Tuesday, October 31, 2017

Yves on UBI


From Ilargi: Is Capitalism Dead or Merely Dying? at Naked Capitalism:
Yves here...

As readers know, we also are not fans of a universal basic income. First, if it were high enough to provide even for a subsistence living, it would be massively inflationary. That means it would at best be a stipend that would wind up subsidizing businesses, since it would allow them to pay lower wages. It would also be used to cut/end existing targeted programs, which are often far more generous to populations with specific needs. Second, it would reduce recipients to being mere consumers, held in contempt by supposedly more productive people. That also means, like the Speenhamland system, it would be at risk of being ended abruptly and displacing people who had long been largely or entirely out of the workforce and would not be able to find sufficient employment.

Monday, October 30, 2017

"Steady economic growth continues"


At Econbrowser: Steady economic growth continues, by James Hamilton. The title says it all.

Well, the title says most of it. There is also this:

U.S. real GDP grew at a 3.0% annual rate in the third quarter. That is close to the long-term historical average of 3.1%, and better than the 2.1% we’ve seen on average since the Great Recession ended in 2009.

And this:

The U.S. remains clearly in the expansion phase of the business cycle.

So that's all good.

No doubt Hamilton's blog-buddy Menzie Chinn has also noticed the improvement in GDP growth. I wonder if Chinn remembers his old Making American Growth Great (by Spaceology*) from January of this year:

From the Trump-Pence website:
DONALD J. TRUMP’S VISION

Boost growth to 3.5 percent per year on average, with the potential to reach a 4 percent growth rate.

Menzie said growth in the 3.5-4% range was "unlikely". I wonder what he'd say today.

Sunday, October 29, 2017

Looking at John Taylor's stuff


I found a link in my URL dropdown to John Taylor's Take Off the Muzzle and the Economy Will Roar. Great title! It's a little creepy to read, what with references to "Lucy and Susan" and The Lion, the Witch and the Wardrobe. But Taylor can write a powerful sentence, and he makes good graphs. So.

Take off the Muzzle links to Taylor's Slow economic growth as a phase in a policy performance cycle (PDF, 7 pages, here referenced as Policy). Another great title. There is a little sleight-of-hand, too: In a list of economists offering "evidence that the poor performance of the economy during the past decade—the Great Recession and the Not-So-Great Recovery—is largely due to poor economic policies", Taylor lists himself twice! He gets away with it because of that wonderful "Great Recession and Not-So-Great Recovery" line, and because he's not listing economists but rather references to their works. Still, in the writing, Taylor says:

While debate over the question is raging among economists, many, including [list] have offered evidence ...

His sentence calls for a list of economists. He provides a list of references.

When someone has the ability to write really well, you have to look askance at the writing. You have to overlook the good writing and concentrate on the discussion of economic forces. I've said that before, about Krugman. It applies to John Taylor as well.

Muzzle also links to Can We Restart the Recovery All Over Again? (PDF, 4 pages, here called Restart). This one I looked at before. That accounts for Muzzle showing up on my URL dropdown list.

"Economics and history," Taylor says, "tell us that changes in economic policy lead to changes in economic performance." Ayep. The trick is reading the tea leaves. Taylor's own read of those leaves is not in doubt. In Muzzle, for example, he says

To turn the economy around we need to take the muzzle off, and that means regulatory reform, tax reform, budget reform, and monetary reform.

John Taylor calls for reform, reform, reform, and reform. It's a complete list that tells us nothing. Reminds me of a glug I heard on MSNBC the other day: Trump has been telling his people to "talk about tax cuts, not tax reform." Whatever. Taylor offers a more informative version of his list of reforms in Restart, where he says

In my view, economics and history also tell us which policies produce good performance: tax reform to lower tax rates on people and businesses and thus reduce disincentives to work and invest; regulatory reforms to scale back and prevent regulations that fail cost-benefit tests; free trade agreements to open markets, entitlement reforms to prevent a debt explosion and improve incentives, and monetary reform to restore predictability and create output stability along with price stability.

Now that is a complete list! But of course when John Taylor writes of "preventing a debt explosion" he is talking about government debt, not private debt. Private debt didn't make his list. It's almost like there was no financial crisis.

And whyingodsname do people insist on thinking that the only way to "reform" taxes is by lowering the tax rate? I've said over and over that we need to create incentives to pay off private debt faster, as a way to reduce the imbalance created by existing incentives that encourage the use of credit. My plan has nothing to do with raising or lowering tax rates. You could use reduced rates as an incentive to pay off debt; that would be a good way to do it. But the important thing is to reverse the existing incentives that encourage the accumulation of private debt.

What affects people personally is tax rates. I get that. But what damages the economy as a whole is having policy that encourages credit use, without also having policy that encourages repayment of debt. We need to prevent the excessive accumulation of debt that occurs when the use of credit increases.

Good grief! There is so much more to consider than just tax rates.

Friday, October 27, 2017

Fair coin, foul outcome


From the Mathematics of Inequality article I quoted yesterday:

This is essentially a coin toss, and you might think that in the end both sides would end up with the same amount of wealth. But it turns out those who have more keep getting more. Even if both agents have the same wealth to begin with, one will eventually begin to dominate the other, even though the coin is fair.

Yeah okay, but I wanted a better explanation. I Googled yard sale model. The first hit was The Growth of Oligarchy in a Yard-Sale Model of Asset Exchange: A Logistic Equation for Wealth Condensation (PDF, 15 pages) by Bruce Boghosian, same guy. The idea quoted above is restated in his PDF:
In the absence of any kind of wealth redistribution, Boghosian et al. proved that all of the wealth in the system is eventually held by a single agent. This is due to a subtle but inexorable bias in favor of the wealthy in the rules of the YSM: Because a fraction of the poorer agent’s wealth is traded, the wealthy do not stake as large a fraction of their wealth in any given transaction, and therefore can lose more frequently without risking their status. This is ultimately due to the multiplicative nature of the transactions on the agents’ wealth, as pointed out by Moukarzel.

So: In any exchange of two equal values, the wealthier party puts a smaller percentage of his wealth at risk than the other guy. The worst outcome for the rich guy is not as bad as the worst outcome for the poor guy. Now, play this game over and over again. Even if the odds are even, the rich guy stands to do better.

Into a spreadsheet, so I can see if I believe this story.


Something else in the article has me confused. What is this "transfer of wealth" that occurs independent of the exchange of equal values? How much is it? Again, from the article:

A simplified version [of the Yard Sale Model] goes something like this: Two people enter into a series of transactions, and both have the same probability of winning some amount of wealth from the other, just as in a free-market transaction.

What is this "small amount of wealth" -- slop in the connection? A dollar's worth of money exchanged for a dollar's worth give or take of stuff? And the better or luckier or wealthier dealmaker (or all of these in one) ends up with the difference?

Maybe that's it. The article quotes economist Michael Ash, who refers to "mutually acceptable, apparently equal exchanges" (emphasis added). Apparently equal, but there's a little slop. Okay, that's good enough for now.

For my spreadsheet I figure there is a poor guy who starts out with wealth equal to 100 and a rich guy who starts with ten times as much. I figure a transaction equal to 10% of the poor guy's wealth, and a wealth transfer equal to 10% of the transaction amount. I don't pretend these numbers are realistic. I just want to see how they work out. Does the wealthy guy always get the slop? I want to see this for myself.

I set up different scenarios. First, the rich guy always wins the wealth transfer:

Graph #1: The Rich Guy Always Wins
The blue line shows the rich guy, who begins with 1000 units of wealth. His wealth climbs to 1100 as the poor guy's wealth drops from 100 to zero. By eye, that transfer of wealth is complete after about 400 transactions. (The numbers on the horizontal axis indicate the number of transactions.)

On this graph, with each transaction, one percent of the poor guy's remaining wealth is subtracted from his total and added to the rich guy's total. The rich guy wins every time.

On the next graph, the guy we call the "poor guy" always wins the wealth transfer:

Graph #2: The "Poor Guy" (the one who starts out poor) Always Wins
The guy we call the poor guy starts out poor, but ends up with more wealth than the guy we call the rich guy. This time the so-called poor guy's wealth grows from 100 to 1100, while the so-called rich guy's wealth falls from 1000 to zero.

By eye, on this graph the transfer of wealth is complete after less than 250 transactions. The transfer happens faster on this graph than on Graph #1. Why? Because the transfer is one percent of the wealth of the guy we call the poor guy, but that guy doesn't stay poor. As the transfer of wealth continues, the amount lost by the so-called rich guy becomes bigger and bigger. So the "rich" guy's wealth evaporates quickly.

I finessed the calculation, and made another graph. On the next graph, one percent of the wealth of whichever guy is wealthier gets transferred to whichever guy is less wealthy:

Graph #3: The Actually Poorer Guy (whichever one is poorer) Wins
The transfers of wealth bring the rich guy's number down and the poor guy's number up until they meet. After that, the transfers take from the guy with a little more, and give to the guy with a little less. This causes the red and blue lines to stabilize around the 550 level.

Finally, the next graph shows the "fair coin" example that the article is about. It shows what happens when the rich guy and poor guy take turns receiving the transfer. The blue line shows a relentless increase in the rich guy's wealth. The red line shows an equally relentless decline in the poor guy's wealth:

Graph #4: Alternating Winners (rich guy, poor guy, rich guy, poor guy ...)
The blue wealth begins at 1000 (low side of the left end of the blue line) and rises to just below 1005 (low side of the right end of the blue line; find the value on the left-hand scale).

The red wealth begins at 100 (high side of the left end of the red line; find the value on the right-hand scale). It falls to just over 95 (high side of the right end of the red line, again on the right-hand scale).

After a thousand transactions the wealthy guy's wealth increases by approximately five wealth-units, while the poor guy's wealth decreases by the same amount. Remember, the wealthy guy receives the wealth transfer for the first, third, fifth, and all the odd-numbered transactions. And the poor guy receives the transfer for the second, fourth, sixth, and all the even-numbered transactions.

Okay, I accept the claim made by the article, that even using a fair coin, "without redistribution, wealth becomes increasingly more concentrated, and inequality grows until almost all assets are held by an extremely small percent of people." In this model, at least.

But why (you may ask) why are those lines so thick? I didn't know, either. So I cropped off the left and right sides of the graph, just keeping the middle section where the lines cross. I zoomed-in on it to get a better look:

Graph #5: A Closer Look at the Thick Lines for the Alternating Winners
You can see here that the "thick" red and blue lines are actually made up of thin lines that zig-zag rapidly up and down. We can say each "zig" is a transaction where the wealthy guy receives the transfer. And each "zag" is a transaction where the poor guy receives the transfer.

The "top edge" of the "thick" blue line is really the sequence of values that trace out the wealth position of the wealthy guy after he receives the transfers. The "bottom edge" represents the wealth position of the wealthy guy after the poor guy receives the transfers. (The thick red line represents comparable values for the poor guy.)

If you look at the position of a thin "zig" line relative to the one just before, the later line is just a very little higher (or a very little lower) than the earlier line. That tiny difference is the "slop" that causes wealth to concentrate.

The thin lines show that after each consecutive pair of transactions, there is almost no change in either guy's wealth. But transactions occur all the time. And the overall result of very many very tiny transfers of wealth, given enough time, turns out to be a very large transfer of wealth. Reminds me of Richard Prior in the Superman movie, turning rounding-errors into huge amounts of money.

But it's not just one guy doing it. It's everybody involved in transactions, and all the transactions. And it turns out that those who have more keep getting more. And without redistribution, wealth becomes increasingly more concentrated, and inequality grows until almost all assets are held by an extremely small percent of people.

The Mathematics of Inequality It's an interesting concept.


Woke up early again. I get it now.

Consider a two-transaction sequence. On average in a two-transaction sequence, because the coin is fair, the rich guy and the poor guy should each win one of the wealth transfers. There are two ways this can happen:

1. The rich guy wins the first transfer, and the poor guy wins the second. Or
2. The poor guy wins the first transfer, and the rich guy wins the second.

If the rich guy wins first, the first transfer reduces the poor guy's wealth. So the second wealth transfer is smaller. The poor guy loses the larger transfer and wins the smaller one. Therefore, his wealth is reduced.

If the poor guy wins first, the first wealth transfer increases the poor guy's wealth. So the second wealth transfer is larger than the first. The poor guy loses this larger transfer. Therefore, his wealth is reduced.

Either way, the poor guy loses.

Poor guy!

// The Excel file

Thursday, October 26, 2017

Bruce Boghosian and the Cycle of Civilization


Why do we trade? Mutual advantage. One guy has a dollar, but would rather have a dollar's worth of stuff. Another guy has a dollar's worth of stuff, but would rather have a dollar. So they trade.

To the one guy, the stuff is more valuable than the money. To the other guy, the money is more valuable than the stuff. Who is right? Time will tell.

Via Reddit, at Tufts Now: The Mathematics of Inequality by Taylor McNeil:
Bruce Boghosian, a professor of mathematics, ... ran across a description of a mathematical model of market-based exchange, the Yard Sale Model. A simplified version goes something like this: Two people enter into a series of transactions, and both have the same probability of winning some amount of wealth from the other, just as in a free-market transaction. Because people cannot lose what they do not have, the amount of wealth that can be won or lost is constrained to be a fraction of the wealth of the poorer of the two agents.

This is essentially a coin toss, and you might think that in the end both sides would end up with the same amount of wealth. But it turns out those who have more keep getting more. Even if both agents have the same wealth to begin with, one will eventually begin to dominate the other, even though the coin is fair. ...

“Without redistribution of wealth, our market economy would not be stable,” said Boghosian. “One person would run away with all the wealth, and it would keep going until it came to complete oligarchy.”

And even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result,” Boghosian said.

Putting aside ethical issues of growing inequality, it can also create an unhealthy economy, Boghosian said. “That’s because when wealth concentrates and the middle class is depleted too much, you may get very wealthy industrialists, very wealthy manufacturers, but to whom do they sell their products? It locks up the economy,” he said. ...

“Bruce’s work on asset exchange pushes the boundaries of conventional economic models,” said Michael Ash, professor of economics [at the University of Massachusetts at Amherst]. “In an elegant and straightforward framework, Bruce demonstrates that, contrary to the conventional model, radical inequalities can be rapidly generated from mutually acceptable, apparently equal exchanges—a reasonable approximation of many financial transactions. This is a remarkable and thought-provoking result” ...

Thought provoking? It woke me up in the middle of the night. Been a long while now, since econ woke me up.

By the way, the name Michael Ash should set off bells in your head. Thomas Herndon? ... Reinhart and Rogoff? ... The Excel error? Yeah, Michael Ash was one of Thomas Herndon's professors.


What if "mutual advantage" is an incorrect assumption? What if trade is only mutually advantageous under certain circumstances. Maybe it works like a chain letter, such that the early participants have a fair chance of making huge gains while the later participants have a good chance of making huge losses. In a zero-sum game like the chain letter, the losses and gains are equal.

> The economy is not a zero-sum game. At least, not always.

Sure, but maybe "zero-sum" is not "the certain circumstance" that matters. Bruce Boghosian is working out the circumstances with his economic models. I'm laying out a concept. The concept is that "mutual advantage" is one phase of a trade cycle. Or that there are times when mutual advantage leaves both parties better off, and there are times when it leaves only one of the parties better off. The other guy gets the best deal he can get, but it still leaves him worse off. Sort of like dealing with Sears.

What woke me up was the sudden thought that trade goes all the way back in human history. There has always been trade. There is always this force at work, concentrating wealth. And here's the thing: When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. But when wealth concentrates faster than it grows, you get the downswing.

If you read me, you can guess where my mind takes these thoughts: A cycle ... since the beginning of human history ... measured in the concentration and distribution of wealth: A cycle of civilization.


Yeah, but trade is mutually advantageous!

Or, maybe "mutual advantage" is an illusion. No, not an illusion, but a fact that happens to be true only sometimes.

The pre‐eminent theorists of mutual advantage are Thomas Hobbes, David Hume, and Adam Smith ...

Maybe in the time of Hobbes and Hume and Smith, the growth of wealth was at its fastest, relative to concentration. And then after that, the 150 years that Keynes called "the greatest age of the inducement to investment" was the crest of the "wealth grows faster than it concentrates" era, from Adam Smith to World War One, say. After that, it was all downhill.

Nobody likes to think in terms of a cycle of civilization, but Boghosian's work is Cycle of Civilization stuff. The cyclic nature of it explains the fact that the post-Roman economy advanced as far as it did before the concentration of wealth started to give us "the end is near" chills.

How does that work again? Oh, yeah: If the growth of wealth outpaces the concentration of wealth, times are good; otherwise, not. I think that statement is a version of Piketty's r>g equation.

Time to wake up!

Tuesday, October 24, 2017

Lucas critique?


Wikipedia:
Lucas critique
From Wikipedia, the free encyclopedia

The Lucas critique, named for Robert Lucas's work on macroeconomic policymaking, argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.

... it is naive to try to predict the effects of a change in economic policy ...

Predict the effects?

It is naive to try to predict the effects? Let's not worry about predicting the effects of policy. Let's worry first about figuring out which direction policy should go. Historical data, especially highly aggregated historical data, is extremely well-suited to that task.

Should we, for example, further encourage the use of credit in the private sector? Historical data, especially highly aggregated historical data, can provide an answer.

The answer is: no.

Monday, October 23, 2017

not to fix our economic troubles, but to fix the underlying causes of those troubles


At the Guardian: Why nudge theory works until a kick in the backside is needed by Andrew Rawnsley.


We live in a time when government seems to have the Sadim touch: everything politicians lay their hands on turns into the opposite of gold. So it is a pleasant surprise when a significant piece of policy affecting the futures of millions of people is working as intended.

Many folk park pensions in that segment of the brain where they keep things they know to be important, but find boring. Many folk would prefer to spend any surplus income today rather than save it for tomorrow. As a result, Britain has a serious problem. Its citizens are saving far too little for their retirement.
Note Andrew Rawnsley's assumption that people have "surplus income". Things booming in the UK, are they? Is aggregate demand pushing the limits of supply, what with people spending all that extra money?

Maybe people are "saving far too little" because they are earning far too little. Maybe the income of Britain's citizens is lagging, like in the States. If so, the "nudge" is not the solution.
Five years ago, the government did something to try to remedy this. It changed the way in which workers make pension decisions by introducing auto-enrolment. Where previously employees had to take a series of steps to opt into a company pension, now you are automatically signed up unless you actively choose to opt out. This subtle-sounding switch has had a rather dramatic result. More than eight million people have started saving for the first time, which means they also receive a pension contribution from their employers.
It is not a subtle switch. It is massive manipulation.
That still leaves many unwilling or unable to save enough for their older age ...
See? Inadequate income. And to the extent that the "saving too little" problem was solved, it was solved by forcing "nudging" people's current standard of living down, or by forcing people more into debt. Or both.

I say it every time, and I'll say it again: If there is an economic problem, you have to look into the past to determine how that problem came about, and the thing you find going wrong in the past is the thing you have to fix. You don't fix inadequate saving by tricking people into saving more. That doesn't solve the real problem. You have to solve the inadequate income problem.
... but it is a substantial advance that we now have nearly 40 million people, a record number, in workplace pensions. Hurrah. A government policy that is working.
Hurrah?

Andrew Rawnsley is nudging his readers, telling them how to react to being manipulated by the government. And he is changing the subject in order to do it, from "inadequate income" to "the government works".

What did the government do that worked? They tricked millions of people. That's not something to be proud of.

Hey, I'm not saying it's bad that more people are saving. I'm saying it's bad to fool people into doing things. I'm also saying it's bad to solve the wrong problem. If fewer people save because fewer people have surplus income, then the problem is not inadequate saving, but inadequate income.
This policy success is in part a tribute to the influence of Professor Richard Thaler, the pioneer in behavioural economics, whose work has just been recognised with the Nobel prize.
Oh, okay. That guy's a dick. I didn't know.
One of his many insights is that people do not always behave in their own best interests.
Who makes that decision? And, who watches the Watchers ?
Human beings are, well, human. This might not be a complete shock to you or me, but it was a challenge to classical economic theories that assumed people were always rational actors. From this observation, he developed an argument that nuanced changes in the “choice architecture” of society can trigger desirable shifts in behaviour.
The "choice architecture" of society. That's an oxymoron, no? Like "jumbo shrimp"?

No, it goes beyond oxymoron. "Choice architecture" is doublethink.
His “nudge theory” was seized on by politicians, especially liberal ones in the west. They were attracted to the idea that their citizens could be induced to make wiser choices without clubbing them over the head with coercive, nannying and opposition-arousing legislation.
Yeah: They get people to make "wiser" choices by tricking them. The wiser choices, of course, being the ones the Watchers want.
Barack Obama’s White House got extremely excited about nudge theory. David Cameron set up a behavioural insights team at the Cabinet Office, which was nicknamed the “nudge unit”. The timing was important. Nudge, the bestseller written by Thaler and Cass Sunstein, was published in 2008, the year of the Great Crash.

It is almost certainly not a coincidence that the theory became popular with politicians and other decision-makers when their countries were being crunched by recessions and money was tight. This created a big appetite for low-cost solutions to public policy challenges.
Low-cost solutions to public policy challenges. In other words, "nudge" was a good fit with "austerity". That would be good thing, manipulation of people aside, it would be a good thing, if only austerity was the right solution to the economic problem. Which, of course, it is not.

Given what is now known about what in earlier times was still the future, policymakers should look back over economic history and rethink policy and its consequences. Instead, the plan now is the same as always: Look at today's problems as if they have no history, and cough up solutions like the nudge.
Nudging appeared to offer easy ways of reforming society without committing to large spending programmes. Nudge units were put to work in countries as diverse as Australia, Germany and Japan.
This sort of thing comes up often: Australia and Germany and Japan use the same solutions that are applied in the UK and the US and elsewhere. I think the point of the argument, typically, is that all these nations have the same problems. What that does for their argument, I don't know. As I see it, these nations share problems precisely because they share solutions. Their solutions create most of their problems.

Policy exists to change the economy. If the economy has changed, the first place to look for the cause of the change is policy.

All you need is a policy that's designed to fix a result rather than the underlying cause, and suddenly you have a bad policy. That's why I say we have to rethink existing policy in light of the results we get. We must make policy not to fix our economic troubles, but to fix the underlying causes of those troubles: not inadequate saving, for example, but inadequate income.
The concept was also embraced by international bodies such as the UN and the World Bank. Nudge became one of the most globally influential ideas among policymakers.
Deceiving millions of people the world over, and pissing me off.
Nudge has also gone rampant in the market place. The Fitbit on your wrist is a nudge device.
I don't have one.
The calorie count on food packaging is there to tilt you to healthier eating options.
I don't read it.
It was once a novelty to find a notice in a hotel bathroom asking you, “dear guest”, to consider whether you could reuse the towel. It is now unusual if you are not greeted with a winsome plea to think about the planet. The hotel is doing a little bit for the environment and, of course, saving on its laundry bill.
Of course, saving on its laundry bill. Otherwise they wouldn't do it.
You know you are being nudged, you know why and you probably don’t mind. I don’t.
Well, I do.
I did mind going through Gatwick the other day where the only route from security to the gate was a long and snaking forced march through miles of “duty-free”. Well, it felt like miles. This did not make me want to fill my boots with the ciggies, spirits, choccies and fragrances. It made me want to walk faster.
So Andrew Rawnsley does mind, after all.
The application of nudge theory in politics has been a similarly mixed blessing. When it works effectively, it does so because it exploits human weaknesses for human benefit. It is a frailty of many of our species to procrastinate. Turning pension contributions into an opt-out rather than an opt-in uses inertia to achieve a desirable end.
... to achieve a desirable end, by manipulating people.
Another winning example is organ donation. In countries where there is a presumption of consent unless the deceased has declared against donation, organ availability has shot up. No one has been deprived of a freedom.
No one has been deprived of a freedom?

Organ donation is a good thing, I'll give you that. So let's use a different example: human cloning. A lot of people don't like the idea of human cloning. So what if the government wanted to do human cloning and was hindered by the ignorance of people who don't like it? What could they do?

They could change a default somewhere in the fine print on some form, so that support for human cloning becomes the default.

No one has been deprived of a freedom, right?
You can still decide that you prefer to take all your bits with you to the grave. But you have been influenced to make a different choice that is more beneficial to society.

In truth, nudging was being practised by artful governments long before it was given a name. The pre-eminent example of that is smoking policy.
Yup.
The tobacco habit is highly addictive and deadly, so government could decide to make it illegal. Which would be a terrible idea, because a blanket ban would criminalise millions of otherwise law-abiding citizens and provide a massive opportunity for organised crime to create an underground market. So instead, successive governments have used the nudge.
Yup.
First, TV advertising of cigarettes was prohibited. Then, all advertising was banned. This was followed by a stop on the open display of cigarettes in shops. Now fags have to be wrapped in packaging plastered with pictures of horrible diseases. One of the best and cheapest contributors to the improvement of our nation’s health is the prohibition on smoking in public places, which was introduced by Tony Blair’s government. That decision tore apart his cabinet.
As well it should.
Some ministers feared a furious backlash from the millions of voters who would no longer be able to puff away in pubs and restaurants. As it turned out, it was introduced with minimal fuss. Predicted pub riots by fuming smokers never materialised. You are part of a small and eccentric minority – and probably also a member of Ukip – if you still think it was a bad idea to end smoking in restaurants and pubs. You are part of a smaller, and frankly weird, minority if you think smoking should still be allowed on trains and planes, in cinemas and at football stadiums and on the London underground.
I smoked during my college years, and after. I quit on my 30th birthday... almost 40 years ago. I'm glad I don't smoke, and I'm healthier for it, I imagine. Once in a while, though, I'll walk past someone who is just lighting up, and it still smells good.

All that aside, manipulating society in that way is just plain wrong.

Oh, and you can that tell Andrew Rawnsley is a propagandist, because he brings up UKIP just to make it look bad.
A big reason for this policy success is that it has gone with the grain of human desires. You’d expect that ban to be attractive to non-smokers. It has worked because it wasn’t opposed by smokers. Most nicotine addicts want to quit. Importantly, it wasn’t a total ban. You can still smoke, so long as you don’t mind going outside.
Yeah, and "no one has been deprived of a freedom". Unless you want to smoke inside.
That nudge has worked because it guides, rather than compels, folk to go in the right direction.
It doesn't "guide" people. It hoodwinks people.
Nudge doesn’t work when it loses touch with the human factor.
That, too.
A topical example is the trouble the government has got into with the introduction of universal credit. This simplification of the benefits system is founded on the excellent principle that work should always pay: no one should be worse off by deciding to take a job or put in more hours. The implementation is going wrong because it failed to take into account how lives are lived. People on low incomes can be a day’s pay away from not being able to put dinner on the table. So a delay of five weeks or more in paying the credit is an atrocious design fault. Charging up to 55p a minute for calls to the helpline was simply stupid, as ministers have belatedly realised.

This illustrates one of the downsides of nudge. It is highly dependent on the nudgers getting it right and we know that politicians and civil servants are also fallible.
Just like any other economic policymaker.
Just like other human beings, they miscalculate risks, prioritise short-term gratification over long-term achievement and can act irrationally. While technocrats quite often really do know what is good for us, sometimes they don’t, and even the best-intentioned can make bad mistakes. For years, the tax system was used to incentivise drivers to move away from petrol cars and towards diesel vehicles because experts declared diesel to be less harmful to health and the environment. That turned out to be a faulty nudge.

“Liberal paternalism”, the posh label for nudge, assumes that there is an elite that knows what is good for the citizenry.
Yup.
This idea – the establishment knows best – is precisely the one that significant numbers of voters have been rebelling against.
Yup. But Andrew Rawnsley likes the nudge anyway.
One of the more powerful critiques of nudge is that it concentrates on the psychological manipulation of voters ...
Yup.
... rather than properly educating them about choices, and the ultimate effect of this is to infantilise the citizenry.

Experience has shown that nudge is not the miracle cure for every political challenge. Some problems are just too big to be fixed by adjusting the “choice architecture”. Britain’s housing crisis is not solvable with a few tweaks to the tax system and the planning regime.
A few tweaks of the tax system would do the trick, if the tweakers knew what was needed. If they only think they know what's needed, the problems will only get worse.
That won’t be cracked without bolder and stronger measures. Not a gentle hand on the elbow, but a muscular kick up the arse. Nudge has some proved beneficial uses for governing, but it is not the answer to everything. Some things need the push and the shove.


I know it's just his opening, but Rawnsley says we live in a time when everything government does comes out wrong. Everything except the nudge, he says.

Screw the nudge. Rawnsley says we live in a time when everything government does comes out wrong. That's a pretty significant observation. Might want to think on that.

Saturday, October 21, 2017

A tale of two tales



... mathematical models must begin with precise assumptions about economic activity. In great measure, the conclusions and insights offered by the model are restricted or even determined by the initial assumptions.


At HBR: The Great Recession Drastically Changed the Skills Employers Want. Shown here on a light-blue background:

The employment shift from occupations that require mid-level skills toward those at the high and low ends is one of the most important trends in the U.S. labor market over the past 30 years.
"The past 30 years". That brings us back to 1987. Or, say, to the 1980s.

Since the 1980s, some people say, our anti-inflation policy has been to suppress wages. If that is true, then maybe that policy explains the trend the article describes. That, and globalization policy.
Previous research has suggested that a primary driver of this job polarization is something called routine-biased technological change (RBTC), an unfortunate mouthful whereby new technologies substitute for repetitive, middle-skill jobs and complement analytical, high-skill jobs. Think of word processors replacing typists or engineers using AutoCAD software.
Here's a peek at labor income since the Great Depression:

Graph #1
Flat in the 1970s. Trending downward since.

Maybe the Fed is responsible for the decline. Maybe not. Either way, with labor income trending down there is going to be more competition for that particular share of income. But the HBR article manages to tell its story without even noticing the decline of labor income.
Until recently, economists thought of this trend as a gradual phenomenon that didn’t depend much on the ups and downs of the economy.

However, studies dating back to Joseph Schumpeter’s coinage of the term “creative destruction” suggest that adjustments to technological change may be more episodic. In boom times, companies may face adjustment costs that deter them from adapting to technological change. Recessions, in contrast, can produce large enough shocks to overcome these frictions.
A recession is a disturbance in the Force. Recession provides an opportunity for the economy to reorganize itself in response to the pressures created by declining labor income and its consequences.
Whether adjustments to new technology are gradual or sudden is important for policy and for our understanding of economic recoveries.
Note that the article attributes the "employment shift" of the past 30 years to "new technology". Not to the decline of labor income.
The recoveries from the last three U.S. recessions (1991, 2001, 2007–09) have been jobless, meaning that employment was slow to rebound despite recovery in total economic output. If adjustment to new technology is sudden and concentrated in downturns, large numbers of displaced workers may be left with the wrong skills as the economy recovers.
Note that the article attributes the employment shift to new technology, observes that employment shift occurs "in downturns" and recoveries have been "jobless", then makes up a story to explain jobless recoveries, a story based on "new technology". Not on the decline of labor income.

There is more to the article, and they make a good case. And I would not deny that their story makes sense. But I wonder how things might have gone differently if labor income was not in decline for the last thirty-odd years, or if it had continued to increase. And I wonder how their story might have changed, if they had considered declining labor income in the article.

Friday, October 20, 2017

Rethinking the same damn thought


Noah Smith at Bloomberg, same post we looked at yesterday. Noah writes

... economists have known for decades that recessions might not be random, short-lived events, but the idea always remained on the fringes. One big reason was simple mathematical convenience -- models where recessions are like rainstorms, arriving and departing on their own, are mathematically a lot easier to work with.
"Recessions are like rainstorms". Nice alliteration. The phrase reminds me of something I read in The Roaring 80s:

... in the Great Depression, economists wrote about unemployment as if it were a bad hailstorm; then the Keynesian revolution gave some hope that nations could do something about the 'economic blizzards' that had previously been considered as random as the weather.

According to Noah, we're back to random as the weather.
... easier to work with. A second was data availability -- unlike in geology, where we can draw on Earth’s whole history, reliable macroeconomic data goes back less than a century. If economic fluctuations really do have long-lasting effects, it will be very hard to identify those patterns from just a few decades’ worth of history.

Skipping ahead a couple paragraphs:

If the only tools available were the ones that prevailed in 2007, it might be best for economists to simply throw up their hands and declare that the problem of spotting, preventing and fighting recessions is best left to our distant descendants.

But fortunately, this isn't the case. New tools are available that could help shed some light on the processes behind recessions. Now that almost all economic activity is electronically recorded, economists are able to observe much more about the behavior of businesses and consumers than they were even a decade ago.
Notice Noah's implicit assumption that recessions must be the result of people's behavior but general changes in people's behavior cannot be the result of changed aggregate quantities like private debt becoming excessive or financial cost reaching a problematic level.
Better microeconomic data will help researchers make better models of behavior. Those more realistic models -- sometimes called “microfoundations” -- will then be able to replace the old, simplistic assumptions that prevailed in previous generations of macroeconomic theories.

Now that almost all economic activity is electronically recorded, researchers can make better, more realistic models of behavior.

So now it's behavioral microfoundations.

The microfoundations will be better, Noah says, and so the macro will be better. Because everybody knows that what happens in the economy happens because of people's behavior.

What ever happened to the whole is greater than the sum of its parts ?


Remember Milton Friedman's best-remembered thought: Inflation is a monetary phenomenon. If prices are going up, it is because people are willing to pay higher prices for things. So there is behavior involved, to be sure. But if there was no behavior, there would be no transaction and no economy. If you are studying the economy, you are already studying behavior.

The results of behavior show up in the aggregates.

Friedman said that what matters is the quantity of money. That's macro. He did not say what matters is the behavior of the individual spenders. That would have been micro.

After 2007 the Federal Reserve increased the quantity of money several hundred percent. But ten years later, inflation still has not broken the 2% barrier. Was Friedman wrong? I'd say no. I'd say his statement was not general enough. It describes conditions in a "normal" economy, but not the economy of the last ten years.

You could say inflation is a spending phenomenon. You could say it is the spending that influences prices, not the money. I've said as much, myself. And then you could argue that spending is behavior and therefore the need is to focus on behavioral microfoundations. Here, my inclination is different. If spending behavior suddenly changes for the population as a whole, I expect to find the cause in the aggregates. Why? Because people respond to economic conditions, and the aggregate numbers describe economic conditions.

Aggregates are macro. Behavior is not. Behavior is the Brownian motion of gas molecules in a container. Macro is the behavior of a container of gas, measurable conditions like pressure and temperature that do not even apply to individual molecules. Boyle's law is macro.


We go shopping, or we don't. We spend money, or we don't. Only a fool would dispute that. But to insist on building up macro from scraps of human behavior is just so micro, so utterly small-minded. And to suggest that macro can be improved by including "all" the scraps of human behavior in the models, well that is plain ridiculous.

Nor is "all the scraps" a re-evaluation of what economists have been thinking for the past 40 years. It is, rather, a strengthening of commitment to the old "some scraps" idea. Using a more advanced technology to think the same old thought is not a way to rethink macroeconomic policy.

Thursday, October 19, 2017

"Rethinking" vs "shoehorning"


At Bloomberg, Noah Smith's Fixing Macroeconomics Will Be Really Hard jumps around so much on my screen that I'm tempted not to read it. Good subtitle, though: "The field is still reckoning with the failure to see the Great Recession coming."

Noah's article considers the same "Rethinking" symposium that Carola Binder went to and wrote about, which was grist for my mill yesterday. Noah writes:

A presentation by Blanchard and Summers provides a useful summary of how elite thinking has changed. They basically draw three lessons from the crisis: 1) the financial industry matters, 2) government should use a wider array of policies to fight recessions, and 3) recessions can last longer than expected.

Here's my response list:
1. financial cost matters
2. government would do better to focus on observing the causes of recessions, and
3. oh my god, are you kidding me?

Noah also comments on the items on his list. Here's what he says about finance:

In the past few years, macroeconomists have been scrambling to shoehorn the financial sector into their standard models. Of course, there’s always the danger that the Great Recession prompts macroeconomists to focus too much on finance, and ignore whatever leads to the next downturn -- fighting the last war, as it were.

Shoehorn as a verb.

I don't like it that Noah buries the "focusing too much on finance" idea between "fighting the last war" and "of course". The burial minimizes the significance of finance's contribution to the problem.

Beyond that, Noah Smith's thought that economists might "focus too much on finance" tells me Noah has no idea why it's important to focus on finance. Noah and other economists. They know it must be important, because that's what the chatter's been since the "financial" crisis. So they'll "shoehorn" finance in, and it'll look like they have everything under control.

And if they are "shoehorning" finance into their models, then I'd say they are thinking about their models, when really they should be thinking about the economy.

It just won't do.

Wednesday, October 18, 2017

Rethinking


In Rethinking Macroeconomic Policy at Quantitative Ease, Carola Binder asks the key question:

"How could we replace or transform the existing modes of analysis?"


Three policy challenges that Binder identifies in the article:

 • Low inflation and low nominal interest rates limit the scope of monetary policy in recessions
 • “Should policymakers care whether inequality is helpful or harmful for growth?”
 • Stabilization policy [is] disconnected from the ... discussion of inequality and growth

These are current issues: low inflation and low interest rates; inequality; economic growth; and stabilization (by which I assume they mean avoiding the next Great Recession). It looks to me like all these economists at all these conferences are caught up in the current problems of policy.

It seems right that economists should be concerned with current problems because we are concerned with those current problems. But maybe it isn't right. Maybe economists ought to be concerned instead with the historical processes that led to the current problems. Rather than trying to come up with ways to move beyond current problems, they should focus on understanding the original sources of those problems.

That would "transform the existing modes of analysis".

Sunday, October 15, 2017

Notes for David Graeber's Public Inquiry


At the New Statesman: We're racing towards another private debt crisis – so why did no one see it coming? by David Graeber.

Graeber's article is presented below on light blue background; my responses are on the parchment.


This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy.
Three sentences in, Graeber is already predicting disaster!
...to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous.
I won't be attending that impartial forum. But I have some thoughts you might bring up when you go. First: We need to know what the problem really is before we can really solve it. So the most important thing is to get the analysis right.
The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.
An inverse relation?

I agree with Graeber that private debt, not public debt, is the problem. I agree the crash happened "because of dangerously high levels of private debt" (though I would omit the word "dangerously" since the danger is obvious from the context). And I'm not sure he means to call public debt the "exact opposite" of private debt, but I agree these two types of debt affect the economy in different ways.

But an inverse relation? No. Recently I showed this graph:

Graph #1: Public (blue) and Private (red) Debt relative to GDP, 1834-2011
Source Data from Steve Keen's XLSX file from 2013
Public debt and private debt do sometimes move in opposite directions. There is sometimes inverse movement, we could say. But that is not a "relation". A relation is consistent.

And even if a thing is true, it may not be particularly significant. It's true that public and private debt sometimes move in opposite directions. That fact in itself is barely interesting, and not significant.

As I've said before, what's really significant about the movement of public and private debt (relative to GDP) is that when we have private debt rising while public debt is falling, we have an exceptionally good economy.

Bring that up at the Public Inquiry.
If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008.
Source: Wikipedia
That's not true. Graeber presents it like a General Principle but it's just not true. The public sector did not "reduce its debt" in the years leading up to 2008. In those years -- lets say since 2001, because before that the trend was different -- in those years, UK public debt increased from about 30 to about 38 percent of GDP.

Source: ukpublicspending.co.uk
Now ignore GDP. Look at the UK public debt in pounds, billions of pounds. There was a steady, gradual increase in public debt from 2001 to 2008.

Again, increase. The public sector did not reduce its debt in the years leading up to 2008. David Graeber is incorrect when he says it did.
As for the idea that private debt goes up when public debt goes down, well, private debt always goes up. Until you get a crisis like the Great Depression or the Great Recession, private debt always goes up. That's the problem. And it has nothing to do with public debt going up or going down.[1]  Private debt goes up because policymakers think the use of credit is good for growth, and they set policy accordingly.

Oh, and they say private debt isn't a problem. The use of credit creates debt, so the policies that encourage private use of credit also encourage growth of private debt. Policymakers don't see that as a problem. That's why private debt always goes up until you get a crisis.

Bring that up at the Public Inquiry.

Where this idea comes from that "overall private sector debt [only] goes up" when "the public sector reduces its debt," I don't know. But it is most assuredly wrong.
... That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.
David Graeber makes an incorrect generalization about the behavior of public and private debt, and treats it as a General Principle. His prediction of "another catastrophe" is based on the flawed generalization.

Don't bring that up at the Public Inquiry.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017.

This is what the OBR was projecting what would happen around now back in 2015:


This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:


Yeah, no. These graphs do not "show the relationship between public and private debt." They don't show debt at all; they show deficits. Deficits and surpluses. The graphs show quarterly changes, not the cumulative totals that comprise debt. That's why these graphs show the numbers getting smaller since around 2009.

I didn't know. I don't do sectoral balance stuff. I looked into it because if the numbers are getting smaller, it can't be debt.

Oh, and the graphs don't show the relationship between public and private debt. The graphs show four sectors, not two: public and household and corporate and foreign. And the graphs don't really show relationships. They show four separate sets of data. To see a relationship you would divide one of them by another, or like that.

Well, I take that back. I think these must be "stacked" graphs. For each quarter, the stuff that's greater than zero is piled up and compared to the stuff that's less than zero. And, for any quarter, the stuff that's greater than zero is equal to the stuff that's less than zero; that's the whole point of the graph. For each date, the bars below zero are the same height as the bars above zero. That's what creates the symmetry.

But symmetry is really all these graphs show.
First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”
"First," he says, "notice how both diagrams are symmetrical." Like that was the most important thing. It's not. The symmetry is of no great consequence. I mean, would you be shocked to discover that when you buy something, the amount you pay is equal to the amount the cashier receives from you?

All the money spent is equal to all the money received. All the money borrowed is equal to all the money lent. These things are not shocking. These are the simplest things. It's how transactions work. It would be shocking if the graphs didn't show it.[2]  Don't be duped by the symmetry visible on Graeber's graphs.


Next, Mr. Graeber provides examples to show that the amount of money involved in a transaction is the same amount for the one party as it is for the other. Two examples, which he puts on a pedestal called the ledger sheet:
As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram.

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).
Graeber expects you to be shocked and impressed by the symmetry in this. I expect you to know better.

Graeber is right when he says "in any ledger sheet, credits and debits have to match." Credits and debits have to match. That is the way accounting is done. And that is where the symmetry comes from.

Nifty. The symmetry is nifty. It may be shocking, if you didn't know. It may even be impressive. But it is not significant. Don't be misguided by nifty.

The amount you pay the cashier is equal to the amount the cashier receives from you. Actually, it's not even nifty. It's just ordinary.


Graeber next launches a generalization from the ledger-sheet pedestal, but it reaches an unsupportable conclusion:
So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.
Everyone else has to go into debt because government is in surplus? That's not true. You can have government and foreign in surplus, while household and corporate are in deficit. You can have government and household in surplus, while corporate and foreign are in deficit. You can have government and corporate in surplus, while foreign and household are in deficit. You can have government and household and corporate in surplus. Or government and corporate and foreign. Or you can have government and foreign and household in surplus -- and this you can actually see in the first two years shown on Graeber's graphs.

None of this stuff happens because of "accounting identities". It happens because of spending decisions people make. It shows up on the graphs because of the rules of accounting.

You cannot say "if the government goes into surplus, then everyone else has to go into debt." The statement is a caricature of thought. It is not true. Don't bring it up at the Public Inquiry.
We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)
There you go. That's a good paragraph, except for the silly stuff about the magic money tree. But yeah, I used to think of money as "already lying around". Back in 1976 I wrote "there is just as much money in circulation as ever there was." Like Graeber's poker chips. And I was dead wrong.

That is a good paragraph from David Graeber. Bring it up.
There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.
Oh, and things were going so well! Graeber is wrong when he says "the less the government is in debt, the more everyone else must be." That's "the real point" of the paragraph, he says. But it is wrong.

Graeber's in good company. Milton Friedman made a similar mistake. In Chapter 9 of Friedman's book Free to Choose we find a little story about building roads:

Financing government spending by increasing the quantity of money looks like magic, like getting something for nothing. To take a simple example, government builds a road, paying for the expenses incurred with newly printed Federal Reserve Notes. It looks as if everybody is better off. The workers who build the road get their pay and can buy food, clothing, and housing with it. Nobody has paid higher taxes. Yet there is now a road where there was none before. Who has paid for it?

The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity...

Milton Friedman is famous for his view that inflation is driven by "the quantity of money relative to output." But in order to make his road-building example work, Friedman assumes the size of the economy is a given. He ignores the normal expectation that output will grow. And he ignores the common sense that says the expansion of infrastructure encourages economic growth.

In order to make his road-building example work, Friedman has to assume zero growth of output. Why? Because according to his own famous phrase, if output grows then an increase in the quantity of money is justifiable and need not lead to inflation.

Friedman assumes zero growth of output. Graeber's mistake is similar. Graeber assumes zero change in total debt, so that government debt can only be reduced when some other sector increases its debt.

He overlooks the possibility that total debt could be reduced. To be sure, this is an understandable error because total debt never is reduced. But total debt is never reduced because policymakers think using credit is good for growth and private debt is never a problem. Debt could easily be reduced if policymakers were open to the idea of reducing it.

Bring that up.

Set aside those policymakers' principles, and reducing debt becomes possible. Reducing debt becomes a way that allows us to reduce government debt without an increase in household, corporate, or foreign debt. In other words, Graeber's "real point" is not necessarily true. There is a way around it.

Bring that up.

But because of the way the economy works, it would be better to give priority to reducing household and corporate and foreign debt. When those reductions bring true vigor back to the private economy, government debt will fall effortlessly.

Bring that up.
Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.
"In reality," he says, "debt is money."

In reality, debt and money are created at the same time (and in the same amount) when you take out a loan. The money gets put into your checking account or someplace where you can spend it, and it is soon gone. The debt sticks with you, and you pay it off gradually over time.

How can anybody in their right mind say debt is money? Debt is not money. Debt is the obligation you take on when you borrow money. Everybody knows that. So do me a favor and don't say debt is money. You're killing me with that stuff.
But of course debt has to be owed to someone. These charts show who owes what to whom.
"Of course" debt is owed to someone. And money isn't. That's the point. Debt and money are different. So, don't say debt is money. The thought is incomplete, and therefore incorrect.

Graeber says his charts show "who owes what to whom." They don't. The charts show who borrowed how much from whom in each period, net. The charts show surpluses and deficits. They do not show debt, so they don't show who owes what to whom.

Graeber is really not very good with graphs. Keep that in mind at the Inquiry.

Come to think of it, at the start of the article Graeber says "The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically)." And at the end of the article he says "And remember: it was a mortgage crisis that set off the 2008 crash". Graeber's focus is debt, dangerously high levels of debt.

He has the right focus. But his graphs show the symmetry of surplus and deficit. The symmetry and the declining levels of surplus and deficit. His graphs are unrelated to his focus. His graphs are irrelevant.

The symmetry may be striking, but the graphs are not relevant. Don't bring that up, but do keep it in mind.

Graeber's article includes two more sections and several more paragraphs. I have no remarks on that part of the article, except to quote this, which is very good:

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

Bring that up at the Public Inquiry, too.

//

Notes

1.
It is true that by increasing at a more rapid rate, public debt can solve some of the problems created by excessive private debt. But this does not mean insufficient growth of public debt is the cause of those problems. The cause is dangerously high levels of private debt, as Graeber correctly says.  Return


2.
Indeed, the second graph fails to show symmetry, suggesting an error. As Graeber describes it: "the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up."  Return

Thursday, October 12, 2017

"moved, steered, and in some cases manipulated"


At Mercatus, Nudge Theory in Action. It's a one-paragraph blurb for a new book on one aspect of behavioral econ, plus the Table of Contents, plus a link to the foreword by Tyler Cowen (PDF).

It's an advertisement. It's a nudge.

I went to the PDF.

"The issues surrounding 'Nudge' are some of the most important in all of economics" Cowen writes. "The simplest models of economics take preferences as given, but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Oh that's new.

When I took macro in 1977, I was taught that there are two major types of economies: command economies, and those guided by economic incentives. "Incentives" was the good one and (not coincidentally) the one we have. The commies had command economies.

More recently I've seen people complain about the ineffectiveness of our approach. Oh, sure, command economies can be much better at getting you to do what they want you to do. If you like that kind of effectiveness. But I prefer incentives: Give me a tax break for doing what you want me to do. I'll get there eventually.

Incentives are compatible with the market economy, if that matters to you; command is not.

When it comes to policy, I prefer incentives. But when it comes to what brand I smoke and what I eat and what I wear and where I live, I prefer to be left alone.

But that's just me.

"The simplest models of economics take preferences as given," Cowen writes, "but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Cowen:
Should we be more suspicious of private sector nudge or public sector nudge?

I am myself never quite sure how to answer the above question. On one hand, I fear the greater competency of private sector nudge. I know that a talented team of marketers is working overtime to try to get me to buy the product, take out a loan, or participate in a charitable cause ...

"A lot of this nudging is good for me," he adds. Fuck that.

Private sector nudge is highly problematic, and I would say it is often worst in those areas we tend to feel best about: health care, education, and charity. In those cases, our guard is most likely to be let down, even if we are highly educated. Or should I say because we are educated?

What about public sector nudge? Well, the good news is that a lot of what government does is simply send money around through transfer programs. In this regard, its potential for manipulating us is fairly limited.

That last part I don't buy at all. The potential for manipulating people is limited because they use transfer programs? If I'm a poor starving waif surviving on government handouts, I have no incentive to kiss government ass? I have more incentive, more likely.

Furthermore, government is extremely bureaucratic and usually it does not have top tier marketing talent. Most of the time I just don’t find my government very persuasive. Is there really anything the DMV can talk me into that I wouldn’t otherwise want to do?

But can I then relax? Can I stop worrying about public sector nudge? I am not so sure...

War, he says. Government nudges us into war.

Government also has nudged us into believing that more government regulation is the answer to many of our problems.

Cowen is not doing a neutral evaluation here. He's got preferences, and his evaluation is based on them. But I think Cowen's preferences show that he has more to fear of manipulation from anti-government forces than from government.

"Finally," Cowen writes,
I worry about how private sector and public sector nudge interact... The problem, in broadest terms, is that the public sector often piggybacks upon the marketing efforts of the private sector. The private sector marketing, taken alone, probably would be far less harmful, but it can be combined with the coercive powers of the public sector.

With anti-government attitudes so common these days, I suggest that private sector nudges are far more effective than public sector nudges.

And what is this crap about "the coercive powers of the public sector"? I thought we were talking about nudging. Incentives, remember? Not the command economy. Did you lose focus, Cowen?

Or are you trying to nudge me.

Wednesday, October 11, 2017

Recommended reading on UBI


When an idea like Universal Basic Income (UBI) comes along, offered as a bold and innovative solution to a whole set of economic problems, it tends to find strong and growing support.

This guy raises an interesting point: Universal Basic Income and the Threat of Tyranny by Shai Shapira, at Quillette.

Recommended reading.

Tuesday, October 10, 2017

"Your thoughts and concerns are very important to me"


I'm old enough to know better. But more and more, I'm hearing talk of scrapping the mortgage interest deduction. I had to say something. So I wrote my senator.

I wrote
Don't give up the tax deduction for mortgage interest without getting something in return. Trade it for a new system of tax credits designed to encourage the repayment of debt. To ease the transition, design the new system to keep the tax benefit about the same as the old system. The amount of tax benefit can be changed gradually, later.

The macroeconomic problem with the mortgage deduction is that "the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness" -- NBER Working Paper No. 23600
http://www.nber.org/papers/w23600

The new system will encourage people to decrease indebtedness.

Three minutes later, I received a response from my senator:
Thank you for contacting my office. Your thoughts and concerns are very important to me and you will receive a more detailed response shortly. I sincerely appreciate your patience in waiting for this response, as our mail volume is often significant.

If this is a request for assistance with a federal agency or an immigration case, please contact ...

That was on 29 September. I'm still waiting for the more detailed response.

Friday, October 6, 2017

SNAFU


Milton Friedman said "Inflation is always and everywhere a monetary phenomenon". He did not say inflation is only a monetary phenomenon. He did not say the increase of money is the only force at work.

People assume that the increase of money is the only force at work. But Friedman didn't say that. People assume that if there is inflation you can clamp down on the money and inflation will go away, and everything is better and nothing is worse by it. But what if there was some other force at work?

What if there was a situation which, to be resolved, requires increase in the quantity of money? By clamping down on the money we could make the inflation go away. But that would likely make the other situation worse, the one that requires monetary increase.


Paul Volcker, saying "the inflation process is ultimately related to excessive growth in money and credit", ignored any possible situation that might require increase in the quantity of money.

Paul Krugman, saying "Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is, necessarily, monetary mumbo-jumbo", ignored any possible situation that might require increase in the quantity of money.

Bill Mitchell, writing of the government "taking a dollar" from people to "manage total spending" in order to avoid going "beyond the inflation barrier", ignores any possible situation that might require increase in the quantity of money.

Scott Sumner, who says "It's kind of scary when top Fed officials have forgotten that inflation is a monetary phenomenon", ignores any possible situation that might require increase in the quantity of money.


A large accumulation of debt requires a large debt service and drains a large quantity of money from circulation. To maintain a given volume of spending, an increase in the quantity of money is required. Inadequate increase leads to stagnation. As debt grows larger, this situation grows worse.

Thursday, October 5, 2017

Hurricanes on Ice


I want to take a few planeloads of dry ice and dump it into the Atlantic in the path of a hurricane that is just starting to form. Maybe lowering the temperature of the water in the region would kill off the storm before it gets going.

Wednesday, October 4, 2017

"The core of economics is that people respond to incentives ..."


Dietrich Vollrath considers why tax cuts don't boost growth, and reaches this conclusion:
... you could make the argument that if you want to raise GDP it would be ideal to raise taxes on financial transactions (a la the Tobin tax) to reduce the incentives to do those type 4 transactions, but lower taxes on type 1 transactions dealing with the provision of real inputs ...

Tuesday, October 3, 2017

Hicks, Friedman, and the "economic environment"


At Amazon: The Optimum Quantity of Money (Revised Edition) by Milton Friedman. Under Editorial Reviews for the book there are some quotes, including this one from J. R. Hicks:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost. It is the former question, not the latter, on which Friedman’s historical researches may well throw some light.

It's almost like an insult: Yes, Friedman is pretty good at the thing most economists are pretty good at, but he's not so good at the important stuff.

So I had a good laugh at that. But look at that first sentence again:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost.

What I want to ask is: What causes the equilibrium to be lost?

You'll find the answer in the same sentence: It's the "defining what should be done" during the equilibrium that causes the equilibrium to be lost.

It's the things economists do when they're not in trouble yet, that get them into trouble.

I've said as much before.


September 23, 2015, Identifying the economic environment:

Back after the end of World War Two, the government had a lot of debt and the private sector didn't. What with reduced output during the Depression and rationing during the war, after the war people were ready to spend some, even to go into debt.

And then, because people didn't already have a lot of debt, it wasn't a problem when they did accumulate a little debt. The economy wasn't dragged down by the cost of debt so much as it was buoyed by the spending of borrowed money.

The economic environment, in other words, was conducive to economic growth. And growth was good.

In that environment, you could put idiots in charge and the economy would still be good.


August 19, 2017: Agreeing with Christopher Snyder, who said "a bad economy can feed back to make beneficial policies look damaging." My thought:

Yeah, exactly, and that's very important. There is another version of the same idea: A good economy can make any policy (good or bad) look good.


Times like the "Great Moderation" and the "Golden Age" that followed World War Two are taken by economists of the time as evidence of their own ability to make great policy. In reality, such times are evidence of the economic environment and of its predominance over policy. It takes decades for policy to destroy equilibrium.