Wednesday, September 2, 2015

Things Keynes did not say

Bill Mitchell:
In Chapter 24 of The General Theory of Employment, Interest and Money, Concluding Notes on the Social Philosophy towards which the General Theory might Lead, John Maynard Keynes confronted the issue of the “arbitrary and inequitable distribution of wealth and incomes” in capitalist economies. The argument he advances in that Chapter of his 1936 book contains guidelines for the progressive left that some just cannot seem to grasp. In short, governments (as our agents) do not need the savings of the rich to ensure that society prospers.

Wow. I never quite got that from Chapter 24.

I stopped reading Bill Mitchell's post at that point, and went back to Keynes. I re-read the whole of Chapter 24, with Mitchell's statement in mind. I found something relevant to Mitchell's opening. Turns out, it is the same that Bill Mitchell quoted. I shorten it and split it in two, here:
Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation .... Many people would wish to see this process carried much further, but they are deterred ... partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity.

In other words, we have sometimes used taxation to reduce the inequality of income. But not often and not much, because we thought the economy needed the saving of the rich in order to grow.

We thought wrong, Keynes says.
... But ... we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it... Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.

In other words, Keynes says he has shown that the economy does not need the saving of the rich in order to grow. (Except in conditions of full employment, of course.)

Okay. So I think, when Bill Mitchell says "Governments do not need the savings of the rich" (in the title of his post) I think he means the economy does not need the savings of the rich. That makes sense to me.

From the full title of Bill Mitchell's post

Governments do not need the savings of the rich, nor their taxes!

I originally thought he meant that governments can just print the money they need; they don't have to get it by borrowing or by taxation. My impression of Mitchell is that he is liable to say that. Keynes, of course, most definitely did not say that.


Mitchell follows his Keynes quote with these remarks:

In other words, the high saving of the rich actually undermine the capacity of the economy to achieve full employment and if they spent more then the government would not have to spend as much to achieve that aim.

Yeah, exactly.

And these remarks:

But the idea that these savings were essential to fund government spending and could be accessed by taxing the rich was clearly understood by Keynes to be flawed reasoning.

Oh. Mitchell *is* thinking in terms of taxing the saving of the rich "to fund government spending", and how this is not necessary. And he is putting those words into the mouth of Keynes -- things Keynes did not say.

Sunday, August 30, 2015

Must-Re-Think: Yes, you do need to rethink this.

... a strongly negative natural real safe rate of interest (there’s at mouthful!) will cause sigificant problems ...

Brad DeLong seems to be a first-draft blogger: as if he has no need, ever, to go back and check his work... to fix a spelling mistake... to get rid of the extra words that muddy his meaning... to use a goddamn comma once in a while. None of that.

I don't often read the guy, because I have to fight with his sentences to figure them out. Even his titles are too long. I'm looking at Must-Re-Read: Paul Krugman: Secular Stagnation, Coalmines, Bubbles, and Larry Summers.

DeLong's post is about "a division in the ranks" among economists who agree with him on what the problem is. The division arises when it comes to a solution:
Some of us–Rogoff, Krugman, Blanchard, me–think our deep macro economic problems could be largely solved by the adoption and successful maintenance of a 4%/year inflation target in the North Atlantic. Others–Summers, Bernanke–do not.

If these guys are offering solutions, and their solutions don't agree, then maybe they ought to check their work: Re-Analyze the problem to see what the problem really is. And then come up with a solution.

Anyway, the solution offered by "some" of them -- Rogoff, Krugman, Blanchard, and DeLong -- is to double the target rate of inflation, and hit that target.

I don't like it. The problem is not that prices are too low.

Oh, hey. "Inflation" -- defined as an increase in the general level of prices (where "the general level of prices" by definition includes the price of labor, or wages, so that inflation lifts all boats) -- inflation erodes debt. Inflation encourages spending. Inflation is associated with growth. All of that.

No shit. But the problem is not that prices are too low.

"When economists write textbooks or teach introductory students or lecture to laymen, they happily extol the virtues of two lovely handmaidens of aggregate economic stabilization -- fiscal policy and monetary policy." - Arthur Okun

When I went back to school for a course in Macro in the '70s, I learned we had two goals and two policies. The policies were monetary and fiscal. The goals were price stability and economic growth.

I am embarrassed for economists. They once knew our goal to be price stability. Now they know it as inflation stability and argue about where to stabilize it. Oh my god. Milton Friedman must be turning in his grave. Maynard Keynes must be turning in his.

DeLong opens his post with a conflict: Some economists agree [with him] that higher inflation will solve the problem. Some don't.

Delong presents his view: "our deep macro economic problems could be largely solved" by higher inflation. But he does not describe the opposing view, except to say that those who hold it reject his view.

According to DeLong, the opposing view is that there will still be "sigificant [sic] problems even if 4%/year inflation allows a demand-stabilizing central to successfully do its job". Did you notice? DeLong does not attempt to understand (or even to state) the opposing view. He only restates his own view -- and adds negativity.

He could still try to understand the other side's position, of course. But instead, he tries to explain why his inability to understand their view bothers him so:

I would have said that my mental model of Bernanke thought is very good. And I would have said that the sub-Turing evocation of Summers that I am currently running on my wetware is world-class

I did say tries to explain.

That is all that there is of DeLong's contribution to the post. (It's just as well, really.) The rest of the post is made up of excerpts from those who share his view. You know: Rogoff, Krugman, Blanchard, DeLong. Oddly, the excerpts come from Paul Krugman, Gavyn Davies, Paul Krugman, and Jared Bernstein.

Well, DeLong is right about one thing: I did have to re-read his post. Here's why: In his introductory paragraphs, DeLong admits to being disturbed by disagreement between two groups. The DeLong group holds that higher inflation will solve the problem. The other group holds it will not.

"My failure to comprehend why they think this disturbs me," he says.

Maybe he means he is coming around to their point of view. Wow! It's pretty well hidden, if that's what he means. But let me tell you why I think that might be the case.

In the first excerpt, Paul Krugman says "I very much fear that [Larry Summers] may be right."

In the second excerpt, Gavyn Davies says if the other guys are right, inflation won't solve the problem: "... the problem of under-performance of GDP will last for a very long time, and will not solve itself through flexibility in prices"

In the third excerpt, Krugman favors higher inflation, but still has doubts:

One answer could be a higher inflation target, so that the real interest rate can go more negative. I’m for it! But you do have to wonder how effective that low real interest rate can be if we’re simultaneously limiting leverage.

In the fourth excerpt, Jared Bernstein favors higher inflation, but still has doubts:

I’m totally with the program re getting the real interest rate down… But I’m nervous that it might not be as effective as historical correlations would suggest.

In those excerpts together, there is as much doubt as support for a policy of 4% inflation. So I think DeLong is telling us he's having second thoughts. Soon, he will abandon the DeLong group.

In his first paragraph he's firmly in favor of 4% inflation as a solution to "our deep macro economic problems". In his second paragraph he is disturbed by other views. In the rest of the piece, he dwells on the fears, worries, concerns, and doubts of others. Brad DeLong is preparing to change his views on the effectiveness of higher inflation as a solution.

My respect for Brad DeLong just hit a record high.

But listen, Brad, buddy, we don't have time for this. We're six years into the sinkhole. You gotta get your act together.

I want to take bits and pieces from the excerpts DeLong provides, to see if I can come up with something he might have missed.

Krugman(2): "When the Minsky moment came, there was a rush to deleverage; this drove down overall demand for any given interest rate, and made the Wicksellian natural rate substantially negative, pushing us into a liquidity trap…"

When the Minsky moment came, there was a rush to deleverage, Krugman says. But I suspect we knew the Minsky moment had come because there was a rush to deleverage. It's not like the Minsky moment came and then we all said let's get out of debt now. The Minsky moment is just the name for that moment when there's a rush to deleverage.

Other than that, Krugman's statement is one long trail of theory. See how he takes an actual event -- the rush to deleverage -- and buries it in layer after layer of theory? It drove down demand... it made the natural rate negative... it created a liquidity trap. This is as good an example as I have ever seen of an economist who needs to go back and rethink the problem: First see what the problem really is. Spend a lot of time on that. Then consider solutions.

Krugman's thought process doesn't start with deleverage. It starts with the liquidity trap. It starts with his conclusion.

Krugman(1): "The underlying problem in all of this is simply that real interest rates are too high…. The market wants a strongly negative real interest rate, [and so] we’ll have persistent problems until we find a way to deliver such a rate."

What the market wants is to be out of debt. Remember the rush to deleverage? Stop focusing on negative real interest rates and other elegant claptrap. Focus on facts.

As of this moment, we're still not ready to rush back into leverage. That's why we still have large output gaps and no evidence of price pressures.

Bernstein: "Many years post-panic, we still have large output gaps and no evidence of price pressures. The zero-bound is constraining Fed policy..."

Fuck the zero bound. That's not the problem. It's a result. Many years post-panic, we still have large output gaps and no evidence of price pressures because we're still delevered.

From mine of 22 September 2012:
The problem is not that prices are too low. The problem is that growth is too slow. There is only one correct focus, and it is to understand the reason growth is slow.

For the record, as long as economists continue to dismiss out of hand the possibility that excessive private sector debt is the reason growth is slow, economists will continue to fail to understand slow growth.

Maybe that's confusing. I just took a lot of your time to tell you the rush to deleverage was the problem. Then I say excessive debt is the problem. Do you see how those pieces fit together?

The excessive private sector debt was the cause of the rush to deleverage. When the excessiveness of it finally hit home, deleverage was the only option left. Excessive debt was the problem that caused the deleverage problem that caused the negative real rate problem that caused the liquidity trap problem. That's how the pieces fit.

Okay. But I also said growth is slow because debt is excessive. But it's the deleveraging that slowed things down. How do those pieces fit?

Gavyn Davies: "The normal route through which monetary policy works, by bringing forward consumption from the future into the present, is unlikely to be successful… There will still be a shortage of demand when the future comes around".

Bringing forward consumption from the future into the present is accomplished by spending future income in the present. In other words, by the use of credit.

We have policies to encourage the use of credit. Indeed, as Gavyn Davies says, that is the normal route through which monetary policy works. (Tax policy also encourages credit use, through tax deductions.) These policies accelerate the use of credit.

We have policies to accelerate the use of credit. But we have no policy to accelerate the repayment of debt. Therefore, debt accumulates to unnatural and excessive levels. The cost of that debt hinders economic growth, fosters the growth of finance, and drives the inequality of wealth and income.

Yadda, yadda, yadda, and rather than raising interest rates to fight inflation, policy must accelerate the repayment of debt to fight inflation.

Thursday, August 27, 2015

Brad DeLong's Freudian Slip

From Must-Re-Read...
... economists who I think have some idea of what the elephant in the room us.

Tuesday, August 25, 2015

Where's the Explosion?

The blue line shows the rate of change in the Federal debt.

The red lines are calculated trends for the periods 1948-1965, 1965-1984, and 1984-2000.

In which period did the "explosion" of debt occur?

Monday, August 24, 2015

The Federal Debt Graph with a Constant-Growth-Rate Denominator

I was saying Noah's picture of debt growth is distorted by a wandering denominator: by a GDP that suffers from a variable and inconsistent rate of increase.

It occurs to me that we could get a better picture of debt growth by faking the GDP numbers. Rather than using actual values, we can calculate a set of values that approximate the GDP numbers, but are based on a constant rate of growth.

I didn't do any of that "least squares" crap or anything like. I just picked 1947 for a startpoint and 2000 for an endpoint, and figured out a constant growth rate that would get me from the 1947 GDP number to the 2000 GDP number. It is completely subjective (or arbitrary, really) and if you know how, you could probably come up with a better series of constant growth rate values. Meanwhile, I got what I got and I'm going with it.

Graph #1
Graph #1 shows actual (often called "nominal") GDP in red, and my constant-growth-rate numbers in blue. You can see that the lines cross some time around the year 2000. (Exactly in the year 2000, actually, as that year was one of the defining points of the blue curve.) By design, the lines also cross in 1947, though we would have to "zoom in" to see it clearly.

The lines also cross around 1977, but this is not because I pinned them together at that point. Actually, that is information the graph gives us. (That is the reason for making the graph!) Now, looking at those three crossing points, we can say the red line runs below the blue for some years before 1977, then above the blue until the year 2000, then again below the blue.

In more familiar terms, we might say GDP growth was less than average before 1977, above average from 1977 to 2000, then again below average. Obviously this is not correct. It is the result of picking 1947 and 2000 as my arbitrary start- and end-dates. If I had picked 1966 or 1973 as an end-date, the whole rest of the blue line after that date might have been above the red.That would have been a better look at economic growth.

But the purpose of this exercise is not to find the point that economic growth began slowing. The purpose is to approximate the GDP we actually got, using a constant rate of growth. For that purpose, the blue line looks about right to me, up to 2007 anyway.

You with me? Do not imagine that Graph #1 shows periods of better-than-average and worse-than-average growth. It does not.

Saturday's post showed this comparison of growth rates for actual GDP (red) and the Federal debt (blue):

Graph #2. Click Graph for FRED Source Page
It is pretty easy to see that the Federal debt jumps up above GDP growth just after the 1982 recession. But if you take a second look you might notice that the red line wanders upward until the late 1970s, which makes the simultaneous increase in the blue line appear less significant. And then the red line wanders downward for 20 years or so, making the increase in the blue line look more significant. The changes in actual GDP contribute to making the change in Federal debt seem like a sudden increase that occurs after 1982.

Like Noah, we are deceived.

The growth rate of actual GDP varies, as the red line on Graph #2 shows. The growth rate of my "constant growth" GDP does not. This approximate measure (the blue line on Graph #1) has a constant annual growth of about 7.25%. Plotted on a graph, the growth rate is a flat (horizontal) line.

I took the numbers I used for Graph #1, worked out the annual growth rate values for them, and made a new graph:

Graph #3
The proportions of Graph #3 differ from those of Graph #2 but, that difference aside, the blue lines on the two graphs are the same. (Both blue lines represent the growth of Federal debt.) But on Graph #3, I show the growth rate of the "constant growth rate" GDP approximation. A flat, red line near the 7.25% level for the full period shown on the graph.

On Graph #3 it is pretty easy to see that the Federal debt jumps up above GDP growth just after the 1974 recession. That's the 1974 recession, not the 1982 recession. It is now quite obvious that a sudden increase in Federal debt growth occurs some eight years earlier than we thought!

The difference is not due to any changes I made to the blue line. I made no such changes. I only changed the red line from a wiggly worm to a constant (average growth rate) value, so that the red line does not obstruct our view of the blue line.

Almost done.

We've been looking off-and-on lately at a picture of the Federal debt relative to GDP, this FRED graph from Noah:

Graph #4: The Federal Debt Relative to GDP
It shows the Federal debt relative to a wiggly worm. According to our Graph #1 above, the wiggly worm ran low in the years before 1977, and then high till the year 2000. Running low before 1977, it makes the Federal debt look falsely high. (Low as it is in those years on Graph #4, it is falsely high.) Running high between 1977 and 2000, it makes the Federal debt look falsely low.

I'm saying that the growth of Federal debt was less than we think in the years before 1977, and more than we think in the years after. We are deceived. Why are we deceived? Because we think of the Federal debt in comparison to the wiggly path of actual GDP.

But now we can fix that. We can use the "constant growth rate" approximation of GDP in place of actual GDP. This will give us a version of Federal debt relative to GDP that is similar to Graph #4, without the distortions arising from variations in GDP growth.

Graph #5, below, shows in red the same "relative to actual GDP" data that we see on Graph #4: In particular, the red line shows the increase beginning around 1982, the increase Noah calls "the explosion in U.S. government debt".

The blue line on #5, which shows the same Federal debt but shows it relative to the "constant growth rate" approximation of GDP, shows that increase beginning around 1975. That is the same difference we noticed above, comparing Graphs #2 and #3.

The Federal debt, relative to actual GDP (red), and relative to a constant-growth approximation of GDP (blue):

Graph #5
The two lines are very similar. That says the two measures of GDP are very similar. And we would want that to be true, so we can have confidence in the approximation.

But the two lines also differ. In the years before 1977 the blue line is lower. In the years between 1977 and 2000, the blue line is higher. But look also at the transition from downtrend in the 1960s to uptrend in the 1980s. The red line (using actual GDP) hits bottom around 1974 and runs flat until 1982, and then suddenly starts on its upward journey.

We know that, of course: Noah pointed it out.

The transition from downtrend to uptrend is different for the blue line. It is earlier. Instead of going suddenly flat in 1974 like the red line, the blue line begins its uptrend there. That uptrend is definitely stronger after 1982; so if you were wanting to blame Reagan for the big increase in Federal debt I guess you can still do that. But 1982 is not where the uptrend starts. Not for the blue line. Not for the Federal debt.

And the only difference between the red and blue lines is that the red line is shaped by vagaries in both debt growth and GDP growth. The blue line is not. The blue line is the better measure of Federal debt growth.

And the postwar increase in Federal debt growth started before 1982.


The Excel file at Google Drive

Sunday, August 23, 2015

And you thought Milton Friedman wasn't funny!

Milton Friedman:
The price system is the mechanism that performs this task without central direction, without requiring people to speak to one another or to like one another.
- Free to Choose, Chapter One

Saturday, August 22, 2015

Oh, no. This again?

If you look at Noah's graph of debt relative to GDP, it certainly looks like the big increase started around 1982:

Graph #1: Noah's Graph

Noah's graph shows the Federal debt as a percent of GDP. I called up GDP (red) and the Federal debt (blue) as two separate series, and looked at the growth rates for those two series. Sure enough, the blue line is way up high in the 1980s:

Graph #2. Click Graph for FRED Source Page
But that's not the only thing I see. The blue line is way up high in the 1980s, and it is way down low in the 1950s and into the mid-1960s. It was low before the mid-1960s, and high after the early 1980s.

From the mid-1960s to the early 1980s, the blue line, debt growth, changes from very low to very high. Between the mid-60s and the early '80s, the growth of debt went from low to high. So it doesn't make sense to me that Noah says a deficit explosion began after the early 1980s. The explosion started in the mid-1960s and ended in the early 1980s. Noah has it wrong.

And if you look at the blue line on Graph #2, yes, debt growth reaches a high point in the early 1980s. But the trend was downhill from that moment to the year 2000.

Why does Noah's graph show increase beginning arount 1982? Why does it show the debt essentially flat all through the 1970s, while Graph #2 shows increasing debt since the mid-1960s?

Well, because Noah's graph does not show debt. It shows debt divided by GDP. That's not the same thing. Graph #2 shows the growth rates separately, so that we can better evaluate what we see on Noah's graph.

On #2 the blue line runs below the red for almost all the years before 1982. Then, the blue line runs above the red for almost all the years since 1982. So the Federal debt was growing more slowly than GDP before 1982, and faster than GDP after 1982.

This transition, this change that happened around 1982, affects the appearance of Graph #1. It pushes the debt-to-GDP ratio lower before 1982, and higher afterwards. This is one of the reasons Noah thinks he sees an "explosion" of deficits beginning in the early 1980s. There was a decrease in the growth of GDP. Noah has it wrong.

Friday, August 21, 2015

DEF: Inflation

I was going to find Milton Friedman's definition of inflation. I thought that would be a good place to go next. But before I even got started, I got email from Greg. If you leave a comment on the blog, I get it as email so I don't miss it. And Greg left a comment on the blog:

Actually Art inflation is most commonly defined as a sustained rise in the general price level over time.

So there ya go. That's pretty much word-for-word what I was attributing to Friedman. I'm still looking for that one. But meanwhile, I found this from Investopedia:

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power... When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a $1 pack of gum will cost $1.02 in a year.

Okay. Except a pack of gum is still a nickel, right?

The company did not raise the original five cent price of a five-stick package of Wrigley's Spearmint, Juicy Fruit, and Doublemint gums until 1971. Management reluctantly did so by creating a seven-stick package and charging a dime for it.

Oh. Never mind. Come to think of it, I probably haven't bought gum since the 1960s.

Thursday, August 20, 2015

Four Measures of Inflation, and Five Interest Rates

The inflation measures are blue. The Interest rates are red.

The one causes the other? They move together?? They don't??? What do you see? I'll tell you what I see. I'm not nit-pickin it. Just a quick look.

On the way up, in the 1960s and 1970s, rising inflation snuck up on inflation expectations and closed the gap with interest rates. We didn't expect the inflation we were getting.

On the way down, in the 1980s and 1990s, falling inflation again surprised inflation expectations, and the gap with interest rates grew. We didn't expect the disinflation we were getting.

Doesn't say much about the relation between interest and inflation, does it?

Says a lot about expectations, though.