At Heteconomist, links to the Keen / Krugman Dialogue on Minsky.
From Keen and the first post in the exchange, Steve Keen says "Krugman ... reassures his blog readers that there’s nothing to worry about when private debt levels rise or fall", and quotes Krugman as evidence:
People think of debt’s role in the economy as if it were the same as what debt means for an individual: there’s a lot of money you have to pay to someone else. But that’s all wrong; the debt we create is basically money we owe to ourselves, and the burden it imposes does not involve a real transfer of resources.
"Does not involve a real transfer of resources."
But if you think of finance as a factor of production (like land, labor, and capital) then it is immediately obvious that an increase in debt is an increase in finance at the expense of the other factors! As Simon Johnson wrote,
It is surely not a good idea for finance to account for 40 percent of total corporate profits ... [S]uch performance, in an intermediate input sector, suggests someone else in the economy is being severely squeezed.
In other words, there *is* a real transfer of resources from the "nonfinancial" sector to the financial sector. And now, in Philippon's work we see an attempt to tally that cost. We see in Philippon the wages and profits accruing to finance -- part of GDP -- counted apart from the wages and profits of the nonfinancial sector.
Certainly, finance's share contributes to Gross Domestic Income and to the cost of production. But the role of finance is facilitation, not production. So the growth of finance offers no guarantee that output will increase along with the cost of output.
When finance grows beyond its Laffer Limit -- when it assumes an excessive share of the nation's profits or wages -- the result can be that costs increase faster than output. In a word: inflation.
In the Arthurian view, excessive finance was the root cause of inflation during the "Great Inflation". Finance has been excessive since the mid-1960s.
In the Arthurian view, excessive finance was the root cause of inflation during the "Great Inflation". Finance has been excessive since the mid-1960s.
ReplyDeleteThen you must also explain how and why inflation has fallen dramatically over the last 30 years, while the finance share has grown dramatically.
Cheers!
JzB
Well, you know about that, Jazz. It's the policy changes since about 1980, the changes you focus on all the time. those policy changes were put in place specifically because of the inflation (or, inflation was the door that opened enough to let those policies get in).
ReplyDeleteI am still trying to solve the problem that was incorrectly solved by supply side economics.
OK. I applaud your efforts. But what makes you think that excessive finance caused inflation?
ReplyDeleteWhat the supply-side canard has given us is generally lower GDP growth, and simultaneously less inflation.
http://research.stlouisfed.org/fredgraph.png?g=6by
(Inflation translated up by 3% to align the curves.)
Meanwhile, finance share has grown apace.
JzB
NICE graph! And you can see that the alignment is very good, except before 1970. And you can see the trend-change in inflation, mid-1960s.
ReplyDeleteBut what makes you think that excessive finance caused inflation?
Occam's razor.
The long-standing explanation of inflation begins by blaming the Viet Nam war, and "guns and butter" excessive demand. Then there is a moment when prices go up during a recession, and nobody had an explanation. And then it was supply shocks. Oil at first, then everything, including toilet paper and Cabbage Patch dolls.
I on the other hand say there was a growing cost that was first (1965-1980) accommodated by Fed policy. And then (1980+) policy changed to deal with the problem (by suppressing income and encouraging the accumulation of wealth).
My explanation is MUCH simpler: it depends only on growing financial cost, and policy.
Occam's razor.