Thursday, February 28, 2019

Losing the American Dream

From A Study of History by Arnold J Toynbee, the two-volume abridgement by Somervell:

... proletarianism is a state of feeling rather than a matter of outward circumstance... The true hall-mark of the proletarian is neither poverty nor humble birth but a consciousness--and the resentment that this consciousness inspires--of being disinherited from his ancestral place in society.

But a world gorged with the wealth ground out by the magic industrial machine is at the same time overshadowed by the spectre of unemployment. Every time the urban proletarian draws his 'dole' he is reminded that he is 'in' a society but not 'of' it.

These excerpts can be found in context on pages 377 and 397-398 at this link.

Wednesday, February 27, 2019

Another good answer from Kimberly Amadeo

The Federal debt is the sum of the Federal deficits. But when you actually look at the numbers, the debt is not equal to the sum of the deficits.


There's a good explanation in US Budget Deficit by President by Kimberly Amadeo at The Balance:
Each year's deficit adds to the debt. But the total amount a president adds to the debt each year is usually more than the deficit. All presidents can employ a sleight of hand to reduce the appearance of the deficit. They can borrow from federal retirement funds in off-budget transactions. For example, the Social Security Trust Fund has run a surplus since 1987. There were more working people contributing via payroll taxes than retired people withdrawing benefits. The Fund invests its surplus in U.S. Treasury notes.

The president can reduce the deficit by spending these funds instead of issuing new Treasurys. That makes the deficit by year less than what's added to the debt by year.
Find an off-budget agency that runs a surplus, and borrow from them. Neat trick.

Monday, February 25, 2019

"spend whatever is necessary"

At Syll: Kelton critiques Krugman's critique of Lerner's analysis

Lerner wasn’t trying to use interest rates to optimize the economy. That was a job for fiscal policy. He argued that the government should be prepared to spend whatever is necessary to sustain full employment without raising taxes or borrowing …
You see that line often, that the government should be prepared to spend "whatever is necessary" to sustain full employment without raising taxes or borrowing. It sounds great, but I can't help thinking that it rests on hopeful analysis rather than on careful analysis.

I call such hopeful views fantasy.

Well, by now everyone who really needs to read this post has stopped reading, called me an ass, and moved on. I'll finish the thought anyway. Maybe they'll be back.

Here's the statement I have trouble with:
government should be prepared to spend whatever is necessary.
"Whatever is necessary" is open-ended: As long as the problem is not solved, the solution remains the same. There is no exit from such a policy. There is no point at which you are forced to say "It's not working. My plan must be wrong." You can use the same plan always, even if it never works.

Some years back, Daniel Kuehn criticized Scott Sumner's analysis, saying that it "meshes together policy goals with actual policies". Kuehn says that for market monetarists like Sumner,
there seems to be no way to logically make the statement "we have done the market monetarist policy rule and the goal was not achieved". Why? Because if NGDP level targets have not been reached then by definition you haven't been doing market monetarist policy.
Kuehn is saying there is no point at which Sumner is forced to say "It's not working. My plan must be wrong."

Not long ago Bill Maher said I don't think there is a great need for new solutions. We've been around these same problems for decades. We know what the solutions are. We only lack the political will to put them into play. Maher's strategy is open-ended: As long as the problem is not solved, his solution is only to try harder. He wants to keep using the same solutions that have not worked in 45 years, and just try harder. Maher's strategy leaves no point at which he is forced to say "It's not working. The plan must be wrong."

Again: There is no point at which Kelton or Lerner would be forced to say "It's not working. Our plan must be wrong."

Saturday, February 23, 2019

Insanity versus the business cycle
From Encyclopedia Britannica, a paragraph on the time between the fall of Rome and the rise of feudalism in Europe. Approximately two thirds of the paragraph is dedicated to a description of the time and place. That's history. The rest of the paragraph is given over to instructing the reader to avoid saying things that someone might possibly presume could be imagined to be offensive to a person who lived in that bygone era. That's insanity. And then, the link to the site calls that time and place the Dark Ages. That's funny.

Dark Ages (historiography)Early Middle Ages

Dark Ages (historiography)

This article is about the history of the concept. For a history of the period, see Early Middle Ages.

Early Middle Ages

The "Dark Ages" is a historical periodization traditionally referring to the Middle Ages, that asserts that a demographic, cultural, and economic deterioration occurred in Western Europe following the decline of the Roman Empire.
The period saw a continuation of trends evident since late classical antiquity, including population decline, especially in urban centres, a decline of trade, a small rise in global warming and increased migration.
We are told that the term "Dark Ages" is unsatisfactory because it implies it asserts "demographic, cultural, and economic deterioration". We are also told that the Early Middle Ages actually saw population decline and a decline of trade. But "a decline of trade" IS economic deterioration. And "population decline" IS demographic deterioration. So where's the problem?

In addition, they go too far by using the word "asserts". Implies is the most one could say.

What I really don't understand is the attempt to prevent anyone from saying that things might be better now, or 100 years ago, or in the year 1200 for crying out loud, better than things were in the Early Middle Ages. The Early Middle Ages -- the Dark Age -- was a recession in the massive business cycle that I call the Cycle of Civilization.

Things are better in the boom than the recession. That's a given.
The term employs traditional light-versus-darkness imagery to contrast the era's "darkness" (lack of records) with earlier and later periods of "light" (abundance of records). The concept of a "Dark Age" originated in the 1330s with the Italian scholar Petrarch, who regarded the post-Roman centuries as "dark" compared to the light of classical antiquity. The phrase "Dark Age" itself derives from the Latin saeculum obscurum, originally applied by Caesar Baronius in 1602 to a tumultuous period in the 10th and 11th centuries. The concept thus came to characterize the entire Middle Ages as a time of intellectual darkness between the fall of Rome and the Renaissance; this became especially popular during the 18th-century Age of Enlightenment.
The Early Middle Ages was labelled the "Dark Ages" in the 19th century, a characterization based on the relative scarcity of literary and cultural output from this time.
It seems that our lack of knowledge about that period is the only acceptable meaning for the word dark in the label "the Dark Ages". If this is true, then it is our knowledge that is dark, not that age of trade and population decline. However, if there was a "relative scarcity of literary and cultural output" from that time, as the Early Middle Ages article states, it's not correct to say that our lack of knowledge is the only acceptable meaning.

I'm also not clear now on whether the Early Middle Ages was labelled the "Dark Ages" in the 19th century, or in the 18th when it "became especially popular".

I think of world history in terms of the Cycle of Civilization, an economic cycle similar to the common business cycle and the Kondratieff, but bigger and slower moving. This makes economic forces the most significant factor in human history, which is in my view how it should be.

Try it sometime.

Friday, February 22, 2019

"A strong, compelling explanation"

The rake-off charged by banks from sellers and buyers alike (not to mention late fees that yield the card companies even more than their interest charges these days) has been a major factor eating into retail profits and personal incomes.

In The Puzzle of the US Productivity Slowdown, Timothy Taylor takes a look at the CBO's recent The Budget and Economic Outlook: 2019 to 2029. Taylor writes:
Why is US productivity growth slowing down? CBO is forthright in admitting: "[E]xtensive research has failed to uncover a strong, compelling explanation either for the slowdown or for its persistence ..." The report runs through a number of potential explanations, before knocking each one on the head.
Summarizing the CBO report, Taylor asks a series of questions, and answers each with an excerpt from the report. Here is a very brief version of Taylor's Q&A:
  • Is the productivity slowdown a matter of measurement issues?
    "... probably account[s] for at most a small portion of the slowdown."
  • Is the productivity slowdown a result of slower growth feeding back to reduced productivity growth?
    "...slower economic growth did not feed back strongly into TFP ..."
  • Is it a result of less human capital for US workers, either as a result of less experience on the job or reduced growth in education?
    "... growth of the estimated quality of the aggregate labor force since 2005 has been only moderately slower than growth over the preceding 25 years, and that slowdown has played at most a minor role in the overall slowdown in TFP growth."
  • Is the problem one of overregulation?
    "... Such problems have been developing slowly over time ... and are difficult to associate with an abrupt slowdown in TFP growth around 2005."
  • Is the scientific potential for long-term innovation declining?
    "... Again, no evidence exists of an abrupt change around 2005 connected to such developments."
The best argument I can make from the CBO's analysis is that there was a Great Coincidence during which several factors must have all gone south at the same time, around 2005. But this seems highly unlikely, unless there was some other factor, one that we overlook, which caused everything to go bad all at once.

One factor that affects the economy as a whole is the rate of interest. Monetary policy raises the rate of interest to slow economic growth, as you know, and lowers the rate of interest to increase economic growth.

Another factor that affects everything is something I call "the factor cost of money". This cost is equal to the rate of interest multiplied by the number of dollars on which interest must be paid. The factor cost of money is an actual cost, like the factor cost of labor or the factor cost of capital. But there are differences.

A rise in the cost of labor is an increase in wages which is good for workers and, rule of thumb, good for consumers.

A rise in profits is good for producers.

A rise in the factor cost of money is good for finance, the non-productive sector.

A rise in any of these factor costs will add to the cost of the things we buy, which affects everyone. There are also benefits, of course. But which factor it is that receives the benefit depends upon which factor receives the increase. A rise in the factor cost of money, for example, will drain money from consumers and producers while increasing the return to finance.

A rise in the return to finance, ceteris paribus, by draining money from consumers, will reduce aggregate demand. By raising costs for producers it will reduce economic vigor. The fall in aggregate demand and the decline of vigor will combine to reduce producers' profits. The reduction of producer profits coupled with the rise in the return to finance makes financial wealth more appealing than productive wealth. This induces additional money to move out of the productive sector and into finance, and leaves the productive sector even more reliant on borrowed money.

As financial costs rise in the productive sector, producers cut corners. They become less able and less willing to meet demands for wage increases. Employee compensation lags.

The economy develops a vicious cycle of rising prices and declining incomes -- something that doesn't even make sense until you remember that income is being drained away from producers and consumers by finance.

A change in business financial costs will certainly affect business costs. Likewise, a change in household financial costs will affect consumer spending, and the resulting change in demand will affect business activity, output produced, labor hours consumed, and productivity.

Rising cost does damage to productivity growth. But cost seems to be missing from the CBO's list of possible causes for the productivity slowdown.

Wednesday, February 20, 2019

Warehouse 13

I don't bother with "apps" on Amazon Prime Video because they're just not worth the trouble: downloading and installing and typing in codes to make em work, then doing the whole thing over again because it didn't work the first time. There was a new one the other day: "IMDB FreeDive" in eye-catching yellow. I skipped over it several times. Then I happened to notice that one of the shows it offers is "Warehouse 13".

I heard of that one. Somebody made reference to it, just enough of a comment to stir up my interest several years back. Things like that, I remember. So I figured I'd try installing the FreeDive and see how far I got. Well it was no problem at all. There's no installation. You basically just turn it on. And now I've seen half a dozen episodes of Warehouse 13 in the past week. It's a fun show to watch.

But that's not why I'm writing today.

There was a scene in the episode titled Elements that put me on high alert, earlier today while I was watching it. I finished the episode, then went to SpringfieldSpringfield for the transcript.

The scene starts 26 minutes into the episode and lasts about a minute. It has series regular Myka (hot girl) & episode character Jeffrey Weaver (wealthy man) at dinner in the hospital cafeteria:
"What made you join the secret service?" Weaver asks.

"It was either that or prison," Myka replies. Then, after a pause: "I'm kidding." Then: "What about you? I mean, what is it you do exactly?"

"Accrue interest," Weaver says. "Re-invest. Try to do something good with it."

"That's a nice life," she says.

"Well, it depends on how you got it," Weaver says.

"Your father."

"My father, yeah," he replies.

"And you don't wanna follow in his footsteps. Is that it?"

"I wanna erase his footsteps," Weaver says. Another pause. "What?"

"I'm trying to decide," Myka says, "if I'm sitting here with a good guy or a bad guy."
That's it. That was the line I needed to quote in context: Myka sitting at dinner with a wealthy guy, trying to decide if he's a good guy or a bad guy.

That's how the economy works on TV, and in the minds of too many people. But that's not the economy that I know.

Sure, I suppose it matters if the guy's a good guy or a bad guy. But that's not where the economic problem arises. The economic problem is simply that the guy has a huge amount of money.

Think of money as matter that has mass. Mass can create a gravity well. A large accumulation of money creates an economic distortion similar to a gravity well.

That's the economic problem. It has nothing to do with whether the guy is a good guy. The problem is in the monetary balances. The problem is that monetary balances eventually become monetary imbalances, and then the economy goes haywire.

Monday, February 18, 2019

How much public debt is sufficient?

In Why public debt is a good thing, Syll quotes Krugman:
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
I'd say that is true, far as it goes, but it doesn't go far enough. "Maybe more than we currently have" doesn't answer the question. Nor does it offer a rule of thumb you can use to figure out an answer.

The question Krugman asks is: How much public debt is sufficient? The rule of thumb answer is: It depends on the level of private debt. When the "private debt to public debt" ratio is high, the cost of private debt interferes with economic growth. To improve growth in that environment, the Federal debt must rise rapidly -- more rapidly than private debt. This happened in our economy between 1981 and 1994:

Graph #1: Private Non-Financial Debt relative to the Gross Federal Debt
It took a long time, because the increase in public debt is a foundation upon which private debt can grow. The increase in Federal debt lowers the ratio, but also allows private debt to grow, which raises the ratio.

If you want to reduce the private-to-public debt ratio, it is a mistake to focus on public debt alone. It is necessary to discourage the growth of private debt, at least when private debt is high. Preferably, always.

Saturday, February 16, 2019

Not a useful argument

In a recent post, Syll quotes Abba Lerner:
Very few economists need to be reminded that if our children or grandchildren repay some of the national debt these payments will be made to our children or grandchildren and to nobody else. Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them.
Lerner is making the "we owe it to ourselves" argument: "Taking them altogether they will no more be impoverished by making the repayments than they will be enriched by receiving them."

Taking the 99% and the 1% together, they will be no more impoverished by making the repayments than they will be enriched by receiving them.

But given growing inequality, "taking them altogether" is the wrong take.

Syll, in the same post:
Some members of society hold bonds and earn interest on them, while others have to pay the taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt cancel itself out between the two groups.
This is not a useful argument in a time of great inequality.

Thursday, February 14, 2019

Intra-governmental holdings

I don't often agree with Kimberly Amadeo, but on this I do:
... you should always look at the total debt, not just the debt owed to the public. That's because all federal debt is eventually owed to the public. That's why Intra-governmental Holdings should be counted in the ​U.S. ​debt-to-GDP ratio.
From: Debt-to-GDP Ratio, Its Formula, and How to Use It

Saturday, February 9, 2019

Has economics failed us again? Yup

Under the heading Has economics failed us? Hardly, Larry Summers:
My friend Fareed Zakaria has celebrated his well-deserved recognition by Foreign Policy Magazine as one of the 10 most important foreign policy thinkers of the last decade by writing an essay entitled “The End of Economics,” doubting the relevance and utility of economics and economists.
This sort of thing happens from time to time, the doubting of the relevance and utility of economics and economists. Perhaps you will remember the attempt by Maynard Keynes
to bring to an issue the deep divergences of opinion between fellow economists which have for the time being almost destroyed the practical influence of economic theory, and will, until they are resolved, continue to do so.

Tuesday, February 5, 2019

Economics and Law

RE: Law and Economics, 6th edition (PDF, 570 pages) by Robert Cooter and Thomas Ulen.

From Chapter One: An Introduction to Law and Economics:
UNTIL RECENTLY, LAW confined the use of economics to antitrust law, regulated industries, tax, and some special topics like determining monetary damages...

Beginning in the early 1960s, this limited interaction changed dramatically when the economic analysis of law expanded into the more traditional areas of the law, such as property, contracts, torts, criminal law and procedure, and constitutional law...

Economics has changed the nature of legal scholarship, the common understanding of legal rules and institutions, and even the practice of law. As proof, consider these indicators of the impact of economics on law. By 1990 at least one economist was on the faculty of each of the top law schools in North America and some in Western Europe. Joint degree programs (a Ph.D. in economics and a J.D. in law) exist at many prominent universities. Law reviews publish many articles using the economic approach, and there are several journals devoted exclusively to the field... The field received the highest level of recognition in 1991 and 1992 when consecutive Nobel Prizes in Economics were awarded to economists who helped to found the economic analysis of law—Ronald Coase and Gary Becker...

The new field’s impact extends beyond the universities to the practice of law and the implementation of public policy. Economics provided the intellectual foundations for the deregulation movement in the 1970s, which resulted in such dramatic changes in America as the dissolution of regulatory bodies that set prices and routes for airlines, trucks, and railroads. Economics also served as the intellectual force behind the revolution in antitrust law in the United States in the 1970s and 1980s. In another policy area, a commission created by Congress in 1984 to reform criminal sentencing in the federal courts explicitly used the findings of law and economics to reach some of its results...
Cooter and Ulen think this is great. I think, if there is a fly in the ointment of economics, using it on the law may harm society. I think, maybe we must look askance at the law because of the econ problems. Just sayin.

From Chapter One, Part One: What Is the Economic Analysis of Law?:
Why has the economic analysis of law succeeded so spectacularly, especially in the United States but increasingly also in other countries? Like the rabbit in Australia, economics found a vacant niche in the “intellectual ecology” of the law and rapidly filled it. To explain the niche, consider this classical definition of some kinds of laws: “A law is an obligation backed by a state sanction.”

Lawmakers often ask, “How will a sanction affect behavior?” For example, if punitive damages are imposed upon the maker of a defective product, what will happen to the safety and price of the product in the future? Or will the amount of crime decrease if third-time offenders are automatically imprisoned? Lawyers answered such questions in 1960 in much the same way as they had 2000 years earlier—by consulting intuition and any available facts.

Economics provided a scientific theory to predict the effects of legal sanctions on behavior.
"Like the rabbit in Australia"? Really? That's the analogy?
To economists, sanctions look like prices, and presumably, people respond to these sanctions much as they respond to prices... Economics has mathematically precise theories (price theory and game theory) and empirically sound methods (statistics and econometrics) for analyzing the effects of the implicit prices that laws attach to behavior.
Many people today would challenge those bold assertions.
Economics generally provides a behavioral theory to predict how people respond to laws. This theory surpasses intuition just as science surpasses common sense.
Unless, you know, the theory is wrong.
Efficiency is always relevant to policymaking, because public officials never advocate wasting money.
You laughing yet?
Besides efficiency, economics predicts the effects of laws on another important value: the distribution of income. Among the earliest applications of economics to public policy was its use to predict who really bears the burden of alternative taxes. More than other social scientists, economists understand how laws affect the distribution of income across classes and groups. While almost all economists favor changes that increase efficiency, some economists take sides in disputes about distribution and others do not take sides.
Ah, "the distribution of income." That's interesting. You see inequality as a problem to be fixed? You're gonna have to unwind the law back to the 1960s and rewind it right.

Friday, February 1, 2019

The tortured argument of Matthew Yglesias

I was gonna let this go, but I can't because it's Yglesias, who is generally well respected, even by me.

The other day I quoted from Michael Hiltzik's article on Elizabeth Warren and inequality:
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.
I've seen this particular sleight of hand too many times: A tax-rate fact and a growth fact, one after the other, along with the implied conclusion that HIGH TAX RATES ARE GOOD FOR GROWTH.

That conclusion is bullshit.

I complained that Hiltzik seemed pleased with the argument, and I wrote:
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.
But it does need to be said.

My morning workout today brought me to Economist's View, where Thoma links to
I jumped on it, because Bernstein and I agree that it needs to be said.

His article is very good, Bernstein's. He says:
... there’s no persistent correlation between top tax rates and growth rates across the US time series, nor in oft-cited international data from Saez et al. This is widely understood among empirical public finance folks ...
He says there is no persistent correlation suggesting high tax rates are good for growth, and there is no persistent correlation suggesting high tax rates are harmful to growth.

Interesting stuff, with a far better quality of argument than the one in the Hiltzik article, an argument so bad that they dare not do more than imply the conclusion.

At one point Bernstein says
To be clear, I neither think nor claim that higher top rates lead to faster growth (though such a case is sometimes made).
Well you know I had to check out the link. And that gets us to Matthew Yglesias.

In Study: tax hikes could grow the economy at VOX, Yglesias writes:
At the core of Washington's economic-policy debate is a premise shared by both Democrats and Republicans: raising taxes on the rich will hurt the economy by discouraging super-talented, super-productive rich people from working as hard.
"... as hard" as what?  How about " hard" instead? Or finish the thought: "... as hard as they do." Somethin.
But in a recent paper "Taxation and the Allocation of Talent," Benjamin Lockwood, Charles Nathanson, and Glen Weyl challenge that assumption. Higher tax rates, they argue, could push talented individuals to eschew lucrative-but-socially-useless jobs in favor of more broadly beneficial careers in teaching and research.
Let me skip over all the parts where Yglesias tries to make this sound like a good idea, and get right to the problem:
The authors show that under a variety of plausible assumptions the socially optimal top marginal income tax rate is very high — in the 70 to 90 percent range — largely because high tax rates would deter talent entry into finance and encourage talent entry into research/academia and teaching...
So really what they're saying is finance is the problem.
... talent entry into research/academia and teaching. The authors also find that this sort of high tax regime is a distinctly second-best policy alternative and that the vast majority of the benefits could be captured with fewer unintended consequences through hypothetical more targeted policy measures aimed at specific occupations.
In order to make the high-tax idea really work, you'd have to decide which jobs are beneficial to society and which are harmful, arrange tax rates to favor the one and discourage the other, and tax the different jobs at different rates. That's a graphic picture of early-stage dystopia. Decline of civilization stuff.

Who gets to decide what's beneficial and what's not? What if they're wrong? And, as always: Who keeps an eye on the decision-makers, making sure decisions are made to benefit society as a whole? Who assures us that the actual decisions (and not only the assurances they give us) are for our benefit? And who watches the watchers?

Then too, the decisions are subjective, even if they are made with integrity. For example:
To the extent that one believes "starving artists" are making contributions to society not captured by their monetary incomes, the true optimal tax rates will be even higher.
Yglesias, however, seems to like the idea:
Ultimately the paper is an extremely provocative theoretical contribution that suggests a potentially fruitful line of empirical inquiry. Given that the case for higher taxes tends to rest on equality, this research offers an interesting additional consideration.
It seems Yglesias likes the idea because it adds something to the argument for equality. But at this point, I HAVE TO SAY "NO!"

Yglesias is willing to use a very bad idea because he thinks it contributes to a good idea. Do you see how scummy that is? How wrong it is? Do you see how it tends to "dirty" the good idea?

Do you think those people, who at present do not see reducing inequality as a good idea, will be more willing to change their minds because of this study Yglesias is hawking?

I doubt it.

Most planners who have seriously considered the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines... The consolation our planners offer us is that this authoritarian direction will apply "only" to economic matters...

Economic planning would not affect merely those of our marginal needs that we have in mind when we speak contemptuously about the merely economic. It would, in effect, mean that we as individuals should no longer be allowed to decide what we regard as marginal.
Excerpts from The Road to Serfdom by F.A. Hayek, Chapter 7.