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

Sunday, June 16, 2013

Credit and Demand

Today on the podcast, no surprise, the policy preferences of wealthy Americans are those followed by the political class, a new study, then the opening salvo from Bill Black on the relative merit of the so-called Nobel Prize in Economics, and then aggregate demand and hedge financing, some observations on productive investment, and we close out with a gratuitous slap at the railroads.
Listen to this episode
First, though, a note.

On May 9th, for the first time ever, the carbon dioxide counter on the side of Mauna Loa, the most important scientific instrument on earth, recorded a daily average of above 400 parts per million. It’s a grim landmark -- it’s been several million years since CO2 reached these levels in the atmosphere.

Bill McKibbon remembered the advent of 350.org, the planetary protection agency that took its name from what scientists identified as the safe upper limit of carbon dioxide in the atmosphere: 350 parts per million. At the current rate, the carbon count will blow through 450 within a few decades.

Wealthy run politics

An article in the March edition of Perspective on Politics confirms what you may have suspected, the opinions of the political class seem to mirror the priorities of the wealthy.

"Democracy and the Policy Preferences of Wealthy Americans" by Benjamin Page, Larry Bartels, and Jason Seawright report on a pilot study, including some very interesting survey results.  We share the link and some of the charts online at demandsideeconomics.net. Budget deficits are at the top of the problems list of wealthy Americans, climate change is at the bottom.  As to priorities, the wealthy give a lower priority to education, environmental protection, health care and social security than the general public, though results are mixed.


Roger Myerson’s Paean to Plutocracy

by William K. Black, New Economic Perspectives
This article begins a project to critique the work by economists concerning regulation that has led to the award of Nobel prizes. The prize in economics in honor of Alfred Nobel is unique. It is not part of the formal Nobel Prize system. It was created by a large Swedish bank and it is the only “science” prize frequently given to those who proved incorrect. The theme of my series is how poorly the work has stood the test of predictive accuracy. Worse, it has led to policies in the private and public sector that are criminogenic and explain our recurrent, intensifying financial crises.

I want to stress that the reason that the work has proven so faulty is not that the Nobel Laureates in economics are incompetent or evil. Indeed, that is part of my theme. Economics is not a hard science and its pretensions that it is have helped make even brilliant economists vulnerable to grievous error, particularly those who were most dogmatic about their hostility to even democratic governments. A recurrent defect that will emerge is the failure of economics to take ethics seriously.

This article responds to the Prize Lecture of Roger Myerson, who was made a Laureate in 2007 for his work on “mechanism design.” Mechanism design theory was developed in parallel to Michael Jensen’s work that led to modern executive compensation. Jensen criticized existing executive compensation as paying CEOs as if they were “bureaucrats” and argued that it led CEOs to shirk effort and avoid taking productive risks. These variants of the classic “unfaithful agent” problem were reminiscent of Ayn Rand’s premise of the CEOs going on a mass strike, but here the strike was against the board of directors and the cause was their “inadequate” pay.  Myerson’s Prize Lecture uses a variant of CEO compensation as central to his argument on mechanism design.  CEO compensation is the subject of Myerson’s most interesting policy recommendation – the CEOs of large firms need to be billionaires and his most controversial conclusion – capitalism’s unique strength is plutocracy.

Last week was supposed to be a big showdown at the Harvard Law School on whether Steve Keen is double counting  when he aggregates demand from income and the change in debt.  To look at the absurdly close correlations between the change in debt, the second derivative -- the so-called credit accelerator -- and employment, you have to conclude No.  This is massively explanatory

One participant in a session with Keen at the Fields Institute last year opined that the dispute was a matter of ex-ante and ex-post observations, and that the issue would be settled if Keen simply changed terminology from aggregate demand to effective demand.  It was the ex ante force that John Maynard Keynes had meant in his discussions of demand.

I'm personally not certain anything is explained by aggregate demand if all we are aggregating is income.  In combining the change in debt with income, we are aggregating one side.  And as I say, it is hugely explanatory regarding employment.

We might aggregate consumption and investment spending, but that will be ex-post as well, and in fact, the dividing line between consumption and investment is not particularly dark  Cars are investment for a household, and even stocks of tuna fish or the contents of a freezer.  Investment goods when manufactured by a business get a big bright bow and all kinds of tax favors.  Investment goods built by the local sanitary sewer district or the state's department of transportation get no such bow.  They might be eligible for bonds, but normally it's just spending with no positive product.

And in aggregate demand we are in one sense simply trying to close the spending gap, so we have adequate demand to employ everybody.  It doesn't really matter whether it's consumption or investment.

Except when it comes to the debt load and debt financing.

That is, if we borrow to spend, we ought to want that borrowing to produce a tool or educated person or piece of infrastructure or plant that will generate the revenue to pay back the loan out of increased goods or services.  A "productive" investment.  If we borrow to consume, we have set ourselves a problem.  And if we borrow to speculate, we have set the whole economy a problem.

Nonsense economics claims that all government can do is spend. Quite the opposite is the case.  There is very little government does, aside from the much rumored rampant corruption and the occasional sports arena that is not some sort of public good, social or physical infrastructure.  Give me an example, if you will, of blatant government spending.

The public pension program of social security?  No.  It is a transfer program, a self-contained public pension program.  Government spends nothing, it is all done by the recipients, less a tiny overhead charge.  You might say that welfare is simple spending. Subsidizing the poor and indigent up to subsistence.  But if that is as close to wasteful spending as you can get, that's pretty sad.  And if everyone had a job, the ragbag of public programs could be put away by reason of income.

A footnote:  Full employment is the law.  Bank profitability is not the law.  In the full Employment Act of 1946 Congress made full employment the target of government activity.  In the Full Employment and Balanced Growth Act of 1978, they updated and reinforced it.  But what's a law these days, eh?  Can you hear me now?

Let's return to the idea that we want to borrow money mostly to invest in productive activities, not so much to consume, and never to speculate.

And I get it that the government doesn't need to borrow in order to spend. The whole exercise with the Fed buying Treasuries illustrates if nothing else that the public doesn't need to cough up any cash for the government to spend.  So I get that.  We are printing plenty of money, it is not causing inflation, but the reason for that is that the money is not being spent, so it is not entering the money supply.  Another recent Steve Keen paper displayed how QE can migrate from the Fed to the banks and never stir up the real economy.  Its only plumage is when the banks buy shares, as Keen calls them, stocks.  Money might trickle out there.  But it could also simply be absorbed in the stock prices.

One analyst suggested, in fact, that 85% of the S&P's performance was correlated with QE.

The idea that we want productive assets for our borrowed money does have some firm roots.

One, it is much easier to sell the public on, "Let's buy infrastructure, education, or relief from the climate chaos," than it is, "Let's spend out of thin air."  Even though this is what they support with the Great and Marvelous Bernanke.

Two, if we are expanding the number of productive loans, we are expanding the hedge financing in Minsky's financing structures.  That is, as Minsky described the progression, from hedge, or productive financing, through speculative, or rollover financing, into Ponzi financing.  The reach for yield leads investors into ever more risky ventures.  But were they leaving productive investments on the table because the yield was too low?  Certainly this is one reading of Keynes and Minsky.  But what if thousands of productive investments were passed over because the markets had no access to public goods?  What if seawalls or levees costing hundreds of millions were left unbuilt and storm damage incurred in the billions that might have been avoided.  (I guess we should eliminate the double negative:  If a project costing one hundred million saved two or three billion, THERE is a productive investment.)  The fact that this prudent investment is invisible, or the benefits of good education, or even the efficiency of good transportation infrastructure, is a matter of politics, not economics ... cost and benefit  It is not the rate of return on these projects, but the fact that they are in the public realm that prevents their being undertaken.  These are high return-low risk operations when the natural payment mechanism for public goods is operable -- that would be taxes.  But we know from our political study that taxes are not really just the way we pay for public goods, taxes are instead the fangs of a vampire government.  Or to be less hysterical, I guess I should just say that the natural financing mechanism for these high return investments is clogged by petty minds.

Let's take an example.  The president of CSX, the big Eastern rail company, says in this clip that railroads have plenty of cash flow for buybacks and dividends, but not so much for investment.  Why?  They are too busy making money shipping bulk coal and oil on present track, squeezing the little guys and pushing low profit freight onto the highways, not to mention passenger.  The other hand is busy thumbing their noses at the public interest.  Well.  He doesn't say it quite like that.  You listen.

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