Saturday, August 23, 2014

Chapter 3, Part III, Paragraphs 1 and 2

The idea that we can safely neglect the aggregate demand function is fundamental to the Ricardian economics, which underlie what we have been taught for more than a century. Malthus, indeed, had vehemently opposed Ricardo’s doctrine that it was impossible for effective demand to be deficient; but vainly. For, since Malthus was unable to explain clearly (apart from an appeal to the facts of common observation) how and why effective demand could be deficient or excessive, he failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain. Not only was his theory accepted by the city, by statesmen and by the academic world. But controversy ceased; the other point of view completely disappeared; it ceased to be discussed. The great puzzle of Effective Demand with which Malthus had wrestled vanished from economic literature. You will not find it mentioned even once in the whole works of Marshall, Edgeworth and Professor Pigou, from whose hands the classical theory has received its most mature embodiment. It could only live on furtively, below the surface, in the underworlds of Karl Marx, Silvio Gesell or Major Douglas.

The completeness of the Ricardian victory is something of a curiosity and a mystery. It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect, added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and consistent logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

Friday, August 22, 2014

This is how investigation begins

Graph #1
When I look at this graph, I see a period of relative stability, which ended by 1970. After that, a series of downward steps. Each downward step shows a sag in the blue line, a sag that runs from recession to recession. The recessions provide relative high points; but each high point is lower than the last.

I don't see balance sheets. I don't see arguments about how it's really a problem, or really not a problem. I don't see things like that. I see a line on a graph.

Impressions? Sure, I have impressions. My impression is that something is seriously different, before and after 1970. It looks sustainable before 1970, unsustainable after.

I don't think you look at this graph and say "every liability is somebody's asset". That's not an argument; that's a definition.

I think you look at the graph and say Okay, well, the Federal government has been doing something different since around 1970. Best case? Best case, the government has been trying to do good for us, pumping money into the economy, trying to make things better. You know: the "Keynesian" thing.

Thursday, August 21, 2014

Federal government net worth relative to GDP, and the Federal debt

Well, I was just going to go with this graph today:

Blue line = the Federal government "net worth" data (from yesterday's graph) converted to billions and divided by GDP.

Red line = Federal debt as a Percent of GDP, expressed as negative values.

But after the responses to yesterday's post, the above seems inadequate. So I tracked down the data behind the "Federal Government Net Worth" graph. I googled Table S.7.q and got to the BEA Integrated Macroeconomic Accounts for the United States page. They list several tables with an "a" suffix (annual) and a "q" suffix (quarterly). Table S.7 in both cases is "Federal government" data.

I'm only looking at annual data as the file is a lot smaller. And only the most recent values -- which is 2012, for some reason. Also, I'm deleting the first 95 line items from the file, to get to the "Changes in balance sheet account" part.

Total assets (line 96) 4626.9 billion dollars. Not far off from the 4 trillion Greg noted in comments yesterday.

Total liabilities and net worth (line 128) also 4626.9 billion. But the liabilities (line 129) are 15245.9 billion, and the net worth (line 145) is -10619 billion.

That's more than enough detail for me.

Wednesday, August 20, 2014

Federal government; net worth (IMA), Level

The units are a bit confusing. The units (in the left side border) are given as "Millions of Dollars". And the lowest number on the vertical scale is given as -12M. That's 12 Million in the hole. But it's not twelve million dollars. It's twelve million million. 12 Trillion in the hole.

But you probably knew that.

Tuesday, August 19, 2014

Effective Demand


Small Business by Demand Media:

What Is the Difference Between Demand and Effective Demand?

by Ronald Kimmons, Demand Media


Demand is the term that economists use to describe the ability and willingness of buyers to purchase a product or service. This is a general term that takes a number of issues into account, such as buyer income, buyer perceptions and buyer needs. Demand is a market force opposite of supply, which is the ability and willingness of producers and service providers to provide products and services on the market. This general idea of demand is often called notional demand, which is composed of both latent demand and effective demand.

Latent Demand

Even if a buyer needs or would be willing to purchase a particular product or service, he cannot do so if he lacks the necessary funds or if he does not know about that product or service. This portion of market demand is called latent demand. The importance of latent demand is that it presents an opportunity to firms to increase revenue by investing in marketing efforts or introducing low-cost products.

Effective Demand

Effective demand is a representation of the actual amount of goods or services that buyers are purchasing in a given market. Effective demand is the difference between notional demand and latent demand. Effective demand is a reflection of the extent to which buyers' income, perceptions and needs combine to result in an actual purchase rather than a mere desire to purchase.

In recent comments at Angry Bear I said to Ed Lambert:

I would suggest again that what you are measuring is potential demand, not effective demand.

Lambert replied:

The term “effective” implies a limit. So it is better than “potential”. But the terms are very close.
Potential output has been surpassed many times, but not effective demand. Effective implies the top limit.

I refer you to the definitions above, from Google and Ronald Kimmons. I still think "potential demand" is the better name for the work Lambert is doing. But of course, I might misunderstand him.

Here's my problem: If I can't get clear on what he's looking at, I can't even begin to understand what he's saying. He's definitely not looking at effective demand as defined by Google and Ronald Kimmons.


A year back, at Angry Bear, I wrote:

I’m thinking Lambert’s “effective demand” is really a kind of POTENTIAL DEMAND. After all, Lambert says “The best way to think about effective demand is the unused capacity of demand in the economy.” What he is describing is demand in an economist’s perfect world, just as Potential output is a measure of real output in that perfect world. Though even that perfect world is far from perfect.

Lambert, your explanations help. But your use of the words “effective demand” troubles me because I think it differs from Keynes’ use of those same words, and from Adam Smith’s words “effectual demand”… both of which refer to the amount of money people actually spend.

Back then, Lambert himself wrote:

if unused supply of labor and capital is high, potential demand is going unfilled. Think of effective demand as potential demand. Yet potential demand is constrained by labor share of income.

Effective demand is demand backed by purchasing power. I think Potential demand is a measure of the most that effective demand could be. I think Lambert is doing Potential demand. And I think it might be real genius. But effective demand is something different.

Monday, August 18, 2014

Bad Debt Expense

Corporate bad debt expense:

Graph #1: Corporate Bad Debt Expense
It just goes up more and more and more. But look at it on a log scale. There is a straight-line increase from the 1940s to 1990:

Graph #2: Corporate Bad Debt Expense, on a Log Scale
After 1990, the increase of bad debt slowed.

I find it most interesting that this graph shows no acceleration in bad debt. The graph shows no upcurving trend anywhere between the late 1940s and 1990. It shows a constant rate of increase, despite the growth of debt.

Sunday, August 17, 2014

The Net Worth of the Financial Sector

From Wikipedia:
The net worth of the United States and its economic sectors has remained relatively consistent over time. The total net worth of the United States remained between 4.5 and 6 times GDP from 1960 until the 2000s...

The net worth of American households and non-profits constitutes three-quarters of total United States net worth - in 2008, 355% of GDP. Since 1960, US households have consistently held this position, followed by nonfinancial business (137% of GDP in 2008) and state and local governments (50% of GDP in 2008). The financial sector has hovered around zero net worth since 1960...

That last sentence there, this is the complete thought: The financial sector has hovered around zero net worth since 1960, reflecting its leverage... But the article has already defined net worth as assets less liabilities, so do we need the explanation embodied in those three extra words? Eh...

For me, the key bit of information is that the financial sector has approximately zero net worth.

Next, from the Dallas Fed, working paper #161 from 2013: Is the Net Worth of Financial Intermediaries More Important than That of Non-Financial Firms?...

Oh, that's funny. At the Dallas Fed, the working papers are in a "documents" folder, which is in an "assets" folder:
One can see the central banker's mind at work. But I wonder, do they also have a "liabilities" folder?

... by Naohisa Hirakata and Nao Sudo of the Bank of Japan, and Kozo Ueda of Waseda University. From the abstract:

Our model, which is calibrated to the U.S. economy, highlights two features of the FIs’ [financial intermediaries] net worth. First, the relative size of FIs' net worth as compared to entrepreneurial net worth, namely, the net-worth distribution in the economy, is important for the financial accelerator effect. Second, a shock to the FIs' net worth has greater aggregate impact than that to entrepreneurial net worth. The key reason for these findings is the low net worth of FIs’ in the United States.

In other words, the low net worth of the financial sector magnifies the effect of a shock; and a shock to the financial sector has a greater impact than a shock to the productive sector.

From the conclusion of that paper:

Our results have policy implications regarding the intensified Basel bank regulations that have progressed after the financial crisis. In those regulatory frameworks, the FIs' net worth is expected to play the pivotal role in achieving the financial stability. Along this line, our results suggest that the regulatory framework that protects banks' net worth from irrational exuberance or that fosters accumulation of banks' net worth may be beneficial from the macroeconomic stability purpose.

Mmm. I don't like this. "Basel" is BIS, the Bank for International Settlements. It's a Friend of the Bank sort of thing. But why would we trust bankers to solve this problem? Did we learn nothing from the crisis?

Look what bankers want to do: They want to protect banks' net worth, and foster its accumulation.

I would rather solve the problem by having governments provide more money, and have each dollar of that money turned into fewer dollars of credit than is the case today. I want to reduce the reliance on credit, and increase reliance on the dollar.

I want to reduce the demand for credit and, in so doing, reduce the demand for a financial sector. If we do this, then boosting banks' net worth might help solve the problem. If we do not, then boosting banks' net worth only hastens the day when banks own everything and we are no longer fremen but coloni and slaves.

Saturday, August 16, 2014

Oh, this is precious

I was looking for "Goldilocks economy".

Dated 22 November 2007, from Lawrence Kudlow at Real Clear Politics:

November 22, 2007

Three More Years of Goldilocks?

By Lawrence Kudlow

There was some revealing information in the three-year forecast published by the Federal Reserve this week. It looks like Ben Bernanke & Co. are dissing high oil and gold prices and the sagging dollar as influences on future inflation. Instead they basically see 2 percent inflation -- both headline and core -- in 2008, 2009, and 2010. The Fed also sees Goldilocks-type economic growth -- not too hot, not too cold -- for the next three years.

For 2008, an election year, the Fed is looking at 2.1 percent growth, their lowest estimate. This rises to 2.5 percent in 2009 and 2010.

So how did the Fed's GDP growth prediction work out?

One out of three.

But it gets better. Kudlow offers his own predictions and analysis:
I think the election-year economy will be stronger than the Fed's estimate -- closer to 3 percent. Too much is being made of both the sub-prime credit problem and the housing downturn. A recent Bank of England study shows that residential mortgage-backed securities in the U.S. total $5.8 trillion. Of that, only $700 billion, or 12 percent, are sub-prime. Even when you add in $600 billion of so-called Alt-A mortgage paper, most of which will not default, the total of these home loans is still less than 20 percent of all mortgage-backed paper.

What's more, the entire market in sub-prime debt is just 1.4 percent of the global equity markets. On any given day, a 1.4 percent drop in world stocks would erase the same amount of value as the collective markdown of all sub-prime-backed bonds to $0. It's just not that big a deal.

"It's just not that big a deal," Kudlow says.

You never know.

Friday, August 15, 2014

...because people don't spend money at night?

Yesterday I wrote:

That's a favor policymakers did for banks, not counting the sweeps. But it makes M1SL an unrealistic number.

I don't like to say anything so unequivocal without backing it up (unless I've already backed it up several times. (See? I can't even be unequivocal about that!)).

Sweeps. Jim said:

The way I understand it in 1994 the banks were allowed to change the way they figured the data that goes into computing M1. Banks were allowed to shift the money from accounts that were less active from checking to savings for reporting purposes. Doing this lowered their reserve requirements.

Lowering their reserve requirements is the "favor" that policymakers did for banks.

As for making M1SL "an unrealistic number" I turn to the link Jim provided: Sweep Programs.

Sweep programs create distortions between reported data on the monetary aggregates and accurate measures of the money stock.

I would love to quote that whole page, it is so good. But the whole thing is only three paragraphs, so taking one sentence is taking a lot.

They also provide this reference:
Cynamon, Barry Z., Donald H. Dutkowsky, and Barry E. Jones. "Redefining the Monetary Aggregates: A Clean Sweep." Eastern Economic Journal, 2006, vol. 32, issue 4, pages 661-673.

Barry Cynamon's name is one I recognize. The site is Sweep-Adjusted Monetary Aggregates for the United States, and I (for one) don't go there often enough.