A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Saturday, January 28, 2012

Transcript: 491 Inflating the burden, deflating the means to carry it with Daniel Alpert

Today we’re going to listen a bit to Daniel Alpert, managing partner at Westwood Capital LLC. Alpert is a blogger at Economonitor and recently was named a fellow at the Century Foundation. The introductory question is from Michael McKee of Bloomberg on the Economy.
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So, we are going to agree with Alpert on much of his analysis, just not the pivot point. It is simply not a problem of excess supply, it is a problem of inadequate demand. I suppose that is the “… relative to demand … ” disclaimer.

We agree that a rational central bank would want to produce some inflation. And we agree that the effort to do that has produced the wrong results. Inflation in everything except the means to pay for inflation. That is, by injecting liquidity, stocks are up, benefitting those who don’t need to benefit, bonds are up, draining interest income from savers; commodity prices are up, sapping the real incomes of consumers; wages are down or stagnant; real assets are down, the debt deflation persists in the real economy in spite of and even because of the financial shadow play by the so-called rational central bank.

So we can reflate our economy, just not with bank-centric money creation. We can do it by real economy stimulus. When you go the other way, this is the madness of austerity – to expect good things when you subtract from an already failing demand side – the definition of the madness of austerity.

But Quantitative Easing is working, right?


We are happy to relay this analysis of the Fed’s impotence and the quantitative easing’s pushing up the wrong inflation rate (as long as we’re going to have more than one). That is, commodity inflation is, in Alpert’s terms, liquidity chasing money substitutes. You may remember our outrage at Demand Side when commodities became a quote “class of investment” when commodities are products of Investment.

Our early call was that 2011 was a repeat of 2008, with the trigger for a new slump being a new spike in oil prices. Those prices have broken from their highs in April. They came down in algorithm-hops and are now trending up again, insofar as a hop is a trend. But the point is that 2011 saw the highest average oil price in history, in real inflation-adjusted terms. It did not come near the peak of $147 per barrel as in 2008, but it did not see the trough of $33 we saw then either. Prices have hopped along near $110 on Brent and $95-$100 on West Texas Intermediate. There’s plenty of folks who point to Iran and Lybia, but we point at Wall Street and the Fed.


There is no problem with competition from excess supply of labor in China when you are building infrastructure in California, employing teachers, firefighters and police, or substituting labor for fossil fuels instead of the other way around. There is no leakage.

The debt part is right.

What about a Tobin Tax, a tax on financial transactions, a casino tax, a way of letting the financial industry help pay the costs of its failure?


The free flow of capital, the bond vigilantes running the governments, this has got to stop. As we’re seeing in Europe, it is either control the movement of capital or give up your sovereignty.

That’s Daniel Alpert. We recommend him.

Extraordinarily painful it is to watch the non-response of the corporate-sponsored governments to the challenges of our time. Eighteen months ago, Greece was solvable. Twelve months ago it was trivial. Six months ago it was a challenge. Today it is a lost cause.

Those who got it right 18 months ago, the Roubini’s, the Stiglitz’es, the others, are no longer getting points or position in the establishment. They are getting frozen out. We at Demand Side no longer see the percentage in arguing on the merits. The argument has been won, and not by us, but also not on the mereits, logic, long-, medium- or short-term viability. We have guaranteed ourselves another crisis because we have let those responsible for the last crisis remain in charge.

We did not fix the problems that were exposed. We punished the innocent for the benefit of the guilty – turning market discipline into a perversion. We are not kicking the can down the road, we are allowing the cancer to fester.

Sunday, January 22, 2012

Transcript: 489 A dispute with Keynes over Keynesianism

Today we’re going to explore the proposition that Keynes and the Keynesians have missed a basic point. Or have not noticed the evolution of the economy. I am not talking about NeoKeynesians – classical economists in sheep’s clothing – but the great man himself, his most important interpreter Hyman Minsky, and such able economists of the present day as Joseph Stiglitz. The point they have missed or failed to foresee is the centrality of public goods as investment.
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When Keynes and Minsky talk about socializing investment, at least as I read it, they are talking about the problem of full employment. Basically, the production of consumption goods for everybody does not employ everyone who needs a job, so the gap is filled by government spending or private investment, or there is unemployment. Sufficient private investment is not forthcoming, because it is not profitable. Government can sponsor investment, but does not need to own the investment it sponsors, it just needs to build and employ people.

Not to be out-wonked, here, from the General Theory, page 377,

Keynes says that his theory,
“The foregoing theory is moderately conservative in its implications. For whilst it indicates the vital importance of establishing certain central controls in matters which are now left in the main to individual initiative, there are wide fields of activity which are unaffected. The State will have to exercise a guiding influence on the propensity to consume partly through its scheme of taxation, partly by fixing the rate of interest, and partly, perhaps, in other ways. Furthermore, it seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will cooperate with private initiative. But beyond this no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.

Suspending the quote for a breath, and to note Minsky’s observation that
THE GENERAL THEORY was a product of the red thirties. With the Great Depression making the weaknesses of capitalism self-evident, thorough-going socialism was very prominent on the agenda of possible resolutions of the crisis. Keynes’ was a contrast to this socialism,

back to Keynes
It is not the ownership of the instruments of production which is important for the State to assume. If the state is able to determine the aggregate amount of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary. Moreover, the necessary measures of socialism can be introduced gradually and without a break in the general traditions of society.

Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own from this point onwards. If we suppose the volume of output to be given, i.e., to be determined by forces outside the classical scheme of thought, then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them.

To put the point concretely, I see no reason to suppose that the existing system seriously misemploys the factors of production which are in use. There are, of course, errors of foresight; but these would not be avoided by centralizing decisions. When 9,000,000 men are employed out of 10,0000,000 willing and able to work, there is no evidence that the labor of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down.”
We like to formulate this as macro is demand side, micro is supply side.
HYMAN MINSKY (CONT.) in his best book, John Maynard Keynes, (not a biography) interprets P. 157
There is an apparent inconsistency between Keynes’s belief that it is necessary to socialize investment to achieve full employment and the view that the market does an acceptable job of allocating resources so that private ownership and control can be retained. In part this inconsistency can be resolved if Keynes’s views are put into the context of the time they were stated and the then-current discussion. … in the 1930s, with the world depression raging, socialism was very much on the agenda. At the same time, civilized men were outraged by Stalin’s Russia; questions as to the inherent totalitarian bias of full-blown socialism were being debated. In the early 1930s economists with socialist sympathies were writing about market socialism and various mixed systems in which the towering heights of the economy were socialized while the rest of the economy remained private. Such market or towering-heights socialisms

However, the socialist path was not taken as the Keynesian lessons were assimilated and applied in the postwar period, even in countries such as Britain, which had substantial periods of rule by nominally socialist parties. The lesson that has been accepted, in part because wartime policy succeeded in establishing full employment , is that a large government sector, in part financed by deficits, can achieve and sustain an approximation to full employment. The argument was developed and accepted that there is no need to socialize ownership of industry. The ownership of productive resources can be “safely” left in private hands, as long as government, through its budget, is big enough. In the programs that were developed, the government expenditures necessary to sustain full employment took the form of claims upon productive capacity – building highways, paying for education and hospitals, arms, space adventures, etc. – and the form of transfer payments and subsidized consumption – social security, welfare, food stamps, Medicare, etc.

This big government sector implied a large tax bite, so that the shape of tax schedules became a weapon for subsidizing (thus expanding) or taxing (thus constraining) various activities. As the gap between consumption at full employment, even allowing for transfer schemes, and full-employment output must be filled with either government spending that uses resources or private investment if full employment is to be sustained, measures to induce investment by increasing profitability have been insinuated into the tax and spending systems. Thus a high-profit, high-investment economy has been created in which tax and government-spending policies are evaluated on the basis of their impact upon private investment rather than on the basis of their impact upon consumption or equity with respect to income distribution. Full-employment policy has taken on a conservative coloration; what has been achieved might properly be called socialism for the rich.

However, as the tax schemes to induce investment bias income distribution in favor of the saving sectors [read the rich], a treadmill process has developed in which ever-greater investment and ever-greater stimuli in the form of profits and subsidies to investment are needed to sustain full employment.

Thus, the way the economy has developed is in marked contrast to the idea Keynes advocated, which was that if investment is inadequate to achieve full employment, then it is not desirable to induce a more rapid pace of investment by providing direct stimulants to private investment, but rather “measures for the redistribution of income in a way likely to raise the propensity to consume” (GT, p.373) should be undertaken. In Keynes’s view such consumption-oriented measures may in fact “prove positively favorable to the growth of capital” (GT, p.373); government intervention, outside the socialized investment sector, is to be mainly directed at raising consumption propensities, primarily by policies that aim at achieving a more equitable distribution of income.”
Those observations from Hyman Minsky

So what is our complaint with all of this? It is that public goods have the character of investment, and this is not acknowledged, nor taken advantage of.

And secondly, I guess, that with the collapse of the housing bubble’s leaving behind a housing stock inappropriate to the needs and incomes of the population, with a transportation system gridlocked and crumbling side by side with an energy industry addicted to climate killing greenhouse gases, and with the global imbalances ever more apparent, there is ample evidence – contrary to Keynes in 1934 – that the existing system seriously misemploys the factors of production.

Public goods do not have the character of private consumption goods. They are not depletable and they are not excludable. A private good has to be depletable, or there is no reason to keep producing it. It has to be excludable or there is no way to target it to the customer. Attempting to make public goods like health care excludable is done only so the private sector can profit. It is neither natural nor efficient. And it only illustrates further the similarities to investment goods.

In the excerpts from Keynes and Minsky, government spending and private investment both serve the purpose of filling the gap between full employment and that employment provided in the private market by consumption goods production.

Again, it can hardly be denied that the expansion of government after the Second World War corresponded with an explosion of prosperity, such as might be expected from big investment. Minsky here characterizes government expenditures as involving claims on productive capacity – highways, education, hospitals, arms, space adventures – without noting that these (aside from military spending) are additions to productive capacity.
The idea of Keynesian stimulus has come down to us here in the second decade of the 21st Century as the idea of stimulating consumption, and this is indeed part of it. The element of equalizing incomes for the sake of raising the propensity to consume is not widely accepted anywhere, except perhaps here at Demand Side. Employment for employment’s sake is another, more liberal part. But our point, public goods as investment is absent. Not even thought of by the Right, which sees nothing but wasteful bureaucracy in police and fire protection, in courts and roads and education and public utilities and the institutions of governance.

Consequently the public goods of social order, education and infrastructure are underfunded. Instead tax breaks for private investment – as Minsky said here – distort both the tax code and the things we build.

Profit in the private market sense involves creation of a stream of value that is tapped to pay for the cost of the investment, a cost adjusted by various government subsidies. But public goods are the basis for growth and stability. They are not a ragbag of charity and waste. Nothing is more apparent than this when you confront the reality of climate change. The value of a habitable planet. The savings from not having to adapt to and mitigate the destruction to come. The physical and social welfare of billions. Immense value. These values are invisible to market-based investment.

Instead, this value should be the source of financing for investment on a massive scale through the public sector.

This is a very short step. A painfully short step. It is made long only by the control of the government by the private marketeers and by the deficiencies of accounting which cannot see resource depletion or the destruction of natural systems or – as in the health arena – value not according to well-being or outcomes, but according to inputs.

Compare the tremendous debt incurred to build McMansions and fill them with outsized appliances to (A) the value of these investments now, which is deteriorating, or to (B) the value of an investment of one-tenth that amount in retrofitting buildings to conserve energy.

We have had a global financial crisis, a recession that doesn’t, to us, appear to have ended (or if it has only because of a technicality of definition), and deepening climate deterioration. We have had an incredible intervention on behalf of banks, including a heroic but ultimately unsuccessful effort by the Fed to keep housing prices from falling out from under mortgage debt.

Retrofitting buildings on this scale produces jobs. The debt incurred can be paid back from energy savings in seven to ten years, that’s conservative for most buildings.

And the example follows to infrastructure and education. By maintaining current roads and bridges and rail, we avoid future costs. Beyond a certain point, crumbling road surfaces cannot be restored, they have to be rebuilt. We avoid immense costs by timely maintenance. Or education. Economists have puzzled at the lag between an invention, a technological breakthrough, and its full impact on the economy. Electricity, printed circuits, the Internet. Decades pass before they are incorporated in the fullest sense. Obviously it is education and training.

And the germ of every technological advance sprouted from the soil of education. To say education is not an investment that pays off is purposely obtuse. Consider the value to companies of an educated work force or an educated and presumably more prosperous customer base.

So, I don’t get it. Actually I do get it.

Public investment is perceived to be a subtraction from somebody’s wallet, either in taxes or in lost profits. But taxes are just the way we buy public goods. Consider:

15 – car payment
5 – insurance
10 – gas
5 – maintenance
15 – climate damage
Say $50

How much for the roads? $2.50. Less than the latte you buy on the way. Sorry. Doesn’t work for me.

I have an uncle, an old uncle, went to college on the GI bill, taught for decades in a public university, had the luck to have a gravel bed on his farm next to an interstate construction project, watches the students pay ever higher tuition with ever bigger student loans, and votes Hard Right, no property tax for him. “I got mine, what do I need to worry about….”

At a minimum it exposes Ricardian equivalence, which predicts somehow his concern for the future would outlast his old age.

But I digress. Public goods are a good deal. For everybody. Even capitalists can make real profits building and selling infrastructure or services. The proper accounting and proper financing mechanisms need to be in place. Government needs to act as the sponsor. The markets need to be made visible.

Who does not benefit from investment in public goods? The banks. There is no massive debt to sell. The government can sell its own bonds without too much help. Banks make their money on writing debt. At least their managers do. If the debt goes bad, their government is there to bail them out. And indeed, that’s where the profit has been – in the expansion of debt, not in building things and employing people.

So, our point today. Expansion and stimulation of consumption as the only Keynesian policy is wrong. Although we do espouse redistributive tax policy as a way of transferring spending power to those with a greater proclivity to spend. It doesn’t bother us if a little social justice is a byproduct. Even direct job creation which we propose and the MMT-ers have right – in the form of a job guarantee – is not the be-all and end-all. Socializing investment in a way that identifies value, often avoided costs, often expanded opportunities, in a way that can be monetized and used to finance that investment is the way to go. Jobs, prosperity, follow.

Sunday, January 15, 2012

Transcript: 489 Commercial Real Estate revisited

One of the key parts of the Demand Side forecast last time was the vulnerability of regional banks to commercial real estate’s collapse. Our calculation was simple: continued high vacancy rates would put downward pressure on rents. Since much CRE is highly leveraged and its owners have limited liability legal structures to hide behind, as soon as rents stopped covering the debt service, owners would walk away. Although because leases are typically locked in for five years, the slope of the decline would be shallow, it was inevitable. Banks would be left with properties they didn’t want. Prices would plummet like residential real estate. A downward spiral of rents and prices would put banks in charge of more and more.

Didn’t happen. It is probably not going to happen. Why?
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Of course, it is more interesting to be wrong than right. Being right just cements your previous opinions. And boy, are ours cemented. Being wrong, you get to learn something.

Why didn’t it happen?

One, CMBS —commercial mortgage backed securities – were far easier to work out than residential mortgage backed securities, which were essentially not worked out. Many now sit on the Fed’s balance sheet. Banks don’t want commercial buildings, and they’ve been willing to restructure and rework the loans. The short step is that CMBS are far more amenable to being unpacked by the owners. This may be a “default” in layman’s language, but in economist-speak, that’s only for sovereigns and things that trigger derivatives. So, one, fewer banks own the properties. They remain in the hands of the people who know how to run them.

Two, financing is available and people are buying. In many markets, those current owners who see yields getting squeezed can sell. Low-rate financing is available to well-qualified buyers, as the radio phrase goes, and the well-qualified include the well-connected to financial firms. They include out-of-country money or money being repatriated into the dollar, which sees high quality CRE as a safe dollar-denominated asset. In this sense, CRE is benefitting from weakness elsewhere. Capital cannot lie under the pillow, not when there are so many Wall Street geniuses ready to put it to work – providing it is not theirs to lose. So, more sales in spite of weak yields.

Third, employment has not fallen to the degree we projected. In particular, public sector employment, though negative, is not negative to the degree we saw coming. At least not yet. Employment earnings are coming down, but not employment itself. Employment drives CRE demand.

Fourth, this is a forward-looking market. Happy thoughts will generate activity. People are looking for yield, need yield, in the case of pension funds, and cannot get it in the traditional safe bonds. It should be noted that total returns for U.S. long bonds is the best performer over the past couple of years. As the yields go down, the price goes up. Capital gains.

Fifth, our interest was on basically major commercial structures like downtown office buildings and business parks. Apartment buildings are also part of CRE, and they have been doing well, or better than bad anyway, as the nation returns to housing as a service instead of housing as a speculative investment. The apartment market tightened considerably between early ’09 and mid 2011, and it has continued to tighten, but at a dramatically lower rate.

All that said, the overleverage of the society is still enormous, and the downward pressure from the macroeconomy continues unabated. The yield on CRE is down even though the average rental rate has stabilized. This follows from the five –year basic lease. Another caveat, I am looking at this through the lens of my neighborhood – Seattle – which is doing better than other neighborhoods. I should look into that.

Well, lookee here. From the Wall Street Journal, January 10. Trouble Is Brewing for Office Market
Penn Mutual Towers, an office complex across the street from Independence Hall in Philadelphia, has seen its vacancy rise and income fall after one big tenant left and another renewed its lease for 15% less than it had been paying. Its creditors are foreclosing on the property, according to data company Trepp LLC.
Similar problems are mushrooming in office markets throughout the country, foreshadowing a new wave of real-estate trouble.
While the housing market was at the heart of the most recent real-estate crisis, office buildings—the center of past meltdowns—until now haven't been a major source of concern.
But many owners who have been able to keep their heads above water are being undone by tenant contractions and the expiration of five-year leases that were signed at the peak of the boom.
Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.
Defaults and foreclosures are rising. The delinquency rate of office loans that were securitized hit 9% in December, up from 7.4% in June.
Analysts expect the rate to keep rising. Meanwhile, the delinquency rate of other asset classes like apartments and hotels has begun to fall, according to Trepp.
"These people have turned into zombie landlords," says Kevin Traenkle, a principal at Colony Capital. "They have been able to service mortgages with rents that are above marketplace today. When those rents roll, they will get a much lower number."
Problems are particularly acute for owners that purchased or refinanced buildings near the top of the market.
So, Seattle is advertised as one of the best cases, and so it seems. Still, however bad the turn for CRE, it probably won’t bring down the banks, for the reasons above, that the apartment component will not be weak and the foreclosure on commercial real estate will be avoided with workouts and writedowns.

Calculated Risk opines: quote “Even with a little improvement in the economy there is still more pain to come for commercial real estate, especially for offices and malls.”

Now, it is quite stimulating when we find a Wall Street analyst who is not in denial, and we’re featuring one after a few notes on the European mess.


The ECB’s $625 billion to European banks at low rates is apparently being hoarded by the banks, and deposited back to the ECB. At least so far. A small amount may have come out and moderated the interest rates for Spain and Italy in recent auctions, but it is likely this ECB action will be treated by the banks in the same way as the zero percent interest rates are treated by U.S. banks. The ECB had hoped, we think, to float the sovereigns for a little longer with this move. Maybe it will still happen. But, as with the Fed in the U.S., the banks are the central concern. And it is delay, not solution.

Hedge funds may be slowing the dance of death with Greece.
Confidence in financial markets plunged yesterday as hedge funds held up a crucial deal to restructure Greece's €350bn (£290bn) debt pile.
The euro fell to a 16-month low against the dollar after signs that the agreement, designed to put the country's public finances on a sustainable path, might be derailed.
European leaders reached an agreement last October with the Institute of International Finance (IFF), the global banking lobby group, that Greek bondholders should suffer a "voluntary" 50 per cent haircut on the value of their investments.
While large European banks have agreed to the deal, several hedge funds are understood to be holding out in the belief that the European Union and the International Monetary Fund will have no choice but to pay them off in full if they refuse to play ball.
The IIF said yesterday it hoped the deal would be concluded in a matter of days and its managing director, Charles Dallara, flew to Athens to finalize the agreement.
But the IIF confirmed that no offer has yet been made to bondholders.
"Hedge funds and other investors will need to see what the final detail is before deciding," a spokesman said. European leaders have also been increasing the pressure on bondholders this week. The German Chancellor, Angela Merkel, said on Monday that the next tranche of EU/IMF bailout funds that Greece needs to avoid a default in March will not be paid unless the restructuring deal is completed first.
Nicholas Spiro, of Spiro Sovereign Strategy, warned that hedge funds frustrating the deal could end up getting burned as the next haircut is likely to be more than 50 per cent. "If hedge funds insist on driving an even harder bargain, they could lose even more in the end," Mr. Spiro said.

Well, clearly the financial markets have been making the play that Greece is a special case and this won’t reflect on the other nations impacted by current account deficits and rising costs of rolling over their debt. We at Demand Side disagree. Any nation whose debt service goes up by the amounts in prospect while it is importing more than exporting is going to be in trouble, sooner or later. Adherence to the Euro blocks the natural balancing act. Unless there are systematic restructurings – which would be bad news for banks – there will be more Greeces.

Thursday, January 12, 2012

Chartalism unbound, a conversation with Nathan Tankus

Many months ago, we engaged in a discussion with one of our listeners, Nathan Tankus, on the subject of MMT and Chartalism.  This is for us a difficult think, so Nathan gave us a hand with the following piece.  It is still difficult for us, although you can see the evidence in support in recent history.  Following the short piece is a back-and-forth, which we may reopen sometime soon.

But we need to get this out.  Along with our second apology to Nathan

Chartalism has five main principles.

  1. The size of the government balance (government spending - government taxation) by itself, whether positive or negative, tells us nothing about whether effective demand is too high or too low.
  2. It is impossible for a nation to go bankrupt when it's liabilities are denominated in a currency it can print and it's exchange rate is floating.
  3. The government always spends by sending money to bank accounts; the sale and purchase of treasury bonds by government is used to control interest rates and is a holdover from the gold standard.
  4.  People start to demand a particular asset when they need it to eliminate a liability (whether it's a tax, loan, tithe, fine or even racket money. I personally think that the state theory of money should be renamed the coercive theory of money).
  5. The only limit to a government deficit is increases in the inflation rate (I'm dynamicizing the explanation more then simple chartalist monographs do), not borrowing or tax revenue.

     These principles imply that what should be considered by government policy when considering stimulating or shrinking demand is change in the rate of inflation, change in the rate of capacity utilization and the change in the rate of unemployment (measuring both against current capacity utilization and unemployment) . When employment (of capital and labor) is falling at a high rate, stimulating demand a certain level tends to slow the growth in unemployment, possibly turning it negative, while tending to having less impact on change in the rate of inflation (since producing more output will tend to decrease average costs at low levels of capacity utilization and increase profits more then increasing prices and keeping output production constant or falling further would). When unemployment is falling at a low rate and capacity utilization and inflation are growing at a low rate, stimulating demand will tend to increase the rate of growth of employment (again, of capital and labor) and increase the inflation rate to a lesser degree. because of this, Chartalists tend to support demand policies that reduce average private sector costs, raise productivity, increase the labor force and target increasing demand for labor (to full employment) above all else (which as you point out in one of your podcasts, will increase productivity further) so that increases in the rate of change of average prices (whether positive or negative) can be kept low.

    Chartalists also think that government budgetary policies raise certain prices much more sharply then otherwise by purchasing x dollars-worth of private goods rather then x amount of a certain good at a certain price (in other words by using a quantity and not a price rule). This principle is the logic behind a job guarantee. Under a job guarantee, the government offers to purchase any labor offered at a certain set price (what would effectively become the minimum wage). The private sector can hire workers out of the job guarantee program simply by offering a slightly higher wage (and the worker accepting it). This adjustment means that government demand for unskilled labor falls by exactly the amount private sector demand rises for labor. in this way the nominal price of unskilled labor is anchored, which has a profoundly stabilizing effect on labor costs (the wage rate of those in the job guarantee will have to be periodically increased to keep labor costs stable and prevent deflation).

    Chartalists also tend to be Minskyans, but since those ideas are not uniquely chartalist (and are shared with the demand side podcast/blog) i will not discuss them here. Ok, on to your responses

    Nathan: First, paying down private debt should be government policy (more specifically, reducing the ratio between debt and after-tax income).

    Alan: Agreed. But that should be done by writing down the debt, destroying the bad loans, as a nod to historical practice and to generate a little bit of market discipline. Steve Keen estimated that excess private debt in the U.S. (including financial debt) amounts to about 125% of GDP. That's $17 trillion, more or less, in today's numbers. The chances of paying that down in any reasonable amount of time is negligible.”
Nathan:For the most part we don't disagree, however I think your comment has a bit of a false dichotomy. Principal and interest write downs are not currently being contemplated. A payroll tax holiday however, has positive rhetorical value on both sides of the political spectrum (reducing taxes considerably for the right and increasing worker's income plus making the tax code more progressive for the left) that if pushed would be difficult to resist. Under these circumstances a payroll tax holiday would be much better then no debt reduction policy at all.

“Alan: The first part of this is exactly my argument for jobs rather than payroll tax reductions. A job, say $25,000 plus benefits, creates a full spectrum of spending, from rents to groceries to durables to gasoline. A payroll tax holiday goes to somebody who already has a job and will likely not make changes to his spending on a large part of that spectrum. The marginal propensity to spend, you say, would be higher. I say it would be saved or used for debt reduction. In the main, of course. Taxes, of course, and particularly payroll taxes are direct transfers to another's income.  The larger the payroll tax cut, the more would go to consumer spending?  Maybe.  This is a flat tax reduction. The more you make the more reduction you get, and we know that the propensity to save goes up with income.

A secondary effect of jobs is inflation. Job programs would by necessity go to public goods and services. The private sector would likely choke any Congressman who allowed jobs to be used to produce consumer goods. These public goods and services ought to be considered investment goods. As Minsky and Kalecki have shown, it is the proportion of the workforce employed in the investment goods sector that determines true inflation, a general price rise. Now I would say that if all that money the Fed is protecting in the financial sector got a whiff of inflation or the prospect of profit, then there could be the much-feared uncontrolled situation. But if that money is properly destroyed, then we have the Minsky starting point, where capitalists are chary about lending, and it is lending that creates money (in the current framework).”

Nathan:  I don't think I was very clear. Let me try again. I don't think that the forms of stimulus with the highest multipliers are the best way to increase demand. In fact, I think picking the forms of stimulus that have the lowest multipliers but also work to reduce average private costs the most is the best policy. Those policies bring us closer to an equitable distribution of wealth and an optimal, more stable economy. A payroll tax [holiday?] reduces labor costs and the cost-of-living considerably and will help repair the net worth of households. From here it is easy to make the point that you have let Minsky's simplifying assumptions carry you astray. Minsky assumes constant labor costs and no other costs in his Kaleckian algebra within Stabilizing an Unstable Economy. This is obviously an unreasonable assumption, especially around a policy such as a payroll tax holiday. Public goods and services don't need to be sold as commodities to reduce inflation, they just need to reduce production costs, labor costs and transportation costs. Tax policy aimed at reducing the share of consumers that are rentiers and unproductive workers and the share of income that comes from capital gains (including unrealized capital gains in the measurement of income) will leave more room for wages to rise without inflation.

Your political argument is the best argument I think you have. Still, I have a few points. progressive policies won't be instituted without popular pressure (I have a paper I’m working on now that argues Minskyan thought, taken to it's conclusions, implies organized direct action is the only way to create a prosperous and relatively stable capitalist system. To be even more heretical I named it “Why capitalism needs anarchists”). During times of organized social movements people tend to become motivated and able to process a lot of complicated information in order to produce coherent and rational demands on government and industry. There is a reason that Martin Luther king and every other major civil rights leader and group forcefully supported a job guarantee of one sort or another (see this article written by a more race and environment oriented chartalist professor at UMKC: http://www.njfac.org/King-jobs.htm). It is because their constituents gained a deep understanding of the problems facing their communities and designed strategies to combat them at the local, state and federal level. The economic, social and political thought of the civil rights movement helped shape their leader's thought and those leaders had less choice then other political representatives in holding unpopular positions. I think you may be surprised by the intellectual strength of an organized social movement.

Sunday, January 8, 2012

Transcript: 488 An economist walks into a bar....

The standup economist is Yoram Baumann, and if you’ve ever heard him do his Mankiw bit, you’ve laughed. But economics is full of jokes told by serious people not realizing they are jokes. It is a profession of straight men and a few women, who have no sense of humor. Not that they’re solemn like funeral directors, they’re just clueless.
Listen to this episode
One piece of evidence is the Phillips Curve. This is the relationship between inflation and unemployment. Economists will seriously assure you that there is an inverse relationship. Our intention at demand side is to produce a joke book where, on one page, this assertion is made. A clear relationship between inflation and unemployment. Turn the page and see the Phillips Curve.

There you will see a – what – corkscrew? If you get one where the data hasn’t been cherry picked, it will look like your three-year-old got hold of a pen. That is, there is no useful relationship between unemployment and inflation.

Check out the blog for versions. We even provide the idealized version, which shows a clockwise circle.

But to show you we are real economists, we are going to destroy whatever humor in the joke by explaining it ad nauseum.

Inflation is a symptom, an effect. General price changes can be useful. They can be harmful. For example, if you assume some prices are sticky downward, then inflation is the only way to adjust relative prices, to adjust prices to another. We’re familiar with the bad version of this when we see energy prices soar and the prices of other goods – like labor -- tank. Another example, as Minsky pointed out, when there are financial crises and debt burdens are too high, those burdens in real terms can be reduced by inflation, and they have been. Nominal debt payments remain the same, wages and profits increase, the relative burden of the debt payment goes down. It has been the recipe for recovery since 1980. In fact, Minsky believed it would always be so. He never envisioned authorities letting things get out of hand as they have in the current stagnation.

Consumer price inflation involves things like energy. The great inflation monster came out of the 1970’s with the Iran oil embargo and the rise of OPEC. I don’t see that anywhere in the Phillips Curve. Oh yeah, it’s the top loop, and the other high loops.

A lot of things can go wrong when you think inflation and unemployment are equal evils. You can manage your economy to keep inflation low and generate Great Moderation that is cover for the stagnation of wages and the rise of asset bubbles. That’s what we’ve seen. Great asset bubbles in the 1990s and again in the 2000s, price explosions completely off the inflation screen, because measures of general inflation do not include asset prices. So the devastating bubbles and busts go completely outside the radar, while inflation in consumer prices gets jumped on with both feet.

There are a lot of things missed when you make inapt comparisons, such as this. Treating a cancerous tumor or an elevated temperature as if both are equally dangerous can make treatment completely nonsensical. My, we’re getting off the track. Be that as it may.

Our position at Demand Side is that investment – public and private – is the necessary driver of full employment, following from the fact that the principle constraint on the modern economy is demand, not supply, and investment is an addition to demand. Investment is not seen in the inflation numbers.

I see we’ll never be a comedian, because we are still wanting to explain our joke. Just look at the examples on the blog. All serious, sober, PhD, solemn economists agree this is the clear relationship between unemployment and inflation. It is displayed in the Phillips Curve. There is no relationship. it is relating an orange to a cow.

Wait till we get to our joke on the Natural Rate of Unemployment, the Fed’s great knee-slapper, the Non-Accelerating Inflation Rate of Unemployment – NAIRU.

But that’s all warm-up for today’s Idiot of the Week.

James Bullard


Crikey! Inflation targeting. That’s what we need! It worked so good for Europe.

In case you’re wondering, we included all the business about minutes and such to demonstrate that the Oracle of Delphi is no competition for the Fed in cryptic pronouncements.

And the Fed has no clue. They’re fighting over inflation when inflation is not a problem, and what inflation there is comes from commodity speculation that they themselves are fueling with the various QE’s. Check out yet another chart on the blog, the money supply. This is supposedly what is going to drive inflation. But it has exploded. The money supply. In the Monetarist view of Milton Friedman, inflation is always and everywhere a monetary phenomenon. Quote-unquote. So either they don’t understand money or inflation is not a monetary phenomenon, always and everywhere. The answer is both. Money is not the exogenous provenance of the Fed, but is endogenous. It comes out of the financial system in booms and goes back into it in busts. Or more rightly is created to finance booms and destroyed when the bust occurs.

So the Fed cannot control inflation even if it wanted to, irrespective of whether that would be a good idea. Back in the 1950s and 1960s they controlled inflation by controlling prices of key goods, not by the magic interest rate button which is like the easy button. You hit it and it makes a satisfying sound, but it doesn’t do anything, or at least doesn’t do what you want it to do.

Yet you have a roomful of bankers and bankers stooges sitting around telling themselves how important they are and how what they do will make a huge difference, so they’d better do something. After giving away the store to the banks, maybe they’d better take care of inflation. Forget unemployment, after all we’ve made corporations as profitable as we can, what more can we do?

Out of the great group think comes, inflation targeting. Now even if the Fed could control inflation with its magic interest rate button, that button operates – as everyone agrees – with a lag of twelve to eighteen months on the short end. Heck, the lag is now into the forty-month range. Inflation happens last month. Steering your car by looking out the back window is not a good idea.

Inflation targeting, then, is basically inflation wishing. And the whole exercise is contrived to publish what the Fed wants to an audience which may believe the Fed can do something, so they will alter their expectations and those expectations will produce the experience of inflation.. You think I’m joking. It is funny. But it is not a joke. This is exactly what is going on here. An elaborate play using as many expensive suits as possible to shift expectations, not really realizing that nobody is paying attention.

There is more in this interview, all exhibiting a complete absence of self-awareness even after the cream pie of the Great Financial Crisis was delivered by the Great Moderation., including Bullard’s amusing assertion that because the middle of the 2000’s was a bubble, we should revise down our estimation of growth potential. We’ll leave you with just another taste, of this minister at the monetary policy court.


Idiot of the Week

It looks to us at Demand Side like the number of forecasts for 2012 is dramatically lower than the number at the start of 2011. Of course, at that time you had three, three and a half, four percent growth projected by economists. While projections from Global Insight, Macroeconomic Advisers, Goldman Sachs were deftly cut throughout the year to make it appear they hadn’t missed the broad side of the barn, there does not appear to be the same eagerness to repeat the experience for 2012.

Yogi Berra once observed in his typical sagacious way:

In theory there’s no difference between practice and theory. In practice there is.

So, however much the demand side explanation diverges from the orthodox Neoclassical market fundamentalism, we remain confident in it. Keynes, the New Dealers, the Galbraiths, Minsky, and now Stiglitz, Soros and Steve Keen are among those who practice and preach an economics that works. But it works in explaining what happens and in prescribing policies that promote the optimal well-being of the society. This is the theory. In practice, economics being a political arena, what is practiced is that which benefits the powerful.

So in the current case, whether power flows to money, or as we state it, money flows to power, you have policy in the hands of non-demand siders, those whose economics is a hash of contradictions and bad assumptions that keep getting blown up by the evidence. But which, we are assured, will work if given enough time.

Of course, this is not true, either. The longer we wait, the worse it gets. Hold on! The economy is recovering, albeit slowly, we hear. Sure, we have trillion dollar deficits, the scourge of the responsible, and zero interest rates, the bane of inflation hawks. But it is in spite of these, not because, that the economy is recovering.

Our view at Demand Side is that the economy is bouncing along the bottom, a bottom which is sloped downward and subject to downside risks. As much as it might seem like old news, or embarrassing to mention in polite company, a business cycle in recovery does not have zero interest rates and trillion dollar deficits. It has investment growth and job growth.

The economics which did not see the crisis until it appeared in the rearview mirror, the economics of saving the banks and glorifying corporate profits, the economics of austerity, socialism for the rich and Darwinism for the middle class…. It hasn’t worked, it won’t work, it can’t work. But it is practiced all the way down, because it is the economics of the entrenched interests and their money is the power in the current political arrangement. At ground zero things blow up, then there is a chaotic search for something that works, we suppose.

For example, in the current European debacle – and look at the Europeans, for all their fiscal responsibility, eyeing the US with envy for our miserable flat line growth. In Europe the debt run up, largely in response to the financial crisis, and the debt service that grows ever larger, must be addressed by austerity, cutting services, reducing wages, to free up the means. How absurdly Hooveristic.

Our point is that the means to repay debt must be in the assets purchased by that debt. We define assets broadly, to include the social assets of education and social order and the public goods of infrastructure. If assets do not generate the net increase in value to pay the debt, debt service will be a reduction of net incomes. A reduction of net incomes means reduced means – sometimes called growth – from which debt may be paid and will thus lead to a downward slope – sometimes called a spiral.

This does not mean that a particular government bond will be defaulted on. It is quite possible the payment will be coerced out of even a falling economy. But it does mean that payment on that bond is derived from non-payment on something else and amounts to a shift of the negative to another. And a downward spiral.

And we have the examples in front of us -- Greece, Ireland, the UK, Spain, and more to follow – whose austerity by command of the market and the instruction of the fundamentalists is leading not to the renewed confidence promised, but to recession and ever higher interest rates and deeper employment shortfalls and larger burdens of debt. AKA the “madness of austerity.”

All justified by an archaic economics that didn’t predict anything, didn’t protect anything and now proposes a lost decade – albeit one year at a time and mostly for workers and homeowners – as the route out.

Well, unfortunately, it is the route – because no other policy, no matter its efficacy, will be tried by the current political regime predicated on the power of money. When President Obama came to office with a promise of pragmatism, we were quite elated. Shoot – even if you’re completely in the dark, stumble around with your hands outstretched and you’ll find the way out. And Obama, by his policy papers, did not seem at all completely in the dark. We didn’t realize “pragmatic” is defined by political necessity, not economic welfare.

In the first year of the New Deal under Roosevelt, you had the Public Works Administration and the CCC. In the third, the WPA. Direct employment programs. Granted, there was a modest public works component and support to states in Obama’s first year. But where is that now?

Compare two charts on the blog – and at the website demandsideforecast.net. One, the proportion of national income going to profits vs. wages. Two, debt by sector.

Whatever the causal links, you will see profits soaring, wage income plummeting, government debt ballooning, business debt sinking.

We propose the causal link is government policy. The Fed’s zero interest rates let corporations refinance and cut debt exposure, particularly in the financial sector which can now actually borrow at zero and lend back to the Treasury at more than zero and pocket the difference. Government deficits in the absence of private investment appear – as predicted or commanded, I guess you would say, by Minsky and Kelecki’s Algebra – appear in corporate profits.

Imagine for a moment government deficits that went to hiring people. It would take, say four hundred billion to bring the unemployment rate, the real unemployment rate, from 16 percent down to six percent. And the headline unemployment down to four. The same profits accrue in absolute terms, though as a percentage of GDP they would be lower because GDP would be higher.

We share Robert Frank’s amazement.

Anyway, there are the charts -— profits booming, deficits ballooning, returns to labor plummeting, business debt plunging.

Be sure, though, debt is trillions of dollars, tens of trillions of dollars, too high to be sustainable. We have that from Steve Keen. Read his Debtwatch Manifesto. link.

Wednesday, January 4, 2012

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