Elizabeth Warren, Michael Dell, Inequality

At the LA Times: Elizabeth Warren’s wealth tax proposal is constitutional, experts say — and necessary. By Michael Hiltzik, Jan 25, 2019.

Constitutional and necessary? That probably depends on who you ask. Makes me worry that Michael Hiltzik is writing for lovers of fantasy.

From the article:

Sen. Elizabeth Warren (D-Mass.), a newly declared presidential candidate, has turbocharged the progressive attack on income inequality with a proposal for a “wealth tax” aimed at Americans with net worth of more than $50 million.

An attack on wealth inequality, maybe, if it's a wealth tax. The article continues:

Warren herself hasn’t issued many details of her plan. But according to UC Berkeley economists Emmanuel Saez and Gabriel Zucman, who advised her on the proposal, the tax would be 2% on net worth above $50 million and another 1% on net worth above $1 billion. They say it would affect about 75,000 U.S. households, or less than 0.1% of the total, and raise $2.75 trillion over 10 years. That’s about 0.1% of gross domestic product per year.

"That’s about 0.1% of gross domestic product per year." So, obviously not a tax designed to balance the budget. That's interesting. It tells me Elizabeth Warren has something other than balancing the budget in mind. (I didn't know politicians could think about anything else!)

It doesn't need to be a big tax, to limit the growth of inequality. An inequality tax, if fully effective, would reduce inequality to the point that no one is subject to the tax. It would bring in zero revenue. To bring in no revenue these days, with inequality so extreme, would likely mean the tax is too weak. But even with a stronger tax, over time the revenue from the tax would fall as high-income earners redesigned their incomes to avoid paying it.

Myself, I'd pick maximum levels for income and wealth -- levels that answers the question "How much is enough?" -- and tax everything above those levels at 100%. This would create a true limit to inequality. Anything less than a 100% tax on income or wealth above the limit would slow but not stop the growth of inequality. It wouldn't solve the problem.


From the article:

The super-rich haven’t been shy about speaking up for their prerogatives. Asked at the Davos economic conference this week about the suggestion by Rep. Alexandria Ocasio-Cortez (D-N.Y.) to raise the top marginal income tax rate to 70% on high incomes, computer tycoon Michael Dell dismissed it out of hand.

“Name a country where that’s worked. Ever,” Dell said. To which Erik Brinjolfsson of MIT, a member of Dell’s speaking panel, promptly replied: “The United States.” Brynjolfsson schooled Dell by informing him that from the 1940s through the 1960s the top rate on income ran as high as 94%. “Those were actually pretty good years for growth,” he said.

Hiltzik thinks he has a zinger here.

The years from the late 1940s through the 1960s were better than "pretty good" years for growth. And income tax rates were definitely high. But there is no reason to assume that high tax rates on income were the cause of the good growth; that is fantasy.

What one can say with confidence is that high tax rates did not make good growth unattainable. And really, this is all one needs to say about tax rates and growth.


From the article:

Dell also said he contributes to society via a family foundation, adding: “I feel much more comfortable with our ability as a private foundation to allocate those funds than I do giving them to the government.”

It’s proper to observe that Dell’s multibillion-dollar fortune is based on mail and online orders of computers — in other words, on infrastructure created and funded by the government he disdains.

Hiltzik makes the point that Michael Dell's fortune was made by taking advantage of the economic environment our government created to promote general well-being and the pursuit of happiness. It's a good point. Dell is not a super-hero, except in his own mind.

One piece of the puzzle Hiltzik leaves out is the business tax code. By favoring growth, the tax code gives advantage to those who do grow. And the tax advantage grows right along with the business. So the lucky few gain almost all the advantage, and everyone else is left in the dust.

This tax advantage is why we've ended up with very few, very large corporations in most any industry you look at. It's also why we have so many private foundations like Dell's, which, by the way, pay no income tax.

This tax advantage is also what makes anti-trust generally ineffective.

From the article:

The question boils down to whether you want society funded out of the whims of Michael Dell or the debated judgments of your elected representatives.

I think there is a stronger argument. The question doesn't boil down to whim versus judgment. It boils down to whether capitalism, and society as we used to know it, can survive while inequality grows ever more extreme. The answer, I think, is obvious: It cannot survive. Society is already changing. And capitalism is giving way to financialism.

The time has come to reverse the trend and reduce the growth of inequality.

Parrots in the wild don't speak English

Take a parrot, domesticate it, keep it fed and pay attention to it, and it will learn to talk. Leave a parrot in the wild, and it will forever be more concerned with survival than with learning to talk.


Thoma links to The Three Revolutions Economics Needs by Edmund S. Phelps.

Good title. In passing, Phelps mentions the neglect of imperfect knowledge and the neglect of imperfect information, but his article is really about the third of his three revolutions: "omission from economic theory of economic dynamism."

Not sure what economic dynamism is; I looked it up, and it seems to be the force that drives change (or some such thing). I'm thinkin Phelps wants economists to figure out what drives change so they can restore dynamism. He writes:

While economists have come to recognize that the West has suffered a massive slowdown, most of them offer no explanation for it. Others ... infer that the torrent of discoveries by scientists and explorers has shrunk to a trickle in recent times.

The torrent of discoveries has slowed to a trickle? The one explanation that Phelps allows is surely not a good one.

He says also:

... economists have been largely mute on the underlying causes of this crisis and what, if anything, can be done to restore economic vigor.

Phelps has something in mind, something he thinks would restore the vigor. He makes his whole argument in a single paragraph, framed between two sentences:

Schumpeter’s theory operated on the explicit premise that the mass of people in the economy lack inventiveness.

This was an extraordinary premise. One can argue that the West as we know it – the modern world, we might say – began with the great scholar Pico della Mirandola, who argued that all mankind possesses creativity. And the concerns of many other thinkers – the ambitiousness of Cellini, the individualism of Luther, the vitalism of Cervantes, and the personal growth of Montaigne – stirred people to use their creativity. Later, Hume stressed the need for imagination, and Kierkegaard emphasized acceptance of the unknown. Nineteenth-century philosophers such as William James, Friedrich Nietzsche, and Henri Bergson embraced uncertainty and relished the new.

As they reached a critical mass, these values produced indigenous innovation throughout the labor force.

So, over the centuries, our culture developed a habit of "indigenous innovation".

Yeah, I dunno. I like the phrase. Not so hot on the argument. To me, it's not even economics. I know, I know: Economic activity arises from people. (That's the whole argument for "microfoundations", isn't it?) But to me -- and I'll admit this is small-minded -- to me, it's human nature. It's just the way people are. Okay, maybe it's just the way people are for those who have been breast-fed by Western Civilization. But Japan? Korea? China? Surely the people of those nations didn't grow up with Cervantes and Kierkegaard and Nietzsche and Hume. So I have my doubts about Phelps's theory. But there is something else. Phelps leaves it out entirely.

What is the likelihood that we've lost the cultural gene for "indigenous innovation"? Little or no chance, I'd say. Surely I'm not the only one who has thought up a better way to accomplish some work-related task, but our ideas went nowhere because our next thought was I don't get no respect.

We didn't lose the innovation gene. We are simply withholding our good ideas because we don't get rightly paid for them. To an outside observer like Phelps it would appear that we've lost the innovation gene. We know better. We're like parrots learning not to learn English.

I've done my share of trying to innovate at work. I may have been the main reason they once put up a sign by the time clock:

IF YOU HAVE ANY GOOD IDEAS, TURN THEM IN BY TUESDAY

After Tuesday, in other words, good ideas will no longer be accepted. Maybe Edmund Phelps should focus a little more on things like that. It's not that we've lost the innovation gene. It's that innovation is being suppressed because, god knows, the employer is now so far above the employee that it's obvious (to the employer) that the employee has nothing to contribute, nothing but menial labor.

Well that brings inequality into the mix, doesn't it. Not my topic. But I will tell one more true story: Saw somethin in the shop that I thought was a problem. Went to the boss and told him about it. (It had to do with inconsistent bolt lengths.) The boss listened politely, and when I was done, he very politely said

Thank you for bringing this to our attention.

I looked around to see who else was in the room. Just me and the boss. His message was clear: I was not part of the same "us" that he is part of. And that was the end of that.

That was also when I started withholding my ideas. But that's definitely not my topic here.

My topic is this: Maybe it's not that we've lost the innovation gene, nor that it has been suppressed. Consider the possibility that something else in the economy has arisen or developed or changed, something that interferes with growth or innovation or vigor.

Consider the possibility that innovation is as strong as ever, but some other factor is interfering with the growth that Phelps expects to arise therefrom.

Edmund Phelps never brings up the possibility of such a factor. He does not look for such a factor. And, of course, he never finds one. This does not mean that there is no such factor.


The economist's task is not to find what drives vigor, but to find what's interfering with it.


What factor could have such an effect? The growth of finance could have such an effect. In particular, the growth of the cost of finance.

Note that "the cost of finance" does not refer only to the rate of interest, but also to the size of the debt on which interest must be paid. The rate of interest, and the accumulation of debt.

Growing financial cost eats into the profits of nonfinancial business, creating upward pressure on prices. Growing financial cost eats into consumer income, creating downward pressure on aggregate demand. Undisturbed, these two consequences of the growth of finance can combine to create an effect which looks very much like cost-push inflation.

It *is* cost-push inflation.

The growth of finance may have been responsible for the cost-push onset of the Great Inflation in the 1960s, and even for the inflation of the latter 1950s which so troubled Samuelson and Solow. This would mean that the size of finance has been excessive -- has been enough to create problems -- for a very long time.

The cost-push inflation problem was "resolved" by Paul Volcker who, as head of the Federal Reserve, simply decided that there's no such thing as cost-push inflation.

Polly want a cracker? Polly wants a raise!

And respect. Polly wants respect.

Real Time with Bill Maher, 18 Jan 2019: Solving consequences

Before you can solve a problem, you have to distinguish between cause and consequence. Many of our economic problems are consequences of a cause we ignore. To solve problems that are consequences, you have to figure out what's causing them, consider the cause to be the real problem, and solve the real problem.


Third Party Presidential Candidates I remember, and how they did:

Source: https://www.infoplease.com/timelines/third-parties

As the graph shows, Perot did remarkably well in the 1992 election, running against Bill Clinton and George H W Bush. Infoplease says "It was the best showing of a candidate from a minor party since 1927."


I didn't vote for Perot, but I did find him interesting. He focused on the economy. He sort of forced the issue for the other candidates. That was a good thing. (That's not to say Perot's solution was right.)

I bought his 1992 book United We Stand: How We Can Take Back Our Country. Still have that book. Here are the opening words of Chapter One:

In June, 117,000 more Americans were thrown out of work. While we were putting the finishing touches on this book in July, eight companies announced they were shedding 23,000 jobs. Those were just the announced layoffs.

The Federal debt is now $4 trillion. That's $4,000,000,000,000. Our political leaders will add over $330 billion to that debt in 1992 alone.

We add about $1 billion in new debt every 24 hours.

Does anyone think the present recession just fell out of the sky?

I love the way Perot gets from debt to recession by magic. And, you know, many voters probably agreed with him that the Federal debt causes recession. What really gets me, though, is that Perot offers no argument at all: no logical explanation for how the Federal debt might possibly cause recession.

Far as I can tell, the analysis comes down to this:

1. Debt is bad.
2. The Federal debt is big and bad.
3. We have a recession.
4. The Federal debt must have caused the recession.

But that was in 1992. These days, the analysis runs more like this:

1. Government is bad
2. The Federal government is big and bad.
3. These days we have lots of problems.
4. The Federal government must have caused them.

That is sorry logic and a flawed conclusion.

There is, however, another explanation, an alternative to the "must have caused it" line of reasoning. That alternative is this: It's the government's fault, because the government is supposed to take care of these things.

This explanation I can almost buy. Our Declaration of Independence tells the world that we have an unalienable right to the pursuit of happiness, that is, to the pursuit of wealth. And the U.S. Constitution, in part, promotes the general welfare, that is, the general well-being of the American people. The U.S. government is supposed to create and maintain an environment, an economic environment in which these things can and do happen. Clearly, the government has lost its way.

In a sense, then, a powerful sense, it is the government's fault that our economy has gone bad. The government is not doing its job. If the economy goes bad, by definition it is the government's fault.

Still, this does not mean that the Federal debt is what made the economy go bad. Reducing the debt is not obviously the solution that fixes the problem. And as voters learn that reducing the Federal debt does not solve the problem, they seem to be moving toward a more simplistic solution: reducing the government itself. For people who hold such a view, every government shutdown is a victory.

Grover Norquist has said "I don't want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub." But it is only a small step from wanting to be able to "drown government in a bathtub" to wanting to do it.

But getting rid of government is a political move. I much prefer to have an economic solution because the problem, as I see it, is an economic problem. Granted, when we run out of economic solutions to try, there will be nothing left but the political solution.

But the fact that none of the solutions we've tried so far has worked, doesn't mean that no solution will work. That's why I keep saying we have to go back and re-think the problem.

 
When it comes to economics, voter logic is no better today than it was when Perot was running. You can see it in Real Time with Bill Maher S17 E1 (18 Jan 2019) when Maher says:

I don't really think there is a great need for new ideas because we've been around the same problems for decades. So we know what the ideas are. It's the political will to put them into play.

and John Kasich replies

I don't disagree with that.

I do. I disagree with Maher. His view is that "we've been around the same problems for decades" but we still haven't solved them, so we must not be trying hard enough. (If that's how people think, no wonder they hate the government!)

Maher sees no possibility that the solutions don't work because the solutions are wrong.

My view is that we misunderstand the economy. We don't know what the underlying problem is, so we're not trying to solve it. We're trying to solve the consequences of that problem without understanding that they are consequences, and without wondering what they might be consequences of.

Bill Maher's view -- we need to try harder -- is a commitment to failure. Maher is unwilling to re-evaluate things. He is unwilling to consider changing our problem-solving strategy. He only wants to try harder. He wants to continue using a strategy that has not worked in 45 years, and just try harder.

The trouble with Maher's approach to solving economic problems is that it is open-ended: As long as the problem is not solved, his solution is only to try harder. Maybe that sounds good. To a point, I'll grant you, it is good. But if the problem you're trying to solve is not the real problem -- if is a consequence of the real problem -- you will never solve that problem. Because you can't solve consequences.


The real problem, the underlying problem, is not the Federal debt, but all the rest of the debt. Or the Federal debt and all the rest of the debt. But then, the Federal debt is a consequence of all the rest.

Remember all the noise about Obama's massive budget deficits? And now, Trump's? Their government deficits came after the rest of the debt caused a financial crisis. The increase in Federal debt was a consequence of the prior increase of debt other than Federal. That other debt, that's the real problem. The big increase in the Federal debt, that's the consequence.

The same has been true since the mid-1970s when economic growth slowed (because of private debt) and the government started increasing its debt (to solve the problem of slow growth). Only briefly in the latter 1990s was there any relief, a decade after private debt growth slowed in the latter 1980s.

Growing the Federal debt was a solution to the problem of slow growth: a solution that did not work.

These days, reducing the Federal debt is seen as the solution. But it, too, is a solution that does not work.

Hey, I could be wrong about the underlying problem. I'm not, but I could be. But I'm definitely not wrong about this: If our solutions have not solved the problem after all this time, then surely we need to re-think the problem.

The Mysteries of Debt. Explained.

Adapted

When there is too much debt, it is necessary to reduce debt. In an environment where everything is growing, it is possible to reduce debt simply by having debt grow more slowly. This is what happened in the 1980s, after about 1986.

When there is not too much debt, the economy is able to grow with vigor. This is what happened in the 1990s. The economy grew faster. And debt started growing faster again.

When debt grows, it accumulates. The cost of debt, the interest and the principal, increases. Eventually, the cost becomes too much, and the economy cannot grow. This is what happened in the 2000s.

Debt growth is always higher than real economic growth, except at the very end.

Recalculatin debt service

In the test-and-development version of Wednesday's post there remain some notes. This one,

ALSO
TOTAL DEBT WE BORROW IS GREATER THAN THE REPORTED NUMBERS BECAUSE WE ARE ALWAYS PAYING DEBT DOWN

and a handful of links to other debt service posts I've done.

In Debt service (3 July 2016), Graph #5 shows "Principal Repayment as a Percent of Household Debt" running near 4.5% all thru the 1990s, and averaging perhaps near 4.5% even after the 1990s. Independently, 4.5% was also my best guess number for principal repayment as a percent of household debt in mine of 22 January. So I thought I was onto something.

I was thinkin maybe I could use that graph for principal repayment numbers all the way back to the 1950s. Unfortunately, when I checked Graph #5, it turned out to be based on FRED's TDSP debt service, which means it only goes back to 1980. So the graph gains me nothing.

So then I was wonderin: How could principal repayment vary so much from a fixed percentage of the debt we owe?

It would vary with economic conditions, probably. If the economy was good, people could better afford to pay down debt. If the economy was bad, people could less afford to pay down debt. That could be part of it. Or the other way around: Maybe when the economy is good, people feel less urgency about paying down debt. But when things suddenly go bad, as in 2008, people feel more urgency, and make paying down debt a higher priority, so the repayment ratio goes up.

I don't know what to do with that.

Maybe it varies with "short term loans", loans that last less than a year. On average, maybe half of those are paid off before the end-of-year roundup when stats are tallied.
// But they do it Quarterly, Art.
Still, some of that short-term debt must slip through the cracks and miss being counted as debt.

If short term debt varies as a percent of debt, then the "slip through the cracks" number would vary as well.

I don't know how much sense this all makes, but it flashed thru my mind quicker than I could write it down, and I made a graph comparing "principal repayment as a percent of debt" to "short term loans as a percent of debt". I see some similarity:

Graph #1: Principal Repayment (blue) and Short Term Loans as Percent of Debt (red)

Some pattern similarity, yeah. Notice, though, that the red line references the right-hand scale, and the right-scale numbers are substantially bigger than the left-scale numbers. So, maybe substantially less than all of the short term debt has influence. As I imagined above.

I divided the red numbers by 6 and added 0.25 "to make the two series comparable", as Milton Friedman would say. I changed the frequency to annual, to get rid of the jiggies. And voila:

Graph #2: The same, but better

It's not a perfect match, red to blue, but it is interesting. I see the red runs higher than the blue coming out of the recessions of the early 1980s and thru the good period that followed, and again in the "goldilocks" of the 1990s. Some relation of red-above-blue to a good economy? Maybe. (BTW it looks like the red is about to go above the blue again just now.)

In the early years, the red line reaches 6.5%, over one third more than the 4.5% figure I noted above. At that rate, using the short term loan number instead of the constant value 4.5% should increase my estimate of principal repayment by as much as 30% or more. So I want to use this data, the red line here, as a guess at principle repayment as a percent of debt owed.

Yeah, you know what? The red line is higher on the left (when debt was low) and lower on the right (when debt is high). Makes sense, we can pay off a greater percentage of our debt when we don't have so much of it. I'm goin with this.


This is what I did on the 22nd:

"I can set up a calculation where I take interest paid, add some percentage of existing debt, and divide the total by disposable income."

This is what I'm doing today:

"I can tweak the percentage number..."

And again:

"The percentage number I get will be a rough estimate of how much debt we repay each year."

and it'll be based on "Short Term Loans as Percent of Debt".

I'll take my graph from the 22nd, duplicate the red line in green, then eliminate the 0.045 (4.5%) as percent of debt repaid and use the other thing.

Here's what I get:

Graph #3: Debt Service using a Guestimated Variable Measure of Principal Repayment (green)

Damn! It sure doesn't look like a 30% increase, going from red to green. Almost not worth the trouble of figuring.

I had the same trouble yesterday. Oh, first I had trouble with the short-term-loan calculation. (I was trying to do it without coffee.) Then when I finally got it right and plugged it in to the repayment-of-principal calculation, I got the same tiny increase you see in that last graph above.

I fiddled with it yesterday and couldn't get it to come out as I expected, so I set it aside. That delayed this post till today, and I put up the "tiresome warnings" post instead. This morning I created the graph again, along with my 3AM coffee.

I got the same result today, so maybe it's not wrong. But it sure doesn't look like a 30% increase. I have to check some numbers. I want to start with the red high points on Graph #2: 1950 (6.55837) and 1973 (6.49469), both well above the 4.5% of my prior calculation.

Table #1: Checking the High Points on the Red Line of Graph #2:

Year	1950	1973
Household Debt	74.845	613.133
Est. % of Debt Repaid	6.558	6.495
Est Debt Repaid (billions)	4.909	39.821
Household Interest Paid	4.155	48.779
Principal & Interest (billions)	9.064	88.600
DPI (billions)	214.823	1008.383
Principal & Interest as Percent of DPI	4.2	8.8

Checking next the percentages that are not 30: Reading off Graph #3 at FRED, for 1950 the red line's value is 3.50196. The green's value is 4.21911, or 20.5% more than the red. For 1973 the red is 7.57358. The green, at 8.78644, is 16.0% higher than the red value for 1973.

These values are figured for the dates with the highest estimates of "principal repayment as a percent of household debt" on Graph #2. As the values fall, the principle repayment percentage also falls from 20.5% (or 16.0%) to lower values. On average, then, on Graph #3 the green values are nowhere near 30% higher than the red values.

And Graph #3 is right. But why is my 30% guess so far off?

1. We add principal repayment and interest payment together to get the debt service payment. If we reduce the principal repayment but do not change the interest payment, the debt service payment changes by a smaller percentage than the principal repayment.
2. Where the values are expressed as "percent of DPI" rather than percent of household debt, those values are affected by the changes in the Debt-to-DPI ratio. When the ratio is less than 1.00, as it was for all years before 2002, the payment is a smaller percentage of DPI than of debt.

These factors, and perhaps others, push the calculated percentages down below my 30% estimate.

Looking at this picture a different way, my "short-term-debt"-based estimate of the principle repayment percentage (red line, Graph #2) is high early and low late. I think this is realistic. When the debt accumulation is small relative to income, it is fairly easy to repay a higher percentage of that debt. But when the debt accumulation is large, repaying even a small percentage of that debt consumes a large portion of income.

I wouldn't be surprised if the actual principle repayment percentage value was substantially higher in the early years than what my graphs show.

Meanwhile, having these numbers to look at is better than nothing.

Tiresome and unjustified warnings of recession

At Reddit...

Catch the drift? Recession, recession, recession.

Remember ten years ago? Nine years ago? Eight years ago?... Seven years ago? Remember all the predictions of raging inflation? I swear I thought those people wanted the raging inflation and were trying to talk the rest of us into somehow creating it.

Same thing now, except the prediction is recession. One idiot after another is predicting recession. And why? Because debt's been creeping up again? Because some unspecified category of home sales "plummeted" for a month? Or because so many people are predicting recession that Americans are "becoming more pessimistic about the economy"?

Empty arguments, all.

Just like the inflation predictions, the recession predictions have been popping up for some years now. They were getting on my nerves already two and a half years back, when I wrote Is anyone still predicting recession? Yes, in fact. (That time it was Larry Kudlow.) On my nerves again today while I was glancing at Reddit.

Hey, I dunno. Maybe we'll have a recession in 2019. Gosh, that's this year, isn't it. Wow. It's time for the recession predictors to update the catch-phrase and push the date out another year.

Like I was sayin, I don't know if we'll have a recession. We might.

Look with me:

Graph #1: Household Debt and H-P Trends

Household debt: There is a bit of a flat spot that begins early in 2000, a year and a half or so before the 2001 recession.

Then there is a peak in the trend line in late 2005, a good two years before the start of the Great Recession.

There is no hint of flattening or peak in 2016 or 2017 or 2018. No sign of impending recession. It won't happen without warning.

Good thing I labeled that vertical axis, huh?


Employment:

Graph #2: Changes in Employment since Before World War Two

Notice that the numbers drop below zero at every recession, and at almost no other time.

Notice that the numbers slope downward toward zero before every recession. This provides a kind of early warning mechanism, a sign that tells us when a recession is likely.

Notice that the numbers show no downward slope at present.

Next graph, same data, only since 1982, with H-P trend lines:

Graph #3: Change in Employment and H-P Trends

No downward slope at present. No indication of recession.


I don't know why I looked at household debt above. Habit I guess.

The Reddit link image refers to "$1.2 trillion in risky corporate debt". FRED doesn't have a category for "risky corporate debt". So I went back to Reddit and clicked the link:

Indebted borrowers increasingly take out high-interest, adjustable-rate loans that are packaged into securities and sold to investors eager for a better rate of return.

Everything’s fine while the economy is growing. But when it slows, those borrowers could default, causing problems to cascade through the financial system.

They're NOT predicting recession. They're saying the debt's gonna be a problem when "the inevitable upcoming economic downturn" happens.

Hey. I agree: private debt is a problem. And I agree recession is "inevitable". But that doesn't mean recession will strike "by the end of 2019" or even by the end of 2020. If recession was imminent, we'd see it in the employment numbers. Or we'd see it in the slowing growth of debt. Or both. If you look in the right places you can tell if recession is on the way.

It isn't.

Calculatin' debt service

Yesterday I thought of a way to calculate the debt service ratio with my only guess being the percentage of our debt that we pay off each year, on average. Granted, it's a guess. But I don't have to guess all the numbers; just the one.

I came up with this graph:

Graph #1: Household Debt Service since 1980 (blue) and my calculation (red)

While going thru the motions, making the graph and writing the thing up, I remembered doing something similar before. In Reverse Engineering the Household Debt Service Ratio (14 August 2016), using the change in household debt along with net private saving, both of them smoothed, weighted, and "relative to DPI", I generated a graph that to my mind was pretty darn good match to the Household Debt Service ratio.

Using that same data from 2016, this graph shows the debt service ratio (which goes back only to 1980) and my calculation (which goes back to 1952). As in the 2016 post, my calculated data is shown with a two-year lag:

Graph #2

The graph shows household debt service beginning in 1980, and my calculation beginning in the 1950s.


As a glance at the two graphs will tell you, the calculations are far apart in the early years. I put both calcs together on a graph, along with FRED's debt service data:

Graph #3: Combining the Data

Egads! It's worse than I thought.

Funny how red and green can run so close to blue for most of the years after 1980, but so far from each other in the years before.

Oh, well. At least I got a blog post out of it.

Why didn't I think of this before?

Debt service includes the payment of interest and the payment of some portion of existing debt.

FRED has household debt service (as a percent of disposable personal income). They have household debt, and household interest paid, and disposable personal income.

I can set up a calculation where I take interest paid, add some percentage of existing debt, and divide the total by disposable income. Then I can tweak the percentage number to get my calculated number close to FRED's debt service number on a graph. The percentage number I get will be a rough estimate of how much debt we repay each year.

This calculation assumes that we pay the same percentage of our income our debt every year. Is that a good assumption? Well, the graph will show us. If the lines run near parallel from start to finish, it is a good assumption. We could then say that, on average, we repay so-and-so percent of our debt every year. But if the two lines veer apart, it's not a good assumption.

My method will be to try different percentage numbers till I find one that brings the lines close together. I know there is a better way, regression or "least squares" or something, but I don't know the one and don't remember the other. So I'll just guess and see how it turns out.

Graph #1: Household Debt Service since 1980 (blue) and my calculation (red)

Okay, if I narrow the graph at FRED, part of the upper-border text goes missing. That's unacceptable. So I left the thing the default width, made it taller, and saved the image, then shrunk it down more than I normally do to fit the blog space. As a result, the text on this graph is smaller that usual and more difficult to read. Thanks a lot, FRED. (To see the graph bigger, of course, you can just click it.)

The blue runs a little above the red at the start and end, and a couple spots between; the two run tight together in a couple places; and blue runs a little below red for the rest. I'm saying they run nearly parallel and pretty close together.

The graph says that on average, we repay about 4.5% of our debt each year.

Couple thoughts:

• I can look at the discrepancy, the difference between red and blue, and try to find how the differences arise. Recession-related? Recovery-related? ExtremeDebtBurden-related?
• I can work backwards and calculate the percentage repayment numbers instead of guessing them. Might be interesting to see that.

Something else: If I'm satisfied that my red-line calculation is good, rough but good, then I should be able to say that the red line is an estimate of household debt service all the way back to the late 1940s. That would be useful.

Minsky's second

In a recent post I quoted Minsky:

The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

I hope Minsky means not that a period of prolonged prosperity gives people enough time to do things that move the economy from stability to instability, but rather that decisions are made and things are done specifically to prolong the prosperity, and these decisions and things have the effect of moving the economy from stability to instability.

Sometimes you wake up in the morning and there it is

Another hoarding-related post from nine years back:

One way the Federal Reserve can fight inflation is to sell some of its assets. If it sells a T-Bill to someone, in exchange the Fed receives money that someone was willing to spend... The Fed receives that money and holds it, and it is no longer in circulation...


I get it now. A few days ago I wrote You can only either spend or save. I wrote People make their own decisions.

Here's the thing: You can only either spend or save. But while you're deciding between the two, you are holding money.

Here's the picture that was in my head when I woke up this morning:

The heavy line between HOARD and FLOW represents the range of possible attitudes toward holding money. Call it the Hold line. If you don't hold money very long, your spending happens near the FLOW end of the line. If you do hold money a long time, your spending shows up closer to the HOARD end.

The diagram also shows that hoarding is not the same as saving. If you save a dollar, your bank will put it to use, lending out multiple copies of it. But until you put it in the bank, you are holding that dollar. And as long as you hold it, no one is putting it to use. The money you hold may count as being in circulation; but it is not in circulation. Just like at the Fed.

Oh, and the active point on the "Hold" line determines Velocity.

Growing wealth by holding money

In a recent post I wrote

Glasner says that holding money costs you money ...

Reading that now, I am reminded of something I read many years ago: It is possible that one's wealth may be increased by hoarding money under the mattress (or somewhere like). For in a time of deflation your money becomes more valuable.

The irony in that is that if enough people with enough money decide to hoard as much as they can, prices will fall and their hoarded wealth will increase in value. Not irony, exactly. But it is a way to induce the death of a nation, or a civilization.


Found it!

I first came upon the word "hoarding" in The General Theory some thirty years ago. The economy was different then. Hoarding was not something in the news, not part of the world I understood. I had trouble with the concept. Below are some notes and quotes gathered since that time.

Friedman, Free to Choose, p.74:

"...a run that results in hoarding of cash by the public tends to reduce the total money supply."

Samuelson, Economics (1958 edition) p.269:

"A hoarder who earns no money interest on his mattress cache finds the real value of his wealth increasing every day as prices fall."

Hoarding reduces the amount of circulating money, which causes deflation, which causes the value of the hoard to increase. In other words, there are times when money under the mattress will increase in value, as though it were collecting interest in a bank.

Perhaps something David Glasner never thought of: Holding money doesn't necessarily cost you money. Yeah. And hoarding by itself, if there's enough of it, is enough to bring on the deflation that grows your wealth. Ooh, it is irony, isn't it.

Also, in case you were wondering, "the old apple tree" is there, too.

To "sharply distinguish" between money and credit

It took quite some time, but I finally have a response to David Glasner's Price of Money post.

In his post, Glasner quotes Milton Friedman:

the interest rate is not the price of money .... The interest rate is the price of credit.

And right up top, in the title of his post, Glasner says Friedman Says the Rate of Interest Is NOT the Price of Money: Don’t Listen to Him!

I had been taking Glasner to mean The rate of interest is the price of money, NOT the price of credit. That was wrong. Glasner doesn't say the interest rate is not the price of credit. What he says is the interest rate is the price of credit and the price of money, too. At least, that's how I read him now.

The word "credit" appears seven times in the quote Glasner takes from Friedman, but only once in Glasner's response, in this sentence:

So although the interest rate is in some sense the price of credit, it is, indeed, also the price that one has to pay (or of which to bear the opportunity cost) in order to derive the liquidity services provided by that unit of currency.

The phrase "in some sense" threw me. But now I see Glasner is saying that the interest rate is the price of credit and "indeed, also" the price of money. He's NOT saying that the interest rate is NOT the price of credit. So I can live with it.

I did think Glasner should have said "indeed, also the price of holding money", not "the price of money". But I now see this is what he says, though not all in the one sentence. Glasner opens the paragraph by saying

there is also a rental price for money, and that rental price represents what you have to give up in order to hold a unit of currency...¹

Everything is there. Glasner's view is that the interest rate is [in some sense] the price of credit, and is also [in the holding money sense] the price of money. I get it now.

That said, however, I still find Glasner's post troubling.

It's not all bad

Parts of Glasner's post are great. For the longest time, I had trouble understanding what "holding money" means. Glasner has cleared this up for me. He describes the "rental price" of money as "what you have to give up in order to hold a unit of currency". And what you give up is "the interest you forego by not lending that unit of currency to someone else".

I understand: If you're "holding" money you keep it where you have immediate access to it. You don't put it in a CD, say, because you would have to wait for the CD to mature before you can access the money. When you "hold" money, you keep it "in your pocket or in your bank account" as Glasner puts it. In your pocket or in your demand deposit account, immediately accessible. Or under the mattress. Or in a box buried under the apple tree.

If you're holding money, as Glasner makes clear, you're NOT lending the money to someone else. And if you're lending it, you're not holding it.

Also, spending. It doesn't come up in Glasner's post, but if you're holding money you're not spending it, and if you're spending it you're not holding it.

So, I get that now. // Almost 70 friggin years old, he mumbled under his breath, before I learnt what "holding money" means.


Some parts of Glasner's post are great. Some are not. The thing is too wordy to suit me. His sentences are often too long to fit between my ears. For example, the sentence where he describes what you have to give up in order to hold money:

What you sacrifice is the interest you pay to the one who lends you the unit of currency, or if you already own the unit of currency, it is the interest you forego by not lending that unit of currency to someone else who would be willing to pay to have that additional unit of currency in his pocket or in his bank account instead of in yours.²

In fewer words: What you sacrifice is the interest you pay to the lender or, if you didn't borrow the money, the interest you could earn by being a lender. That's what he says. My way is a little shorter. I have to shorten and restate sentences sometimes, to get the meaning. And now that I get Glasner's meaning, it troubles me.

If I want to hold the money, he says, I have to pay interest on it, or not earn interest on it, one or the other. He says this again later in the post, and makes it explicitly "either/or":

anyone holding deposits is either by  paying interest ... to the bank or is foregoing interest that could have been earned by exchanging the money for an interest-bearing instrument.³

To hold money, Glasner says, either you pay interest or you forgo interest. Either/or. But this is not correct. The two costs are not mutually exclusive. They can combine in various ways: If I earn a dollar, I can lend it or hold it. If I borrow a dollar, I can lend it or hold it. The decision to lend or hold is independent of the decision to earn or borrow.

If I choose to hold money, I choose not to lend it, so I cannot earn interest on it. Take that as a given. But if I choose to hold borrowed money, I'm paying interest on it AND I cannot earn interest on it. That's not either/or. It's both. It doesn't work as Glasner describes.

If I borrow money, I pay interest.⁴ If I hold money, I forgo interest. Those are the options. It's not an "either/or" situation. Glasner mixes up the options and confuses them together.

I can earn money, or borrow to get it. Once I have the money, I can hold it, or not. If I choose to hold the money, I forgo interest income from it no matter how I got the money. And if I borrow money, I pay interest on it whether or not I choose to hold it. Glasner's "either/or" plays no role at all in this.

There are four possibilities: I can earn and hold, or earn and not, or borrow and hold, or borrow and not. Four possibilities do not make an "either/or" choice.


The part where you pay interest if you borrow the money, that's Milton Friedman's "price of credit" view. The part where you forgo interest if you hold the money, that's Glasner's "price of holding money". Broken out this way it makes good sense to me.

I should say, though, that foregoing interest is not the same as paying interest. Paying interest is a contractual obligation between you and someone else. Foregoing interest is a personal choice. Beyond that, paying interest is an actual expense; foregoing interest is an opportunity cost. The two are simply not the same.

Let's go round again. Either you earn money, or you borrow it. If you borrow, you pay interest on it. Borrowed money has an extra cost that earned money does not have. Borrowed money and earned money are different. That is why I distinguish between earned and borrowed money, calling one money and the other, credit.⁵

There is no distinction between money and credit that arises from holding them.

Let me take these thoughts a step further. The opportunity cost which arises from choosing to hold money or credit exists for you only as long as you hold the stuff. If you lend it, the opportunity cost passes to the borrower. If you spend it, the opportunity cost passes to the recipient. The recipient (or the borrower) becomes the one who must decide whether or not to hold the money. The opportunity cost travels with the money.

This is not true for the actual cost, the interest on money borrowed. The cost of interest remains with the borrower until the loan is repaid, no matter whether the money is held or spent. The price of credit is therefore different from the price of holding money. The economic consequences differ.

The cost of interest remains with the borrower until the loan is repaid, no matter whether the money is held or spent or lent again. The opportunity cost, by contrast, stays with the money, and moves from hand to hand with the money.

The burden of interest remains with the borrower. The burden of choosing what to do with the money remains with the money.


Apart from the length of Glasner's sentences and his erroneous treatment of "borrowing" and "holding", I have a few other specific problems with his "Price of Money" post.

The Omission of Spending

It troubles me that Glasner never considers spending. He talks about holding money. He talks about lending money. But he never mentions that people sometimes actually spend the stuff. He never mentions that spending is sometimes necessary: in order to eat, for example.

Nor does Glasner seem to notice the opportunity cost of not eating. He does not consider the need to eat as something which could more than offset the opportunity cost associated with holding money. It is as if the real economy no longer exists for Glasner, but only the financial economy. He writes from the perspective of someone who has so much money he does not even notice the cost of food; from the perspective of the men of immense wealth. This troubles me.

Liquidity Services

I'm troubled by Glasner's understanding of "liquidity services". Glasner says the rental price is the price you pay, or bear, "to derive the liquidity services provided by" money.

He evidently thinks money comes without liquidity services, and that to get those services you have to pay something extra.

My thinking is just the opposite: Money comes with liquidity services. On this, I think as Keynes thought. Liquidity is a property of money:

... the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period.

Liquidity travels with the money, from spender to recipient. Liquidity travels with the money from lender to borrower, and then from borrower to lender. If you have the money, you have the liquidity. Glasner does not see it this way, and that troubles me.

Money Borrowed

I am troubled that Glasner sees borrowed money as money, not credit. When you borrow money you get both the money and a debt; the two, created together and joined at the hip, are credit. When you spend the borrowed money, the connection to debt is broken. The money (and its liquidity) move on, but the debt remains with you.

Money becomes credit when you borrow it, because it comes with debt attached.

If you spend the credit, the recipient does not receive credit. He receives money, because he didn't borrow it. But for you the money was credit, and you still have the debt to prove it.

Credit becomes money when you spend it, because spending breaks the link to debt.

If you lend the credit, the borrower receives credit because the money comes to him with debt attached. You still have a debt for that money, and now your borrower has a debt for that money, too.

Glasner seems not to see things this way. That troubles me. How can he not see it as I describe? I'm not making things up. I only look at the economy and describe what I see.

Money Lent

I am troubled that Glasner seems to see money on which you receive interest as money and not debt.

In a comment below his Price of Money post, David Glasner writes

To say flatly that the interest rate is not the price of money is to deny the basic proposition that the (nominal) interest rate is the opportunity cost of holding money

He adds

(under the assumption that money is non-interest-bearing which was a standard assumption back in 1968).

1968, because that is the date of Friedman's remarks; so the "standard assumption back in 1968" would have been Friedman's assumption. Evaluating Friedman's 1968 remarks, Glasner keeps the old standard assumption in mind.

On the assumption, then, that money is non-interest-bearing, Glasner says if you take money out of an interest-bearing account in order to "hold" it, you are sacrificing the interest you could have earned. This is the opportunity cost of holding money. I get it.

For me, though, the standard assumption of 1968 remains the standard assumption today: I assume that money is non-interest-bearing. This is more than an assumption; for me it's a definition. It's how I distinguish money from debt.

Glasner's remark helps me understand why no one around me thinks as I do. Why they say things like "money is debt". And why my thinking (which is simple and obvious to me) never seems to "click" with anyone else.

Glasner's remark calls to mind a comment on my old blog, where Jim said the fact that demand deposits being non-interest-bearing was policy established in the wake of the Great Depression. I'm going from memory here, but Jim's comment tells me that making demand deposits "non-interest-bearing" was at the time thought to be part of a solution to the problem that created the Great Depression.

Glasner's comment tells me that in 1968 this solution was still standing, but it has since fallen. And that reminds me of something Minsky said:

The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.

I am troubled by Glasner's view because he considers "the assumption that money is non-interest-bearing" to be a mistake, and he considers "the basic proposition that the (nominal) interest rate is the opportunity cost of holding money" to be correct -- and not only correct, but "basic". Glasner is living proof of the transit Minsky describes. Glasner and the Great Recession, proof of the Minsky transit from stability to instability.

Glasner says that holding money costs you money because, in his view, the normal and natural state of money is to be earning interest. As if the real economy no longer exists, but only the financial economy.

Me, I still think that if money is earning interest, then someone is paying the interest, so the money is not even money. Really, it is somebody's debt.

Glasner as Financialist

I am troubled by the financialism evident in Glasner's post. He believes that the normal and natural use of money is to be lent at interest, not treated as a medium of exchange. He believes this even though 78% of US workers live paycheck to paycheck and "many workers aren’t able to put anything significant into savings" and collect little or no interest.

The troubles in our world today are largely economic, or have economic roots. Those troubles have arisen because finance is predominant and excessive and costly. But rather than recognizing this fact and addressing it, economists like Glasner consider the world as it is, bloated by finance, to be the normal and natural condition, not a problem to be solved.

Glasner's views show him to be a financialist. He thinks like a banker.

For most people, to afford food, clothing, and shelter is a juggle and a struggle. For Glasner this is so inconsequential that he doesn't even bring up spending. His concern is the struggle of those who have plenty, to decide between lending their money at interest and giving up interest income in order to hold their money close.

It must be nice.

The Glasner view tends to arise when finance is excessive, as part of the transit to instability. These days, Glasner's view is widely shared. I'm convinced this is why people think I'm nuts when I talk about differences between credit and money. And why they have no use for my Debt-per-Dollar graph.


It troubles me that Glasner quotes Milton Friedman, focusing on "Friedman’s repeated claims that the rate of interest is not the price of money", and completely missing Friedman's point.

Friedman's point:

You must sharply distinguish between money in the sense of the money or credit market, and money in the sense of the quantity of money.

Friedman's "money in the sense of the quantity of money" is money. Friedman's "money in the sense of the money or credit market" is credit. Friedman's point is that you must sharply distinguish between money and credit. It troubles me that Glasner fails to distinguish between money and credit, and chooses instead to focus on the words "the rate of interest is not the price of money".


Why distinguish between money and credit? Because credit is money that comes at an extra cost, the cost of interest. Only if we distinguish between money and credit can we evaluate the extent of this cost. Only then can we see to what extent interest cost interferes with the real, productive, nonfinancial economy.

If we distinguish between money and credit, we can watch the transit of finance. We can compare the credit-to-money ratio with the economy's performance. We can look at the credit-to-GDP ratio and see the growth of financial cost, a cost that competes with the cost of labor and capital.

But we can only do these things if we distinguish between money and credit. Glasner does not distinguish. These days, almost no one distinguishes. That's not good, because if almost no one makes the distinction between money and credit, almost no one can see the problem of excessive finance.

As Milton Friedman said,

You must sharply distinguish between money in the sense of the money or credit market, and money in the sense of the quantity of money.

I couldn't agree more.

NOTES:

1. When Glasner writes of what you have to give up in order to hold money, he is saying that you already had this thing and now must give it up. What you have to give up, he tells us, is the interest you could have earned: "the interest you forego by not lending that unit of currency to someone else". The implication is that, for Glasner, the normal and natural primary function of money is to gather interest. Not to be held close. And not, apparently, to be spent.

2. In order to hold money, Glasner says, you must either pay interest (because you borrowed the money) or forgo interest income (because you choose to hold the money rather than lend it out). I don't think that's right. Even if you borrowed the money, to hold it you must forgo interest income: You can't lend the money out and hold it at the same time. So really, it is interest foregone that is the price of holding money. Not the interest you pay for borrowing money. Much as Glasner tries to deny it, interest you pay the lender is the price of credit.

3. Depositors, Glasner says, are either paying interest (for having borrowed the money) or foregoing interest (by not making better arrangements for their money). But again, the interest we pay on borrowed money is the price of credit. It has nothing to do with holding money. The cost of holding money is foregone interest income, an opportunity cost as Glasner says, but this has nothing to do with whether the money you're holding was borrowed. Glasner's analysis here is horrible.

4. If I borrow money, I pay interest and, again, the borrowed money is credit (because it comes to me with debt attached), and the interest is the price of this credit.

5. Credit is money that comes to you with debt attached. When you borrow, you receive money with debt attached: You receive credit. When you spend it, you put the money into circulation, but not the debt: Your debt is a measure of how much money you have put into circulation, that still remains in circulation as far as you know.⁶ (As you pay down the debt, the money comes out of circulation.)

6. If you spend a dollar into circulation, there is a chance that a recipient of that dollar will choose to hold it or save it. When that happens, the dollar is technically out of circulation. But from your perspective (and as far as you know) it remains in circulation.

Fall of Rome

It's like some kind of sickness

From Wikipedia, the Credit Theory of Money:

Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt)...

The relationship between credit and money is an important topic, I'll give you that. But understanding is one thing, and blurring together is something else entirely. The Wikipedia article goes for the big blur:

"money and credit/debt are the same thing"

It's not bad enough that "credit" and "debt" are blurred together by a slash, as if the writer couldn't decide which word/term to use because his/her understanding of the pair/the two is so poor that he/she cannot distinguish between them. No: They find it necessary to take a third term -- "money" -- and assert that it also is "the same thing". This leaves us with the new compound term "credit/debt/money", which combines three conceptually different terms without providing so much as a hint of what they mean.

Worse than the failure to provide meanings for these terms is the fact that they are being equated; that's just plain wrong.

Money is not "the same" as debt. One is an asset, dammit, and the other is a liability! One's a plus, and the other, a minus. You might say money and debt are "two sides of the same coin" -- but that's just a metaphor. And anyway, if money and debt are two different sides of the coin, they are different.

Money is money. Credit is money you borrow. And debt is money that you owe.