The General Economics Thread

@Fighteer: Unfortunately, revolutionary thinking won't get through the US government as long as our franchised population contains a rock-solid chunk of the population that are completely insane and as long as the system that gives that segment disproportionate voting power continues to exist. So as long as the system continues to exist, the system will continue to exist.

The kind of revolution I was talking about was jettisoning the whole system of government out the window, the good and the bad, and making a new one. Such an action should be reserved only for the really dire situations.

@Trivialis: It's also pretty much impossible. Any full-scale revolution in the U.S. would end up being more like a civil war between conservative and liberal interests, with no clear battle lines between or within states. It would be a horrific mess.

On-topic, it would also be an economic catastrophe. It is my belief that the conditions for a revolutionary state could not occur unless such a catastrophe happened first. We're talking Great Depression level or worse, not this Lesser Depression we're in now.

edited 13th Nov '13 8:45:59 AM by Fighteer

Okay, something very significant just came to my attention. It's Krugman's blog but he's citing directly from Larry Summers — yes, the fellow that was up for the Fed before Democratic revolt got Janet Yellen the nomination instead.

There's a ton of material that I recommend anyone interested read in detail, but the gist of the article is that secular stagnation — the condition where the natural rate of interest to maintain full employment is below zero — may be our default state rather than an aberration.

In short, we need bubbles to have full employment, or an alternate approach like finding some way to make real interest rates negative. Krugman's theory is that this relates directly to population growth, with the natural interest rate pegged to it.

The key piece of evidence for this theory is that in none of the bubbles that have occurred in the last 40-ish years has there been any significant increase in inflation, which you'd expect if the economy were running too hot — demand exceeding supply. In other words, since about 1985, absent "loose money bubbles", we've been in a state of persistently depressed demand.

If this is in fact true (and I commend Summers for breaking with VSP orthodoxy to deliver the idea), then the ideas of "business cycle" theorists are not only wrong in the specific case of the liquidity trap, but wrong in all cases. Not that they were ever particularly right, but still...

Among other conclusions, national debt is not only not bad, but the real rate of interest on it, taking into account fiscal multipliers from the expenditure of the borrowed funds, is negative. Put more simply, there are no long-term consequences from unrestricted debt issuance. None.

Also, people saving money in a state of persistent secular stagnation is counterproductive. That one hit me like a Wham Line. We shouldn't be saving for college and retirement; we should be spending that money now.

edited 16th Nov '13 8:18:36 PM by Fighteer

It's not productive for the economy, but it is productive for those people in question. Saving for retirement is a really good idea for individuals, even if the effect on the economy isn't completely positive.

It's a paradox, labeled originally by Keynes: the paradox of thrift. Saving money, normally a good idea for the individual, is bad for the economy as a whole. A nation of people all acting in their own rational self-interest conspires unwittingly to act against their collective self-interest.

Government is supposed to be the super-rational actor, but it's paralyzed by people who can't accept or even comprehend the nature of the paradox.

Common Keynesian wisdom states that the paradox of thrift applies only in liquidity trap conditions and that in "normal" periods of growth, you want to do the straightforward thing and save for a rainy day. It turns out that the liquidity trap/secular stagnation may be the actual "normal", with booms the exception.

Sorry for serial edits, but there's one other component. I had long believed that income and wealth inequality were responsible for the general stagnation since 1970, but it may be more complex than that. "Natural", as opposed to bubble-driven, economic growth occurs in the following conditions:

• With population growth as a natural consequence of more consumers/workers entering the economy.
• When technological changes create surges of demand for new infrastructure, goods or services.
• When government issues broad-based wealth redistribution measures through stimulus fueled by progressive taxation and/or borrowing.

To this we will have to add:

• When interest rates are sufficiently low as to make people wish to spend more than they save.

In conditions of secular stagnation, the desired interest rate is negative, so some new type of monetary policy is required. One example proposed is eliminating paper money and charging a price for savings rather than paying interest on them.

edited 16th Nov '13 8:46:45 PM by Fighteer

Krugman and Summers are halfway there, but they are missing key data (as are most economists).

The issue is that labor-saving technology is deflationary for labor markets (lower demand for workers drives the value of their work down). This is a big part in the current price-wage gap that's been noted. Having to overcome this deflationary effect is the reason why those reports say a boom is necessary. This can be done by the usual methods: increasing demand of products through population growth enough to restore demand of workers back to normal levels (what they observed happening in 1960-1985), sidestepping the labor-saving technology by opening new markets, or government directly increasing its own expenditures.

The problem with the analysis is that almost all available economic data comes from economies in recent history where the implementation of labor-saving devices was in full swing. The hidden assumption that undercuts Krugman's and Summers's findings is that labor markets are automatically deflationary, independent of any other factors. This is not and never will be the case.

...and more then that, when economies become more affluent, birth rates fall as people feel the need to have fewer (or any) children, eventually leading to population decline.

In fact, some countries already have declining populations: Japan is one, and soon Germany is going to be another as populations age and the "Baby Boomers" start to die off.

edited 16th Nov '13 10:41:05 PM by Greenmantle

China's going to get hit really severely by that in the future.

China has a huge amount of room to grow its per-capita productivity and income, though, as do other developing nations.

China also has the advantage (I use that word really loosely here) of not having good working conditions at the moment, thus there being shorter lifespans and the labor pool growing as fast on the elderly end. (This is combined with a culture that traditionally all but worships the elderly.) Or in short, they don't have to worry as much about technology being supply-side deflationary for labor markets.

edited 17th Nov '13 12:09:14 PM by TotemicHero

Krugman did do a series of blog posts and a column or two on the role of technology in reducing labor force participation. His conclusion was that the only way to address the issue from a progressive standpoint while still keeping the technology is to become more redistributive in terms of wealth. That is, set taxation policies to ensure that the profits of the capitalist class don't get permanently trapped within that class.

Here is the thing, "Saving for retirement" in general does not fall under the paradox of thrift because most of it is invested in the market where it can help others build businesses. (In theory at the least)

It does, actually. The "market" isn't doing any investment in growth right now, because it has nothing worth investing in. Demand drives investment.

See, here's the thing Soban: that's non-liquidity trap logic. That's exactly the point we're making-that more saving doesn't lead to more money being spent precisely because of the situation we're currently in (and, it looks like, may have been in for far longer than we care to admit).

Has anyone else heard of Hjalmar Schacht and his re-inflationary Policies?

Please do us a favor and summarize in some way. Providing links and expecting us to do the research is rude.

I'd guess that's a no.

I was trying not to mention who Schacht worked for between 1933-37^note  Namely the Nazi Party.

Basically, what Schacht did was to massively expand existing public works schemes into projects such as building Germany's initial autobahn network and rebuilding heavy industry, as well as using Mefo Bills to surreptitiously run a greater deficit and re-inflate the Germany economy, by means of re-armament.

Keynesian, perhaps?

edited 17th Nov '13 2:22:41 PM by Greenmantle

The Nazis did a fantastic job of boosting Germany's economy by mobilizing it for total war. If you're concerned about running afoul of Hitler Ate Sugar, there are plenty of examples of weaponized Keynesianism to talk about that are not Nazi Germany,

I know. I was just curious if anyone else had heard of him. It appears not.

Wrongo: I had. The problem is having to factor such anomalies as slave labour into the equation. -_- Well, actually... the current US privatised prison system isn't a million miles away, come to think. <_<

edited 17th Nov '13 2:45:28 PM by Euodiachloris

America did about the same thing with the New Deal and prepping for world war 2. If it wasn't for the Republicans, we could probably pull off something similar by doing a big push for a proper mass-transit system with High-speed trains. Money'd go into steel, technology, construction, ect, and the country'd get something useful out of it.

Any large-scale infrastructure program would return its cost many times over in future benefits. The interstate highway system is another example.

If you look at tonnage hauled, rail is one of the cheapest ways to move things. I think that if we re-privatized the passenger rail industry (perhaps like Japan did) and started a high speed infrastructure project, travel by rail could be a force to be reckoned with again.

edited 17th Nov '13 6:20:08 PM by soban