Saturday, January 30, 2010

I Love My Job

I get to sit at a desk, use AutoCAD all day, and draw. (And they call this work!) And I create little utility programs in VBA, hook them up to toolbar buttons, and use those buttons to make my job faster and easier. Maybe not everybody would like this job. But I sure do.

I don't work for a company that makes drawings. I work for a company that makes stuff out of wood and metal parts. My job is to find out what the boss wants, or what the customer wants, and translate that into something useful for the guys in the shop, the guys who create the stuff we sell.

My job, really, is to make it faster and easier for the company to produce the stuff we produce. I don't produce the stuff myself. I facilitate production.

You have to know by now. This post is some kind of analogy. Yep: I'm like the finance industry, producing paper that helps the work get done.

In our economy we have the productive sector and the finance sector. The finance sector is like me, producing paper that facilitates production. The productive sector is like our shop, where the real work gets done.

My boss could decide to close the shop, and produce drawings for other companies instead. That would make our company like... like the Cayman Islands, say, where the only industry is finance. Some companies do that. But not every company can do it. If nobody's making things, then nobody needs the paper.

There has to be balance between production and facilitation, production and finance. If too many guys are making drawings in our economy, some will go out of business. That's the "invisible hand" at work.

But the invisible hand doesn't seem to work for finance. When Ford makes more money financing cars than it does making cars, it's a sign that finance plays too big a role.

For some reason when we get too much finance, finance becomes more profitable than production. This draws more people and more money into finance and makes the imbalance bigger. The imbalance grows until it is unsustainable.

And then you get a financial crisis.

If this is true -- if the imbalance between finance and production creates serious economic problems -- then there must be a Laffer Limit for finance. There must be a point at which continuing to do the same thing begins to have the opposite effect.

There must be a best point, or a best range, where we have just the right balance between finance and production. That is the point where finance facilitates the most production. Increase finance a little more, and the cost of finance begins to add too much to the cost of doing business. And then economic growth will be less than expected -- except in the finance industry.

I couldn't begin to guess what the perfect-balance point would be. But I know we have too much finance per unit of production. So I say set a target: shoot for cutting debt by half. Shoot for cutting finance in half. Simon Johnson of The Baseline Scenario says the same. He thinks finance should be about 4% of GDP, not 8% as it is today.


Secret Economist said...


Great idea! But how do you go about implementing the target? Are you thinking we should increase the taxes on the financial sector? Limit entry by permit? Restrict asset classes?

It seems to me the last might be the best.

But I am not sure.

The Arthurian said...

Hello SE,

Wow, I don't even know what "restrict asset classes" means. But the other two options you list sound like micromanagement of the credit supply. Thumbs down to that.

I would leave the supply side alone. To reduce the growth of debt, I would tweak the demand side. Reduce the demand for credit-use by accelerating the repayment of debt. Maybe that sounds like it would be bad for growth. But it doesn't have to be.


Secret Economist said...

But still, how do you tweak the demand side. Remove the interest deduction on debt? I don't mind lowering debt levels -- I think it is inevitable -- but how you do it seems to matter.

Restrict asset classes was short hand for restricting both the source of funds for banks and bank-like entities and restrict the types of investments they can make.


The Arthurian said...

SE, I remember a clear statement from your post of May 8, 2009:

"The global economy cannot return to health until households have worked off at least part of their excess debt. So far they have made little progress."

Since reading yours, I have seen several statements about the need to reduce debt. I have three ways to do it:

1. The normal-economy plan: Accelerate the repayment of debt.

At present, we have no policy that encourages the repayment of debt.

Carrot AND stick is probably better than carrot OR stick. But I don't see the stick -- elimination of the remaining interest deductions (mortgages, business interest) -- as politically or economically viable today.

The carrot: Give people a tax break for making an extra payment or two (or three) on their existing debt. The objective here is not to reduce debt to some particular level, but simply to create a downtrend in the "debt per dollar" ratio. If this plan had been put in place 25 years ago, our economy would be in good shape today.

2. The crisis-economy plan: Reduce debt by direct action.

In a world where people believe it necessary to significantly reduce debt before recovery can happen: Let the Federal Reserve print another trillion, and use it to pay off debt for people. A trillion dollars divided by 300 million people is over $3300 per person, or $10,000 for a family of three. That much debt-reduction, undertaken with military efficiency, would end the slump quickly.

The Federal Reserve is hindered by the gold-world notion that it must get something in exchange for its money. If we're in an economic emergency caused by excessive debt, the Fed should reduce debt without worrying what it gets for its newly-printed dollars.

3. The perfect-world plan: Disrupt the credit cycle.

Replace variable interest rates with variable tax rates. My goal is to take the national, unified effect of rising interest rates and break it down to the level of the individual. If I borrow a lot to expand my business, my tax rate should go up in some proportion. That would be an incentive for me to pause my expansion for a couple years while I work off some debt, to get my tax rate down again.

That would give my competitors a chance to grow. It's good for competition. The way things are now, I can just borrow to buy up the competition.

I like this plan because it disrupts the national, unified credit cycle, which is a driving force behind the business cycle. I think we can use this idea to eliminate credit-driven business cycles.


Secret Economist said...

I like the combination of carrot and stick. I think the first step should be removing all subsidies for interest -- no more homeowners deduction. Then, add sales tax to interest payments. Credit is a service so charge sales tax on the payments.

Then force banks to raise capital primarily through deposits. This reduces the wedge between deposit rates and lending rates (while at the same time raising both) and encourages savings.

The Arthurian said...

Ouch! What part of that is the carrot?

I think existing conditions are the result of existing policy. Unintended consequences of policy.

We accumulate debt because all our policies encourage it. If this is true, it is a guide to the kind of solution we need.

Secret Economist said...

Sure, it's hard. but the interest subsidies are a big part of the problem. They are a distortion that encourages debt.

I guess you are right. I don't think I am in favor of carrotts here.