The General Economics Thread

that’s more or less what classical Keynesianism calls for; cut government spending during good times, raise it during bad times to even out bumps in the fiscal cycle.

Ah, did not catch that. We appear to be in agreement there.

x3

Not quite. Automatic stabilisers are a thing, you will naturally remove more money from the economy during booms and less during slumps because of the way taxes and benefits work. Obviously they aren't perfect, but they make things passively less painful and provide time for the politicans to talk things through. We have technocrats running most economic policy right now anyway since they control monetary policy and Parliaments have tended to refuse to conduct fiscal policy under the current arrangements, it's one of a few reasons why I don't particularly like independent central banks on principle and inflation-targeting monetary policy in practice.

Edited by DeathorCake on Feb 14th 2019 at 2:12:01 PM

How is MMT not inflation targeting? Outside of the "magic free money" woo, it's just doing the same thing as a modern central bank but by different means; inflation in MMT is controlled through the money supply instead of debt issuance.

You control inflation by restricting the money supply. Right now interest rates are very low, and the deficit is high, so our economy should be awash in money, but large employers are not spending their savings by expanding production or investing in new product development, so inflation is low because the economy is still stagnant. This is also why reducing the debt right now wouldnt help.

I believe that the best way to promote domestic economic growth under these circumstances is strengthen consumer spending without promoting consumer debt. And the only way to do that is by raising wages. So a higher minimum wage will help a lot. Another approach would be to tax corporate earnings or financial transactions and spend that money in ways that directly benefit consumers and employees, such as public transportation or education.

Primary target is full employment of resources or as close as can be reasonably obtained, low inflation is nice to have but a bit less important.

Inflation targeting by means of interest rates is a rather vague blunt instrument to use on an entire economy compared to fiscal policy, and keeping aggregate demand high by in essence just increasing private debt levels probably hasn't exactly helped the private debt crises scattered over most of the planet, or the inequality problem. Why is free money woo exactly? The Bank of England summoned a few hundred billion from thin air a few years ago to prop up financial markets, no inflation worthy of the name then.

Edited by DeathorCake on Feb 14th 2019 at 3:30:50 PM

And how is that meaningfully different from Keynesian monetary policy, which eventually ran into stagflation it was unable to address, leading to the implementation of the modern fiscal policy regime?

Edited by CaptainCapsase on Feb 14th 2019 at 10:50:53 AM

Really? "Cut government spending" feels like picking a precise wording. If you decrease spending or increase taxation, the economic effect is the same: less money moving in the economy. It would be particularly strange for an economic theory to go "things are going well, let's just deliberately fuck the people that rely on government programs."

The argument for anti-inflationary tactics is a sound one, but the scale people like to apply it...

If doing well, take money away from the entities that are only interested in self-enrichment and hate society.

Are you really trotting out the stagflation meme after all this time? That was a supply crisis: specifically, oil. It caused an inflationary spike in the prices of goods. The Keynesian playbook does not say to conduct fiscal stimulus in situations like these, but the people in power read it wrong and applied the wrong solution.

More specifically, the playbook in use at the time did not take into account the problem of supply shocks, and so did not have a ready solution for the situation at hand. It's not the fault of the theory that it was used incorrectly; indeed, the Keynesians fixed their mistake shortly afterwards. That failed to stop the political damage, however, and the neoclassical twats seized the opportunity to jump in.

The baby was clearly thrown out with the bathwater, but trying to claim there wasn't a systemic crisis for the post-world war 2 economic regime in the 1970s isn't a hill worth dying on IMO.

Well, there's truth and then there's what everybody knows so strongly that there's no point in trying to make the argument. I hope you can understand if I am dissatisfied with meekly acceding to the latter.

Or by direct consumer investment. If inflation needs to go up then we can boost inflation by printing money, that money can then go directly to consumers (via either targeted state aid or a tax rebate) so as to boost economic growth without increasing consumer debt.

The problem is that there’s so much consumer debt that much of a stimulus like that might just be used to pay down debt, people will want to get out of the hole they’re in before they spend in a way that boosts the economy.

That’s before considering the impact that would be had on the consumer debt industry, reducing consumer debt means shrinking that industry.

That industry is parasitic rentier capitalism incarnate, kill it and be glad. There's a not invisible faction of economists who advocate directly using government money to pay down private debt as an end in itself as a method to reduce the power of finance and reduce the risks of debt deflation, of whom Steve Keen is probably the most famous.

Personally I rather like the idea.

So it sounds like the main difference between MMT and mainstream Keynesianism is that the former prefers using monetary policy as its primary lever for manipulating the economy, and the latter prefers fiscal policy. ie, Keynesianism would rather issue debt to cover deficit spending, while MMT would rather print more money.

I'm not really sure what the pros and cons of either system would be in comparison to each other. I suspect it would be harder for, say, Congress to implement MMT (since Congress controls fiscal policy, not monetary policy) but that's more an observation about the American political system than Keynesianism or MMT specifically.

It depends what strand of Keynesian thought you're talking about, in some cases like Krugman's New Keynesians there are a few other differences, especially with regards to private debt, but you've got the most important one down.

A lot of MM Ters don't really consider monetary policy distinct from fiscal policy as such, since lending and borrowing money are just different kinds of fiscal intervention. The lines blur a lot, especially with stuff like QE or "helicopter drops", which are basically just fiscal stimulus but considered "monetary policy" because the central bank is doing it.

Edited by DeathorCake on Feb 15th 2019 at 1:57:43 PM

I'm not sure I understand the difference between "printing money" and "lending more"? Isnt lending money to commercial banks the primary way that the gov't distributes currency?

OK, "creating money directly by typing positive numbers into people's bank accounts, which they can then withdraw and spend". Not literally printing notes and making them available to the public somehow.

The macroeconomic distinction is that if you use monetary policy to maintain aggregate demand you keep interest rates low, causing more people to borrow money (which creates new money as the private banks simultaneously create money and debt) which is then spent on goods and services, or servicing other debt.

If you use fiscal policy ("money printing") then you don't bother with the roundabout method of increasing private debt, you just spend more money directly, thus putting it in the hands of the private sector. This can be harder to coordinate effectively since it's by nature a more precise and complicated tool than "base rate up 25 basis points" and is controlled by politicians with all their foibles, admittedly, but given the central banks are currently just as politicised and much less transparent and accountable I'm personally willing to take the risk.

Also you're not effectively outsourcing large sections of economic policy to Wall Street by allowing them to take the lending decisions and accrue the profits thereof. Always nice.

Edited by DeathorCake on Feb 15th 2019 at 2:23:49 PM

Hm. I know that corporate debt greatly exceeds consumer debt, so my assumption is that most borrowing is by businesses investing in themselves, and that most of it ends up as wages in one form or another (unless they are investing it in . Granted, it's a multi-step process, which as a tool for controlling economic growth makes it slower to act and take effect, but some might say that's a feature, not a bug.

In any case, any way you get it there, giving money to consumers is a short term solution unless the influx is sustainable, which is why wage growth is preferable to direct one time subsidies.

Personal/household debt has been rising dramatically by pretty much every measurable index since the late seventies, it's really not just been corporations (which are net savers in the USA IIRC). The economists I talked to about this once said that the optimal level of private debt is about 70 to 100% of GDP depending on country and buisness cycle, but right now the UK, US, China (scary, since they haven't crashed yet) and a good few other countries all have many times that. Australia's private debt graph is literally exponential for a few decades.

High private debt of either kind squeezes wage share of income, since both consumers and firms pay financial capital interest before allocating the rest of their income. If income of workers is not rising faster than inflation + wage share drop that means they have to take out more net debt to maintain living standards, which causes a bubble which eventually causes a crash.

Government fiscal intervention can be whatever scale is required for however long is required, although obviously it must be scaled to the economic conditions. Wage growth is obviously good at present, but it's not like the Bank of England is going to run out of pixels to move around on computer screens. Influx is always sustainable in terms of financial constraints.

Edited by DeathorCake on Feb 15th 2019 at 3:12:01 PM

Rising consumer debt is a problem, not least because it tends to fuel "pseudo-growth", ie an increase in spending that fools the business community into thinking that its a long term trend, which it cant be. Consumer debt can actually remain below gdp growth and still become a problem, which is one reason gov watchdogs didn't see 2008 coming. However, commercial lending is less of a problem, as long as most of it goes toward creating capital assets (ie, not more debt). The devil is in the details, obviously, but monetary policy can and has worked well as long as financial institutions dont fool themselves (which is what happened in 2008).

As for fiscal policy (ie, direct subsidies), where does the money for it come from if it isn't based on taxes on wages? And if it is, then wages have to grow to sustain it anyway, so...

Capital investment has been noticeably not correlating particularly well with corporate debt, though. Very little investment, rising corporate debt, etcetera. Either way the repayments to financial capital squeeze wages share.

The money for the government spending is summoned out of thin air by central bankers typing numbers into fancy excel spreadsheets, same as normal expenditure on guns, butter or bureaucrats. Governments don't "spend people's wages" by taxing them, they tax them, delete the money and thus free up resources like labour that they can then buy with newly created money without causing inflation. The US/UK and other countries with their own currencies cannot go bankrupt in that currency.

I would rather not maintain demand by handing a UBI to all the workers to make up for low wages since I feel this neglects rather important issues of labour power and various other things, but you could do that or something similar if that's how you wanted to play it.

Edited by DeathorCake on Feb 15th 2019 at 3:27:25 PM

Ah, I see. I think that likely would create inflation then. The point of basing govt revenue on taxes is that the value of currency is then based on national productivity, which forms the basis of the value of the currency. We aren't facing inflationary pressure right now (and haven't for a long time) but putting the amount of money into circulation that I suspect your plan would require (enough to maintain consumer spending while simultaneously paying down debt) is a little too experimental and risky for my taste.

Long term, the problem is increasing wealth disparity, which means the solution is ultimately consumer/employee capital, not spending power per se. The most valuable and reliable form of consumer/employee capital are high demand job related skills, which act as a reservoir for wages (ie, skills are the stock, and wages are the flow). I would rather see increased govt spending focused on institutional infrastructure which promotes that cycle, such as education, health care, housing, and so forth. Call that "indirect fiscal policy" if you like.

Paying down debt destroys money in the same way that creating debt creates money, so that's not very inflationary and can even be deflationary at times. Steve Keen has proposed having the money be allocated specifically to debt so as to avoid the "how much gets paid down, how much gets spent" problem when projecting available fiscal space for budgets. Give everyone X moneys, if they have debt it has to pay the debt, if they don't they just get a cash injection to do with as they will.

Under the fiscal policy regime I would prefer the monetary base would be more or less whatever is required to run the economy at maximum capacity without causing inflation, managed by automatic stabilisers. That if anything would be more based on the productive capacity of the economy than the current regime whereby a lot of money is created alongside debt and taxed while being used for pointless financial speculation that does next to or less than nothing to boost real output since a lot of the financial sector is a zero-sum game.

Personally I prefer what you call "indirect" fiscal policy to the UBI approach, but flat out throwing money at people is much simpler and more reliable than increasing departmental budgets and such when building economic stabilisers (benefits, job guarantee, UBI etcetera). Sure, skills are nice to have, but running a high-pressure full employment economy decreases their relative importance as labour has increased power relative to capital, so workers have an easier time getting hired and pushing for wage increases to some degree independent of skill or ability. I have zero problem with dealing with the rentier capitalism that is both a product and cause of wealth inequalities, but throwing everything at the mostly-nonexistent "skills gap" won't fix it, since not everyone can be more competitive at once.

Edited by DeathorCake on Feb 15th 2019 at 4:14:05 PM

What will fix it is getting the money out of politics, but that's another discussion.

The problem that I see with using govt subsidies for paying down debt is that it uses current money to remove future money. When people take out a mortgage, they owe hundreds of thousands of dollars, but only over 20 or 30 years. Paying all those mortgages off today creates a significant net currency increase, today. Of course, you could use subsidies simply to make debt payments, but now you are propping up a for profit industry with government favoritism, which is an unfair business practice. Everybody will want to get into lending. Have you thought about the incentives you are creating?

Consumers/employees are not rational decision makers, meaning that they aren't driven by a desire to maximize return on their investment (they are driven to maximize current and future comfort). If you pay down their debt, they will just borrow more, because they can. People want bigger houses and bigger cars, and more of them, so they will always spend at the limit of what they think they can afford. The reason consumer debt goes up is because they achieved a standard of living in the past which then becomes no longer sustainable. Make debt more affordable, and they will acquire more debt. But people are not irrational either, so historically if they have had the option of earning it rather than borrowing it, they will choose that.

Also, I fear that you are treating the symptoms rather than the disease. Yes, consumer debt is rising, but that's because middle class wages have stagnated, and that's because employers are disinvesting from their employees. Automation and offshoring has changed corporate executive culture, and they now believe it makes more sense to wait for opportunities to increase productivity at the expense of payroll, than it is to invest heavily in expensive training. They look at Walmart and see how profitable that is. Reversing that will be more complicated than giving everyone free money. We start with trade agreements that promote working conditions overseas, but that again is another discussion.

Yes they have. Wages at the upper end of the earnings scale are increasing disproportionally, whereas those at the middle or bottom are barely changing, which distorts the national average.