The General Economics Thread

3-5% is what eliminates inflationary pressure, key difference. Upwards wage pressure should happen well before you hit the NAIRU.

That is only true if employers are trying to fill a large number of positions from a small labor pool. It is far more likely that if unemployment got that low because potential employees were discouraged by the lack of jobs available. You certainly would not be seeing raising wages in the latter scenario.

Couple articles on the potential infrastucture projects from the Trump administration. tldr, it's more likely to make Trump's friends rich(er) than have any major positive effect on the economy.

Paul Krugman's take on the topic .Quoting here in case you've hit the Time's free article limit for the month:

Trumpists are touting the idea of a big infrastructure build, and some Democrats are making conciliatory noises about working with the new regime on that front. But remember who you’re dealing with: if you invest anything with this guy, be it money or reputation, you are at great risk of being scammed. So, what do we know about the Trump infrastructure plan, such as it is?

Crucially, it’s not a plan to borrow $1 trillion and spend it on much-needed projects — which would be the straightforward, obvious thing to do. It is, instead, supposed to involve having private investors do the work both of raising money and building the projects — with the aid of a huge tax credit that gives them back 82 percent of the equity they put in. To compensate for the small sliver of additional equity and the interest on their borrowing, the private investors then have to somehow make profits on the assets they end up owning.

You should immediately ask three questions about all of this.

First, why involve private investors at all? It’s not as if the federal government is having any trouble raising money — in fact, a large part of the justification for infrastructure investment is precisely that the government can borrow so cheaply. Why do we need private equity at all?

One answer might be that this way you avoid incurring additional public debt. But that’s just accounting confusion. Imagine that you’re building a toll road. If the government builds it, it ends up paying interest but gets the future revenue from the tolls. If it turns the project over to private investors, it avoids the interest cost — but also loses the future toll revenue. The government’s future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal, say because the investors have political connections.

Second, how is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? You could bring in private investors by guaranteeing them future government money — say, paying rent in perpetuity for the use of a water system built by a private consortium. But this, even more than having someone else collect tolls, would simply be government borrowing through the back door — with much less transparency, and hence greater opportunities for giveaways to favored interests.

Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? That is, how much “additionality” is there? Suppose that there’s a planned tunnel, which is clearly going to be built; but now it’s renamed the Trump Tunnel, the building and financing are carried out by private firms, and the future tolls and/or rent paid by the government go to those private interests. In that case we haven’t promoted investment at all, we’ve just in effect privatized a public asset — and given the buyers 82 percent of the purchase price in the form of a tax credit.

Again, all of these questions could be avoided by doing things the straightforward way: if you think we should build more infrastructure, then build more infrastructure, and never mind the complicated private equity/tax credits stuff. You could try to come up with some justification for the complexity of the scheme, but one simple answer would be that it’s not about investment, it’s about ripping off taxpayers. Is that implausible, given who we’re talking about?

And an op-ed in the Washington Post: Trump’s big infrastructure plan? It’s a trap.

I wonder what the people in Congress will think about this idea, especially the Tea Party inspired ones. Everything's fine because it's for Trump rather than Obama, or kill that Big Government monster now?

Democrats seem to be willing to go along with it, since they're desperate to find some common ground with Trump and their candidate had an infrastructure proposal too, right? Both the articles are framed as a warning against this line of thinking, because (as always), the devil is in the details, and the details of Trump's plan are terrible. On the right, I imagine they're largely willing to go along with it, since it's framed as "encouraging private investment" rather than "evil government spending" (even though there's basically no difference, fiscally speaking).

(FT) China manoeuvres to fill US free-trade role: Xi Jinping courts regional support as election of Donald Trump clouds future

With the TPP likely sunk due to the toxic nature of Trade Deals, as well as many controversial provisions, China seeks to create its own Asian Trade Deal. Left and the Right both killed it, but I can't help but think that Big Businesses trying to push too hard (on the International Courts, Medicine, SOPA/Copyright Provisions) are chiefly to blame for this. With so many poisonous/easily to condemn provisions, it turned itself into Public Enemy #1.

Tried to get their wish list and instead got fucked for it.

(Cross Posting to TPP Thread)

Inside Donald Trump’s Economic Team, Two Very Different Views: ‘It is the supply-siders versus the zero-sum crowd’; trade policy seen as a particularly divisive issue

Either which way, Team Trump looks to be Team Protectionism, so expect an economic recession in the US as a result.

edited 20th Nov '16 5:37:08 PM by PotatoesRock

Not necessarily since import/exports are actually a relatively small part of the US economy and the aggregate effects of lower imports and exports may end up evening out, but it is certainly something to look out for.

The recession wouldn't come from trade wars per se, since that's largely a zero-sum game, at least in the short term. Unless we run into a shortage of some desperately needed commodity as a result of our protectionism, there's no reason to expect any serious downturn. If Trump is serious about cutting taxes across the board, that will also have a small to medium stimulatory effect at first.

No, the pain will come when he and his cronies start slashing government services and government budgets. Since the U.S. government employs a colossal number of people, the layoffs will have serious negative consequences.

We'd likely have a military industrial buildup, though, so the effects would be offset in the short term. Just depends on how thoroughly the budget hawks are silenced now that there's a Republican president in control.

The military doesn't employ nearly as much people as the US Govt does and the Military has a relatively high entrance bar and not everyone is willing to enlist.

The PMC industry will explode however that money wouldn't actually go completely to the US economy.

Money spent through the military procurement system that goes to wages is very nearly as effective on net as money spent on wages elsewhere in the economy. If that's the sole measure, then it's largely a wash; however, one has to also take into account the portion of money spent that is taken as profit and/or rewards capital investment, which has significantly lower multipliers.

If you completely discount material returns on investment — in other words, the things that the money produces that are of value in and of themselves — one can calculate the direct economic value of any particular bit of public spending into the private sector as ((Mw * Sw) + (Mp * Sp)) / S, where M is the fiscal multiplier, S is the amount spent, w is wages, and p is profit or capital gains. For the sake of abstraction, let's say that wages and profits have the same multipliers across the economy. Thus, if the wage multiplier is greater than the profit multiplier, you get more return if you spend money on a project with a lower profit margin.

This is, as noted, discounting the question of the value of what gets produced: there is certainly more immediate economic value from roads, bridges, water systems, etc., than from tanks and planes.

All in all, it seems conclusive that military spending is not as efficient a use of public funds as many other kinds of spending. That said, it is still better than nothing.

Of course, if you try to explain all this to an "economic conservative" voter, you get sermons about the moral evils of government providing jobs and/or the inherent inefficiency of government. These are ideological positions rather than factual ones, which means that such people are voting with their "feels" rather than any particular grasp of economic reality.

edited 21st Nov '16 9:04:31 AM by Fighteer

This of course focusing on the raw economic value of the spending and not ignoring the other benefits that one gets from having a properly funded military.

Or drivable roads, structurally sound bridges, schools that aren't falling down, water systems that don't poison people, etc.

Military procurement has zero direct value; tanks, planes, bombs, and so forth don't contribute anything useful other than their ability to protect our economic interests. This is a highly intangible concept. If someone's bombing your cities, then your air defenses have almost infinite value. If your tanks are sitting in mothballs in the desert, they have no value whatsoever.

If you're bombing a bunch of terrorists in the deserts of Syria, then the value of the expended assets can only be calculated as part of a very complex equation involving U.S. reputation, future risks of leaving these targets alive, the social cost of continued military action, the risk of giving power to jingoistic elements that will destabilize our political system, and many more. Meanwhile, roads, bridges, schools, and water pipes have much more tangible, definable value.

edited 21st Nov '16 11:37:14 AM by Fighteer

There's also the value (which it's impolite to mention but has to be said) of the military side of the American Empire in terms of ensuring some measure of global peace (as well as enough tensions that our arms exports can flourish) and in keeping resources and markets available for exploitation by American corporations. Of course, said military expenditures are worthless if not backed by the political will and intelligent leadership needed to use the military as an effective foreign policy tool.

Continuing on the theme of what I was talking about earlier, there's a paper today on new ways to look at the division of income in the United States.

The most interesting piece of data in that report is that both the labor and capital shares of income are dropping across the economy. What does this leave, you ask? Glad you asked, hypothetical questioner: it's profits. Over the thirty year period from 1984 to 2014, labor's share of income dropped 6.7 percent, the capital share dropped 7.2 percent, and profits gained 13.54 percent.

The working hypothesis, supported by empirical data, is that lack of market competition is allowing higher markups on products sold.

The diversion of income to profits is almost the antithesis of what classical economics says ought to happen in a market economy, and signals deep problems with our regulatory environment that lead toward increasing monopoly rents throughout the U.S..

So with the newly empowered GOP within striking distance (on paper, party unity is another story) to call a constitutional convention, a lot of Republicans are demanding a balanced budget amendment as their primary dream issue. Needless to say, this would be a disaster for a federal government in any country to take.

http://www.cnn.com/2016/11/22/politics/constitutional-convention-explainer/index.html

You would think that Classical and especially Neo-Classical Economist, with their obsession with "micro-foundations" would know that even a cursory look at micro-economic behavior would tell you that companies want to achieve as close to monopoly pricing as possible, and will be more then happy collude to achieve such.

Nah, if we're all rational paperclip maximizers, then anyone taking advantage of the system to monopolize prices would be undercut by competitors. This is such an axiom of neoclassical that it's almost funny to see how they try to dance around the fact that it's total bullshit.

Classical, for its part, simply doesn't take this factor into account, although Smith did recognize the need for government to act as an arbiter, and he understood the problems with monopolies.

Now, there is a valid critique of government regulation, which is that it can become corrupted by the system it seeks to control, leading to it actively abetting monopolistic business practices. This holds whether you are approaching things from a supply-side or demand-side model, and is one of the key reasons why the more libertarian leaning types (Austrians in particular) demand the complete removal of all regulation in order to allow markets to set prices without interference.

The problem is that, again, that's patently BS, because without any form of supervision, businesses will collude to set prices, and the question is more one of how much of that can be tolerated than whether it will occur at all.

edited 22nd Nov '16 8:46:07 AM by Fighteer

Adam Smith seemed to me like someone who was aganist any kind of big concentration of power in the economy.

I get the feeling that he was around today and had similar views he would be against monopolies and cartels, but also labor unions and maybe even public utilities.

I was reading an economic history book recently and it talked about how Malthus and Ricardo were contemporaries whose philosophies came out of the post-Smith economic system in which abuses of labor and monopolistic power grabbing were rampant and it looked as if capitalism might completely destroy society.

Malthus imagined that society would eventually destroy itself through overconsumption of resources, viewing this as fundamentally inevitable no matter what form it took. Ricardo was less pessimistic, putting forth the theory that economic value ultimately derives from the labor used to produce it, in contradiction to Smith's emphasis on capital.

Hilariously, all of them turned out to be slightly wrong (or at least incomplete), and it was Keynes who realized the role that the money supply plays in regulating economic behavior. Profits, of course, are an integral part of this: excesses being a sign of monopoly rents.

Taking a Marxian perspective, the diminished share of income going to labor will eventually set off severe unrest that will lead to social and political disruption. We can see some of that today, in Trump's election.

edited 22nd Nov '16 9:34:24 AM by Fighteer

Looks like Trump may be planning to stimulate the economy through deficit spending, like Reagan did.

Yeah, but his actual policy ideas seem to be based around privatizing public assets and paying for them with tax credits, which, given his general history of cronyism, means that he'll be selling the rights to public infrastructure to his friends and handing them tax money with which to build.

NY Times: Krugman: "Build He Won't"

Even in a world in which you honestly believe that privatization is good, this seems to be a case of going out of one's way to develop infrastructure without stimulating the economy.

edited 22nd Nov '16 12:23:12 PM by Fighteer

"Build"

I wonder how many of these projects benefit his businesses. If he's as bad a businessman as we know, a bit of money from the treasury would surely do good.