Pets? ...Pets???

My play-by-play on a foolish idea in yesterday's Parade magazine:

A Tax Break for Pet Owners

Animal shelters across the country have reported a sharp surge in abandoned animals, many cut loose by owners who can no longer afford to care for them. Now, Rep. Thaddeus McCotter (R., Mich.) has introduced a bill that would use the federal tax code to help.

Sad, the sharp surge in abandoned animals. Odd, that Rep. Thaddeus McCotter (R., Mich.) has introduced a bill to use the federal tax code to help relieve the sadness.

The idea behind McCotter's plan is that when people "can no longer afford" something, tweaking the tax code can help. I do agree we need to change the tax code. But all sorts of changes are possible, and not all of them are improvements. McCotter's bill is not an improvement.

Individual Responsibility

Some topics are difficult to discuss. This is one of 'em.

"People don't take responsibility for their actions."  Those are not my words; they are common words. That is what makes the topic difficult to discuss. There is a magical power, a holiness to the words, and anyone who brings the subject up but doesn't use the right words is gonna be in trouble.

Do I lack the words?

I take responsibility for my actions. Most people do, I think, though I am no judge of character. But I don't care about that.

I care about the economy. About understanding the economy. About fixing what's wrong with it. It fascinates me. It's a big, complex system that needs to be tweaked. I have a tweak that no one else has thought of. And I want people to think about it. But some other time, maybe. That's not what this post is about.

Some people say we should use gold for money. To them I say: Go ahead. Use your gold for money. I'll accept gold as payment. I don't think I'll use it for payment myself, but you can. You think it's the right thing to do. So, go ahead. Do the right thing. Take the initiative.  Individual responsibility, and all that.

What's wrong with this picture?

Questions from Aaron

Recent email from my son Aaron:
What should individuals do to reduce the 'credit per dollar' numbers you're talking about? I think you've laid out what govt. could do to help... So perhaps some practical guidelines would be good for the simple folks... (something about 'ask not what your country can do for you...').

How does one calculate their own 'credit per dollar'? Or for a business?

Is there one 'number' that we could come up with to compare individuals or businesses (or countries or what not) as far as this measurement goes? Or locate where this problem is growing the fastest? Or compare yourself to the average? Is this done already?



My reply:

> What should individuals do...?

There are lots of people and businesses and churches offering advice on how to get out of debt. But the problem only grows worse.

I am (apparently) the ONLY person who thinks our excessive reliance on credit is due not to individual behavior, but to ECONOMIC POLICY.

I (alone) am not talking about how people, or government, should be more frugal and cut back and eliminate waste. I am saying that policymakers misunderstand the cause of inflation, and as a result of this misunderstanding they have established bad policies and pursued them far too long.

(Actually, the policies were not always bad. But as a result of policy, the economy changed. And after it changed, a different policy was needed.)

How does an individual help? That is like asking: How does an individual change economic policy? The only answer I have for that is, you have to understand that policy is the source of the problem. When enough people understand, the problem will go away.

(Beating a dead horse.) Meanwhile, as long as policy-makers fail to understand that RESTRICTING the quantity of spending money while ENCOURAGING spending is a policy whose useful life has passed, they will continue to cause sluggish growth and "structural" inflation.

Substantial Friedman

Milton Friedman is famous for having said "inflation is always and everywhere a monetary phenomenon." Indeed, he makes much of it in Money Mischief: "I believe I first published the statement in these words in Friedman (1963)," he writes. And in his preface he makes the statement the "central thesis" of his book.

Sometimes, though, writers leave out a word here and there. I do. In my previous post I wrote, "The tweak shows that money increased more quickly than prices." What I meant was, "The tweak shows that 'the quantity of money relative to output' increased more quickly than prices." Taken literally, the difference is significant. But extra words weigh down the thought and make it more difficult to toss and catch.

Writers leave out words sometimes. Friedman left out the word substantial. Not every time. But enough that the lighter phrase caught on. People say, "Inflation is always and everywhere a monetary phenomenon." Friedman said "substantial inflation is always and everywhere a monetary phenomenon." He even put it in italics.

Milton Friedman's Mischief

On the left is a scan of one of the graphs from Milton Friedman's book Money Mischief; on the right is a tweak of that scan.  [Regarding the tweak...]

For the figure on the left, I moved the "Figure 3" label to the bottom and reduced the size of the text below the "Figure 3". Otherwise this figure is not retouched.

In the figure on the right, I moved the label, reduced the text, and shifted the "money" line up so that the two lines start at the same level. That makes it easier to compare the trends. And I erased the Y-Axis labels because shifting the trend line makes those labels incorrect. (These tweaks were all done in Paint.)
The tweak shows that money increased more quickly than prices. Funny -- that's not what you might expect. If printing money causes inflation, the two lines should travel together. They don't.

Thoughts at Three A.M.

Up, up, and away...

It seems to me there are three basic reactions to the apparent shift in Fed policy that can be seen in this graph. First is the view that printing money causes inflation and, basically, we're doomed. This view leaves no room for discussion.

Then there is the view that maybe they're not all idiots at the Fed. As the lender of last resort, the Fed resorted to an unprecedented increase in the quantity of money to deal with an emergency. And when the time is right, the Fed will withdraw that money and defuse the inflationary outcome.

There is plenty of discussion related to this view. How will they know when the time is right? How will they withdraw the money? What is the exit strategy? How successful will it be? Will we avoid some or much of the inflation that we expect?

That discussion spills over to the fiscal side of policy. Is the stimulus working? Is it big enough? Is it too big? Was it even needed in the first place?

And then there is the third view.

Taylor Rule - Equation Discussion

Sometimes I discuss these topics with my son Jerry. This is one of those times. He got back to me after taking a look at the Taylor Rule. He makes very good sense of it...

Disarray

Thanks for the update, Kevin.

Blinder:

"Unfortunately, macroeconomics has been in utter disarray since the Keynesian consensus broke down in the 1970s."

Heilbroner:

"Keynesianism was the economics of the world from around 1940 through the 1970s, but in the 1960s and 1970s came this extraordinary and quite unexpected inflation. And that took the bloom off the [Keynesian] rose. The Keynesian schema, which had tremendously wide acceptance, had no theory of inflation.... Since then, no new view that anyone can agree on has emerged, and there has been a vacuum in terms of a defining picture of what the hell economics is.... In the history of economic thought there has never been such a prolonged period of intellectual disagreement."

Not heard much on the topic lately. Until today. In a comment on Scott Sumner's Does macro need a paradigm shift?, Kevin Donoghue wrote:

So in my view you can only expect to see agreement on what tight money means when there is agreement on the appropriate model. That seems to be much farther away than it was in the 1970s when students could look at papers by Tobin and Friedman and say, what’s the argument about, the length and variability of lags, is that all? Fine tuning bad, coarse tuning good. There was a mainstream then, with only Austrians and Post-Keynesians and suchlike outside it. There is no mainstream now....

Not yet, Kevin. I'm workin' on it.

The Reliance on Credit

Where are we?

Following the Secret Economist's Altig link brought me to this:

Scratch any gathering of macroeconomists these days and out will bleed a steady stream directed at incorporating credit and financial market activity into thinking about the aggregate economy. The necessity of proceeding with that work was emphasized by no less an authority than Don Kohn, vice chairman of the Federal Reserve Board of Governors, speaking at just such a gathering of macroeconomists last week:

"It is fair to say, however, that the core macroeconomic modeling framework used at the Federal Reserve and other central banks around the world has included, at best, only a limited role for the balance sheets of households and firms, credit provision, and financial intermediation. The features suggested by the literature on the role of credit in the transmission of policy have not yet become prominent ingredients in models used at central banks or in much academic research."

I will admit that economists were not exactly ahead of the curve with this agenda, but prior to 2007 it was not at all clear that detailed descriptions of how funds moved from lenders to borrowers or how short-term interest rates are transmitted to longer-term interest rates and capital accumulation decisions were crucial to getting monetary policy right.

So, What's the Problem?

This is amazing.

If you look up "Taylor Rule" in Wikipedia, this is what ya get:

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the by U.S. economist John B. Taylor in 1993.

There's more, but I got scared off by that big, ugly formula.

Well check it out! it also says this:

Uses of such a rule include systematically fostering price stability and full employment in reducing uncertainty and increasing credibility of future actions by the central bank

This is totally amazing. The inflation problem is solved. The unemployment problem is solved. Plus, problems I don't even know about: The uncertainty problem is solved. And the credibility problem is solved.

The only problem that remains? Idiots. Either the people that use the Taylor rule, or the ones who posted that joke, or me for not getting it. Pro'bly me.