3 Big Reasons Monetary Realism Matters

Brad DeLong has coffee with Stephanie Kelton:

“As of January 1, 2016, enough time will have passed for us to be able to judge whether the Federal Reserve’s policy shift to the Evans rule plus an open-ended $1 trillion a year of balance sheet has been a success or not.

Stephanie Kelton is almost certain it will not be a success. I think it might well work. Mike Woodford is almost certain that it will work. It seems to me that there is an opportunity here for me to lock in a profit of some sort here…

The first stage of this is crafting a bet that Stephanie Kelton would accept for what states of the economy on January 1, 2016 would qualify as success for the Fed, and what states of the economy would qualify as failure. She does expect a better economy in three years–She expects private sector deleveraging to continue at its slow pace And as a result the forces making for balance sheet recession to ebb. Success would, for her, have to count as stronger than expected improvement in the economy given this positive underlying trend.

How should I phrase the bet? And then what bet should I offer Mike Woodford when I run into him by accident in San Diego?

This would be a bet between monetary policy and fiscal policy, between two people who are very smart, co-ordinated by a person who is also very smart. But the bet is a not a smart setup, because all three of them lose by entering into this wager – and we lose too. They would all become less informed by participating in this wager. Everybody is worse off with this wager.

Here is reason #1 Monetary Realism Matters: Monetary Realism recognize both monetary and fiscal policy will work.

We know a few things. We know Monetary Policy can work. We know Fiscal policy works when we let it. So this is a bet between two things that work, two very different policies we know will work if we do them semi-correctly!

So this bet Brad DeLong proposes, it seems like the wrong bet, or a wrongish bet if you can stand the word “wrongish”.

Monetary policy isn’t perfect, but it can work. It’s worked in the past, when it has promoted or destroyed credit. Monetary Policy will probably work if the fed does $1T of QE for a few consecutive years. It will probably work even though it’s primary channel of influence – that’s real estate – seems broken for a generation.

But here is something else - Fiscal policy works, even though some people deny it works.

Here is where fiscal policy can really, really help. Yes, we could use endless years of trillion dollar QE to end the recession – but why when we have another choice the market is begging us to use?

The Bond Market is begging the U.S. government to spend more money as of 12-18-2012.

Right now, the market is voting – via the bond market – for massively increased government spending. Negative real yields have been going on for years, so it’s not ablip or accident – we can assume the markets are fairly valued at some negative real yield. If we should trust non-existent NGDP futures to tells us how much QE to use, why can’t we trust one of the largest and most liquid markets on the planet to tell us when to spend more money? Why not use fiscal policy when the market is literally begging us to do use fiscal policy?

 We know Fiscal Policy works. Our best indication of the market sentiment on fiscal policy is literally begging us to use more fiscal policy. We should be using fiscal policy right now to fill our output gap, not monetary policy.
Here is reason #2 Monetary Realism Matters: We recognize the limits of monetary policy and fiscal policy.

A good question is “Do we WANT  monetary policy to work in todays economy?” The lending monetary policy helps to stimulate is mostly real estate lending. Real Estate is the channel of monetary policy. If monetary policy works, real estate prices will go up, private credit will increase. Private citizens will leverage their balance sheets further, and we will use more real estate as collateral than we do today.

We want the economic growth that will result from these activities. But do we want to stimulate through credit creation?  No, probably not, because Real estate collateral is fairly valued now.

So even if monetary policy wasn’t having such a hard time getting traction due to the market problems in real estate, we wouldn’t want to use it to stimulate our economy! We don’t really want Monetary Policy to work, considering the other true facts about our current economy!  Expanding credit would mean real estate would go back into overvalued levels! We would further leverage the private sector.

Cullen Roche likes Richard Koo because he talks about balance sheet recessions, even if Mr. Koo doesn’t get about inflation. Here is a good way to think about monetary policy and balance sheet recessions: Don’t use monetary policy to end a balance sheet recession, because it recreates the conditions for another finance-driven crash. 

Here is where the Austrians have a series of good points – the fed can distort the economy by creating too much credit. Making more credit to end the pain caused by too much credit is foolish.

But their cure of reducing credit without any offsetting expansion is worse than the disease. Their plan results in an economy guaranteed to make a significant portion of the population absolutely miserable, and frequently ends up starting shooting wars due to massive unemployment.

This is the kind of thinking that results from not knowing the accounting.

Fiscal policy has limits too. We can’t just spend money forever, without limit, without thinking about the real resources we have available to use. Today, those limits on spending are far beyond our current levels of spending, but that does not mean these limits do not exist. Those limits exist.

Not only do they exist, but there is a point long before we hit the inflation limits where we would no longer want to use fiscal policy to stimulate the economy – even if there was still slack, even if there is still unused capacity. It’s a matter of choice and of balance. We can use also monetary policy to stimulate our economy, because monetary policy works.

Yes, we can make the government spend until we get to full employment – but shouldn’t the private sector be doing some or much of this work when the situation warrants it? Yes – Hell Yes!

Big Reason #3: Monetary Realism Bridges a Gap

There are not many people in the world who are arguing for a reasonable blend of monetary and fiscal policy even when the economy is doing well. There are very few people even thinking about this idea.

In fact, some of the brightest people out there are engaging in wagers where we all end up losing. If Michael Woodford “wins”, yay! We get started on another housing bubble! Great news, right? If Stephanie Kelton wins Yay! We’ve been in a semi-recession for 3 years!

This is why I write for MR, why I spend time on it. We’re doing real work here. We need a pragmatic approach to our world.

Here is a jewel: JKH wrote a paper which goes into detail about a combined Central Bank and Treasury, and it’s a must read paper for people like Brad DeLong.

This Central Treasury Bank structure has some important abilities:

“The entire liability structure of the CTRB is now intra-convertible, in terms of the fluidity with which reserves, currency, bills, and bonds can be issued or redeemed according to a fused and seamless fiscal and monetary machine.”

A fused and seamless fiscal and monetary machine requires a fused and seamless fiscal and monetary policy regime. Here is something to note about todays world - we require fused and seamless fiscal and monetary policy regime today, right now.

We are bridging the gap, slowly but surely here at MR. I made the Strong Economy Rule (aka the TC Rule), and beo has proposed a series of fiscal rules to help guide our fiscal policy. These are not enough – we need a more seamless policy guide than these rules.

 

 

 

 

 

 

Comments
  • Mcwop December 19, 2012 at 8:21 am

    Has it worked in Japan? Me thinks it has not:

    http://pragcap.com/the-economics-of-japans-lost-decade

  • Clonal Antibody December 19, 2012 at 9:41 am

    Mike Woodford, and Brad DeLong, are two people secure in their jobs, and not showing much concern about the social devastation going on around them. I have never seen either of them express any concern for the devastating effects of the current state of the economy on the long term unemployed. Stephanie Kelton has repeatedly expressed such a concern.

    • Michael Sankowski December 19, 2012 at 9:56 am

      Well, that is a different post. :)

      Brad has expressed outrage we are not doing more to get the economy growing. He’s done many rants over there. I don’t think he wants to put it into personal terms yet – he’s wants to be respected in his field yet, so can’t go all Stiglitz on people.

      Kelton is an outsider so has less to lose by using more emotionally charged language.

      Woodford, well, he seems like a math geek. He may not even be aware of the real hardship, the social devastation.

      • beowulf December 19, 2012 at 11:02 am

        “I don’t think he wants to put it into personal terms yet – he’s wants to be respected in his field yet, so can’t go all Stiglitz on people. ”
        respected in his field yet = hasn’t won a Nobel Prize yet (Stiglitz and Krugman have already cleared that hurdle). :o)
        Brad is a good guy. I’ve been reading his blog for ages, he ‘s smart as as a whip and does have an open mind. Over the past 4 years he’s clearly shifted from the Woodford camp towards the Kelton camp in response to events ( Mike’s merely suggesting that perhaps the golden mean lies somewhere between those two extremes).
        Maybe I like the guy because he was an early adopter of the Trillion Dollar Coin. More likely, its because I only went to go see the 21 Jump Street movie because Brad plugged the hell out if it (his cousin directed it). Great flick! :o)
        http://delong.typepad.com/sdj/2011/07/the-presidents-obligation-to-take-care-that-the-laws-be-faithfully-executed-requires-him-to-start-minting-large-denomination.html

  • Cullen Roche December 19, 2012 at 10:46 am

    An interesting bet. Not sure whose side I would take.

    And yes, MR is standing over the puck. They’re skating towards it. They just don’t see that we already have possession. :-)

    • Geoff December 19, 2012 at 1:03 pm

      Thanks for the shout-out to your Canadian fans.

      • Cullen Roche December 19, 2012 at 1:08 pm

        Yeah, can you guys fix this NHL mess? I am one of those Americans who loves hockey as much as you all do so this is really putting a crimp in my 2013 prospects.

  • beowulf December 19, 2012 at 11:28 am

    “But the bet is a not a smart setup, because all three of them lose by entering into this wager – and we lose too”

    So… its a volatility play? :o)
    If Woodford is right, interest rates will be going up. If Kelton is right, interest rates will stay in the gutter. What’s interesting about that bet (Mike, how would an investor set that up besides writing call options?) is that the risk you’re actually assuming isn’t whether monetary only works– of course it won’t– but whether Congress figures out, sometime before January 1, 2016, (1) what the words “output gap” mean and (2) they’ve had the the power to fill this “output gap” all along.
    http://tinyurl.com/outputgap00-12

    I think its a safe bet that Congress won’t (the cognitive dissonance created by 2 will likely block acceptance of 1 & 2). The trouble is— and maybe there’s something wrong with me– I don’t like betting on the side of stupidity and poor decisions. It its like taking bets whether a homeless man sitting in the street below your office will be hit by a bus.

    • Michael Sankowski December 19, 2012 at 11:26 pm

      Gold price increases are strongly related to negative real yields. So if negative real yields continue, gold will tend to go higher. Going long gold could end up being a nice trade if the economy remains cool. Izabella Kaminska has written about this several times.

      Low yields mean the USD will be used as a funding currency for any currency carry trade over JPY. Sell USD (low borrowing rates), buy currency de jour. Currency trades involve borrowing one currency which is then sold, and buying another currency which is then lent out. So if real yields are negative, you’re getting “paid” to borrow, and also getting paid to lend. Carry trades can be extremely powerful – witness the strength of the Aussie.

  • jt26 December 19, 2012 at 11:47 am

    Shaking things up even a bit more … should MR broaden their mandate? Some examples …
    What about immigration policy? (That affects the unemployment rate and inflation expectations doesn’t it?)
    What about trade policy?
    What about currency policy (why should China be able to buy US Tsys, but not the other way around)?
    etc.

    • Michael Sankowski December 19, 2012 at 11:28 pm

      Well, when I get that beta level sims up by using Watson to emulate my thinking patterns and all that I know, my betas can just start riffing on it all.

      We have about 25 more good years before skynet.

  • Cullen Roche December 19, 2012 at 1:15 pm

    Looks like we have been labeled economic rent seekers! Hide your kids from us, everyone! We might charge you interest on the money you can’t obtain and don’t have the creditworthiness to prove you deserve!

    Anyone who understands the design of our banking system knows that it is designed around inside money. Banking is a business designed around risk management. “Rent seeking” is primarily a bi-product of this risk management. After all, you can’t have a private competitive banking system that throws risk management to the wind. And if you don’t like private competitive banking then maybe we should just turn the money system into one big govt run charity where money is distributed regardless of one’s personal creditworthiness or ability to create anything of value! Obviously, I am being a bit facetious and playful, but I think this is about balance once again. Tom makes some great points, but I think there’s a fair amount of unfair generalization in this sort of labelling.

    I am all for redistribution of some form and I understand that it’s necessary to some degree, but this idea of attacking the rentiers appears somewhat misleading as it pertains to the actual design of our system. After all, if our banks are not prudent rentiers (as they weren’t in 2003-08) then the system implodes on itself and the govt ends up cleaning up the mess anyhow….

    Lots to chew on, but important post by Tom and I thank him for taking the time to write it.

    http://mikenormaneconomics.blogspot.com/2012/12/michael-sankowski-3-big-reasons.html

    • dilletaunted December 19, 2012 at 3:34 pm
      • Cullen Roche December 19, 2012 at 3:56 pm

        Ah yes. Well, there’s a HUGE difference between traditional banking (which is what I am referring to) and the guys on trading desks who just flip contracts with one another….I am not the protector of all things traditional banking related, but I do think that there is a great deal of sense in the way we have designed a private competitive money distribution system that allocates money in large part based on the ability of the competing entities to manage the risks of their clientele.

        • Michael Sankowski December 19, 2012 at 5:53 pm

          Yes, banking is not entirely flawed. ;)

          Markets work. They work pretty good. Markets are an important part of any healthy economy.

          Banks, in general, help the world. Keynes thought the invention of finance was the key which vastly accelerated human progress. I agree with Keynes. I think the invention of finance combined with the idea of mass markets was one of the keys of the industrial revolution.

          And hey – I’ve flipped those contracts before! Futures markets are good! The bad part about finance is the…well lots of stuff!

          • Cullen Roche December 19, 2012 at 6:06 pm

            Ha. Well, I used to do worse than flip contracts when I worked in insurance. I’ve stared right into the heart of the most evil parts of the financial services industry and nearly got swallowed up by it….

            • Michael Sankowski December 19, 2012 at 7:44 pm

              There is jut so much money sloshing around in the financial world. It doesn’t seem like much too the people that have it, but a few 10′s of bps (basis points) across millions ends up being a ton of money for the people in finance.

              • Tom Hickey December 19, 2012 at 8:33 pm

                Funny you should mention that Mike. I had a friend with a math degree and an MBA from MIT and he used to mutter, if I could only get one bp from millions of trades… That was decades ago and I’ve lost track of him so I don’t know how it turned out for him. But that was exactly his thinking.

        • dilletaunted December 19, 2012 at 7:05 pm

          Yes, but we should be interested in what actually happens in the banking world, not some mythical “base case” of how you think banks should act

          • Cullen Roche December 19, 2012 at 7:46 pm

            Not sure where I mentioned a “base case”. I think maybe you’re confusing me with the MMT idea that bank horizontal money is “leveraged” vertical money. Is that the myth you’re referring to? :-)

            Just kidding. I am definitely not trying to start another MMT/MR war…..Those have been waged already….

          • Michael Sankowski December 19, 2012 at 7:55 pm

            What’s your point? I am not getting it, so cannot respond.

      • Michael Sankowski December 19, 2012 at 10:17 pm

        I hadn’t read that exact article, but nothing in it surprises me.

        That’s why I wrote this:

        “Don’t use monetary policy to end a balance sheet recession, because it recreates the conditions for another finance-driven crash. ”

        I should have pointed out one of the weaknesses of monetary policy in this paper is that it works by increasing leverage and risk. I’ve made lists of the problems with monetary policy here and at the traders crucible. This particular post wasn’t trying to deal with every possible detail, it was a lament about the waste of this particular bet, and a way to point out more pragmatic and realistic path to prosperity.

        Yes, monetary policy is flawed, and there is some aspect of rentierism inherent in the idea of banking/lending. But even with that flaw, I still think it’s worth while to have the private sector decide some part of money creation.

    • Joe Franzone December 20, 2012 at 8:11 am

      http://www.zerohedge.com/contributed/2012-12-20/why-it-not-possible-be-moral-and-work-bank

      Economic rent seekers is a compliment compared to what this loon is labeling anyone that works in banking.

  • Oilfield Trash December 19, 2012 at 2:25 pm

    Tom puts up some food for thought.

    http://mikenormaneconomics.blogspot.com/2012/12/michael-sankowski-3-big-reasons.html

    I think MR has done a great job trying to keep Bias out of their thinking, but would agree with Tom rent seeking activities or policies that support them can do more harm than good, when they dominate the real economy.

    With the support of JKH MR has done some great work in explaining FED banking and their relationship with the government. However IMO without exploring the relation of the so-called shadow banking system to the financial crisis and our banking system, and what happens to your economy when you don’t supervise financial innovations (you don’t know what they do, you don’t know how they work). I think this what Tom is suggesting (I hope) in his post. Although I do not think MMT has done much analysis on this topic either.

    How many truly understand Rehypothecation when the collateral posted by a prime brokerage client (e.g., hedge fund) to its prime broker is used as collateral also by the prime broker for its own purposes. Every Customer Account Agreement or Prime Brokerage Agreement with a prime brokerage client will include blanket consent to this practice unless stated otherwise.

    If an item is listed as an asset or liability at one bank, then it cannot be listed as an asset or liability of another bank by definition; do we know if this true for pledged collateral, since it is off-balance sheet and permitted to be re-used.

    The pledged collateral is not owned by these firms, but due to rehypothecation rights, these firms are legally allowed to use the collateral in their own name. This can build large amounts of leverage into your system.

    With rehypothecation in mind what is the critical relevance (if any) to banking stability of very small repo haircuts (and by extension, collateral ratings) and the concomitant large credit multipliers. If those ratings are volatile, and or haircuts are volatile, your banking system is unstable (think about this in the context of MBS moving from AAA to some lower rating during the crisis)

    IMO if you do not know how all this works in your monetary system then I do not know how you can formulate any policy conclusions.

    My own gut feeling is the FED is using QE to elevate or maintain asset values in order to prevent reverse gearing on leverage in the shadow banking system. If this is true then it would be big difference if you tried to use the coin to do the same thing. I do not think shadow banks would have rehypothecation rights to a coin worth a trillion dollars.

    • beowulf December 19, 2012 at 4:45 pm

      “My own gut feeling is the FED is using QE to elevate or maintain asset values in order to prevent reverse gearing on leverage in the shadow banking system. If this is true then it would be big difference if you tried to use the coin to do the same thing. I do not think shadow banks would have rehypothecation rights to a coin worth a trillion dollars.”

      That’s hilarious. Most people think that “printing money” (or in this case, “coining money”) is inflationary, but what you’re describing would make it anything but. If using TDC (instead of T-bonds) makes the shadow banking system implode, the easing Fukushima eactor 3 levels of deflation could be cured with even more printing (and spending!) even more fiat money.

      That makes me smile because I’ve suggested before that the way to provide universal Medicare without raising taxes is to stick the Fed with the bill. That is, the Fed’s job would be to pay for Medicare “deficit spending” (as far as Tsy’s concerned, it’d be off-budget) with an adjustable mix of deflationary bank transaction fees AND inflationary coin seigniorage, so covering a trillion dollars in “deficit spending” 100% with transaction fee and 0% seigniorage would be a very tight fiscal stance; but covering Medicare 0% with transaction fee and 100% seigniorage would be a very loose fiscal stance. The golden mean, as I said above, will usually lie in the middle, it would be the Fed’s job to find it.

      This would give the Fed discretionary fiscal policy too, the American people universal healthcare, and the CBO a revenue-neutral program in year 1 to year 75… what more do you people want from him? :o)
      http://monetaryrealism.com/mmt-jg-medicare-mmt/

      • Michael Sankowski December 19, 2012 at 6:02 pm

        Oilfield!

        Dude – that was epic!

        “IMO if you do not know how all this works in your monetary system then I do not know how you can formulate any policy conclusions.”

        True, so true.

        We’ve only touched on this here a few times. I wrote a few things about it in those money-like instruments posts I did a while back about Cardiff Garcia’s work.

        And how can I have missed this idea? It’s like you channeled what I should have been thinking all along!

        “My own gut feeling is the FED is using QE to elevate or maintain asset values in order to prevent reverse gearing on leverage in the shadow banking system.”

        That must be a factor, and it’s obvious now you say it. Bernanke is thinking this during the darkest hours of the night.

      • Oilfield Trash December 19, 2012 at 6:06 pm

        Glad I brighten your day.

        Ironic that since MBS can no longer provide leverage levels the Securitized Banking sector needs when it uses Repos as an alternate money derivative, that they need the government to spend more, to produce enough treasuries to accomplish the same task. Your coin idea sort of shuts this down and might give some insight as to why the demands for treasuries are currently so strong.

        A lot of people say printing money causes inflation, but only look at what the FED does, and pay little attention to the creation of money derivatives, which IMO does the same thing but with a skewed distribution of wealth.

        When asset prices go up we say that’s not inflation that’s wealth creation, which is good for the economy. When the cost of energy, food, or health care go up they say look at what the FED is doing to the real economy, with their reckless money printing you better invest in assets to protect yourself from future inflation we will even let you do it on margin and of course we will just take a little off the top for the service.

      • Oilfield Trash December 20, 2012 at 12:00 am

        Beowulf

        That’s hilarious. Most people think that “printing money” (or in this case, “coining money”) is inflationary, but what you’re describing would make it anything but. If using TDC (instead of T-bonds) makes the shadow banking system implode, the easing Fukushima eactor 3 levels of deflation could be cured with even more printing (and spending!) even more fiat money.

        I am sort of a “Real Bill Doctrine” kind of guy when it comes to my perspective of inflation. My view is that modern paper currencies, which we normally think of as unbacked fiat money, are actually backed by the assets of the central bank.

        I am not sure that even if the TDC would be a asset of the FED is it worth 1 trillion of newly created money, something to think about. Like James said free lunches and all that comes with it.

        Monetary theorists think the quantity of money should move in step with aggregate output of goods, but I think the money supply should move in step with its backing.

        It is my KISS principle, does not matter to me if it is inside or outside money.

        Rehypothecation of collateral would violate this view, where you get a increase in the Qty of money, but no corresponding increase in the value of the asset backing it. Seems to me that has inflation written all over it.

        • beowulf December 20, 2012 at 9:08 am

          “My view is that modern paper currencies, which we normally think of as unbacked fiat money, are actually backed by the assets of the central bank.”

          “Its like Thomas Edison said (and every instinct tells me Tesla would agree),
          “Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit.”

          Ultimately the value of our currency is backed by the human capital of the Nation. Hmm, wish somrone had worked out a valuation of that– oh yes, some organization (or, who knows, one guy with a website) calling itself the “US Department of Commerce” issued this report a couple years ago, estimating America’s human capital stock at approx $750 trillion (2% inflation alone increases it $15T a year and there’s also the growth in population and labor productivity to consider).
          http://www.bea.gov/scb/pdf/2010/06%20June/0610_christian.pdf

          Now those numbers could be way off— after all the EPA and OMB’s $10 million per statistical life saved estimate (multiplied by 310 million) puts our human capital stock at $3.1 quadrillion. Reasonable minds can differ on this I guess, my point is simply that $3.009 quadrillion of human capital + $1 trillion in US Coinage = $3.1 quadrillion (that equation also work for $749T + $1T = $750T), its an asset swap! :o)
          Inflation is something to guard against, to be sure. We have to be vigilant that aggregate demand doesn’t outrun aggregate supply but with our trillion dollar output gap, I wouldn’t stay up late worrying about it.

          • Oilfield Trash December 20, 2012 at 4:11 pm

            Beowulf

            Human capital is an asset which derives its value from output that can be monetized. In this context I would agree that increasing the supply of money to the value of this output would not be inflationary.

            However any additional money issued (maybe by using a TDC) above the value of this output is only backed by the government ability to cover this increase of money with future governmental surpluses if you want to avoid inflation.

            • beowulf December 20, 2012 at 11:10 pm

              However any additional money issued (maybe by using a TDC) above the value of this output is only backed by the government ability to cover this increase of money with future governmental surpluses if you want to avoid inflation.

              Right, that was Edison’s point. It would be American taxpayers who’d fund these “future governmental surpluses” (if necessary, running a surplus sounds a lot like overtaxing). :o)
              I really don’t have any disagreement with what you’re saying, Oilfield. I just like throwing out those human capital stock numbers because the sums are so cartoonishly large compared to the public debt total– I don’t think I’ve used “quadrillion” before for anything else. :o)

  • Detroit Dan December 19, 2012 at 3:15 pm

    I dispute that monetary policy can “work” in all but the most narrow of senses of economic management. And the link to Beckworth is not at all convincing to me.

    This is why I have stayed in the MMT camp as opposed to MR. MR gives undue respect to monetary policy stuff that is pure fantasy. And I agree with Tom Hickey’s implication that there is an element of political correctness at work here.

    So, if you want to understand macroeconomics, go with MMT. If you want good discussion of macroeconomics without ruffling too many feathers, go with MR and ignore any reference to NGDP targeting and similar monetary nonsense.

    MR is like liberal Christianity in that it tolerates widely accepted, if highly unlikely, lore. There’s certainly a place for that in my world…

    • Michael Sankowski December 19, 2012 at 5:44 pm

      Hi Detroit Dan,
      :) Whaaasss up!

      You know I am not the biggest fan of monetary policy. Yes, sometimes it works in a crude, ham-handed, and hugely distortionary fashion. The “long and variable lags” of monetary policy make it hard to use. You’ve been a big part of those discussions where I just ranted and listed and detailed the flaws.

      But it does work. We are just getting started here, and I suspect at some point we are going to start doing work on how to structure private lending so the costs to non-financial private sector are not quite so high.

      Godley seems to think it works. Here is Godley:

      Figure 2 shows the discrepancies between actual and “forecast” GDP expressed as a proportion of GDP. It also shows net lending to the (nonfinancial) private sector, normalized to fluctuate around zero and scaled by GDP in the same way as the discrepancies. There is a clear relationship between the two series: The timing and amplitude of their fluctuation is broadly the same, and the slight tendency for GDP to fluctuate more than net lending could be accounted for by multiplier effects. Introduction of net lending into the formula greatly improves the fit: The error is reduced to 1.6 percent, and the formal diagnostic again indicates no significant bias.”

      If changing interest rates impacts nonfinancial private lending, then monetary policy does work.

      Dan, I understand if you stay more with MMT. It’s all good. I’ve much appreciated your inputs here and hope you continue to engage with me and the rest of the MR gang.
      :)

      And heck, I’ve laid the biggest hurt on NGDP futures of anyone in the entire world. Sumner did not do the reading, he didn’t do the homework. Those things died so fast they are in hell thinking they are still alive.

  • jt26 December 19, 2012 at 5:46 pm

    Rent seeking vs. fiscal policy .. analogy with international development … there used to be that old debate whether the IMF should lend to the third world vs. outright grants by governments. The IMF and the first world were the rent seekers, vs. the latter were income redistributors. I wonder where that debate ended up.

  • jt26 December 19, 2012 at 5:54 pm

    Is monetary policy just rent seeking? Most of the fiscal policy deficit has been accumulated by corporations and foreign entities (MR’s sectoral balance). China in particular is using that warchest to purchase long life global assets (and unfortunately for them, only nice people like Canadians and African dictators will let them). Fiscal policy doesn’t sound that great does it, w.r.t. rent seeking?

  • Cullen Roche December 19, 2012 at 6:11 pm

    I jumped the gun. It looks like the fine folks over at MNE have come up with a definition of rentier that clears us all. Well, at least me. :-)

    “Excuse me beowulf – I would have thought the definition of rentier obvious!

    _________________________________
    World English Dictionary
    rentier

    — n
    a. a person whose income consists primarily of fixed unearned amounts, such as rent or bond interest
    b. ( as modifier ): the rentier class
    _________________________________

    So, if the gentlemen you are defending qualify under the definition, then Tom is correct. He made no comment about their humanity. Nor has he ever behaved as an Inquisitor in my reading of his voluminous comments made on MNE – that is you introducing that notion and using it in defence of the character of mates? “

    • beowulf December 19, 2012 at 10:56 pm

      I would suggest the definition of rentier is bit less obvious than the one gleaned from the “World English Dictionary”. Michael Hudson’s latest paper (co-written with Dirk Bezemer) is quite good.

      “Incorporating the Rentier Sectors into a Financial Model…
      In principle, all monopolies should be included in this rentier sector, as they represent a special privilege (control over markets, especially for necessities) whose return in the form of prices and income in excess of necessary costs of production is a form of economic rent, that is, a transfer payment rather than “earned” income. But statistically there is no practical way to isolate monopoly rent in the NIPA, as this would include a large part of the information technology sector, pharmaceuticals, and much “industry.” The ideal conceptual framework for statistics would be to separate economic rent from underlying cost value… Today’s post-bubble attempts to incorporate balance-sheet analysis into NIPA statistics on current activity are too crude.

      http://michael-hudson.com/2012/09/incorporating-the-rentier-sectors-into-a-financial-model-3/

      • Tom Hickey December 19, 2012 at 11:38 pm

        I would suggest the definition of rentier is bit less obvious than the one gleaned from the “World English Dictionary”.

        Agreed. Keynes used it largely to mean saving in excess of reasonable need, i.e. “hoarding” This results in demand leakage unless offset, which essentially means increasing govt debt to support private hoarding. Keynes left a tidy sum from his investments, so it would seem that he put the bar of hoarding quite high.

        Hudson’s use of “rent” is somewhat different. He contrasts economic rent — land rent, monopoly rent, and financial rent — with productive gains through capital investment and productive contribution from “work.” For example, gain above a reasonable ROI would be seen as coming from artificial scarcity or market power that result in monopoly rent. Similarly in finance, productive contribution has to do with providing the service of risk management rather than engaging in risk taking, especially when risk taking is backed by a government backstop. The difference is financial rent. Land rent is increase in land value above and beyond owner improvement, e.g., though public improvement such as infrastructure, education, etc. that the land owner does not contribute. Economic rent is basically a “free ride” on circular flow and is parasitical on the system — which is why Hudson says to tax it away to discourage it.

        • JKH December 20, 2012 at 4:43 am

          I think its time again for Mike’s link to “On Bullshit”

          Let’s get specific and objective, with a little less in the form of self-referencing definitions of rent.

          For starters, I’d like to know the (MMT presumably) definition of rent on the following:

          a) a 10 year Treasury bond
          b) a 10 year corporate bond
          c) the rate of return on corporate equity

          • Tom Hickey December 20, 2012 at 9:40 am

            JKH, I don’t know of any papers of MMT economists that address economic rent. The guy at UMKC that writes about economic rent is Michael Hudson, but he is an MMT “ally” rather than an MMT economists, and some of the MMT economists don’t agree with everything he says. So I don’t know what their position on rent is. What I have said is based on chiefly Hudson.

            When I asked Warren about financial rent, he basically said that his reform proposal would take care of most of it that is problematic if enacted, so taxation would not be needed to discourage rent-seeking in the financial sector. He agrees about taxing land rent, which not rent received from renting RE but rather land value appreciation in excess of owners’ contribution.

            There are in general different views of economic rent, largely because it is a distinction that is ignored by most economists. As Michael Hudson points out, it was central to classical economics, which was a reaction to the landowners living off the “rent” they received without contributing anything to production or productive capacity. Of course, it is central to Marx, too, who saw capital substituted for land but the same “feudal” system applying.

            Analysis of economic rent disappeared when neoclassical economics presumed that money is a veil and markets reflect circular flow which supply and demand maintain at equilibrium. In fact, discussion of economic rent was avoided as “Marxist,” and even Keynesians did not want to get tarred with that brush after what happened to Lorie Tarshis. So the discussion of economic rent has disappeared.

            It was not really until Fisher and Minsky’s focus on financial instability that this came into focus again with the crisis that economic rent is even being talked about in the periphery. Here, some of the MMT like Wray and Mitchell economists have joined with allies like Hudson and Black to attack what they perceive as “excesses” of both the cb and the financial sector, focusing on crime, which is an egregious form of rent extraction. They just call it crime rather than than rent though. :o

            Basically, Hudson’ criterion is that the classical economists. If gains are from production, then they are not rent. If they are not, then they are rent. Hudson’s program is to tax rent and not gains from production.

            It’s not the case that rent is unnoticed in the mainstream. Krugman wrote a blog on it, but it is meager. Who Are The Rentiers? What economists are noticing through is that when rent-seeking becomes more profitable than productive investment then productive investment falls, and the economy gets “hollowed out.” This is a concern with the US and UK economies with manufacturing contracting and being replaced by FIRE as a % of GDP.

            • JKH December 20, 2012 at 2:27 pm

              Thanks for that reply, Tom.

              Turning to one specific example that I suggested – a corporate bond:

              Presumably economic rent when discovered is found in the form of income of some type.

              A corporate bond earns income for the bond holder. So it is income of some type.

              Suppose the issuer of a corporate bond is engaged in “productive” activity, defined in such a way that no rent is earned in the activity that is generating income on the bond. It is an ‘MMT approved’ activity insofar as rent is concerned. Fine.

              Now suppose the bond is held by an agent whose income consists entirely of income on financial assets. Suppose the judgement by those who judge these rent issues is made that this is simply excessive – that agent is contributing nothing directly to productive activity, particularly as it relates to that kind of financial asset income. In effect, his crime is that he has saved too much. It seems to me that this is an example of what is often being described as the situation of the ‘rentier’ in modern terms.

              The dilemma is that somebody will hold that bond.

              How can the productive activity that covers the cost of the bond qualify as non rent activity while at the same time the holder of the bond is a rentier? And if somebody who holds the bond qualifies as a a rentier while somebody else doesn’t, surely that particular criterion boils down to an issue of income distribution.

              It seems to me that issues of ‘qualifying productivity’ are being confused with issues of income distribution, when categorizing rent and rentiers.

              So the term seems to be sufficiently vague as to be ambiguous and even self-contradictory in this way.

              • Cullen Roche December 20, 2012 at 3:08 pm

                This looks like another case of people confusing the role of primary and secondary markets and the law of securities that all securities issued must be held. These securities further represent money that has been “put to work” in some form of productive use. They are only outstanding so long as that productive need has a lifetime.

                I am surprised Mosler didn’t squash this “rentier” mantra years ago. Of all people he should know that it’s built on a neat sounding political premise that falls apart once you start to dive a little deeper. I get the money manager capitalism argument to some degree, but the generalizations that occur within this “rentier” debate or the idea that “I don’t agree that the financial sector produces real value. at least I’ve never seen any come out of it in the last 40 years” (yes, that’s actually a Mosler quote) are extremist positions that sound nice in theory, but largely fall apart upon closer inspection.

                • Tom Hickey December 20, 2012 at 3:20 pm

                  But remember the sharp point of the spear is Michael Hudson, who was a Wall Street economist who left when he figured out what it was all about. And it is not only about economic rent, as he writes in Super-Imperialism. This is all of the piece called “neoliberalism” which is a political POV based on an economic one based on “competitiveness,” which is really social Darwinism. In the institutionalist view to look at this as an economic or financial issue independently of the social and political issues involved, as well as wrt the professed agenda v. the hidden agenda, is to miss the forest for the trees and be taken in.

              • Tom Hickey December 20, 2012 at 3:11 pm

                JKH wrote: “How can the productive activity that covers the cost of the bond qualify as non rent activity while at the same time the holder of the bond is a rentier? And if somebody who holds the bond qualifies as a a rentier while somebody else doesn’t, surely that particular criterion boils down to an issue of income distribution.

                It seems to me that issues of ‘qualifying productivity’ are being confused with issues of income distribution, when categorizing rent and rentiers.
                So the term seems to be sufficiently vague as to be ambiguous and even self-contradictory in this way.”

                This sort of issue involving vagueness is generally brought up in discussions of economic rent and formulating tax policy that I have seen. The general answer is to tax all revenue as income progressively, assuming that in the higher brackets the gains are saved, resulting in demand leakage and accumulation of political power at the top.

                Michael Hudson sometimes articulates that view. At other times, he draws the line between establishing the distinction in the tax code between productive and non-productive gain, but I haven’t seen him be specific about cases. I assume that this would be a matter for experts in the areas in question to determine. He seems to think that it is a not a big issue. This kind of thing happens all the time in an IRS audit where one has to justify deductions at the margin of the code. Some you win, some you lose and some you compromise on a settlement. Change in tax policy would have to be sorted out in congressional committees and get past the legislative process since it is fiscal, and there would be a lot of haggling over where to draw the lines. But at least there would be recognition of a design flaw and motion toward addressing it. Now we are moving in the opposite direction.

                My impression from what Hudson has said is that this is not about going after the small fish but rather the big rent-seekers that are generating distortion. His thrust is against the push to tax income from work and un-tax revenue that is not related to work, that is, to make taxation more regressive, while also reducing social benefits, to “make room” for un-taxing the “producers,” mos of whom are not producers at all, but rent-seekers. In this he is countering the neoliberal push that we are seeing today, and the resistance of the financial sector to reform and accountability, along with insistence on a double standard of law and justice for “finance capital,” who are acting like the industrial robber barons that culminated in the anti-trust legislation in the Progressive Era.

                The more nuanced answer from the MMT vantage is Warren’s point of view. Taxation is chiefly to control inflation and secondarily to discourage negative behaviors such as lead to negative externalities. Land rent is not too difficult to establish, but monopoly rent and financial rent are more difficult to deal with, for reasons similar to the ones you bring up. But it’s not necessary to go for the margins here.

                In Warren’s view as I understand it, taxing land rent corrects a large part of the problem, and monopoly rent and financial rent are better approached through legislation, regulation and accountability, along with institutional change through reform, e.g., that puts banks back in the business of plain vanilla banking instead of financial engineering, which would return a lot of engineers and technically savvy people to productive work in industry.

                Again in Warren’s view as I understand it, this would eliminate the need to get into grey areas regarding productive and non-productive when the objective is really to address the obvious excesses that are leading to extreme inequality, economic underperformance, and incentivizing negative behaviors such as led to the crisis and are preventing it from being resolved expeditiously.

              • Tom Hickey December 20, 2012 at 4:21 pm

                I am far from well acquainted with the literature on this, but my impression is that there are two views on this. First is the Keynesian one that seeks to reduce saving to the level reasonably necessary in order to reduce demand leakage without increasing public debt, which Keynes didn’t like. Second is the view that non-productive behaviors should be discouraged by tax policy as leading to negative externalities.

                Those adhering to the first view would tax all saving above a certain level in order to encourage consumption and primary investment. Those adhering to the second would institute a sharper line between what is productive and non-productive, taxing what is non-productive at a higher rate.

                Let’s take a corporate bond as you suggest. The most conservative approach would the position that investment is to better from savings rather than debt, so firm indebtedness should be discouraged through tax policy, especially leveraged buyout and other financial engineering. The more liberal approach would be tax revenue from “rent” in excess of gain resulting from productive contribution, which would vary by individual. Coupon clippers would pay a higher rate than workers and those receiving a return on primary investment. As a practical matter when it comes to writing tax policy, if it does, there will be an intense debate over these issues “at the margin” like this. Fixing the boundaries will be the overriding issue, and it will be decided by who holds the stronger hand after all sides make their case.

                There would be considerable debate over the margins when this gets legs, and I think it will at some point barring a return a degree of equality and prosperity that I don’t see in the cards they way things are aligned now. It’s been a lesson in disaster capitalism in the UK and EZ and to some degree also in the US, although the impact is huge in the US due to the relative size of the economy,

                I don’t think that such issues will be come clear until there is greater awareness of economic rent and rent-seeking to the degree that there is debate around it. But it is coming to the fore as the push grows to “broaden the tax base,” which means to tax work more, and to provide relief to corporations that “pay the highest tax rates in the world,” as well as the push to exempt dividends from “double taxation,” capital gains to “encourage investment,” and to repeal the “death tax.”

                Where I see this going is toward a more progressive approach to taxation with higher tax rates at the upper echelons since a great deal of that comes from interest, dividends, capital gains, including land value appreciation, and inheritance. It is very difficult to accumulate great wealth otherwise. There are Horatio Alger stories that are trundled out as a smokescreen to hide growing income and wealth inequality and immobility in the US, for example.

                • beowulf December 20, 2012 at 7:01 pm

                  OK guys we’re sort of going into the weeds on this. Let’s all listen to the stylings of Joe Stiglitz on this topic.

                  “Rent is a return on income that you get not as a result of your contribution but because of your ownership of land. It was a notion that income does not have to rise out of effort or making a contribution…. But economists have generalized that to a much broader usage, which really includes any kind of activity, which is more directed at redistributing the existing pie nationally rather than enhancing national income. Much of what goes on in the financial sector is this kind of rent-seeking. The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top…

                  There is another example where the financial sector has been particularly bad. They pushed for laws like our bankruptcy laws that gave priority to derivatives…. and workers and everybody else has to swallow their losses… At the same time, they pushed for laws that made it more difficult for ordinary Americans to discharge their debt”.
                  http://www.foxbusiness.com/personal-finance/2012/07/03/is-wealth-gap-hurting-all-us/

                  I realize Tom offered the duel and JKH was the one who chose the weapons but why are we talking about the T-bond> If there is a financial market that is more efficient or serves a more valuable public purpose (Borrowing on the Credit of the United States, as the courts say, “is a power vital to the government, upon which in an extremity its very life may depend.”)., I’ve never heard of it.

                  I’m not saying bond traders are heroes, but their job does provide value to society. Making them the exemplar of what’s wrong with the Finance sector only leaves off the hook the “Man is The Prey of Man”-style capitalism Stiglitz is talking about. THAT is rent seeking, not whatever it is that JKH does in Miami with his team of hot female detectives.

                  • Tom Hickey December 20, 2012 at 8:29 pm

                    Yes, there are some major voices coming online now, including Joe Stiglitz and Jamie Galbraith. Jeff Sachs is also getting excited although he hasn’t figured out just where he is coming from yet. Neil Barofsky is also making waves.

                    The focus is turning to inequality, cronyism, and corruption, and this is a lead into the rent-seeking v. productive contribution issues that underlie. It seems that Andy Haldane gets this, for example. I suspect it won’t be long before we hear a lot more about Schumpeter and Minsky, for instance. Post Keynesians should have a leg up here.

                    • Cullen Roche December 21, 2012 at 2:29 am

                      As much as I’d love to think you’re right, all of the PKers are still in some rain puddle somewhere between the fresh water and salt water economists. The PK economists haven’t even made a splash worth noting thus far. There isn’t just a long way to go here. There are probably lifetimes. If real progress is to be made we’re going to need someone with a media presence that is similar to a Krugman or a Friedman. Someone who can make that splash. I don’t think that person exists in the PK world, unfortunately….At least not as far as I can tell.

                    • Tom Hickey December 21, 2012 at 10:58 am

                      Yeah, I think that is probably correct, Cullen. It’s going to take either charisma or celebrity or both.

                      However, when the next crisis hits, I suspect that the game will change significantly, and new opportunities will develop in unforeseeable ways. The best thing we can do now is work to put good plans on the floor where they can be picked up if we can’t yet get them on the table.

                      This is not say that the “person a white horse” during the next crisis will be wearing a white hat through. For example, the US got an FDR and the UK a Churchill, but Germany got Hitler and Italy Mussolini. This is no longer an isolated situation affecting the US. It’s gone global with the transnationals, global finance, and global neoliberal elite. So really hope we can attend to this sooner rather than later. But so far I don’t see it happening. The momentum seems to be in the opposite direction, and the far right is gaining strength in many places.

                    • Cullen Roche December 21, 2012 at 3:22 pm

                      I would have thought this crisis would have changed things a bit more. But the saddest thing is that the biggest development in economics from this crisis is….Market Monetarism. Those guys are far and away the winners of this crisis. So the thing is, it’s going to take 20 more years of failed monetarist focused policy before anyone can actually look at their work and conclude that it doesn’t work as well as some presume. And unfortunately, I doubt the PK economists will make substantial headway until we’re done with this second wave of monetarism. That’s my best guess anyhow.

                  • JKH December 21, 2012 at 4:50 am

                    “Much of what goes on in the financial sector is this kind of rent-seeking. The most dramatic example was the predatory lending and the abusive credit card practices, which took money from people on the bottom and the middle often in a very deceptive way, sometimes in a fraudulent way, and moved it to the top…”

                    Those are abuses to be sure. But if that’s what is meant by rent, then the term is even more amorphous than I thought. It seems archaic and diffusive to the point of not being particularly useful, except as a display of loaded language. Those who use it might make a better case by abandoning it for more specific categories.

                    • Tom Hickey December 21, 2012 at 11:09 am

                      I agree that “rent” is bad framing. “Economic rent” has a different meaning than “rent” in ordinary language and that invites confusion. So one spends too much time explaining the explanation. That is not a good place to be.

                      I do think that a lot of what the PKE economists talk about has to do with economic rent without using that terminology. But framing-wise there is a lot of work to be done here.

                      A big problem is that the present framing is strongly biased toward the neoliberal social, political and economic paradigm, and the way the game is now set up, any serious opposition is tarred as “socialism,” “communism,” “class warfare,” etc.

                      Randy has realized that the framing is not working, too, and he recently put up a series about fixing it over at NEP.

                      The major point about framing is using rhetoric in conjunction with logic to tap into feeling as well as to appeal to reason. Neoliberal apologists have this down pat. The disorganized opposition not so much. There is a lot of rage building over the current mess, and those who are able to harness it are getting exposure, on the PKE side people like Steve Keen, Michael Hudson, and Bill Black. Others, not so much.

                    • beowulf December 21, 2012 at 1:12 pm

                      As you know Tom, I’m a fan of Richard Nixon not least because he understood that in this country, the more progressive the reform, the more reactionary and angry the terms in which it must be framed.

                      For example, the gun control folks should be including in their bills a federal requirement that every high school student pass a marksmanship class to graduate; or even better, a federal concealed carry law for revolvers (6 shots is plenty to stop a lunatic but not enough to wipe out a classroom).
                      Stress that the Supremacy Clause would mean Americans could walk around Times Square and see the Broadway lights with a wheelgun under their shirt… and there’s nothing Mayor Bloomberg can do to stop them. Why? Because this is America, that’s why! (remember, reactionary and angry). Add that to a gun control bill and it would have a prayer of passing.

                      Its sort of distressing that so few politicians understand this country well enough to get this point (Newt Gingrich does, he’s actually a Job Guarantee supporter but he’s smart enough to pitch it as attacking the poor).

                    • Tom Hickey December 21, 2012 at 4:53 pm

                      To amplify on the framing, I just posted this over at MNE in response to a comment by Art Shipman:

                      Art, the way I conceive of economic rent the way it is generally is as an aspect of the “free rider” problem. I think that the terms “economic rent” is confusing if only because the term “rent” is used differently there from the ordinary language usage that most people are accustomed to and automatically think of when the they encounter it. So I would frame it as productive contribution with value received proportional to value provided v. free ride due to some “privilege,” subterfuge, market anomaly, govt capture, illegal activity, etc. that is essentially parasitical because the gain is unearned and the exchange is disproportional. In any exchange there may different proportions of earned and unearned between 100% earned (usually wage labor) and 0% unearned (e.g., crime).

                    • JKH December 21, 2012 at 6:51 pm

                      I read the Krugman post above. Looks like he’s referring entirely to what amounts to income distribution and/or wealth distribution. Again, I see a lack of coherence in the meaning here.

                      In a closed, balanced budget economy, S = I. Krugman is attacking the wealth distribution associated with cumulative S, and designating the upper tier of wealth concentration as “rentiers”. He doesn’t refer to ‘I’ at all.

                      Without that S concentration, there would be no issue, at least on that basis. ‘I’ could consist of the most productive investment conceivable, with fully justified saving S. Rentierism depends only on the distribution of cumulative S on that Krugman basis, ignoring the fact that I may be fully productive.

                      This issue needs to get far more analytical in order to separate it from issues of income and wealth distribution, indeed if there is any effective separation.

                    • Tom Hickey December 21, 2012 at 8:01 pm

                      Maybe why Hudson often just mentions progressive taxes as the way to deal with it and recommends putting the top tax rate back to 90%. He makes a case that the economy did fine under such a tax policy.

                  • beowulf December 21, 2012 at 9:28 pm

                    Cullen, I think the Market Monetarist guys are winning because they’re the only ones who can enter the race. The Fed is free to adjust monetary policy but only Congress can adjust fiscal policy. And since Congress is doing nothing (well, worse than nothing, they keep trying to tighten the fiscal stance), I can’t fault the Fed for trying to do what they can to paddle the raft across the ocean to dry land.

  • jrbarch December 19, 2012 at 6:24 pm

    Cullen omitted the point I was trying to make; the rest of my post read:
    __________________________________
    But I think all of that is unnecessary.

    My simple reading of Tom’s post is he is interested in the human impact of rentier behaviour on others; an interest shared by many. The societal (human) impacts are far bigger than any persona. And yet it is through the persona we must debate.

    I don’t think this stands in Tom’s way or yours; or even the said gentlemen (who I have noticed are also rather voluminous and open about their beliefs and well-equipped to publish and defend them).

    As a reader – that the debate goes on thoughtfully, is more important to me.
    _______________________________

    Am not one of the ‘fine folks over at MNE’ – I’m just me.

    Thankyou,
    jrbarch

  • Lars December 19, 2012 at 6:26 pm

    They keep deleting this comment at MNE. Maybe you guys won’t:

    Excuse me if I am wrong, but isn’t the biggest rent seeker in the post-keynesian world…Warren Mosler.

    He owns a bank, ran a hedge fund in the Cayman islands and pretty much lived off of his ability to invest in fixed income products his whole life.

    It strikes me as a tad bit hypocrtical for any MMT advocate to disparage anyone else for being a rent seeker when the founder of MMT is himself the ultimate rent seeker.

    • AndyCFC December 19, 2012 at 6:58 pm

      Lars what are you talking about it, its up there.

    • dilletaunted December 19, 2012 at 7:03 pm

      You’re not paying attention to the argument. There’s nothing hypocritical about criticizing oneself

    • Tom Hickey December 19, 2012 at 8:28 pm

      Excuse me, Lars, but your comments are still up at MNE — I just checked to be sure. In addition, I quoted them in responding to both your comments.

    • beowulf December 19, 2012 at 9:26 pm

      Ha, that’s funny. So if we sign a consent order stipulating that Cullen, Mike and Warren are all rentiers (and all good eggs), I believe that closes out the case. :o)

      • Tom Hickey December 19, 2012 at 10:11 pm

        Well, as I replied to Lars over at MNE, Warren has OK’d taxing land rent, and feels that his financial reform proposal would deal with financial rent. What are the proposals over this way?

        • beowulf December 20, 2012 at 8:00 am

          The badge of rents is excess profits. President Wilson was right after WWI that Congress should have dropped the corporate income tax but kept the excess profits tax, of course they did vice versa (and kept the deduction of debt from income, which had been “temporarily” added to tax code to harmonize CIT with excess profits tax). Its not too late to un-ring that bell, or more precisely, stop ringing it going forward. :o)

          Hmm, I wonder what our friends in Australia– the land of the $15/hr minimum wage that has both a larger social insurance system and smaller % of GDP going to govt than us, are up to?
          “ACTU push to expand super-profits tax … Under the model known as an “allowance for corporate equity”, super-profitable companies would pay tax of 40 to 50 per cent, but many businesses would pay less tax because they could claim a deduction for “normal” returns to equity investors.
          “The movement towards a system that taxes economic rents more heavily, and normal rates of return to capital more lightly, may bring substantial economic benefits to Australia,” Mr Lyons has told the Business Tax Working Group secretariat, which is part of Treasury.”

          http://www.theaustralian.com.au/national-affairs/treasury/actu-push-to-expand-super-profits-tax/story-fn59nsif-1226491003338

          • Tom Hickey December 20, 2012 at 9:47 am

            Good one. Duly Evernoted. Usually monopoly rent is not even mentioned.

          • Michael Sankowski December 21, 2012 at 12:02 pm

            First I saw the quote, then the link, and knew it could only be you. How do you find this stuff? :)

            • beowulf December 21, 2012 at 1:12 pm

              It finds me, Mike, it finds me.
              :o)

  • Fed Up December 19, 2012 at 8:11 pm

    “We know a few things. We know Monetary Policy can work. We know Fiscal policy works when we let it. So this is a bet between two things that work, two very different policies we know will work if we do them semi-correctly!”

    If monetary policy means more private debt and fiscal policy means more gov’t debt, then I disagree! I see both types of debt as problems!

    • Michael Sankowski December 19, 2012 at 11:14 pm

      Fed up,

      Some sector (or sub sector) must go into deficit for another sector to have savings in the unit of account. “No debt” sounds reasonable to someone who does not know the sector balances. It is not reasonable to someone who understands the sector balance equation.

      • Fed Up December 20, 2012 at 12:16 am

        Is current account deficit = gov’t deficit plus private deficit missing an entity?

        • beowulf December 20, 2012 at 7:34 am

          “Assuming domestic private sector net savings are 0, then…” :o)

          • Fed Up December 20, 2012 at 3:15 pm

            beowulf, I want to assume CA deficit = 0, gov’t deficit = 0, and private deficit is a positive number (meaning in surplus).

            • Michael Sankowski December 21, 2012 at 12:04 pm

              Good luck making that work. I think a gold standard can fake something close to this accounting. And you get all the positives of the gold standard too!

              • Fed Up December 24, 2012 at 2:12 pm

                Doing my best Barney Stinson impression, challenge accepted! Abolish the fed/central bank! Spin the medium of exchange entity off from the federal gov’t into a separate entity. Now the federal gov’t is a currency/medium of exchange user.

                current account deficit = gov’t deficit plus private deficit plus medium of exchange entity deficit

                Assume CA deficit = 0 & gov’t deficit = 0 so…

                0 = 0 plus private deficit plus medium of exchange entity deficit

                Move private deficit to other side of the equation.

                private surplus = medium of exchange entity deficit

                The medium of exchange entity will have no tangible assets. It will probably need intangible assets.

                • Michael Sankowski December 26, 2012 at 9:32 am

                  Not too shabby!

                  “Spin the medium of exchange entity off from the federal gov’t into a separate entity. ”

                  What does this mean? Is this a public entity? How would it be different than a central bank? This seems like a “and a pony” magical thinking.

                  • Fed Up December 28, 2012 at 9:29 pm

                    “What does this mean?”

                    Get it away from Congress and the President.

                    “Is this a public entity?”

                    Yes. I mean public not federal (meaning away from Congress and the President).

                    “How would it be different than a central bank?”

                    Imo, the central bank wants all new medium of exchange to come from the “hedge fund” model (including banks). That is actually the problem. Debt and the “hedge fund” model should not be allowed.

                    “This seems like a “and a pony” magical thinking.”

                    No, it is trying to describe what is actually happening with time, real AD, real AS, and the medium of account (MOA)/medium of exchange (MOE) market(s) (including the retirement market).

  • Detroit Dan December 19, 2012 at 10:09 pm

    Thanks Mike and all. Thanks for the good work you do here, and the civility you bring to the conversation…

  • Greg December 21, 2012 at 5:32 am

    Excellent Post Mike and great conversation everyone.

    Much to respond to but a few initial thoughts.

    Just finished Nate Silvers new book “Signal and Noise” and it is a must read for all who post and comment here. It describes the practice of forecasting/predicting and how to do it correctly/better. He would very much endorse Delongs IDEA to formulate a bet, although not necessarily the design of the bet as proposed. He thinks more and more betting on things will encourage faster movements towards “truths”, because the science of good betting requires constant updating of odds based on new facts on the ground.

    He has a chapter on sports betting, weather forecasting, earthquake prediction, epidemiology and economic forecasting amongst others. His econ chapter was centered around talks with non other than Jan Hatzius of Goldman (JKH???)

    To me the problem with Delongs bet is that its simply between three people and is likely just for a 300$ lunch or something. Design a contract that expresses the parameters you think are important and put a value to them. Come up with ways to continue to monitor the parameters so you can decide who is “winning”
    and have at it, but get as many people involved as possible not just three economists. I think, like the NGDP idea, that even attempts to do this will be informative and add to the signal and reduce noise.

    The downside of a Nate Silver revolution could lead to more things like the peasant insurance problem, or buying fire insurance on your neighbors house but no efforts to maximize the utility of our human markets are risk free.

    Finally, in my view the first thing that needs to happen before any of these policies will be more than just bandaids is that citizens need to be guaranteed an income. I see no added value to setting the floor at absolute destitution for any one and I see great upside in stability when everyone knows that they can at the very least service X amount of debt payments. How many trillions would have been spared in bank bailouts if people who were facing job loss would have at least known they could continue to make 60% of their mortgage payment without selling all their possessions? How many jobs would have been saved if businesses had not seen so many of their customer go from 2000-2500/month to ZERO in known monthly income?

    How about we not only encourage more Nate Silver type speculation on more important things, but why dont we go the “Full Monetization” with people. Using Beowulfs numbers of our human capital why doesnt every child come with an account at the Fed that starts with 250,000 credits. These can go up or down based on his performance through life. Private banks can still try and help someone maximize their potential and take a portion of their future credits but no one can be stripped to zero by another private entity. Only our elected bodies can do that as part of our justice system.

    I know the Mike Sankowski of the world can figure out a way to design a futures contract, we just need some that when people are betting on them we are getting broad based growth and not just casino activity. I also know that some people have already put a value on our lives……… Well, give it to us …… NOW!!

    • Michael Sankowski December 21, 2012 at 9:02 am

      Well, I cannot confirm or deny JKH is or is not Jan Hatzius. :)

      This is a good idea:

      “I know the Mike Sankowski of the world can figure out a way to design a futures contract, we just need some that when people are betting on them we are getting broad based growth and not just casino activity.”

      Why not make a futures contract which is designed around prosperity? Well, the problem with most contracts is they need to be traded. “Traded” to some people sounds like something which happens only on a stock exchange, but it’s really not like that at all.

      Imagine the market for 20oz bottles of pepsi, how it works, why it works, who participates from the producers of the product and packaging all the way to the end consumer, the delivery process.

      This is what happens in the futures world, too. Exchange based markets are simply markets almost exactly like the broad market for 20oz bottles of pepsi. It’s just that every single part of the delivery process for an exchange has been streamlined to near perfection.

      This is part of the reason understanding futures markets is so useful to understanding economics. It’s a beautiful system.

      This is why NGDP futures are doomed to failure – there is no economic reason for people to need NGDP hedging. The relationship between NGDP and personal income is extremely variable. For most people, NGDP does not impact their personal income much. but if you lose your job, It’s a frackin’ gigantic impact! hedging a 2% fall in NGDP growth is stupid on an individual level. Once you start thinking like this, you’ll quickly see why there are no groups which will use NGDP futures, except perhaps, maybe, possibly in a dream world large defined benefit pension funds.

      Frankly, this makes me question how well Scott Sumner understands the economy and markets, and therefore how the models he uses to describe the real world could be flawed. He makes such simple mistakes in thinking about NGDP futures – how can he understand what’s going on enough to make a model of monetary policy if he cannot see why NGDP futures have a nearly insurmountable indifference hurdle?

      But can there be a contract which does promote a great economy? Nick Rowe proposed trills, kinda modled after Schillers Trills. I have a tough time with any tradeable contract because I don’t think they will really trade.

      I suspect it would be simpler to just give people extra cash, linked to payroll taxes. This would have the same effect, and we already have a extremely efficient delivery system for this extra cash in place for every working person in the United States.

      Re: DeLongs bet – well, I doubt SK will foot a $300 lunch, because she has kids and works for UMKC, not berkerly or Princeton. ;)

      STF made a good point SK didn’t say this at all. What would be a good bet, STF?

      Economic prediction: Imagine using Godley’s matrix, plus Silvers methodology. All he has to do is read that paper by Godley, and our GDP forecasting just got a ton better.

      You have to figure Hatzius spent like 4 hours mastering the techniques of Nate Silver – thats how long it would take him. He’s probably already done some spreadsheet models.

      Regarding the guaranteed income – yeah, this would be a ton better than our current system. The uncertainty caused by NGDP is largely caused by the changes in spending by the unemployed.

      The problem is that some (many?) people in the lower income brackets think totally differently than the people who comment on this blog. They really do try to game the system so they don’t have to work, they really do try to take off work.

      For example, my dads company employs about 25 people. We have a really, really hard time finding people who just show up for work consistently, and it doesn’t matter the wage we offer. We’ve found over time it is much better to start people at a low wage and see how they do. If they can show up, we bump pay. If they work hard, we bump pay a good amount. If they are smart and work hard, they become a forman in a year or so.

      It’s weird how this is so different than what I am used to. In many of the places I’ve been, people would beg for extra work and extra responsibility. It was a fight to get a project or task, because you had to compete with others to get put into the project.

      Tom made a good point when he said we here at MR aren’t addressing the institutions enough. We don’t. On the other hand, just slightly improving the understanding of the monetary system would be a world changing accomplishment. We like to think we have had a small, but discernable impact in the real world debate, and that our impact will accumulate over time. JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else. He’s ground zero.

      We haven’t started to address the trade deficit much here, but that’s a whole field which could have a dramatic impact for the better…but we can’t do everything.

      When jt26 asked for more information/opinions on other topics, it was flattering! I do this as a hobby. I am not a professor, or anything like that.

      “Beowulfs numbers of our human capital why doesnt every child come with an account at the Fed that starts with 250,000 credits.”

      There is a guy who works for my dad. He’s really, really smart. He’s also a huge drunk. The guy with the highest IQ is a construction worker. In a way, he was forced to go Galt by our system. How much human capital gets thrown away by the system? I don’t know.

      • jt26 December 21, 2012 at 10:37 am

        “I do this as a hobby. I am not a professor, or anything like that.”
        Don’t sell yourself short, passion is more important than anything. Even in the hard sciences, you’ll find amateur astronomers discovering new stars, comets. Mountain biking, snowboarding, jazz, hip hop, personal computers were all just hobbies as well, at one time. Mike it’s never too late to become our Joe the Plumber or Congressman Gopher (of Loveboat fame)!

        • Michael Sankowski December 21, 2012 at 12:00 pm

          “Mike it’s never too late to become our Joe the Plumber or Congressman Gopher (of Loveboat fame)!” I want to frame this! lol

      • Tom Hickey December 21, 2012 at 11:28 am

        1. Mike: “JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else.

        Agree. I had been encouraging JKH to blog himself rather than scatter comments all over the blogosphere, which is very hard to track. Glad to see he is posing his wisdom.

        No doubt that Cullen has made sectoral balances well-known in finance. Financial types seem more open to it than economists, who seem to resist having to recognize a factor that would result in their having to revise their thinking, teaching and textbooks. They are heavily invested in the status quo. Financial types know that the need to use feedback to stay abreast. Huge difference in methodological orientation. But for political change some major economists are going to have to move, too. Politicians won’t move without the blessing of “experts.”

        2. As far as a comprehensive vision of institutions goes, I think that Jamie Galbraith is the guy. As his father’s son, he is carrying forward the great Galbraithian tradition. While he considers himself a Galbraithian, he is closer PKE than anything else and is an ardent opponent of neoliberalism. I would say that he is the progressive Krugman (who remains a liberal as his blog advertises).

      • beowulf December 21, 2012 at 1:19 pm

        “Well, I cannot confirm or deny JKH is or is not Jan Hatzius. :)”

        That’s hilarious! All inquiries about JKH will simply get the Glomar response. :o)

        “In United States law, the term Glomar response refers to a “neither confirm nor deny” response to Freedom of Information Act requests. There are two instances in which Glomarization has been used. The first is in a national security contexts, where to deny a request on national securities grounds would provide information that the documents or programs which the requester is seeking indeed exists. Glomarization is also used in the case of privacy, in which a response as to whether or not a person is or is not mentioned in law enforcement files may have a stigmatizing connotation.”
        http://en.wikipedia.org/wiki/Glomar_response

      • Greg December 24, 2012 at 5:38 am

        Sorry for the delay in response, I promised my wife no computer time while our holiday guests were here. Actually, it wasnt too bad after a couple days, sometimes we need to step away.

        I wonder if a key to having a “prosperity contract” so to speak is to have EVERYONE participating and trading it. The more people making their predictions the better.

        “This is part of the reason understanding futures markets is so useful to understanding economics. It’s a beautiful system.”

        Agreed, but as in your excellent post about gas prices and oil prices, there needs to be strong mechanisms for preventing capture. Also certain things just shouldnt be permitted to be gambled on, at least not by outsdie third parties.

        “But can there be a contract which does promote a great economy? Nick Rowe proposed trills, kinda modled after Schillers Trills. I have a tough time with any tradeable contract because I don’t think they will really trade.
        I suspect it would be simpler to just give people extra cash, linked to payroll taxes. This would have the same effect, and we already have a extremely efficient delivery system for this extra cash in place for every working person in the United States.”

        Agreed

        “Regarding the guaranteed income – yeah, this would be a ton better than our current system. The uncertainty caused by NGDP is largely caused by the changes in spending by the unemployed.
        The problem is that some (many?) people in the lower income brackets think totally differently than the people who comment on this blog. They really do try to game the system so they don’t have to work, they really do try to take off work.”

        I have to think that gaming the system occurs at every level of the income brackets, but even if not, worrying about whether some guy is “deserving” of his 350$/wk seems a waste of time. If you really think that guy has it better than you, quit and get your increased free time. My guess is you wont really think he has it all that well after a month or so.

        “For example, my dads company employs about 25 people. We have a really, really hard time finding people who just show up for work consistently, and it doesn’t matter the wage we offer. We’ve found over time it is much better to start people at a low wage and see how they do. If they can show up, we bump pay. If they work hard, we bump pay a good amount. If they are smart and work hard, they become a forman in a year or so.”

        I hear many guys give the same story and Im sure its hard to keep a trained and motivated workforce in many areas. Is this a macro problem I wonder? IOW are things not getting done because of this or is it just that your dads company cant do as much as he would like? My sense is that we have a lot of redundant people, according to the system we have developed the last few decades. We are still more than capable with the current work force of producing surpluses in virtually every good demanded on the current market. Some of this is likely the point of some of our policies I fear. Make workers more desperate by needing less and less of them.

        “We like to think we have had a small, but discernable impact in the real world debate, and that our impact will accumulate over time. JKH and Cullen are doing the heavy lifting here – thanks guys. No matter what the MMT crowd thinks, Cullen has done more for getting the sectoral balances out to the masses than anyone in human history but Wynne Godley. He’s done more to get the ideas of how the economy really works out into the current discussion than anyone else. He’s ground zero.”

        I dont disagree

        My comment about a “human capital account” at the fed is really just spitballin an alternative to a minimum guaranteed income. We all agree that we have our most potential at birth, its ALL ahead of us, so lets capitalize it, and draw this account down or up based on performance through life. Our participation in the “prosperity futures” markets can come from this, after age 14 or something.

        I really think all people just need to start with something of their own of value, something to trade. Not just be saddled by their daddys debt or rewarded with their daddys incredible luck.

        Merry Christmas