T.B.T.F.

In an old Kiplinger Letter from 1982 or so, I once read that agribusiness had grown "beyond its economies of scale." A memorable phrase.

During the recent fiscal crisis, the memorable line was "too big to fail."

I totally buy the TBTF argument. To let your biggest firms fail in the midst of "the worst recession since the Great Depression" is to invite disaster.

John Maynard Keynes, asked by a journalist whether there had ever been anything before like the Great Depression, replied: "Yes, it was called the Dark Ages, and it lasted four hundred years."

If you want to break up big businesses, do it while the economy is on the up-swing. Don't wait to do it during the worst whatever since whatever.


A question arises: How do businesses get TBTF? In particular: What makes a business grow "beyond its economies of scale?" What makes a business get so big that it would be more profitable to be smaller -- and yet continue to grow?

What makes a business grow larger than its natural economic limits would allow? The tax code. The tax code makes business grow. The tax code says re-invest your money or we'll tax it. To minimize taxes, business must grow.

What makes a business get too big to fail? The tax code, that's what.

The Use of Credit

Used to be, we'd use credit for growth. And for special circumstances. Now we use credit for everything. It's too much. That's why there is so much debt.

After World War II we had three or four dollars of credit-in-use for every dollar of spending-money. Sixty years later we have thirty-five or forty dollars of credit-in-use for every dollar of spending-money. So everybody has to run ten times as fast now, just to keep up with the payments.

Other people say debt is the problem. I say the use of credit is the problem.

You say but we need to use credit.

I say, yeah.

You say, so?

I say, debt is the measure of credit in use. If debt is a problem, then credit-use is a problem. You can't have it both ways. You can't complain about debt, and demand increasing credit-use at the same time.

Or maybe you can. I think I know a way....

A Simple Fact

No matter how much or how little we spend, if we spend credit then we're gonna have debt. And the more credit we use, the more debt we have. If we never use credit, then we never have debt. No matter how much or how little we spend.

Conclusion: The problem is not excessive spending. The problem is what we use for money.

Points of Agreement

Most people see differences between Republicans and Democrats. Well, sure, but in some ways the two parties are much the same. Nobody makes an issue of the points of agreement, because everybody agrees that's the way things should be done. But what if the way we've been doing things is the source of our economic troubles...?

Democrats and Republicans both expect the Federal Reserve do our inflation-fighting for us. And both use tax policy to stimulate the economy. There is, of course, a lot of bickering about the best way to stimulate the economy. But maybe the bickering is a distraction that keeps us from seeing the problem clearly.

What if the way we've been doing things is the cause of our problems? That would explain why we've been unable to solve the economic problems. It would explain why the problems keep coming back and getting worse. It would explain a lot.

This reminds me of the Hero Worship story.

What if the way we've been doing things is the source of our troubles?

Winter of Despair

From Franklin D. Roosevelt and the New Deal by William E. Leuchtenburg:

The persistence of the depression raised questions not merely about business leadership but about capitalism itself. When so many knew want amidst so much plenty, something seemed to be fundamentally wrong with the way the system distributed goods. While the jobless wore threadbare clothing, farmers could not market thirteen million bales of cotton in 1932. While children trudged to school in shoes soled with cardboard, shoe factories in Lynn and Brockton, Massachusetts, had to close down six months of the year. With ten billion dollars in bank vaults, hundreds of cities felt compelled to issue scrip because there was not enough currency in the town. Some groups even resorted to barter....

The savage irony of want amidst plenty drove farmers to violent action. As farm income dipped sharply while taxes and mortgage obligations remained constant, thousands of farmers lost their land for failure to pay taxes or meet payments. One account reported that on a single day in April, 1932, one-fourth of the entire area of the state of Mississippi went under the hammer of auctioneers....

It was frequently remarked in later years that Roosevelt saved the country from revolution. Yet the mood of the country during the winter of 1932-33 was not revolutionary. There was less an active demand for change than a disillusionment with parliamentary politics, so often the prelude to totalitarianism in Europe....

Many Americans came to despair of the whole political process, a contempt for Congress, for parties, for democratic institutions... "There is no doubt in the world," wrote William Dodd, " that both political parties have been bankrupted."

Many believed that the long era of economic growth in the western world had come to an end.

Instability

I'm still trying to decipher a recent Krugman post. This bit of it in particular caught my eye:

"John Cochrane, on the other hand, says that it’s all because George W. Bush gave a scary speech."

The "it" in that sentence is the financial crisis. Cochrane says we had a financial crisis because President Bush created a panic. I'm looking for Cochrane's version of what Cochrane said. Have not found it yet. But for me, the panic began with Hank Paulson's speech of 19 September, 2008.

References

• This YouTube video may be the President's "scary speech"
  
• Here is the text of Paulson's speech.
  
• Wikipedia describes Paulson's 19 Sept 08 speech
  

Krugman rejects Cochrane's view as "the argument-from-authority thing" --

Source W says crisis.

Source W is authoritative.

Therefore, crisis is true.

No. Krugman has to be wrong about this. Anything can create a panic. President Bush's scary speech, or Treasury Secretary Paulson's scary speech, or both of 'em together in a one-two punch, that could create a panic.

It wouldn't work every day. It wouldn't work in a strong, healthy economy. But in an economy that's been going downhill for 40 years, an economy with irreparable problems, yeah. Scary talk could push us over the edge.

Point, Cochrane.

It's Not That Complicated

Back in February, 2009 -- almost a year ago, now -- Bloomberg did an article on James Tobin's influence on Obama's $787B stimulus. The story included John Cochrane's thoughts on the subject.

Cochrane's view (as the article has it) is, "the idea that spending can spur the economy was discredited decades ago." John Cochrane, a finance professor at the Booth School of Business at the University of Chicago, said that while Tobin made contributions to investing theory, the idea that spending can spur the economy was discredited decades ago.

“It’s not part of what anybody has taught graduate students since the 1960s,” Cochrane said. “They are fairy tales that have been proved false. It is very comforting in times of stress to go back to the fairy tales we heard as children but it doesn’t make them less false.”

To borrow money to pay for the spending, the government will issue bonds, which means investors will be buying U.S. Treasuries instead of investing in equities or products, negating the stimulative effect, Cochrane said. It also will do nothing to unlock frozen credit, he said.
From: "Yale’s Tobin Guides Obama From Grave as Friedman Is Eclipsed," by Oliver Staley and Michael McKee. Feb 27, 2009. Bloomberg.


I'm no economist, as I've said before, but one thing is obvious to me: Spending is the economy.

Work and getting paid, and shopping and paying: this is what the economy is. Add to that producing stuff, and developing stuff if you want (but I count that in with work). Add leisure time and vacations and such if you want (but I count that with shopping). Add owning stuff if you want (but that's just how we keep score). That's what the economy is. That's all it is. There's no magic to it.

And how would you measure the economy? The only way is to measure the spending.

And how would you describe the economy? You could list all the various kinds of work people do, and all the various things they produce and the various ways they spend their money, and I suppose you could expand upon that. I use one word: transaction. The economy is transaction. The economy is spending.

Spending is the economy. A dollar of spending is a dollar of "spur." That's the whole idea behind "economic stimulus." It's not that complicated.

Exponential Force

The purpose of policy is to change the economy

The economy changes in response to policy. The economy changes, but policy doesn't.

The economy changes, and after a while policy starts to fail because policy has not changed. We don't change policy, because we think our policy is the right solution to the economic problems.

When policymakers realize their solutions are failing, they don't change them. They strengthen them. As time goes by, strengthened policies reinforce the economic changes, changes created by policy. The strengthening makes things worse.

We think we know what must be done to fix the economy. We think that if we make our policy strong enough, we can make things better. But it turns out we must strengthen policy again every few years.

It becomes a trend. Policy grows stronger as time goes by. The strengthening of policy in this manner is a driving force that can create exponential trends in economic data.

The exponential growth of debt is a consequence of economic policy.

To tie up a loose end

From last time:

Debt has been growing exponentially since the end of World War II. The growth of debt is not under control. But since the end of World War II, it has been regular and predictable. It depends on mathematical forces or, let's say, on the mathematical consequences of economic forces. It does not depend on who wins the election.

I hold that economic forces are directed by economic policy. You might point out that economic policy is created by politicians. That puts politicians at the head of the line of causation. So then (says you), the growth of debt does depend on who wins the election.

Very nice. But "who wins the election" is subject to change. Sometimes one party wins, and sometimes the other. Those different outcomes do not show up on the Debt-per-Dollar graph. The graph does not wiggle one way when Democrats win and wiggle the other way when Republicans win. In fact, it hardly wiggles at all. The graph doesn't show political trends. It shows exponential increase. It shows the mathematical consequences of economic forces.