Tuesday, December 21, 2010
Our government is the captive of the wealthy. Such is their power, so complete the government’s servitude, that it is by many not even seen for the prisoner it is. The people are blinded to the evidence, though this captivity is the cause of their distress.
The elections, as they have proceeded, did not change this. Hidden money has flowed into the coffers of the candidates, cementing the hold the wealthy and influential have over them. The candidates did not speak to it. Our elected officials do not speak of it. The Congress is now seeded with the lackeys of the wealthy, who do as they are told. It will get worse for the people. Our government, no longer a government of the people, will remain the captive of the wealthy.
As their captive, our government does their bidding:
It allows the manipulation and degradation of its money, forcing the people into debt, and servitude to the wealthy.
It lowers the taxes of the wealthy, and the taxes of their corporations. At the same time, it borrows from them, and accumulates a ruinous debt, an unseen burden on the people, to the great gain of the wealthy.
It reduces its regulation of the activities of the wealthy, allowing them to exploit the people.
It rescues the corporations of the wealthy when they squander their assets. It places the burden of these debts upon the backs of the people.
It subsidizes their corporations when they cannot compete on their own, and guarantees their profits.
It defends and subsidizes an inefficient and inadequate system of healthcare, one increasingly ruinous to the people, and immensely profitable to the wealthy.
It neglects the assets of the people, and allows them to crumble. It refuses to capitalize and invest in the people's future.
It allows its educational system to deteriorate, that the people may be more easily manipulated and restrained.
It refuses to effectively defend the nation’s borders against unfair trade, and illegal immigration, driving down the wages of the people, and for the profit of the wealthy.
It sells the property of the people to the wealthy, at less than its true value.
It buys things from the wealthy at exorbitant prices.
It allows and encourages the destruction of the nation’s natural resources, to the profit of the wealthy.
It prosecutes an undeclared war in a distant country, squandering the people’s assets, and thousands of the people’s lives, as well as the lives of innocents. A war from which the wealthy derive unjust profit.
It raises the specter of Terror against the people, where little is seen. It makes enemies in distant places, to the profit of the wealthy.
It enforces laws that are harsh against the people, yet excuses the wealthy.
It compromises the people’s right to due process.
It placates the people with the people’s own money, and deflects the people’s anger away from the wealthy.
It allows the press to also become the captive of the wealthy, to speak with their voice, and to distract the people with the inconsequential.
It obfuscates the nature of its actions, and the actions of the wealthy, to the confusion of the people.
It silences the discourse of the people, with insinuations of unpatriotism.
It enacts laws which perpetuate and rationalize its captivity
It enacts laws which increase its powers to do these things, to the greater harm of the people.
The government does all this in servitude to the wealthy, to the harm of the people, and the nation.
And finally, the wealthy cause this to their own harm. The wealthy gild their plumbing with their plunder, with what they gnaw from the true foundation of their wealth, which is the people, for it is by the people’s toil and sweat, and forbearance, that the wealthy live their lives of privilege.
The recent elections have strengthened the grip of the wealthy on our government: The government will enact policies that further aggravate the disparity of wealth and income between the wealthy and the people. It will inflict hardship on the people, and further insulate the wealthy from the consequences of their misrule.
Make no mistake, this land is ruled by the wealthy, and they rule for their own pleasure, and at the expense of the people. They become an ever greater burden on the people, and treat the people with ever greater contempt.
But the people are pillar on the top of which they prance.
Sunday, December 12, 2010
Who is all this money owed to, hmm?
And this guy's a trip:
1. YouTube - Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The ...
Dec 2, 2010 ... Explaining the last 200 years of 200 countries in 4 minutes.
1. Hans Rosling shows the best stats you've ever seen | Video on TED.com
TED Talks You've never seen data presented like this. With the drama and urgency of a sportscaster, statistics guru Hans Rosling debunks myths about the ...
Tuesday, November 30, 2010
But it merits further discussion: One consequence that he does not discuss, is that as the American college costs escalate, and returns to individuals stagnate, those seeking entry level management positions will be squeezed out by the cheaper foreign educated. The process is a little more complicated: More and more individuals will decline the expense of a college education as its returns decline, and thus fail to qualify for management positions. It will be cheaper to import foreign educated managers for the entry level positions, (who will then get promoted, etc…) and also to export other management functions, such as design and development. Thus American labor will increasingly consist of the underemployed and over qualified, and be increasingly managed by foreign nationals.
Advice for the college bound: Learn Hindi and get a passport.
This link too:
In fact, the entire blog is worth following. Scary though, considering who we are governed by.
Thursday, November 18, 2010
Government issues about 5% of the money that is in circulation. The rest of it is created by banks, when they make a loan.
When a bank makes a loan, it creates the money to loan out of nothing, just adding numbers on their computer. So the total money supply is the principal of all the loans outstanding, P, plus the amount issued by the government, G. This does not include money the government borrows, which, after all, is still just created by the banks.
The banks then charge interest on the loan, on money which they have created out of nothing.
Because of interest, the total money needed to pay off all loans will be greater than all the money loaned, ie greater than the money supply in ratio (P + G + I - E)/(P + G), where I is all the interest, (not the interest rate,) and E is all the expenditures of the financial industry, if I > E. (If I < E, the opposite will be true.) This implies (I - E)/(P + G + I - E) share of borrowers will always be unable to pay off their loans. Only when I = E is the system stable, and all borrowers able to pay off their loans. Where E is less than I, this leads to an exponential growth of both the money supply and debt. Only with an exponential growth in real consumption, and thus necessarily production, can this be maintained. Since this is ultimately impossible, this spiral has no (nice) ending.
What can the government do? From the equation, it would seem not much, since G appears in both numerator and denominator, and is only a small portion of the total money supply. However, if we consider that the interest comes due at the end of the time period we are considering, it would seem that if G were to increase by I-E over that period, the money supply would remain in balance. That is, the government, if it wishes to keep the economy from going bad, would ‘print‘ the quantity I-E, that is spend that quantity in excess of revenue, but not by borrowing it.
However, for the government to borrow that money it would also add to I. While this might be useful counter-cyclically, it would be less efficient than printing it. Further, it would add to the total debt burden, and thus fail to address the long range problem: It would still contribute to a debt spiral.
So, barring government ‘printing’ at least the quantity I-E, the financial industry, by holding expenditures, E, less than the interest, I, on all loans outstanding, creates a shortage of money. There is simply not enough money to pay off all the debt and the interest. So they force the rest of the system into increasing indebtedness to them, in order to pay off the debts they already owe.. They force individuals, companies, and governments to take out more loans or default. They have simply created a shortage of money needed to repay the loans and the interest, in the real economy, while hoarding the rest of that money to themselves.
The financial industry has been doing this for years. That is why individuals, companies, governments and their countries' real economies, are gradually being ruined. That is why, in the US, for instance, total indebtedness has been climbing to over $50 Trillion, now about equal to all the US real assets. Great Britain, and many other countries are in worse shape.
(Check out the charts. The links are at the top of the page.)
The figures are incredible when you think that it’s most everybody that’s in debt. Indeed, is so called deleveraging (paying off debt) even possible, with so much debt? After all, annual interest on $50 Trillion, is about $2.5 Trillion, at 5%, which is more than the entire revenue of the federal government.
Government austerity, by forcing all future increases in debt into the private sector, will inflict tremendous hardship and damage to the real economy.
This 'crisis' is just another step down the road, where the financial industry, in their eagerness to own it all, kill the goose that lays their golden eggs.
Friday, November 5, 2010
If you only ever follow one link, follow this one.
Here's another copy:
The YouTube version has more and better followups.
Friday, October 29, 2010
Some will be for fun. It won't be a complete record of where I've been, but it will feature a few of the highlights. I hope you enjoy.
"The Stealth Coup D'Etat: U.S.A. 2008-2010"
"Capitalism Uber Alles: How the American Working Class Got Brainwashed"
"What Does Greece Mean to You? - John Mauldin's Weekly E-Letter"
This article is really about complexity and catastrophe, especially as it has to do with economics. One important sentence: "In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes."
"The Normalization of Sociopathology in America"
http://www.oftwominds.com/blogoct10/normalized-pathologies10-10.html: Yeah, This guy is really good. His blog isn't that easy to navigate, but it's worth the time.
So, I hope you keep coming back for more. Also, feel free to provide links of your own, in the comments. If you can't make the link active, I'll copy it to the blog.
Sunday, October 17, 2010
What is that 15%? Well, that 15% is 15% of all personal income. (All personal income is about $10 Trillion.) So it is $1.5 Trillion. Now if this $1.5 Trillion was distributed to the other 99% of the population, they would be 15% better off. That is, on the average, they would each be 15% better off. That works out to $7500 for somebody earning $50,000. $1500 for someone making $10,000, etc.
Most of the money would be spent, since most of the rest of the people are living closer to the edge. Figure $1 Trillion spent. That makes for 10 million or so jobs. (Well, figure less. The rich do spend some of their excess money.) And figure $50 Billion or so per year to social security.
Millions would be lifted above the poverty line. It would reduce the need for government expenditures on the poor, and other social programs, by $60 billion or so. ($10K x .15 x 40 Mil people.)
Over $300 Billion per year would go to people who owed mortgages. Millions of these would be able to pay their mortgages. Not all would need it. But for millions it would make a difference. It would put a boost to housing prices, and put a big dent in the bubble collapse.
Now let's compare the income of the top 1% to that of the Federal government. 24% of the personal income of the nation works out to about $2.4 Trillion. The income of the Federal government for 2010 is $2.4 Trillion. The income of the top 1% is equal to the income of the entire Federal government. Federal government expenditures are going to be$3.6 Trillion dollars. The deficit is $1.2 Trillion, or half the income of the top 1%.
Of course we already have that the top 1% pay over 40% of all income taxes. Thanks FOX. All income taxes are $1.06 Trillion. So the top 1% pay $410 Billion or so, or just over 1/6th of their income, or 17%. This tells us where FOX is coming from. Since the government’s share of the GDP consumption is 25% or so, we would expect that percent, 25%, of income paid as tax, even under a flat tax. We may conclude that the top 1% pay a smaller share of their income than the rest of society. (Well, to be accurate, the tax end of the government share of GDP is only 17%. But since almost half of the poplulation pays little or no income tax, the tax paying half, minus the top 1%, pay a higher percentage of their incomes.) Now if the wealthy paid 25% of their income, that extra 8% works out to $200 Billion, or 1/6th of the current deficit. If they paid 40% of their income, as they easily can afford to do, (they would still be far better off than they were in the 70's,) the additional amount would pay about 1/2 the deficit.
But, as we have pointed out before, or elsewhere, they are largely the ones the government borrows from. Clearly it pays them not to pay taxes. And since they are largely in control of government....
Now to say they rule America is somewhat of a misstatement. A proper ruler rules for the benefit of all, if only out of enlightened self-interest. The more correct title is: “Who exploits America.” That they act according to unenlightened self-interest is to all our sorrow. For they have made themselves enemies of the rest of us. In fact, they have made themselves enemies to each other, and to themselves.
They wealthy have the power to save the government. But not the..inclination.
Justice Oliver Wendell Holmes Jr. observed that, "taxes are what we pay for civilized society." (See the link.) Evidently, the wealthy do not want a civilized society.
Do the rest of us?
Thursday, September 30, 2010
Suppose the economy grows at 3%. Then just by controlling where that 3% is spent, the government can control the direction of the growth of the economy.
Of course, that is just the first approximation. The economy also undergoes change, which does not show up as growth, but investment compensating for depreciation and other asset consumption. This percentage must also be controlled. Further, what is destroyed must also be controlled. It can tax what it wants to destroy, and it can then spend the money to direct investment. This will cause the money to be spent in the direction the government deems desirable. The economy will then grow in the direction the government desires.
And it does this already. A government which is 20% GDP can’t help but direct the economy. That it does so inefficiently, and without much direction, merely means both it doesn’t understand what it is doing, and that some, or a lot, of the ‘growth’ is directed to waste.
What we are talking about is Gross private domestic investment, nonresidential. (Although the government could control the residential as well. It can tax larger mortgages, a graduated mortgage tax. It can tax the building of some houses, and subsidize the building of others.) Nonresidential gross private investment works out to be just under 10 percent of GDP. So by directing that 10 percent of the economy, the government can make it grow any way it desired, and provide any services desired. Well, any way desired that was sustainable. It could do this simply by subsidizing desired services, and taxing the crap out of any other investment.
Of course, it wouldn’t have to be so crude. It could be more measured, taxing according to degree of undesirability, subsidizing according to degree of desirability. If they wanted more health care, they would subsidize its production. Pay for more doctors, more nurses, more hospitals. If they wanted less concentration of wealth, they could tax it. More windmills, subsidize; fewer automobiles, tax. Less financial, tax. More manufacturing, subsudize.
Think this is heavy handed? Look at the ham handed government we have now. Look at the effects of its policy. It is 20% of the GDP, controls more, and what direction do we get from it? Instead of planning, we have special interests, pulling government investment this way and that. Financial has increased to 6%, with more profits than manufacturing. Manufacturing gets little support, and has been in decline for decades. Just 1% of our GDP goes to industrial equipment. That’s the stuff that goes into factories. In agriculture, unsustainable factory farms are subsidized, while family farmers are not. Health care has increased to 17% GDP. (This is not in contradiction to what was said above. This is demand (subsidized) driven inflation as a result of inadequate supply (taxed). The government should do the opposite. Subsidize production, and tax demand.) Infrastructure deteriorates, at the same time demand for it is subsidized. Unemployment is subsidized, employment is taxed.
All this and more is the result of government policy, of its spending, taxation and subsidy, Either that, or the government, spending 20% of GDP, and controlling more, has no effect on the economy. That is, it is essentially impotent. Of course, the government can still be essentially impotent, spending 20% of GDP, if it is locked into its commitments, the captive of special interests, and cannot change the way it spends its money. Like the government we have now.
Wednesday, July 21, 2010
Over the long run, Consumption and Income (or production) are equal, for economies of all sizes. Everything that is consumed must first be produced. Everything that is produced is pretty quickly consumed. Yes, there are inventories, but they are seldom for more than a few months, and they usually stay more or less stay the same. (Every economy, especially modern ones, is at most, only a few months from disaster) Let’s draw a picture, Diagram 1, with Consumption on the vertical axis and Income on the horizontal axis. Then the line where they are equal, for economies of all sizes, is the 45 degree diagonal. If we draw a point above this 45 degree diagonal, the economy it represents will have Consumption greater than Income. Below this line, Income is greater than Consumption. So any economy we talk about, is in the long run, going to be a point on this 45 degree diagonal. If we talk about a 100 billion economy a, it will lie on this line, where its Income and its Consumption are equal. The same for a 200 billion economy b, or a 500 billion economy c.
Now think about Consumption. If our economy is really little, we are going to want to consume more than we produce. If our economy is bigger, we are going to produce more than we want to consume. (Then we are also going to want to save, or more properly accumulate.) We represent what we want to consume by a line C. Diagram 2. This line is called a curve, by economists, lest they forget, as they sometimes do, that it really doesn’t have to be straight. The distance between this line, and the bottom of the graph, is how much we want to consume, at each level of income y. It slopes upward because the greater people’s income (y), the more they want to
Consume. Now this line C, this curve, crosses our 45 degree diagonal, at point e. Below, to the left of this at point e’’ for instance, our economy is little, and people are going to want to consume more than they produce. (In this simple model they can’t, of course. They have to starve) So the Consumption line is above the 45 degree diagonal, more desire to consume than income. To the right of e, at e’ say, our economy is larger, and people are going to have leftovers from what they want to consume, which they will want to save. As our economy grows bigger, and moves further to the right of e, people will want to save more and more. This is shown by the vertical distance between the 45 degree line, and the Consumption line C. Note they are also consuming more and more.
Now this Consumption line is sort of a matter of attitude. (And other things. In fact, this whole argument, is a matter of attitude. As is the diagram, except for the fact that the economy is on the 45 degree diagonal. Notice we’re also ignoring little things like taxes and government and exports and imports.) If people feel like consuming a greater proportion of their income, for a given size of their income, the Consumption line would be higher. This is shown by curve C’ in Diagram 3. At the size of income marked by y, though people are neither saving or dissaving at C, at C’ they want to consume so much they would be dissaving.
Back to the C curve, and Diagram 4. At income y, C is below the 45 degree diagonal, and the difference is how much the people in the economy want to save. (Want to consume + want to save = what is produced.) Now, where can this savings go? It has to go somewhere, because in the long run, economies cannot accumulate stuff. Economies do not save. (This is particularly true of market economies. A company that ‘saves’ too much of its product ends up going under. Well, maybe except for banks. But saving money is not saving stuff.) Nobody is going to make 50 million dishwashers, or 50 million cars, so that 5 or 10 years down the road, they will have them to sell. (Inventories that are accumulated are for at most a few months, and we’re talking about longer than that. Also, note that services cannot be saved.) No. They’re going to want to build a factory to make these things. They’re going to want to invest in a factory. That’s where all the savings goes, investment, and so savings is equal to Investment. (Remember, we’re talking about real savings. Right now, people are money savings like crazy, or trying to. But it is not being invested. So really, they are not saving anything. THey are redistributing demand, both in the present, and the future.)
Now Investment uses resources and is therefore like Consumption. Desired Investment also depends on the Income of the economy, so it can also be represented by a curve, and if we take this curve for desired Investment and add it to the (desired) Consumption curve, we end up with a total, the sum of Consumption and Investment, which economists call Aggregate Expenditures, or AE curve. Actually, what we have here is Aggregate desired Expenditures. Now where wishes, that is the AE curve, meet with reality, that is with income, or production,(y) on the 45 degree line, at e, we have the size of the real economy. This is also where desired savings is equal to desired investment. (We cheated and used a different argument, that real investment and real savings really have to be the same. The Keynesian argument with desired savings and desired investment is more complicated: Suppose the economy produced more than at e, at e’ say. Then the economy would be really producing more than people wanted to expend (at the AE curve.) So with all this extra production, inventories will expand, producers will want to cut back, they will invest less, and the economy will fall back to e. Suppose instead, the economy produced less than at e, at e’’, say. Then the economy will really be producing less than what people want to expend. Inventories will shrink, producers will see this and want to produce more, so they will invest more, and the economy will grow, back to e.)
Now this diagram doesn’t explain very well how economies grow, and move up the 45 degree line as both income, that is production, and consumption grow. Apparently, the AE curve has to keep shifting upward, which means either desire to Consume, or desire to Investment, or both must also keep shifting upward.
In the diagram, though, the economy is kind of stuck at e, because we can’t save more than we invest, and we can’t invest more than we save.
From this diagram, we can draw a simpler diagram of just the relationship between desired Savings and desired Investment. We do this by simply subtracting the Consumption curve in the diagram. If we subtract the C curve, that is shift the C curve down to the horizontal axis (down the orange arrow) and keep the other lines in the same relationship to each other, we have a diagram of the relation between desired savings and desired investment. Diagram 5.
As in Diagram 4, the economy we are talking about is really where the lines cross, at e, where desired Savings equals desired Investment. This is the diagram we will be discussing in the next posting.
Wednesday, July 14, 2010
Not easy to navigate to Part II: Go to bottom of page, click on 'blog,'
then down that page to the list of entries for July.
Saturday, July 3, 2010
You will remember the producer-consumer problem: No matter how much cash the consumer starts with, the consumer has to keep spending it, and eventually the producer ends up with all the money. Then the system crashes. The problem is more general, since any difference in relative gains results in one party ending up with all the money. For instance, if we imagine a system of company and labor in balance, and then, say, labor is given a slight cut in pay, eventually the company is going to end up with all the money. And then it’s the company store. 16 tons. That’s because the equilibrium between company and labor is an unstable one: The slightest disturbance and it heads, one way or another, for a crash. (It could head the other way, labor ending up with all the money, the company in bankruptcy. But it hasn’t.)
Now an enlightened government, (we don’t have one,) would either take steps before things got out of hand, (like say around 1990,) or arrange things so that the equilibrium between company and labor was, locally, a stable one. Graduated asset, or property taxes might by one way. Graduated income taxes, one for the corporation, one for labor, though trickier, would be more efficient.
The idea is actually tax and subsidy: Suppose the system of company and labor in balance. Then there would be no net transfer of money, and no taxation or subsidy by the government.. Suppose the company got a little ahead. Then there would be a slightly greater tax on its earnings than this increase, which would, directly or indirectly, go to labor, to bring it back down to equilibrium. If labor got ahead, there would be a tax on labor, which would go to subsidize the company, to bring the system back to equilibrium.
This oversimplifies things. Of course, you want the system to grow. That means business has to make a profit. It has to have the extra money to invest in itself. But this profit would have to be shared, since you want labor, (demand) to grow apace. One way to do this would be to induce inflation. Suppose with a 3% inflation rate, the company has a nominal 6% profit. The government spends the extra, inflation inducing deficit on labor, effectively sharing the profits. Hmm. Interesting. Another motive for moderate inflation. In fact, the whole thing could be managed through the rate of inflation: Set inflation to over half the nominal profit rate of business to transfer resources to labor, so demand would grow faster, or to under half, to transfer resources from labor to business, so supply would grow faster.
Another Hmm. We’ve been at very low inflation for along time now. We should not be surprised, then, that corporations have a lot of extra cash. There’s been a lot of transference of money from labor to business in recent years. So not only do we have grounds for policy, but we have an explanation, in part, anyway, for what is now happening.
As grounds for policy, though, it has problems, most noticeably the delay between the time the money is actually pumped into the system and the inflationary effect. Perhaps business profits could be anticipated…
But what is to be done with the current corporate cash glut. Well things are way ($6000 per capita) out of balance. The problem, of course, is that the corporations have no motive to spend the money on increased production: Consumers (labor) don’t have any money to spend! So corporations have to be induced to give it up, or it has to be taken from them, or government can print more money to give to labor, to compensate.
So we have a financial asset tax on corporations. And a tax holiday for labor.
But, our government has neither the guts, nor the sense. And, of course, there’s all those bonds.
By the way, if corporations have been taking money out of the system in equal amounts over the last 10 years, about $184 Billion per year, then that contributes about 1.3% per year deflationary pressure, that is inflation would be 1.3% more without their hoarding all that money.
Wednesday, June 30, 2010
What do we mean? We mean that it is only in the present that society supports its members. It doesn’t ‘save up’ present production to support them in the future. It doesn’t take past production to support them in the present. In terms of what is being produced, it only has what is currently being produced, to support its economy. Yes it has inventories, but usually these are at most a few months. Society doesn’t accumulate (save) a 20 year supply of dishwashers, so it will have them when they are needed ‘down the road.’ Society doesn’t do this with anything.
The closest society does to this is invest in its productive structure. Roads, structures and machinery last a fair length of time. It builds these things in the present, so it will have their productive capacity in the future. It has built these things in the past, so that we have them now. This is physical capital. A society builds capital in the present, so it will have the productive facilities to support its people in the future. In order to do this, it takes away some of its current production from direct consumption, and invests it.
Now the more society builds these things in the present, the more productive capacity we will have in the future. The more productive capacity we will have in the future, the better off, materially, we will be. Assuming, of course, we have the energy to power it. And the labor to direct it.
In particular, the greater comfort we will be able to support our retirees, and the rest of the idle class. And of course, everyone else. And everything else. Because production must also be supported.
Now the way we decide how to divvy up this production is with money. Those who spend the most money get the most goods and services. Those who spend the most, in the long run, are those who have the most. So if you save money in the present, in the future you will have more money to spend.
Now the theory is that the banks will take this money and loan it to someone who will invest it. That is, take current production, and use it to build more productive capacity, so there will be more goods and services to divvy up in the future. This isn’t the only money that does this. Corporations make profits, which they may spend to increase their productive capacity. Some of government spending may go to increase productive capacity, as with some of the ’stimulus.‘
So what happens instead when the banks take your money and squirrel it away?
Well, you’re still saving, but society is not investing in its future. Its capital is not expanding. So the pie is not growing any bigger. So down the road, when you retire and spend your savings, you may have a bigger share of the pie. But since the pie will not be any bigger, everyone else will, on the average, have a smaller share. This includes other retirees, say those on social security, and those who still work, who are supporting you with their labor. It also includes those other things, the productive facilities which must be supported to maintain present production and expand production in the future. So your individual savings, when you spend it in the future, takes away from everything else, including supporting the production on which it depends.
Now, if this were just you, this would not be very significant. But if there is a substantial share of savers, and the banks are not investing the money, (or investing it badly, say in housing or commercial real estate) then all the other people will have a significantly smaller share. And so will production.
What does this mean? Well, under these circumstances, savings is deflationary in the present, and inflationary in the future. In the present, money is being taken out of the economy, and since it is not being invested, (spent on capital) and put back in the economy, there is continually less money, chasing a constant supply of goods. And since the money was not invested, but merely saved, productive capacity is not expanded, so the quantity of goods will not increase.
So when in the future the money is taken out of savings and spent, along with the money that was there before, we will have inflation. Over time, these two effects could be expected to cancel out. What won’t cancel out is a big increase in money supply caused by deficit spending. If this is invested to expand the pie, well and good. If squandered, so the pie still does not expand, much the worse for inflation. What also won’t cancel out is the contraction caused by the deflation, which is that the decreasing amount of money chases a quantity of goods which is also decreasing., though not as fast., which does tend to mitigate the deflation, at the expense of the destruction of productive capacity. The pie actually shrinks.
So this is what is caused by the financial industry doing its retrenchment thing. Now we have already pointed out that the financial ‘industry’ is much too big, so its hoarding of money (rather than investing it in real industry) can be expected to go on for a while. To the detriment of the rest of the economy, since it means that the money supply in the rest of the economy can be expected to decrease, thus robbing productive industries of their nominal profits. Since these industries are losing money, they are not investing, they are cutting back. Still. (Add to this the contraction brought about by the trade imbalance! See: April 2010 The Effects of Unbalanced Trade)
The problem, of course, is that as long as these banks are in business, they’re going to be sucking the money out of the economy, so destroying the economy on which they depend. The government with its stimulus tried to counteract this action. It didn’t, much. It can’t. The banks are sucking too much, too fast.
So. In Economics, savings and investment are equal. At equilibrium. But not in the economy we are experiencing, where savings and investment are not equal.
Just by the way, elementary Keynesian theory predicts a reduction in a nation’s income with an increase in its ‘thrift.’ It assumes savings increases with income, but investment is relatively independent of income, or flat. How to explain the Chinese, though, eh? Next time.
Thursday, June 24, 2010
How does it do this? Well, it does it in a most peculiar way: Money values most what is least valuable to an economy. And this is necessarily so.
Consider, for instance, which is more valuable, a dollar’s worth of gasoline, or a dollar’s worth of greeting cards. Well, as far as money, or the market, goes, they are the same value. But from the economy’s point of view, the dollar’s worth of gasoline is more valuable, because you can do more with it. For instance, you can have a modern economy without greeting cards, but you cannot have one with out gasoline. We’ll call this a real valuation, as opposed to the monetary one. The monetary valuation undervalues the real value of the gasoline, and overvalues the real value of the greeting cards.
Consider the resources that go into a car: the energy, the materials, the labor. In money terms, these things together add up to less than the price of the car. That is why we build the car. Because the maker of the car sells the car for more than the price of the resources .that go into the car. But in real terms the combined value of the energy, the materials, the labor, is greater than the car.
In particular, energy is, in monetary terms, undervalued. Its less now, but it used to be that 10 times the amount of energy came out of a gallon of oil than went into producing it. It is this real profit, this 10 to 1 ratio, that allows us, drives us, to use (burn) the oil. Suppose instead, there were no real profit: That the ratio was 1 to 1, that as much energy went in to producing the oil as was gotten out of it. Then, from an economic point of view there would be no point in producing the oil in the first place. (In particular, if we used the energy from the oil to produce the oil, nothing would be produced. Except waste.) Nothing is gained. (Of course, with subsidy, an uneconomic process may still go forward. Witness ethanol production from corn)
Allowing for profit, and neglecting things like taxes, that means that the monetary value of the oil was about 1/10 its real value. Suppose instead that it sold at its real value. Suppose your gallon of deisel sold at $30, or 10 times its current valuation. Then there would be no point for you to buy it, because you couldn’t make money off it. (at least using it for energy.) Its real cost to you, monetarily valued at $30, would be equal to the benefit you expected from it. (We’re not allowing for the induced inflation. With the price of oil going up, the real price, the price of everything will go up. More on that in a later post.)
Similarly, commodities are undervalued. Undervalued energy went into making and extracting them. But it is this monetary undervaluing that makes them more valuable in reality. Because they are undervalued, they can go into making things. For instance, you wouldn’t use gold to wire a house. Monetarily, it’s too valuable. You would use copper. Copper is more valuable here than gold, because if you used gold, you couldn’t sell the house for a profit. In fact, the less valuable it is, the more useful it is. If the price of copper were to double, you might still use it to wire the house, but you might not use it for the plumbing.. If the real price of copper were to halve, you would not only use it for the wiring and the plumbing, you might use it for the roof as well. So the lower its monetary valuation, the greater its real valuation.
Suppose now that copper was as rare as gold. Those who owned copper would be much richer, but society would be much poorer. They wouldn’t be able to use copper to wire houses. Indeed, the uses of copper would be few. It would have little real value. Just like gold. It would be too precious to be useful.*
Now if some things are undervalued, other things must be overvalued. That is the monetary value is more than the real value. Or, these things are worth less to society than they are to the individual. So what is overvalued? That is what is overpriced?
If we look at production, at each step, resources are destroyed. Energy and labor are destroyed at all steps. Now the irony is, that the more resources are destroyed in making something, the more (monetarily) valuable it becomes. (This is in a well functioning economy. Under subsidy, resources can go into making something that is less monetarily valuable. For instance, the subsidy of corn production makes possible the production of hamburgers at less than would be their monetary cost.) But as those resources are destroyed, the real cost of the thing goes up. So its real value goes down. The more resources are destroyed making a thing, the less valuable it is. To society. Suppose 10 times the resources as now go into making an automobile are used. Automobiles would cost 10 times as much. There would be many fewer of them. They would be less useful to society. Conversely, if automobiles cost one tenth the resources to make, there might not be more of them, but the resources freed up which would otherwise go to their production could be destroyed to other use. In that sense, they would still have a greater value to society.
But, at each step in the destruction of resources, that is, the destruction of real value, “value is added.” Monetarily. The thing becomes monetarily more valuable, and can be sold at a profit. So in general, resources, which are undervalued, are converted to finished goods, which are overvalued, and it is this twist in valuation which drives economic process. (We can even go a little further, and say that those goods which are most overvalued will be preferentially produced. They will have the highest profit margins in the conversion process. Goods under subsidy will be preferentially produced, for instance.)
Now the economy does need finished goods. Indeed, that is the whole point of an economy: To create goods and services to the benefit of the individual. But economically speaking, most finished goods are useless to an economy. A dishwasher, for instance is economically useless. (It may benefit the individual. It does free up leisure. Depending on how much one valued that, one can calculate the benefits one would get from buying a dishwasher.) The end result of economic process, the conversion of resources, in particular the destruction of energy, is a finished good or service. (Actually, since energy can neither be created of destroyed, we really mean the conversion of energy from useful forms to useless forms. So for instance, one could say the dishwasher was worse than economically useless, since the power it consumes when operating increases the conversion of energy to useless forms.)
So where does money fit into this? Well, in real terms it is worthless, so we can say it is most overvalued. If government printed up a room full of money, society would be no better off. More on this later. Energy, which drives the modern economy, is most undervalued. Some labor is also undervalued. (Some is overvalued.) Some has to be exploited, for the manufacturer to make his profit. This is not a bad thing. But because labor is also the ultimate market, (all economic processes are ultimately for the benefit of individuals,) it does create a problem. So does overvalued labor. For a later post.
So what is valuable? To a society, the resources, and the means to convert those resources to goods and services desired by individuals. To an individual, these desired goods and services. It is the difference between these two valuations that drives an economy.
*There is an ironic phrase which refers to extraction of minerals: ‘The riches of the earth.’ However, it is the poverty of the earth, the scarcity of what is extracted, which makes it monetarily valuable, and reduces the real value to society. But, it is this relative scarcity that makes extracting the minerals profitable to the individual in the first place.
Sunday, June 13, 2010
Consider now the financial sector. Historically, even during times of prosperity, it had ‘produced’ under 3% of GDP. But as of 2006, it has ‘produced’ 8% GDP. I put ‘produced’ in quotes, because the financial sector produces nothing. It is merely there to allocate resources. It does not make things. It is overhead to the economy. It rearranges money. And instead of arranging money to encourage productive industries, it seems to be allocating much of these resources to itself: Its profits, in recent years, have been over 40% of the total profits of all US businesses, despite the fact that it ‘produces’ only 8% of the GDP.
How does it do this? How does it ‘sell’ almost 3 times as much ‘services’ as in the past, and make more money than ever doing it? After all, we would expect that if it had more services to sell, their price, and their profits,would go down.
Well, it has government support. It has its bailouts, and the government has gone through agonizing contortions to see that the banks' mortgage income and value are maintained. The Fed also supports the industry with low interest loans. And the government throws business its way by selling bonds at a higher interest rate.
It does sneaky and unethical things: It sells fraudulent products, CDO’s and CDS’s and dubious mortgages with teaser rates that balloon into unpayable amounts after a few years. The whole real estate bubble was an effort by the banks to generate profit, in fees and interest, sufficient to keep themselves in business. Now the bubble is gone, and the only way the banks can support themselves is to eat into the real economy, It withholds credit from the real economy until its bloated balance sheets will be 'repaired,' inflicting deflation on the economy. And where is the next bubble going to be? Perhaps we are looking at it: the debt bubble.
It colludes, with the combination of algorithmic trading and ‘front running,’ to effectively defraud legitimate traders of their just profits. In these it is explicitly self-serving, and not to the benefit of the rest of the economy.
It holds its customers hostage. With too big to fail banks that the government thinks it is obligated to maintain and foster. With fees and usurious interest rates on credit cards and payday loans.
Meanwhile, the financial sector uses its power to deflect the efforts of government to effectively regulate it. In fact, should the regulation the government is considering prove effective, it would cut into the financial sector’s profits, would tend to its ruin, and force the government, as it now conceives its duty, into even greater efforts to rescue and maintain it.
It siphons off from legitimate industry, and corrupts, some of the best minds of society with its disproportionate remuneration, and contributes to the country’s increasingly inequitable distribution of wealth and income.
And we should expect this. We should expect it to act, not to be benefit of society, but to its harm. It is merely doing what it has to do to survive, in its bloated and destructive form.
That this should lead to the destruction of the economy which supports it, it does not care. The people involved are either indifferent or oblivious to the damage they inflict.
I have painted all banks with the same brush. I'm mainly aiming at Wall Street, though many other banks were a party to the real estate bubble. To those that don’t deserve such a paint job, I apologize. I’m sure there are good banks out there. I hope mine, that is the bank I use, is one. But these banks are at a competitive disadvantage to the bad banks. And the absence of effective regulation reinforces this.
Yet I don’t hear the officers of good banks decrying the malfeasances of the officers of the bad banks. Is it because I just don’t hear, of is it because they do not. Perhaps they feel more a sense of community with those who work at the destruction of their society, than those of the communities they ostensibly serve.
Saturday, May 29, 2010
Well, we'll get into that some other time. First, we ask the questions. And the first question we ask is, who owes what to whom? Which is really three questions, so let's first ask who is the money owed to. There are numerous possibilities. We can eliminate space aliens. We can also eliminate the poor. If they were owed the money, they would be rich. How about the middle class? No, they seem to be drowning in debt. How about our government. But we all know it's up to its ears in debt. Of course, there are also rich governments, who seem to be owed a lot of money. But that much? No.
So who does that leave us? Hmm? The rich. But we've got to be talking the really rich. Even the median of the top quintile, for which I have data (2004) owes $167K, though net worth of $318K. The really rich seem to be owed all that money.
And we've also answered the question of who owes. The poor, the middle class, and the government.
But what do they owe? Lots of money. Debt to GDP is at about 380%, of which 290% is
privately owed. So GDP ~$14T x 3.8 = $53T/300M people = $177K per capita, as of 2008. $354K per worker. Now $42K per capita of that is the public debt, so $354K - $84K = $270K per worker is the private debt. Now the interest on the public debt is (now) 0%, sort of, and let's figure the interest on the private debt to average out to 6%, which is probably low, since AAA bonds are yielding a little over 5% interest. So $16.2K in interest. $16,200. Interest per worker. That's all going where? The company store? Sixteen tons?
Take a step back: 6% on 290% of the GDP means $2.44T or 17% of the GDP goes to interest payments, aka debt service. Non wonder demand is somewhat contracted. And the interest on the US debt is not really 0%, so we probably should add a percent or two.
Just by the way $53T is slightly more than the value of all the assets in the US.
Now of course, this isn't owed one person to another, this is all owed to banks. $16.2K to the banks. But apparently many banks aren't doing all that well, so who do the banks owe? Well, they 'owe' their owners, they owe their bondholders, and they owe their depositors. Now their depositors aren't getting much in the way of interest. So all the interest must be going to the bondholders, and the owners. But if the banks are still in trouble, that means it must be the bondholeres who are getting all the money. Owners are just making up their losses, recapitalizing their balance sheets. (Are they? And who does own the banks?) Bondholders must just love this deflation we're having.
Well, we've spun our wheels a little bit here, and it's hard to find out who owns what. But if you own a lot, you're probably owed a lot. And you're rich.
So if you owe, you owe probably owe the rich. Or maybe some pension fund. Another possibility, among others.
Saturday, May 22, 2010
In the short term, it is in the separate interests of the wealthy to corrupt the system to their benefit. That is, they will seek their own benefits ahead of the people's, first by becoming the instruments of government policy, then by bending government policy to their interests. They will cooperate with each other to do this, and secure advantage over the people. Securing advantage, they will plunder the wealth of the people. This is what (most of) the national debt is. It is what the people 'owe' the rich. Instead of paying taxes, wealthy 'loan' the money to the government, which it then has to pay back. The wealthy have used their power to cause this.
In securing their separate interests, they will cooperate in gaining favors. They will trade for votes. This is not 'zero sum' as regular trade is, but each party gains, and both their influence on, and burden on, government and the people, will expand. That is, through the instrument of government, they each acquire disproportionate wealth. And since all resources are competed for, others, the people, are at a disadvantage. The system becomes rigged.
But then they will compete, they must compete, to secure advantage over each other, and further advantage over the people. The government becomes an instrument of their competition, as they compete for its favors. Those who do not compete will be at a competitive disadvantage.
So all the wealthy are forced to compete against each other. They will compete to cause the government to pursue purposes to their own separate ends,which is the very definition of corruption. These interests, the benefit of the wealthy, harm the system, and the people, necessarily, by the law of externality: Those costs which can be externalized, will be. Thus the costs of the benefits to the wealthy will be laid upon the people, until the wealth f the people is exhausted. We are seeing this happening in the present 'recession.'
But the welfare of the people is essential to the welfare of the wealthy, and where it is destroyed, so is their own welfare. If the destroy the income flow of the people, they destroy their own income flow as well.
A poor society has few rich people. Neither has it much power to project, or even protect its interests.
In the long term, an uncorrupted government serves the interests of the wealthy better. A government can only remain uncorrupted to such degree as the influence of the wealthy is limited.
The people have been losing the competition for their government. They have persistently elected the servants of the rich to office. Now the system is rigged in the favor of the wealthy. Not good.
Cross posted as comment to angrybearblog.com: Maule and Pappas on progressive taxation and the decreasing burden on the rich
Friday, May 21, 2010
So that's a lot of money. But it is all loans, and the fans are not impressed. A The markets seem to think that this is just pushing the problem down the road. And it is. Germany doesn't want to bite the bullet and let Greece, and the other countries it has a current accounts surplus with, off the hook. But it will let the bankers and other speculators off, and put the European taxpayers on instead. We are talking about a massive transfer of wealth here. And the problem: Still the producer-consumer problem. The only way out is to give the Greeks, and the other PIIGS for that matter, back their money, so they can spend it on German goods again, and keep those factories in the Ruhr humming. So, with the people of the European Union somewhat poorer from the experience, they can all go back to work. Will they be wiser?
Meanwhile, a trillion dollar contribution to sovereign debt. The wise banker should be shaking in his shoes, because bankers the world over are going to succeed beyond their wildest dreams. If things play out.. wrong, and this is a giant step in that direction, they're going to end up with all the money! What a happy day that will be for them!
All our banker has to do is give it away. But, like the monkey with his hand in the jar, he won't let go of the banana. And if the monkey won't let go of the banana, he can't get his hand out of the jar. So he's stuck there.
Clues you in to how smart our masters are. Unfortunately running a monetary system requires a little more intellect, and a lot more balls, and pandering to the powers isn't going to do it.
Sunday, May 9, 2010
This will not solve the problem.
I figure the best thing for the EU to do is just give the money to the Greeks, and then they can go back to playing the same game. Give the Greeks back their money, so they can go back to spending it on imports from Germany, and the Germans can go back to making exports for Greece. Otherwise the interest on the loan is just going to come due, Greece won't be able to pay up, it will stop importing and put a little crimp in the German economy. And then the other little PIIGS come to market.
Another way to put this is just have Greece default on its debts.
The only other option is for Germany to buy up Greece. Which still won't solve the long range problem, which is maintaining Greece as a market for German goods.
Which is the general producer-consumer problem. No matter how much money the consumer starts with, eventually the producer ends up with all the money. Then the producer either has to give the money back to the consumer, stop producing, 'loan' the consumer the money, or buy the the consumer's assets. Buying the consumer's assets is just another step in the process, and doesn't work in the long run because eventually the producer will still end up with all the money. And the assets. And this chokes off demand. Loaning the money to the consumers doesn't solve the problem, because the loan compounds, and eventually the costs of servicing it chokes off demand. Only by giving back the money is demand maintained.
The only way for the game to continue is for the producer to work out a way to give the money back to the consumer. Otherwise the game comes to a stop. Chaos ensues. Anarchy. The death of millions, etc.
This is the general instability of the market system. This is important. Pay attention. This is the general instability of the market system. Especially under free trade, (ie a 'free' market.) And not just between countries, but between any organized entities, or any individuals. If any individual works just the slightest bit more than another, and there is free trade (exchange) between them, either the harder working individual trades down, that is accepts less that par value for what the other has to offer, and allows the other to trade up, or he eventually ends up with all the other's assets. The other ends up with no assets, and the harder worker ends up with it all.
And as between two, so between three or four or a million. The hardest worker(s) eventually end up with it all. And this might be called the most just result. Of course, it doesn't have to be the hardest worker. It could be the cleverest, or the luckiest. Or the one with the most leverage.
Because the producers don't necessarily end up with all the money. There is another class, whom we will call manipulators. The manipulators do not produce anything, but they control the money, and because they control the money, they can arrange it so that they themselves are the most efficient accumulators of money. More so even than the producers. So they are the ones who end up with all the money. And the assets.
And default will be prevented, the debts assumed by the people, so as not to offend the sensibilities of the manipulators.
Many libertarians go on about: "What ever arises from a just situation by just steps is itself just." (Nozick) Well, the end result of this 'justice' is the impoverishment of most of society, and ownership of everything in the hands of a very few. (Actually one, in the limit.) And not even those most 'deserving,' not even those who most contribute to the wealth of society, but the most skilled at manipulating. Horrorshow.
The generalization is mine, I think. The particular with reference to free trade, is: "Mathematical modeling reveals that under these conditions, outright Las Vegas decadence is not necessary for there to be a problem. It reveals that with free trade between nations with merely different discounts on consumption, the nation with the higher discount (more impatient) will tend to maximize present consumption by having past generations (who produced the assets that can be sold off) or future generations (who will service the debt) pay for present consumption. Various factors can interfere, but that's the underlying dynamic." Ian Fletcher, 'Free Trade Doesn't Work What Should Replace it and Why.' (p47) He includes this reference to Joseph Stiglitz: 'Factor Price Equalization in a Dynamic Economy,' Journal of Political Economy May/June 1970.
Monday, April 26, 2010
Can't run up debt, though. That would outstrip GDP growth. So you have to 'print' it. Would be inflationary but the extra goes to foreign countries, who can't get rid of it very easily. They have to spend it. Here. It would be like they had it in a savings account, if they buy bonds. Or like a checking account if they hold onto the cash. So one of the purposes (the purpose?) of selling bonds is to keep the money out of circulation, until the bond matures.
So, with deflationary pressure from the trade deficit uncompensated for because of inadequate government deficits a good investment strategy would be to short US industry. If you were a ...what? Traitor? How is investing betting of the failure of your neighbor? Or your own failure, for that matter. But the losing strategy results from the government inadequacy of spending.
Still not a very good way of compensating for the trade deficit, though.
Friday, April 23, 2010
All rights are the creation of men. It is the desire of men to have rights, which creates rights. Rights derive from the relations between men, and the resources available to men. Men give rights, so that they may have them. They are property, which each man possesses to one degree or another. Rights have value. The value of a right is not its formality, but its effect. Each man values each right, to one degree or another, according to its effect on his life.
All rights are by the consent of others. Since the consent of others is always contingent, no right can be absolute or inalienable.
Each society has available to it, even where it extracts rights from other societies, only so many rights to distribute among its members. A society with more resources has the potential for more rights. It may have less.
Each right that a person has is a limitation on the rights of others. Each right is a burden on others.
Rights incur responsibilities. The failure to meet those responsibilities is a cause tor the alienation of those rights. The first responsibility is the granting of rights to others. The second responsibility is their enforcement. The third responsibility is mercy. Since the responsibility of rights represents a burden, the fourth responsibility is the minimization of that burden, given the maximization of those rights, given the resources available. The fifth responsibility is the education to those rights, and their responsibilities, and their burden.
The people of a society grant rights for their own benefit. Rights are granted where the effective benefit of those rights is greater than the real burden of the responsibilities. Where the people benefit less than the burden, those rights will be discarded.
The people of a society develop institutions for securing their rights. These institutions formalize the granting of rights, and their enforcement. These institutions are themselves granted rights, to the benefit of and at the expense of the people. Such institutions necessarily also increase the rights of a few. To such degree as they use force, or are inefficient, they reduce the rights available to the people and increase the burden of those rights.
In a society, there is a natural distribution of rights, which depends on the resources available to that society, demanding the least force and incurring the least inefficiency, which maximizes the value of rights available to the people. The institutions chosen by the people need not guarantee that distribution, and indeed may be chosen to impose distributions of rights different from this natural distribution. The additional expense, the loss of rights to a society, will be more than proportional to the deviation from the natural distribution.
So by consent, the members of a society may make certain rights universal, and held in equal quantity by all, and inalienable except for failure to meet the incurred responsibilities. These certain rights then represent a form of property which cannot be bought or sold. A society may consent to this, at the expense of other rights, that the few more fortunate of more able, shall not otherwise acquire those certain rights of the many less fortunate or less able.
And by consent a society may make certain rights held by a few, who incur greater responsibilities. It may assign these rights, and those responsibilities, to the few, in
various manners. These certain rights then represent a form of property, which may also be bought and sold. A society may consent to this, at the expense of other rights, if the many choose to not effectively exercise themselves those responsibilities these rights incur.
Properties are rights, and by the consent of others. Therefore, no property is absolute or inalienable. Others consent to properties, so that they may also have properties. Those who consent to have less, do so in the expectation that they may attain more, either in the present, or in the future. Since properties are rights, those with more properties have more rights than those who have fewer. Those with more properties also impose greater burdens on their society, and incur greater responsibilities. Since there is a natural distribution, those with more properties may impose a disproportionately large burden of their society, and incur disproportionately greater responsibilities.
There will always be those with many rights. There will always be those with few. When those with few are many, and those with many few, a society is poor.
Where many rights are narrowly held, where the many have few, either the few exercise their responsibilities, and impose the lesser burden on society, or they impose the greater burden of society, and the consent of the many is obtained and maintained through fraud and excess force. The many may either shake off their burden, or succumb to it. The resources taken to enforce fraud and excess force take away from the rights available to society.
That distribution of rights which maximizes the value of rights, and minimizes fraud and force, is most just, and most merciful.
Subject to revision.
Friday, April 16, 2010
Warren Mosler, at
suggests, however, that we counter China’s policies simply by giving money to consumers sufficient to overcome its effects, and create sufficient demand to sustain domestic industry, as well as the excess in imports. He proposes a tax holiday, distribution of Federal money to the states, and national service employment.
His proposals have other significant merits. However, his proposals will not change the relationship between the Aggregate Supply curve provided by domestic industries, and the augmented Aggregate Supply curve provided by the combination of domestic industries and imports. The augmented Aggregate Supply curve will always be to the right, and the equilibrium price level will always be less than the price level in the absence of imports.
The revenue received by domestic industry will thus on average, always be less than the cost of its production, despite any overlay of inflation caused by giving money to consumers. Domestic industries will be under persistent competitive disadvantage.
Compare with balanced trade, where only some industries experience competitive disadvantage, but the others experience competitive advantage. The two even out, and the economy as a whole is helped. ( Although there is increased 'creative' destruction, as the economy adjusts. Do the costs of this balance with the benefits of trade? This seems to be just a transition state, however and in the long term balanced free trade will be mutually beneficial.)
An influx of cash shifts the demand curve to the left. The Aggregate Supply curves for just domestic production, or for balanced trade, and domestic production plus imports, do not change. With imports, price moves down the AD curve to the AS curve for domestic production plus imports, at the lower price. Solid lines. However, domestic revenue goes down the Aggregate Supply curve to the new equilibrium point at both the reduced price and a reduced quantity, and so is also reduced. Domestic industry, with reduced revenue, contracts. With an influx of cash, the same phenomenon repeats itself, but just at a higher price level. Dotted lines. But see Redux.
A reminder that might be pointed out is that the problem with deflation is that in general it reduces nominal profits and, at least in perfect competition, nominal costs are greater than nominal revenues.
A comment: The Aggregate Supply curves in this diagram could be vertical, or curved, for those who consider that an influx of cash is itself unlikely to cause an increase in production, but merely cause an inflationary increase in the price level, at least in the long term. The basic argument is the same. The country with deficit clearly declines both in quantity and price, and certainly could produce more at higher price levels, having idled capacity. The country with surplus is continually expanding, and its growing capacity must always outpace production.
Thursday, April 8, 2010
Those who claim that current trade policies are harming the US have, to our knowledge, proposed no clear mechanism. We propose one here.
We show that, while balanced free trade may be beneficial to all, or at least not harmful, when trade is not balanced, the net exporting country grows at the expense of the importing country. That is, the net importing country’s economy undergoes deflation, and erodes. The demand of the importing country’s economy is driven down, and its industry is increasingly idled. Since this affects labor, even many of those consumers enjoying the immediate benefits of lower prices, may pay a greater price, in lower wages and higher unemployment. Consumers are involved, whether they want to be or not.
We should also expect erosion of the tax base. There is, in the economy as a whole, more pain than gain. We model the mechanism.
The basic idea is that the price level in the importing country goes down, decreasing the revenue available to its industries. However, that country’s demand is ultimately equal to the revenue of its industries. That is the key relationship. The country's demand declines with the decline of the revenue of its industries. With continued imports, the price level continues to go down, as does revenue and demand, along the Aggregate Supply curve. With the continued erosion of revenue, industries are increasingly idled, and unemployment increases. The importing country is forced into a deflationary spiral.
In the exporting country, on the other hand, the price level goes up, and including the revenue from its exports, so does the revenue of its industries, and ultimately the country’s demand. Its industries, with increased revenue, grow, as does the country’s demand, along the Aggregate Supply curve. With continued exports and continuing increases of revenue, industries continue to grow. So does demand, and employment.
The unbalance of trade has been an issue for some time. When one is not doing well, one looks around for someone to blame. One also looks for causes. When one finds both, one must act- wisely.
Note that when trade is balanced, there is, here, no effect. Only when there is an imbalance in trade, where one country is a net exporter, and the other country a net importer, does the importer’s economy erode, and the exporter’s economy grow. There is a certain symmetry: The exporter benefits at the importer’s expense, despite the apparent benefits to the importing country, and the apparent costs to the exporting country.
Monday, April 5, 2010
The Smoot-Hawley Tariff Act was passed in response to protectionist sentiments at the beginning of the Great Depression in June of 1930. US tariffs, already averaging 40% due to previous legislation, were increased an average of 20% or so, initiating retaliatory tariff increases by US trading partners. It is generally credited with worsening the international economic situation, and aggravating the Great Depression.
We will consider a depression to start with an excess of supply over demand, due to a contraction in demand. Excess inventory leads producers to cut back on production, and further to cut back on factors of production, particularly labor. However, labor is the ultimate consumer, and by cutting back on labor, producers ultimately cut back on the final demand for their own products. This leads to a vicious cycle: Job cuts lead to reduced demand leads to job cuts etc.
In order for the cycle to end, supply must eventually equal demand. Since the cycle starts with an excess of supply, supply must decrease at a rate greater than demand, in order for the two to eventually become equal. This forms the bottom of the depression. One process that tends to happen is that, as the number of workers in a firm decreases, a point is reached where the marginal physical product (units per worker) decreases. Under these circumstances, supply indeed decreases faster than demand.
Other policies which help to maintain demand, such as unemployment benefits and deficit spending, also work to reduce the severity of a depression. The collapse of credit, by reducing demand, works to aggravate a depression. At the beginning of the Great Depression, between 1930 and 1933,the money supply declined by about a third.
With a reduction of trade, supply of goods and services is also effectively decreased. This is especially the case with a country operating with a trade deficit, but it is well known this decrease happens even under the conditions of balanced trade.
Consider the case of two countries, which trade two goods. If the countries impose barriers to trade, such as a tariff, each country becomes short in one good and has a surplus in the other. (To phrase it more precisely, the price of the first good goes up above the expense of production, while the price of the other good goes below its production cost. However, it is now apparent that markets do not always clear immediately, that surpluses and so also that shortages may exist, and may persist. If a good is a factor, other shortages may result.) Since the good a country is short in it produces less efficiently than the good it produces in surplus, when the now excess factors of production are transferred from producing the good in surplus to the good in shortage, the new total of production will be less than before. The combined supply of the two goods will be reduced. Further, during the transition period, the good in surplus will no longer be produced in surplus, but production of the good in shortage will not have begun, since it is still being capitalized. Also, during the transition period, the cost of the transformation of capital will increase demand.
In 1934, President Roosevelt signed the Reciprocal Trade agreement, liberalizing trade and undoing much of the tariff legislation. But by 1933, the Depression had already bottomed out.
This analysis suggests that the Smoot-Hawley Act, by helping to more rapidly reduce the surplus supply, helped supply and demand to equalize at higher price and quantity levels than they otherwise would have. Despite the negative effect the act had on business confidence, the Smoot-Hawley Act may have reduced the severity of the Great Depression.
This raises the issue of the general application of restrictions to free trade. In a sense, free trade maximizes the supply of goods and services to the world economy. It also maximizes international competitive pressures. Is this desirable? Is it desirable that only the most efficient producers survive? That is, is it desirable that the producer surplus be minimized?
It also suggests that a certain level of restrictions on trade may be beneficial for global economic stability. With some restrictions, balance of payments may be maintained. With unrestricted free trade, imbalances will almost certainly occur. Some have touted the benefits of trading goods for over-valued pieces of paper, but that paper represents debt, and the promise to repay in goods and services, which may come at an inconvenient time for a hard pressed economy.
I will not go into the well known equalization of factor prices under free trade, except to mention that it suggests US professors in economics will eventually be paid the same as their Chinese counterparts.
The analysis can be generalized to internal trade and specialization at all levels of social structure, due to the effects of comparative advantage. The relentless drive to specialization, while it increases the quantity of goods and services produced, may be socially destabilizing, and perhaps policies should be adopted that ameliorate these pressures.
I have simplified the discussion of supply and demand. The real discussion is more complicated, involving the shifting of the "Aggregate Demand curve" to the left, and the "Aggregate Supply curve" also bending to the left at the lower level of demand, so that the equilibrium point where they cross, where quantity demanded equals quantity supplied, is at a lower level, as may be the price, etc. The process stops when the equilibrium price level, which may be lower than originally the case, is greater than the cost of production, at the new price level. The reason the demand curve, and following it the supply curve, doesn't just spring back is because demand is money. No money, no demand. And money has been taken out of the demand side of the system. One answer is to gradually pump money back into the system, on the demand side. Under these circumstances, giving money to producers is useless, and worse, since they need no longer produce to make money. And so can lay off more people, etc. So is giving money to bankers. They have no reason to lend to the unemployed, nor to producers who have no demand for their product.
Monday, March 29, 2010
With increasing complexity, an increasing proportion of the population cannot be expected to cope. Indeed, many of the potentially most productive members will be less capable of coping, because they have invested a greater percentage on their education in their skill, rather than in their ability to cope with the system. In most cases their skill will be necessary to maintain the system. The system, as it becomes more complicated, thus selects against its most useful members, those most skilled in maintaining the system, and selects for those most skilled at coping with, or manipulating the system. (Or course these skill sets are not independent, but there is only limited overlap, as is evidenced by specialized educations. Not all education is to learn to do things that help maintain a society.) There is increasingly a separation of population, into those skilled at manipulation of the system, and those who maintain it. Those who manipulate the system come to do so for their own benefit, at the expense of those who actually maintain it. They thus gain income at the expense of those who maintain the society. Further, it is in the interests of the manipulators that it be sufficiently complicated that those who maintain it cannot both maintain and manipulate.
But with the prosperity of the manipulators, more people become manipulators, and fewer maintainers. Since the maintainers are the strength, and the manipulators are the weight, the society gains weight and loses strength, becoming less capable of performing essential functions. Increasing income stratification due to increasing complexity is not only inequitable, it is destructive of the society.
And we have not even addressed the issue of those who are insufficiently skilled at either maintenance or manipulation, for whom the maintaining skills, and the manipulation skills, are simply too complicated for them to cope with, but who could cope with and perhaps even prosper in a simpler society. To what degree of exclusion should these people be relegated, especially considering that society is, for many of them, at least partly responsible for their miseducation.
Friday, March 26, 2010
With health care, an inadequate supply will show up in things like reduced life expectancy, higher infant mortality, use of emergency rooms by the poor because there are not enough clinics, shortages of doctors in some areas, especially rural ones, and higher prices than in countries that have adequate or better than adequate care for their people. These things we see. Also, the mere fact that payment is such an issue suggests there is demand among those who cannot pay for it.
With health care, people only need so much, but that much they need. They are willing to pay high prices if they have to, and if they can. But even with low prices, they are not, individually, going to buy that much more health care than they need. ( Unless they are sold more. We have heard of some places where they are sold more, driving up expenses still further.)
If our health care is inadequate, why is it also so expensive? The paradox of a nation paying more and getting less is explained by elementary economics. Health care is an
example of what in economics is called a service with inelastic demand. (More properly the equilibrium point of supply and demand for health services is in the inelastic region of the demand curve.) The demand for such a service, or such a good, like oil, does not change much, no matter what, within reason, is the price. If the supply decreases, the quantity demanded does not change much, but the price goes up a lot. An inadequate supply will lead to excessive prices.
Conversely, increasing the supply a comparatively small amount will lead to a dramatic decline in prices. The paradox arises because, if the health care system supplied enough services to meet or exceed demand, the share of the nation’s resources consumed by the health care system would be less than it is now. Competition would drive the price down. (Down to zero, in fact. The role of government would be to keep compensation up to cover costs, despite prices being insufficient to cover those costs. But the total cost would still be less.)
The calculation is simply quantity of services provided times the costs of those services. This equals the burden the health care system places on the economy. For an inelastic service like health care, a small increase in that service, times the large decrease in price, would bring about the reduction in total costs, reducing that burden on the economy.
And clearly health care is an inelastic service, because other industrialized nations provide their people more health care, and usually more than adequate healthcare, for a smaller share of their countries’ GDP than ours. If instead the demand for health care were always elastic, no matter how low the price, no country could afford a nationalized health care system. Then the nominal prices charged by many national health care systems, which are much less than the costs, would lead to an uncontrollably greater demand, and the total costs to an economy would be impossibly large.
On the contrary, it is the cost of the US’ privatized system that is becoming impossibly large. Already 17 percent of GDP, it is estimated to increase to 20 percent of GDP, an incredible burden that the rest of the economy perhaps cannot even bear. This is happening because a privatized system is unlikely to provide adequate, and thus inexpensive care, or even to restrain its costs. It simply cannot be expected. Since adequate care will drive down prices, and thus drive down profits and force down costs, it is in the interests of a privatized health care sector to keep health care inadequate. That is, to keep it in short supply. It is rather unreasonable to expect private health care providers to act altruistically, and contrary to their own interests. Indeed, the future may well correspond to the delivery of an even more inadequate service, especially with reform expanding demand, but not supply.
Many would claim competition is in fact keeping the price of health care down. However, by this principle, we would expect competition to keep prices lower than the non-competitive nationalized health care systems in other countries. It does not. Therefore the amount of competition in the health care industry is simply not enough to restrain its prices. The sheer cost of privatized health care, as it is in the United States today, justifies its replacement.
If the United States had adequate health care, it would cost less for individuals, however they paid, and take up a smaller share of our GDP. It would be more efficient. This would increase the efficiency of the entire economy, free up resources for other, more vital, uses, and increase the competitiveness of American industry in the world market.