove labor share way up. (But I don't see a big fall in corporate profits at that time.)

The graph of labor share, to my eye, does seem to show increase since 2015: It doesn't go below the 100 level since 2015. Labor Share was trying to inch its way up. 

The big covid-related spike ends in 2020 Q2: midyear. Since that time, Labor Share has fallen back and is now almost back to the 100 level, our "normal".

Since things are almost back to normal, the disturbance appears to be about over, and I'm thinking this means that the post-covid inflation is just about over. Come to think of it, inflation is not much in the news anymore. The complaints, yeah, but not the newscasters' excitement over the big new monthly increases. I guess inflation is just about done for now.

And what has changed? Not Labor Share. Labor Share is back to normal. But profits are higher since the covid recession:

Graph #2: Corporate Profits

They'll probably stay at the high level, too... Come to think of it, there does seem to be room for prices to come down.

But don't hold your breath.

Jane Jacobs, "The Nature of Economies"

I googled predicting the dark age

At Bloomberg: "Even Late in Her Career, Jane Jacobs Made Predictions That Are Coming True Today" by Richard Florida:

Released in 2004 when she was 88 years old, Dark Age Ahead is hardly talked about among urbanists and fans of Jacobs’ earlier works. In fact, it was widely panned as the work of an aging crank whose best days and smartest commentary were behind her. The New York Times called it an “extremely sloppy” and “haphazard” book. Such reactions were par for the course with her later works. The MIT economist Robert Solow wrote that her 2000 book The Nature of Economies “[does not tell] us much about the nature of economies, beyond the pun itself.”

I wrote myself a note: ART check the book Robert Solow didn't like: The Nature of Economies.

It is available at archive.org
Jane Jacobs, "The Nature of Economies"
https://archive.org/details/natureofeconomie00jaco

I turned to Chapter One:

"Hortense and Ben have broken up," said Armbruster, waving a fax at Kate as she slid into the booth, balancing her cup of coffee.

"I'm sorry but not surprised." said Kate.

It's written like a novel. I don't read novels. And whodahfuc is Armbruster? And why should I care? I stopped reading and skipped ahead a few pages to see if only the first bit was novelish. My eyes landed on this paragraph, on page 11:

"To repeat, I'm convinced that economic life is ruled by processes and principles we didn't invent and can't transcend, whether we like it or not, and that the more we learn of these processes and the better we respect them, the better our economies will get along."

Oh, yes. That's me. I say stuff like that. Maybe not as well, but stuff like that. I repeated some of it after quoting Harvey Wilmeth, a couple months back.

Chapter One continues:

"That sounds pretty pessimistic," said Armbruster. "Here we are, already loaded up with government regulations. And now you want to compile still more lists of economic rules and regulations decreed by nature?"

"Limits are part of it," replied Hiram. "Awareness of them can prevent futility."

It's still a novel. 

And Armbruster obviously doesn't think about what people say. The dipshit can't even figure out that if we abide by the economy's rules, we will need fewer government "rules and regulations" to get the economy to do what we want. But I don't know how much of this I can read, with Armbruster and Kate and Hiram now, already, and balancing the coffee cup and all that.

Almost to page 12:

"But here's what interests me most: Natural principles of chemistry, mechanics, and biology are not merely limits. They're invitations to work along with them.

Yes!

"I think it's the same with economics. Working along with natural principles of development, and correction, people can create economies that are more reliably prosperous than those we have now and that are also more harmonious with the rest of nature."

Well, "harmonious with nature" sounds good, but I'm no expert on that topic. But Hiram, and Jane Jacobs, are right to say that by doing things the way the economy wants we'll have more reliable prosperity. No question about it.

And from page 12:

"... What does nature say about money?"

"Nature says money is a feedback-carrying medium," Hiram replied.

Yes. I talk about monetary imbalances being a problem, and restoring balance as the solution. The imbalances are the "feedback", which our economists and policymakers seem to ignore.

The economics in The Nature of Economies is wonderful. But I can't read the novel.