The Covid-19 pandemic is forcing a rethink in macroeconomics
economist.com
economist.com
> Many economists want precisely this state intervention, but it presents clear risks. Governments which already carry heavy debts could decide that worrying about deficits is for wimps and that central-bank independence does not matter. That could at last unleash high inflation and provide a painful reminder of the benefits of the old regime.
Sounds more like a plea than a warning, coming from The Economist. Prophecies of inflation seem like a joke in a time of record low inflation with high government deficits. Just look at the case of Japan for one.
I mean housing policy in itself is entirely political: weaponized zoning laws and the lack of new construction to match the growth of the country are a direct result of this infinite growth machine. Housing being considered "an investment" will further perpetuate this price inflation because there is a vested interest in not allowing property values to decrease which is what happens when you can build to match demand.
Affordable where? In West Texas or in Paris? Today, Paris' population is ~2M and the residential buildings cannot be taller than 50m by law. If 10M people want to live there, is it a "basic human right" to build 10M homes for them by replacing existing Parisian building by skyscrapers? What will that do to the existing fabric/culture of the city, and who gets to decide what is allowed? Existing residents or the would-be residents?
40 years ago my parents were able to buy a large modern home for about 3 times times one of their salaries. For young people today it is more like 6 - 10 times the combined salaries of two people.
I'm not an economic expert but it baffles me that people pay attention to a single CPI and don't look at many at once when analyzing economic policy. A single CPI optimization is inherently going to cater towards the effects on one group, but without study we don't even know what that group is.
The prices of houses, stocks, art, and startups are not. The reason is that assets prices are very heavily affected by interest rates.
Imagine a house that costs $100,000 but rents out for 10,000 a year in profit because interest rate are 10%. Now imagine interest rates drop to 1%. Arbitrage will mean that individuals will borrow money at 1% and buy the house and collect 10%. This drives up the price until the return on the house matches the return of other investments, or basically until the house is worth $1,000,000. Now the cost of rent hasn't changed, but the price of the house has gone up 1,000%.
Did the economy experience 1,000% inflation? No because the cost of living hasn't changed.
Since our economic system is built on assets (they appreciate, you can borrow against them, etc.), the inequality gap keeps growing.
My dad bought a house and had a kid in London aged 27. He didn't even have a degree and was an immigrant arriving with all the money he had scrounged in his hand.
Compare that with the London of today where £200k buys you a 80sqft squat:
https://www.dailymail.co.uk/news/article-8541513/Micro-studi...
But you know, house prices and rent aren't a good so there's no inflation so there's no problem right? /s
Things that are in actual demand [1], like health care, education and housing (in desirable areas) have absolutely been outpacing inflation.
Sure, if you measure the absolute basics needed to not die in a society, the figures might make sense (as it would be mostly food and clothing, both of which are dirt cheap. So cheap in fact that most of the time they can be had for free! Thrift stores and food banks are your friend)
But if we're talking about a thriving society and population, surely our aims should be set higher than the very first step on Maslow's hierarchy of needs?
[1](it's not Smart TVs and Smartphones, although even flagship smartphones have recently ballooned in price far outstripping any sort of inflation figures)
Very much agreed.
The issues with sectors that have been outpacing inflation aren't due to a blanket "we're pumping too much fiat into the economy" but are absolutely political choices.
Healthcare: The US does spend too much here for what we get in return but this is a political choice. We could institute Medicare for All and _save_ money [0]
Education: Again political here. How much funding has been stripped at the state/local level for the universities and how much can be attributed to extremely bloated administrations? Other countries can manage education just fine.
Housing: this is current housing being weaponized to increase the value of property while artificially limiting what, where, when, who, and how much can be built at any given time. See: all of California. Housing as strictly a monetary investment now dictates that nothing is ever allowed to depreciate, only ever increase.
[0]https://www.thelancet.com/journals/lancet/article/PIIS0140-6...
This is absolutely true, but also exceptionally hard. Extracting the $1 Trillion/yr out of the current healthcare system is going to put a lot of people out of work. We'll need a good system to re-train them for new work too.
I think items like housing and transportation costs are used by some regions when calculating the cost of living that determines the "poverty line" for aid programs. So there's probably already a well-vetted process for looking up some of those price points. Then it's just a matter of aggregating them and tracking that value over time...
I prefer the older CPI system. It’s still imperfect but it was fairer.
It makes me feel sad and guilty but that is the reality. Inflation is real when you look for it.
[0]: 0]: https://www.supermoney.com/inflation-adjusted-home-prices/
[0]: https://dqydj.com/number-of-developers-in-america-and-per-st...
I live in Minneapolis. Not as wide ranging options here, but many of them are at fortune 500 companies (relatively stable), and homes are affordable. I'm sure you can find examples in many other similar cities.
The Valley may have the most opportunities of anywhere, but to say that there's just no work anywhere else is a bit ridiculous.
People do like space, but the like cities as well. Suburbs are an attempt to compromise.
I want freedom from the impact of other people; no more noise through the walls, smoke in the halls, or the unwanted scents from cleaning and cooking when the windows are opened for ventilation. Even renting a house I can't escape this and now there isn't one 'grounds-keeping day', it's every freaking weekend day that someone near me decides to mow their lawn.
Conversely people might like living far apart so they've got the freedom to make a mess, do things an HoA would hate (I argue HoA's exist due to lack of proper, and local, laws and enforcement). For that matter, HoAs are also something that others force as an anti-freedom.
I think what I would really like is a bunker, someplace with nice thick insulation and isolation and very good air filters. However I'd still like to be able to easily visit stores for food, so probably some kind of suburban bunker.
Keep in mind they may find something you do to complain about!
And the Northeast, which is apparently more expensive per sq foot than the West, according to your source.
In things where supply is near-infinite? No. Think digital entertainment, cheap calories or cheap clothes.
The usual outcome of this situation is something far worse than high inflation. Instead, you typically get a financial crisis, then war and conquest as the new technologies are applied to weaponry.
Absent central bank intervention, a productive economy should naturally undergo significant price deflation year after year as efficiency improves, causing more goods and services to be produced with the same inputs. This is why consumer technology prices trend continually downward.
So if the default, absent any intervention, would be for prices to go down every year across the board, pointing to "low inflation" numbers is a red herring. The question shouldn't be how far inflation numbers are above zero, but how far they are above the negative rate of inflation we'd see otherwise. That differential is what tells us how much wealth is really extracted from the economy via what is effectively a highly regressive tax.
1. It isn't clear that the (real) cost of essentials like food, shelter, clothing, healthcare, education is actually going down significantly.
2. Even if what you say is 100% correct, this "extraction of wealth due to inflation" seems to be a somewhat stable scenario, and certainly hasn't lead to the apocalyptic visions of collapse that inflation hawks perennially create a ruckus about. So even if you think we are living through a hyper-inflationary doomsday scenario, certainly this is a very different doomsday than what one is usually led to imagine (Zimbabwe, Wiemar Republic, Venezuela etc.). Maybe inflationary Armageddon isn't so bad after all!
Truth is, worldwide there are more deaths from the side effects of too much food, than not enough.
however, we are in a unique situation that has the potential for causing hyper inflation. I say potential because I still think it's not a likely outcome. We are paying people not to work, but eventually someone has to produce something. We ALL can't wfh or be unemployed and collect checks as if we were employed and expect our Amazon deliveries and canned food to arrive; someone has to make and deliver it.
Eventually all the extra money laying around today will chase yesterday's production. I think this is why we often see hyper inflation scenarios stem from low inflation environments. it sounds counter intuitive at first.
This is why we have to be extremely careful when we try to pick and choose what is essential or not. Now we got situations were food is rotting on the vines and milk being dumped down the drain. I dont think we will enter hyper inflation, but we have to be careful about it.
https://en.wikipedia.org/wiki/Hyperinflation#Notable_hyperin...
It is if you think about it. In the 1970s a baby born premature at 28 weeks would have been unlikely to survive. Healthcare quality has increased enormously. If you could get 1980-level healthcare it would cost less of your wage than it did in 1980.
Food, clothing, transport, and heating have unambiguously fallen as a proportion of wages.
Education is perhaps an outlier here. The spiralling cost is usually explained as a zero-sum social signalling mechanism that is super important for life outcomes, and its rising price as being enabled by the falling cost of everything else.
You can probably listen to free lectures by country-leading authorities on any STEM subject. Well, TEM. I'm not sure about biology and the other sciences. Access to humanities-related texts is also unbelievable vs the 80s.
The cost of getting socially certified as having become educated is growing. Not the cost of education.
This comment assumes that central banks create money and that's what drives inflation but this isn't the case: commercial banks are the ones which create money (through credit).
Also, you can't sustain an economy under deflation, because deflation would just make the whole economy collapse. In a market driven industrial economy the limiting factor for the economy isn't the output, but the demand, and deflation is the ultimate demand killer (which is why basically nobody buy things in bitcoin: realizing the pizza you bought five years ago is now worth a few thousand dollars doesn't sound cool).
It is a problem for debtors ( home owners, and corporations ) and banks.
Who wants to have a mortgage on a house that is going down in value every year?
How is a corporation going to get investment in their factory when a competitor could create a similar factory at a cheaper rate in a couple years.
Why would a bank lend money to people who may not be able to pay them back when just holding onto the money generates returns?
Sounds like a car loan. If the house was cheap enough, people would probably be OK with it, but of course starting from current prices it would be incredibly bad.
Deflation is generally regarded negatively, as it causes a transfer of wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency, and because confused pricing signals cause malinvestment, in the form of under-investment.
In this sense it is the opposite of the more usual scenario of inflation, whose effect is to tax currency holders and lenders (savers) and use the proceeds to subsidize borrowers, including governments, and to cause malinvestment as overinvestment. Thus inflation encourages short term consumption and can similarly over-stimulate investment in projects that may not be worthwhile in real terms (for example the housing or Dot-com bubbles), while deflation retards investment even when there is a real-world demand not being met.
Hasn't this been happening for a long time? Plenty of computing equipment had done just this.
I do. That's how housing works in Japan - you buy a house to live in, not to save money or invest. Older houses have lost their value (largely due to perceptions of danger in old housing stock - until the last decade or so, increasing understanding of earthquake/tsunami safety meant that houses wouldn't meet current building codes)
That (combined with adequate housing stock, less zoning restrictions, and negative population growth) means that even in the biggest cities, housing is fairly affordable. You buy a house because you want the control and the permanence that comes from owning a house.
Something I don't understand: if there is real deflation, your buying power increases if you wait. In this case: wait a year, get a nicer house for the same price, or pay significantly less for the current house. So even if you're not buying the house as an investment, waiting would improve your situation as a buyer. The more you wait, the better for you.
How do you ever get to actually buying a house in such circumstances?
If you look at metrics that actually matter, like quality of life, income inequality, education, crime rates, public infrastructure, life expectancy, etc., it's up near the top--and is certainly doing far better than the US in many important areas.
Now, I think we should forgive most if not all student loans, and start paying for an education, but if the system insists on the majority of college degree seekers carrying student loans then you have a huge problem with deflation.
It would also be a massive problem for corporate debt right now. I think the central bank would rather print money by the Trillions then allow deflation at scale.
The problem is not the declining value of the house, it's that the borrower's income is declining.
To a first approximation, inflation is rising wages relative to the goods and services bouoght with them.
Deflation means falling wages, which makes it progressively harder and harder to pay back loans, so people are less and lesss willing to take on debt.
Falling ability to repay also increases risk to lenders making them less willing to lend and causing them to demand higher rates and shorter terms, reducing both investment and consumption.
> just holding onto the money generates returns
No. No, it doesn't. To generate a return, it must be used for investment or lent (ultimately) to someone who invests.
Deflation also disincentivises investment directly (besides lender unwillingness): your market will have less and less disposable income over time, so the expected value of investment declines and the risks go up. So the business case hurdle for investment gets higher and higher.
Deflation is a reinforcing feedback spiral to zero for capitalism. Inflation at about 3% - 4% per year seems to be optimal.
People rent housing, paying monthly and knowing that they'll have nothing to own in the end. People even stay in hotels.
They are buying a service: a place to live under their control, where they want it.
I never hear about produced goods deflation that is a price drop like from mass efficiency gain where the existing money/assets start being able to buy more things. That should produce more demand, wouldn't it?
The demand destruction comes from individuals and corporation saving more money instead of spending or investing it because they get a 4% better return in one scenario than another.
The biggest purchase individuals make is buying a house. Surely you can't argue that paying a 1-4% higher interest rate on a house wouldn't noticed by consumers.
That depends on how house prices are determined.
If houses are priced primarily based on the cost of construction plus the cost of materials, you would expect consumers to notice a significant difference in total cost under high vs low interest rates, since the base price of the house will be the same either way and a higher interest rate will lead to a higher total cost.
If houses are priced by people looking at what the maximum monthly payment they can afford is, and are bid up to whatever that maximum monthly payment is, people will just observe that houses cost "almost more than I can afford" no matter what the interest rate is. Lower interest rates will lead to higher prices (capped at 360 (30 years x 12 months per year) times what people can afford, at 0% interest rates), and higher interest rates will lead to lower prices (down to the floor the principal being the of cost of construction).
I think most housing markets are more like the first scenario than the second, at this time, but it is entirely plausible that this won't always be the case, and some would argue that e.g. the bay area housing market already more closely resembles the second scenario.
Edit: typo
But luckily for us very little of the U.S. is as screwed up as San Francisco.
Maybe don't think about it when buying a pizza (although I think even then it impacts on consumption), but I recently talked with a friend from Argentina and said that he was buying the sacks of concrete while working in US to build his own house in Argentina in the future as he did not want to deal with the contractor arguments about costs of the material due to the duration of the construction.
Wrong question. The real issue is: how many consumers check the unemployment numbers before buying a pizza? Answer: a whole hell of a lot.
And Keynes got to contrast the U.K.'s monetary policy with France's moderately inflationary policy. France made it through the Great Depression relatively unscathed.
Of course, Germany had strongly inflationary policies leading to hyperinflation. They also suffered terribly during the Great Depression. But Germany deliberately chose hyperinflation to spite the U.K. and France for enforcing crushing war reparations.
That is reducing a comparison of the French and English economies down to 1 variable. It is unlikely (nay, practically impossible) that inflationary vs. deflationary policy was the biggest difference between the two.
It is like saying inflation policy was the biggest difference between Japan and the US in the 90s. One of those countries had natural resources, favourable demographics and a fire-hose of migration. The other had limited resources, unfavourable demographics and migration-hostile policies. Their legal systems and approach to corporations was completely different. There are a large number of important variables when comparing the two. Monetary policy is important but not the be-all and end-all.
One is going to be better than the other, but 'Country A did X and did well, B did Y and did badly' isn't an argument. There is too much going on.
Nowadays, people don't really know what inflation is because there is none (too little to bother at least) but back in the late sixties and seventies it was a huge popular concern.
> how many consumers check the inflation numbers before buying a pizza
An economy isn't just people buying pizzas. A significant part of the economy is corporate investment, or consumer spendings made thanks to credit, and those are what's really hurt by deflation.
All we have to do is look at history to disprove that. From 1800 to 1914, for example, the USA had periods of inflation and deflation netting out to zero.
We've also had quite a history of crashes, crises, inflation, etc., since the Fed was created.
[1] https://en.wikipedia.org/wiki/The_Myth_of_the_Rational_Voter
In the US farmers don’t need to expend significant political capital maintaining farm subsidies. It still comes up from time to time, but nowhere near as much as you would think given the economic and heath costs of such policies.
Voters hold many mercantilist and nationalist beliefs (on both sides of the aisle), and policies largely reflect these, not some propaganda-driven special interests.
It is an interesting bit of history, but the specifics really drive home what I was talking about.
Like the Scandinavian countries, which also have the highest reported rates of happiness in the world. Why, at the government level, do we not look at best practices worldwide?
I mean, if I were designing a system to reinforce inequality in districts and schools, local property taxes would be first on my list of policies.
The real goal of education is to teach people how to think. Logic, rhetoric, analysis, scientific method, how to identify logical fallacies, understanding statistics, falsifiable theories, analyzing history not only through secondary sources, but actively seeking out primary sources to corroborate secondary sources, so on and so forth.
A useful education for a healthy well-functioning society is about inquiry, not regurgitation.
Because there is a ruling class and for the rulers it is not about best practices or happiness, it is about maximizing wealth and maintaining power.
Education and healthcare (which should be considered human rights not industries) are very helpful in seeing some of the tools the ruling class uses to maintain power. Both education and healthcare are standardized enough they are rated by Country and while the US spends more on both than any other country the US is not even close to being rated number 1 in either category.
Yet, to your point, when one points to other countries as evidence how well other systems work (with less funding) that person will be demonized as Anti-American. Even in the current pandemic where the numbers speak for themselves, we are subjected to having to hear the ruling class get on TV and tell us how we are #1 and doing better than every other Country and even worse in many cases this ruling class refers to the pandemic in the past tense and proclaim how they defeated it. It is Machiavellianism incarnate.
If you go to Scandinavia or study comparative politics, the answer is simple: Scandinavia is Scandinavia, the US is the US. They are different places with outcomes that reflect different values and choices.
What people ignore about Scandinavia: mono-cultural society (if you tried some of the integration stuff that these countries do in the US, you would have people loading guns), huge tax burden on middle class (in the US people who currently pay no tax will have to hand over 40%+ of their income), small population, heavily monopolistic economy, significant exposure to trade/reliance on individual companies, significant natural resources (Norway has 20% of the US oil reserves, their population is smaller than almost every state in the US). Saying they are happier is very woolly, particularly as most countries in that region are societies that place significant social pressure on individuals to conform and be happy (their rates of depression and suicide are high, indeed when Sweden was the socialist paradise their rate of suicide was highest in the world).
Also, you ignore that most Scandinavian countries have moved towards the US model after decades of underperformance and then financial crisis. Even Denmark which has huge trade union membership has the most flexible labour anywhere...again, what people understand about Scandinavia is usually based on their preconceptions about America and their belief in a perfect, easy ideal that confirms their views about the world.
The US gets things far more right than wrong. It is, by far, the most successful economy that has existed to this point. No other large country has replicated that success (all the East Asian economies used Germany as their model, which has resulted in significant baggage). You can say that some stuff needs to be changed...okay, but it isn't as simple as just copying Scandinavia. That will never happen, and won't work if it did. It just makes no sense. The solution to an American problem is American, not Swedish.
I've seriously been wondering why there isn't a field of study dedicated to comparing government policies across countries. I'm sure such a field of study exists, but I have no idea what the name of that field is - does that fall under public policy? Comparative politics? The fact that I can't put a name on it is the very problem as it shows the field (if it even exists) has very little influence on public policy (unlike say economics, which has the Council of Economic Advisors, CBO, BLS, Fed, U.S. treasury, etc).
Production wise, an economy that is not concerned with democratic institutions or reducing inequality will outperform one that is. With that in mind, globalization is basically a race to the bottom human rights wise.
Briefly, rising incomes under a non-democratic regime lead to a local maximum of growth, as totalitarianism is inextricably linked with economically inefficient institutions. As an autocrat, your top priority is to compensate those who keep you in power, which requires wealth extraction from the productive; this disincentivises efficient production. Unfortunately, nothing about rising wealth will necessarily lead to regime liberalization.
"Reducing inequality" is very different from democracy, and would probably lead to reduced economic efficiency, as it necessarily reduces the incentives for efficient production.
That cost is insignificant when the ruling nomenclature is a relatively small portion of the population and when basic workers rights are not respected. Especially in manufacturing stuff on a pipeline in huge quantities, a totalitarian system can be much more effective output-wise, at the cost of disregarding any environmental and human condition externalities.
This cost can be extremely high, as the autocrat has to pay off enough people to ensure that rivals cannot achieve an advantage.
this argument gets made a lot (for instance, re: the lower capital gains rate) because proponents want it to be true and its flaws are not immediately obvious, but it's unambiguously mistaken.
first, esteem from wealth is relative, and as long as there is a spectrum of wealth, the wealthiest will derive maximal esteem regardless of the absolute value of wealth. and that's the primary driver for the ambitious and greedy, not putting resources to highest and best use (which is at best a side effect). greater equality doesn't change that equation one iota.
second, it's plain to see that large accumulations of wealth are fairly unproductive, simply illustrated by the localized real estate bubbles driven by both wealth seeking safe harbor and PE-backed landlords seeking unproductive rents.
in fact, there seems to be a central optimum. relative to now, wider dispersion of wealth (less wealth disparity) seems to provide the best bang-for-buck when it comes to efficiency, putting more potential to work rather than mostly relegating it to the menial sidelines.
They are absolutely bound together. Ensuring that every person has the same power in the political process means that everyone has the time and energy to pay attention and be educated on what's going on the world, and that nobody has so much wealth that they can use it to buy influence. The trend towards more inequality while the working class has less and less political power is painfully obvious, especially in the United States.
Globalization is why extreme poverty has plummeted in the last few decades. Hundreds of millions of people chose to leave their subsidence farm to work long hours in a factory because it's still an improvement for the quality of life of themselves and their families. Sure it would be better if an Indonesia factory worker got paid $20 a day instead of $10, but nobody is offering them $20 and you can't force anyone to.
It's a political choice not to (for example) impose import taxes on goods based on the difference between wages in the two countries concerned.
Not doing this is bad for people, but good for capital.
Like, I'm Irish, so I have benefited from this trend for my whole life, but that doesn't make it right.
Literally hundreds of millions of people in the Third World to were able to raise themselves into the global middle class over the past few decades.
The main people hurt by the outsourcing trend have been middle-class people in wealthy countries who had well-paid, lower-skill jobs producing physical things which are now shipped in from far away.
Good for foreign labor, good for capitalists, and bad for the middle class in rich countries.
This could have even been a win-win-win, if managed more carefully — Germany had pretty robust job retraining programs for people who lost factory jobs. I'd imagine the UK did not.
We should be honest about who benefited, as well as who was hurt.
Yes. Trade is supposed to mean that no side of the bargain loses. If my country's working class loses, I'm losing. It's not our job to impoverish ourselves for other people's good.
The question is: How can the market be adapted to create a fair, innovative and sustainable society, globally?
How can a single government force any rules with these goals without lowering the welfare of its inhabitants and thus threaten its reelection?
The first of these is incompatible with the latter two.
However, given that both VC valuations, and stock market valuations (like P/E ratios, IIRC) are arguably in bubble territory (many have argued this), it doesn't seem like the Fed buying more of these assets is very efficient.
I am a major beneficiary of this policy and I still think it sucks big fat honking weenies, particularly since it has been implemented by people who rail against welfare for the people who actually need it. The brazen hypocrisy makes me want to retch.
[0]: https://www.federalreserve.gov/releases/h41/current/h41.htm#...
Um, because every central bank in the world is controlled by rich people?
I also won't pretend to be an expert here, but I think this is where your thinking may be going astray. There are lots of retirement-age people who are counting on their pension funds to fund their retirement. Pension fund managers assume steady growth in stocks, something like 7-10% per year. If stocks don't meet that threshold, major parts of the pension system run into big trouble. Pension plans have trillions of USD in assets. This article [1] estimates ~$9T. Retirement-age people in general are a powerful constituent.
[1] https://www.investopedia.com/articles/credit-loans-mortgages...
This is a separate question though than whether they are also very important for retirement accounts. You are 100% right about that, even though middle-class retirement accounts represent a small share of the overall market.
And according to Wikipedia data, in 2016 84% of stock was owned by the top 10%. That leaves 16% of the market to everyone else, a very small %.
It's indirect, but it's a very real benefit.
Edit: Adding to this, the company's reinvestment of funds generated by issuing stock drives demand in other places of the economy. Investing in your own business means spending money on people, infrastructure, and other goods you need to offer your company's service. This necessarily drives demand for these goods. Additionally, this creates cascading demand through the keynesian multiplier effect.
[0]: https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
[1]: https://www.federalreserve.gov/releases/h41/current/h41.htm#...
(1) If a person can start a successful new company, they get assets (stocks) that they can sell for money. This creates an extra incentive to start new companies.
(2) Large investors (eg, Buffet-sized) have an incentive to buy significant stakes in companies and improve their management, then sell them to long-term investors. Being able to sell shares for a profit after improving the company creates an incentive to improve companies and then move on to the next one.
And there are a couple of other things like that. So stock trading doesn't in itself do anything useful for the economy but it is the point in time where past decisions that did boost the economy are realised as a profit in dollars. It also creates a barometer for measuring what people with money think about a company's chances, which is useful information and hard to get otherwise.
There is also a very helpful long-term effect where people who can accurately predict the future make money from stock trading, which means over time (in theory) company ownership becomes biased towards excellent long term planners.
We've reached the limits of what central banks can do, from here on out it's direct government intervention in the commercial credit sector, and driving up demand through fiscal policy.
The democratically controlled house would have to come up with a bill, then the republican controlled senate would have to agree to it, then the president would have to sign it. I don’t think there is that much coordination happening at the federal level right now.
There is, but it's divided between two types of bills: boring and sensationalist. Boring bills usually get coordination, bipartisan support, and little news coverage. Sensationalist bills, even if they align with both parties' platforms, get drawn out and played for show on the news.
Sadly, only a few acts can show at the same time. And in the current political world, new acts keep popping up (email dumps, whistleblowers, official tweets). So things that take a while, like infrastructure, never get to launch. (How many times has it been "infrastructure week"?)
To give a more tech focused example: building infrastructure to give everyone in the US 50 mbps internet would be expensive and quite valuable. Improving that infrastructure from 50 to a gig would also be expensive but (for now) far less valuable.
In Pennsylvania, we've put off maintenance so long, the politician who funds it will become the sexiest man in the state. People here hate potholes more than redirected traffic.
> Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off.
[Rutger Bregman][ubi]:
> Poverty isn’t a lack of character; it’s a lack of cash.
[money]:https://www.tbray.org/ongoing/When/201x/2014/05/01/Piketty-C...
[ubi]:https://www.ted.com/talks/rutger_bregman_poverty_isn_t_a_lac...
Particularly when your predominant stimulus tool is 'print money to buy assets rich people have.'
But they’d have more money, presumably more than what they paid for the assets. Not that money and goods are exactly fungible, but buying assets from the wealthy makes them wealthier, not poorer or status quo.
From 1929, central bankers learnt that liquidity can be a terrifying disease in an economy, 2008 showed that printing helps and here they go with their newly learned tool trying to fix all problems. Now they have to figure out that if you only inject that liquidity from the top, the inflation appears in certain kind of assets (mostly financial) and has a hard time reaching the rest of the economy, causing ever-rising inequality.
I think a more refined approach will be developed at some point, where they will start using two levers to steer the function of the economy. Money printing from below via UBI and regulating the inflation of day-to-day assets and money-printing from above and regulating the inflation of financial assets. This could allow finer control balancing target inflation rates of different assets and preventing rising inequality to tear down society.
The government grants a job to anyone that wants to work at a minimum wage salary. When unemployment grow, the government automatically expend more in the economy because more people access to the job guarantee.
When the economy recovers the private sector take workers away from the job guarantee through paying a little more than the minimum wage (or the same and better conditions) and the government spending is reduced.
It's both an inflation and an unemployment stabilizer. UBI doesn't have those properties.
The guaranteed job need not be pleasant. Hell, many already aren't.
But a job would be guaranteed and would meet basic needs.
But the original question was how to provide incentive. Assuming able-bodied persons must provide some work, opportunities for advancement, more pay, or more favourable environment, and the prospect of less attractive work, remain. Military and similar environments provide models, e.g., latrine duty.
Most people would prefer some useful occupation, I suspect, however humble.
And again, with guaranteed employment, even the worst job would provide a livelihood.
There are different ideas, but, I suppose that you could see it like a training program too.
Also, there are some supposed psychological benefits to work. And there is always something to do at the local community level, so it would not be totally unproductive work.
Also I don't think it's necessary that a job guarantee make an employee immune from being fired. I'd imagine a job guarantee would have all kinds of jobs ranging from relatively simple (eg. cleaning) to more complex (eg. science). If you're in a more demanding department and underperforming, you could get fired and have to apply to another job in another department.
For example, the military is sort of like a job guarantee in the sense that anyone meeting the physical bar is effectively hired. But any military member can get discharged.
Remember that 40% of americans can't afford a $400 emergency.
Also, it's not only, even not mainly, a social program, but an automatic stabilizer in the economy.
It gives power to the workers too, because there is always an, even if with low pay, alternative available.
I don't think there is a great track record of jobs being run by the government (or farmed out by the government to other organizations) as being idyllic workplaces.
Also a bs job is soul crushing and work-ethic destroying.
The only true power comes from being able to walk away from the control of anyone else, being able to simply say "no". For that, one needs a UBI.
I don't know much about the USSR, but I don't think they set everyone's salaries the same or distributed money equally, or any other nonsense like that.
If this central authority is even necessary is an entirely different discussion. My current view is that the economy viewed as a dynamical system is subject to strong positive-feedback loops and these are known to cause ugly behaviors in the solutions of a system (the equivalent of boom and busts in economics). Introducing forces contrary to those positive-feedback loops to stabilize the economy may make sense theoretically. The jury is out if central bankers can do this, know how to do it or if the political incentives are there to even make it happen.
But that's about the limit of it.
The one change I have noted is that where the tactic was invoked only once or twice a decade, its use now seems far more frequent, every few years in the aughts, now only months apart. A search of the paper's archives, or external Web search, largely confirms this:
https://duckduckgo.com/?q=rethinking+(macroeconomics%7Cmicro...
Whilst I'm strongly convinced that economic orthodoxy is sharply flawed, monetarism a stunted model like its progenitor, Keynes was insightful, and that Marx's class-consciousness has merits, full understanding and remedy for present concerns must look further afield.
MMT, W. Brian Arthur's complexity economics, and Steve Keen's work unifying capital, labour, class, and energy would be a good start.
It explains good ideas, but I would notice a strange formulaic structure they often used. Many poor-quality articles were subtitled "A [paradigm/company/event] brings [boon], but [caveat]".
Though this does bring to mind Robert K. Merton's unintended consequences and overt/covert functions.
For anybody seriously interested in the subject I would recommend the 2019 textbook ‘Macroeconomics’ by Mitchell, Wray & Watts.
- What happens when your deficit gets so high that it's obvious to the people buying treasuries you can't pay the interest they expect without massive inflation? - How do you explain away stagflation from the 70s without being concerned about repeating it?
Basically, deficit spending is fantastic for as long as you can get away with it. The question is at what point will you no longer be able to get away with it? 10 years? 20? 100? No one knows. But at some point the interest burden of the debt itself requires more monetary expansion than purchasers of treasuries are willing to accept (inflation is the enemy of fixed interest assets), and then you have a problem. The US recently doesn't have this problem because of its dominant economic and military position in the world (as well as the petro dollar/default currency status), but what happens when those things cease to be true?
Those are the concerns I wanted Stephanie to at least pay lip service to, but she conveniently didn't even mention them.
She, and other MMT proponents, do it in other places. Obviously this was only an introduction. If you are really interested there is now a full textbook [1].
Your questions make me think that you don't understand the basic of what MMT is saying.
>>"[..]deficit gets so high that it's obvious to the people buying treasuries you can't pay the interest"
All the point of MMT is that governments that use its own floating currency don't need anybody do finance them. They could just spend without selling any treasuries. The only limit to that spending is inflationary and selling treasuries don't reduce the danger of inflation. This is not a belief, it's just a description of how the system works today.
For instance, now all the main governments in the world are applying stimulus at the same time. Where is the money coming from? Where is the inflation in Japan? And where the Yens from the increase in the Japanese public debt in the last 30 years come from?
>>"explain away stagflation from the 70s"
Frequently, problems of inflation comes from supply problems. Anyway looking to the QE programs, the current stimulus programs or Japan the last 30 years, should be obvious, by now, that monetarism is a fallacy.
That doesn't mean that you can't spend too much in the economy, but there are frequently other causes. In the 70's you have oil crisis, the Vietnam war, etc..
"[..] at some point the interest burden of the debt itself requires more monetary expansion "
A government with its own currency don't need to keep the fallacy of selling debt to "the markets", but if they choose to do it, and the debt is owned by the Central Bank, the money of the interest goes back to the government.
Gregory Mankiw, an economist at Harvard, voices my criticisms with the book better than I can: [1]
I think it's funny that you point to Japan as a counterexample here. The reason Japan doesn't have high inflation is because the Bank of Japan refused to print money for 20 years[2]. If it did when other countries did not, inflation would be high.
To your next point, you kind of answer it yourself. Why is there no inflation when all the main governments of the world are applying stimulus at the same time? Well, first, because they're all doing it at the same time. As soon as you remove that fact, the situation changes entirely because the economy (and currency/bond markets!) are global, not local. And second, because demand is historically low due to a pandemic. Again, when you remove that fact, everything changes.
On stagflation, I think you are misinformed about what causes/caused it. [3] is a good summary: federal interference in supply + printing money. If that sounds a lot like what MMT proposes as a magic wand, it's because it is.
Finally, I think it's important to distinguish that many critics of MMT, myself included, don't disagree with the marketing-friendly premise that debt spending can be a good thing. We disagree with the idea that it's an unlimited tool with zero repercussions. At some point there is a reckoning - either unsustainable inflation (like 1970s US) or effectively dead economic growth (like Japan) depending on how the central bank reacts. We should be concerned about these things and take steps to make sure that the time of reckoning stays far in the future.
[1] https://scholar.harvard.edu/files/mankiw/files/skeptics_guid...
[2] https://www.ceicdata.com/en/indicator/japan/m2-growth#:~:tex....
About the stagflation I recognize that I have not looking enough into it (yet) to be able to have a meaningful debate.
About Japan, your comment: "the BOJ refused to print money for 20 years" puzzles me. The public debt of Japan is, currently, around 240% of GDP, and around half of it is owned by the BOJ. If that's not your interpretation of "printing money", what is it?
I don't understand neither your comment "[..] no inflation when all the governments of the world [..] at the same time". Are you making a reference to the external sector aspects of inflation?
You say: "[..] debt spending [..] We disagree with the idea that it's an unlimited tool with zero repercussions."
Please, note that MMT doesn't say that. MMT says that excessive deficits can be inflationary in a problematic way, what MMT disagree is that public debt (the accumulate of past deficits) is problematic.
Finally, thanks for engaging in this discussion. It seems to me that it's reasonable that people disagree in policies, because policies come from values and those can be very different. What we should be able to agree is in how the financial system currently works. MMT have some policy proposals but that's not the important thing, the important thing is that the description of how the system works is different and, should be falsifiable. Sometimes, in this kind of exchange, I despair because it seems the other person and I are talking past each other.
I think I found your webpage, would you be willing to continue this exchange by mail? I have some problems understanding what is what the MMT critics don't understand. In the worst case scenario we will finish with a better understanding of the other position.
[1] - http://bilbo.economicoutlook.net/blog/?p=43900 - http://bilbo.economicoutlook.net/blog/?p=43961 - http://bilbo.economicoutlook.net/blog/?p=43997
[1] https://www.wsj.com/articles/the-deficit-myth-review-years-o...
There was a fear that the US would hit that after the 2008 crash. But the US did come back. At least until the epidemic.
Macroeconomists think macroeconomics determines what happens. Sometimes it does, and sometimes it doesn't. When it doesn't, central bankers are totally lost about what to do.
Should a country have an industrial policy? The traditional answer in capitalist countries is "no". But it worked for Japan, S. Korea, Singapore, and China, which now make most of the world's good stuff. China's current industrial policy, set in 2015, is called "China 2025"[2][3]. The plan is to achieve dominance in the remaining sectors where China is behind - aircraft, ICs, etc. It's not talked about much outside China, but it's still the operating plan. The main items in 2015 were:
1. New advanced information technology
2. Automated machine tools & robotics
3. Aerospace and aeronautical equipment
4. Maritime equipment and high-tech shipping;
5. Modern rail transport equipment
6. New-energy vehicles and equipment
7. Power equipment
8. Agricultural equipment
9. New materials
10. Biopharma and advanced medical products
Halfway through the 10-year plan, China is doing well on at least 7 of those items.
Western countries are assuming that the knobs controlled by the financial system determine what happens. When the biggest country on the planet isn't playing that game, that approach may not be competitive.
[1] https://www.csis.org/analysis/made-china-2025
[2] https://www.pbs.org/wgbh/frontline/article/made-in-china-202...
[3] https://static.seekingalpha.com/uploads/2019/1/21/saupload_J...
Scott Sumner disagrees on no one understanding this. They’re not printing enough money. Basic sketch of the market monetarist position is that Friedman was right about money being really important but very, very wrong about the appropriate target. Keep printing money until nominal GDP growth hits target, then stop. Better to target NGDP future to reduce instability. Japan’s central bank’s is up there with the Fed causing the Great Depression by contracting the money supply by a third at the beginning of a recession in terms of economic mismanagement.
Japan's problem seems to be very low net household savings and too high savings by corporates. It would be preferable to shift income towards households instead of running up public debt to keep every one employed.