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

Wednesday, July 31, 2013

Today, new GDP benchmark revisions, then into an extended and edited version of Senate Hearings entitled "Examining Financial Holding Companies:  Should Banks Control Power Plants, Warehouses and Oil Refineries?"   Featuring Senators Sherrod Brown, Jeff Merkly, and Elizabeth Warren, analyst and author Josh Rosner, and Prof. Saule Omorova with insight into banks taking over commodities.
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GDP benchmark revisions came out this morning from the Bureau of Economic Analysis, along with the second quarter advance estimate.  That number, which is little more than a guess, was 1.7%, higher than consensus expectations by the 0.7 markdown to the first quarter estimate.

The benchmark changes changed everything from 1929 to now.  They were pretty big in the small sense of the word.  Average annual growth 2009 to 2012 was 2.4, not 2.1 percent.  That's 0.6 percent added to 2012 mostly.  Some of the change comes from revising down inflation.  In terms of GDP, though, the last four quarters have averaged 1.4 percent.  This is not negative, as it would be under Demand Side's rules for health care and climate change accounting,  but it IS bouncing along the bottom, about half the level the new normal folks need to convince us things are not going to hell in a hand basket.

Hidden in the numbers is the shift of income and wealth to the top.  GDP per capita is kind of growing, but if you knock the 1% cap off, it is not growing.  Knock the top 10% off, and you have the decline most Americans are experiencing.  Even with the happy upper class, per capita GDP is not back to the 2007 level.  If course it is still in the1980s when climate change and health care are accounted for properly.

Today's podcast is brought to you by Paul Krugman's posting the debt chart.  We have that on the transcript, and maybe we have the link there.  But it is true.  Mr. "Debt doesn't matter because we owe it to ourselves. The man whose public service was in the Reagan White House alongside Larry Summers.  Acknowledgement after a fashion of the relevance of household debt.

Before we get into that Senate hearing, James K. Galbraith has put the issue succinctly when he said in a recent interview that recovery is held back partly by "the financialization of energy and commodity markets, which allows the economic rents to be extracted very rapidly if there is a movement toward faster growth.  Energy prices go up very quickly, and then you get basically a tax on the system and a drain on demand as a result.  That's again part of the problem of having a financialized global commodities market."

and later,
"... the collapse of the financial system ... is universal in Europe and the United States.  The banking sectors are vast institutions that have served very little public purpose, if any.  At this point, they could be run as public utilities, and the fixed cost that they presently impose on the economy could be lifted, and you would then have some more scope for private profitability in everything else, which would be a good thing."

Here, by way of preface, Senator Elizabeth Warren with Prof. Saule Omarova.


Yes, long-time listeners to the podcast may remember that this was one of our hunches -- if a conviction not accompanied by a New York Times article is a hunch -- that when Enron was shut down, the coke-snorting high living traders just moved to Goldman Sachs.  You can see by the behavior of the market that it is controlled.  Remember the bunny hops?

That exchange is part of our feature today -- an extended and edited version of Senate Hearings entitled "Examining Financial Holding Companies:  Should Banks Control Power Plants, Warehouses and Oil Refineries?"  This is more evidence of the return of the Gilded Age.  Not trusts this time, holding companies, specifically bank holding companies, well into controlling commodities using cheap money from the Fed. Get the link to the hearing on the website.

Link to session testimony
 We have the second part this weekend for the flagship feed.  Sorry we run out of bandwidth so quickly on the legacy site.  Feel free to change.  Use the brown icon on iTunes.

The chair here is Senator Sherrod Brown.


Wednesday, July 24, 2013

Transcript: Pettis and Krugman on China, Mark Blythe on Austerity

Today on the podcast, China, GDP numbers down there as well as here, and Mark Blythe, author of Austerity: The History of a Dangerous Idea, with Bloomberg Surveillance team Tom Keene and Michael McKee.

Several banks have followed Michael Pettis into marking down Chinese GDP numbers into the 3 to 4 range, down from the 7, 8, 9 that has been the assumed norm for now until forever. While Pettis does not see that as a tragedy or crisis, necessarily, for China, and those numbers may be several quarters away, it is hard to tell what the markets will do.
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We put up an excellent interview on the flagship feed last Sunday with Pettis courtesy of FT Alphaville. If you're still on the legacy site, you can access that interview via demandsideeconomics.net. No ads there, but there is a donate button. Thanks to those of you who have found it already.

Pettis makes several good points.

One is that there are more Chinese entrepreneurs in California than there are in China. Chinese capitalism is not entrepreneurial capitalism. It is crony capitalism. To get rich, you get close to cheap money or you get close to government officials.

Another is that the Chinese miracle is the same miracle of other investment-led countries which lever up and deliver high growth for a time, but get addicted to the process, and continue to expand debt long after the productive investments have been financed. This means the debt begins to get more and more rolled over, rather than paid off.

A third point here that Pettis makes is that the Chinese households are not really over-savers, as they have been pictured by some, including us here at Demand Side. Their savings are in line with other developing nations. They simply receive a far lower proportion of GDP than households in any other nation, possibly any nation in modern history.  I'm not sure I buy that. We've said people hoard against old age and want in China, since there is no social safety net.  Whatever the real story, the remedy of instituting a social safety net, for retirement and health care, would go a long way to bringing the Chinese economy into balance.

Pettis says the slowdown to 3 percent need not lead to massive unrest, but if income is diverted to households from investment, the authorities can manage an orderly transition to a more consumer-based society.  He gives the central government high marks -- as opposed to the corrupt regional and local governments -- and says the central authorities have credibility with the population as well.

You should listen to the interview for a very good take on the situation.

Ours is different.  The Chinese downturn was the inevitable result of the global downturn. It had to happen to the sweatshop for the world, when demand falls from Europe and the U.S. It exposes an endemic corruption that is not under control, no matter how well the central authorities impress various observers. You only have to look at the skies of China to see that the government is unwilling or unable to invest in the right things -- just as here in the U.S., I suppose.  And for the same reasons, the deniers are in power, sponsored by the entrenched interests.

We predicted five years ago that China would be the first environmentally failed state of the modern era.  Growth has not been so much growth as conversion of the Commons and the natural environment into marketable commodities, a one-way trade that is more eating the future than growing a stable economy.

The massively polluted skies and waters and soils are obviously not leading to prosperity. If the population has ridden with this group on the promise of ever increasing prospects, they will not be happy now.

In fact, just as in the U.S., the productive investments are really in protecting the environment and planet, but are not pursued because they do not enrich the entrenched interests.  A great proportion of the population are active deniers, no less guilty and perhaps more so than the holocaust deniers.  It is too inconvenient to stand up, so we will let the whole planet -- our children and ourselves included -- burn.

But our point, or the point we started to make, is that the Chinese slowdown is the result of being the sweatshop for the world, and the world is cutting back on its purchases.  The multitudes of interlocking financial arrangements that contingent production involves are coming unwound. The rollover debt is becoming Ponzi debt. You can have a Minsky Moment there just as well here.  This is a downward self-reinforcing spiral, just as the boom in credit and investment was an upward self-reinforcing boom.

The New York Times columnist and Nobel Prize-recipient Paul Krugman penned a piece titled “Hitting China’s Wall.” He wrote, “The signs are now unmistakable: China is in big trouble. We’re not talking about some minor setback along the way, but something more fundamental. The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits. You could say that the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”

Let's see how the redoubtable Krugman does without the benefit of debt as a descriptor. For you remember that Professor Krugman believes debt does not matter, since it is owed by one spender to another, "We owe it to ourselves," and absent an unrealistic difference in our spending habits, it should make no difference. In piece one, Krugman postulates that China is running out of "surplus labor":
Hitting China’s Wall, by Paul Krugman, Commentary, NY Times: All economic data are best viewed as a peculiarly boring genre of science fiction, but Chinese data are even more fictional than most. ... Yet the signs are now unmistakable: China is in big trouble. ...
Start with the data, unreliable as they may be. What immediately jumps out ... is the lopsided balance between consumption and investment..., for China ... almost half of G.D.P. is invested.
How is that even possible? ... The story that makes the most sense to me ... rests on an old insight by the economist W. Arthur Lewis, who argued that countries in the early stages of economic development typically have a small modern sector alongside a large traditional sector containing huge amounts of “surplus labor” — underemployed peasants making at best a marginal contribution to overall economic output.
The existence of this surplus labor, in turn, has two effects. First, for a while such countries can invest heavily in new factories, construction, and so on without running into diminishing returns, because they can keep drawing in new labor from the countryside. Second, competition from this reserve army of surplus labor keeps wages low even as the economy grows richer. ...
Now, however,... to put it crudely, it’s running out of surplus peasants. That should be a good thing. Wages are rising; finally, ordinary Chinese are starting to share in the fruits of growth. But it also means that the Chinese economy is suddenly faced with the need for drastic “rebalancing”... Investment is now running into sharply diminishing returns and ... consumer spending must rise dramatically to take its place. The question is whether this can happen fast enough to avoid a nasty slump.
And the answer, increasingly, seems to be no. The need for rebalancing has been obvious for years, but China just kept putting off the necessary changes...
How big a deal is this for the rest of us? ... Western economies are going through their “Minsky moment,” the point when overextended private borrowers all try to pull back at the same time, and in so doing provoke a general slump. China’s new woes are the last thing the rest of us needed.
No doubt many readers are feeling some intellectual whiplash. Just the other day we were afraid of the Chinese. Now we’re afraid for them. But our situation has not improved.

Ah, perhaps not. Failing to connect the pullback in demand from the West to the downturn in China is at best, obtuse.  To say that China is running out of surplus peasants is quite an odd take on the situation.  Perhaps if the factories were booming... Or maybe if they cut back on the 400,000 who die every year in China from environmental pollution. But it also runs in the face of another observation by Michael Pettis, that the great investment boom in China meant that it was capital, not labor, that was driving production. Krugman ought to trade W. Arthur Lewis in for Michael Pettis.

But Krugman is entertaining to read. In another post he ponders the appropriate image for the slowdown.

One of them was that in a way, China’s low-consumption high-investment economy was a kind of Ponzi scheme. Chinese businesses were investing furiously, not to build capacity to serve consumers, who weren’t buying much, but to serve buyers of investment goods — in effect, investing to take advantage of future investment, adding even more capacity. Would there ever be final buyers for what all this capacity could produce? Unclear. So, a kind of Ponzi scheme.

Also, my worries are that China doesn’t know how to slow down — that it’s a bicycle economy that falls over if it stops moving forward.

And of course I’ve argued that running out of peasants creates a wall.

So, the Chinese Ponzi bicycle is running into a brick wall. Also, the fascist octopus has sung its swan song.
Elsewhere, More Krugman:
How Much Should We Worry About A China Shock?

Suppose that those of us now worried that China’s Ponzi bicycle is hitting a brick wall (or, as some readers have suggested, a BRIC wall) are right. How much should the rest of the world worry, and why?

I’d group this under three headings:

1. “Mechanical” linkages via exports, which are surprisingly small.

2. Commodity prices, which could be a bigger deal.

3. Politics and international stability, which involves some serious risks.

So, on the first: this is what many people immediately think of. China’s economy stumbles; China therefore buys less from the rest of the world; and the result is a global slump. Or, maybe not so much.
Some quick, rough, but I think useful math: In 2011, the combined GDP of all the world’s economies not including China was slightly over $60 trillion. Meanwhile, Chinese imports of goods and services were about $2 trillion, or around 3 percent of the rest of the world’s GDP. 

Now suppose that China has a slowdown of 5 percent relative to trend. Imports would fall more than this; typical estimates of the “income elasticity” of imports (the percentage change from a 1 percent change in GDP, other things equal) are around 2. So we could be looking at a 10 percent fall in Chinese imports — an adverse shock to the rest of the world of one-tenth of 3 percent,or 0.3 percent of GDP. Not nothing, but not catastophic.

And even this is arguably an exaggeration, because a significant part of China’s imports are components for its exports,and don’t depend on Chinese domestic demand.

As I said, then, the mechanical links through trade flows are relatively small, although they could bulk much larger for some of China’s neighbors (but would be smaller for the United States).

Commodity prices are a potentially bigger story. China is a major consumer of raw materials — for example, about 11 percent of world oil consumption. And because the supply and demand of commodities tend to be relatively unresponsive to prices in the short run, a sharp drop in Chinese demand could lead to sharp falls in commodity prices. So the Ponzi bicycle shock could be a bigger deal for countries that sell raw materials, whether they sell to China or not, than it is to China exporters.

Finally, politics and international relations. I am obviously no kind of expert here. But it’s obvious, first, that China’s political regime is remarkable, even given the annals of history, for the hypocrisy of its position: officially it’s building the socialist future,in practice it’s presiding over a crony capitalist Gilded Age. Where, then, does the regime’s legitimacy come from? Mainly from economic success. Let that success falter,and then what?

And if you really want to get nervous, think about what cynical governments trying to distract their populace from domestic failures have often done in the past. Saber-rattling over some islands somewhere, anyone?
No particular bottom line here, except that you probably want to focus much more on the indirect effects than on the direct export multiplier.
 Michael Pettis makes a very, very good point, which I'm sure Krugman would agree with, when he says that what is most lacking in economies across the globe is demand.

But again, the claims that the authorities are fully cognizant of the situation and are trying to do the right thing, and deserve high marks, etc., fly in the face of radical repression of democratic rights, the manifest destruction of the Chinese environment, and the basic crony capitalist scheme that is producing billionaires ready to move to the U.S.If they really understand they have to do something and are determined to do it., they're a dozen years too late.

Now to Mark Blythe, Brown University, in interview with Blooberg's Tom Keene and Michael McKee, on his book Austerity: The History of a Dangerous Idea.

Saturday, July 20, 2013

Relay: Michael Pettis on Cbina

Michael Pettis disecting the radically lower growth rates in China, the economic conditions in that country and the likelihood of a disorderly rebalancing.

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Wednesday, July 17, 2013

Social Security: Reality v. the Household Metaphor

Social Security

One of the signature programs of the New Deal of the 1930's, Social Security addressed the critical situation of widespread impoverishment of the elderly population. Those who had families were the lucky ones.
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We hear today about unfunded liabilities, about how we have to do something about entitlements or they will bankrupt us, about -- though it is never stated explicitly, Social Security and Medicare are somehow responsible for the current economic stagnation and how cutting these programs is the only route to economic stability.  "Everyone agrees," it is often said.  That "everyone" is primarily the political class of the beltway and their sponsors in corporate America and the media.

Today on the podcast, let's look directly at Social Security.  Its financing. Is Social Security near bankruptcy?  Is it going to go broke?  Let's look at a bit of the history. It exposes the self-styled adults in the room as simply old cranks.  Then let's examine the real economics around Social Security, how these and other New Deal programs served well as a floor under demand during the crash and how cutting benefits is a recipe for economic decline.

As a preface, to avoid confusion, we need to recognize that there is no evidence to support the attack on Social Security.The attack arises from the political opposition to the New Deal.  These are the Old Guard Republicans, the Trickle Down Economists.  This is fear of the future in the place of rational discussion.  The entire case relies on convincing the gullible that the government is like a household or business and must manage its budget accordingly.  When we follow this metaphor and the impose the austerity it intuitively demands, we will blindly impoverish real households and bankrupt real businesses until the society can take no more.

I make this comment here at the beginning of the podcast to alert the listener: It is not that I am omitting the evidence from the other side.  That evidence simply does not exist.  It is not that there is a more cogent argument which I do not allow you to hear. There is simply no argument.  The entire proposal is built on a metaphor that falls apart under direct examination, and so the argument falls apart.

Now.  History.  The program was set up in the 1930's.  It is now the twenty-tens. Eighty years. Never missed a payment.  Looks pretty sturdy.  Not too many other programs around for that length of time. Much less programs that bankrupt the nation. Certainly nothing of the scale of Social Security.  Maybe the Defense Department.

What was the situation in the Depression? Millions of seniors faced impoverishment and deprivation.  The retirement scheme of the day was to have lots of kids and move in with them when you were too old to work.  If you had no kids, or they had no work, you were SOL.  The financing of Social Security was in concert with the times.  Pay-as-you-go financing.  Were we really going to help starving old people by requiring them to pre-fund retirement?  Take their non-existent incomes and cut it to invest in non-existent investments?  No.  We made it a quote "generational contract" unquote.  Current workers would support current retirees.  In this way we formalized the existing scheme.  The kids as a whole supported the parents as a whole.

This had some enormous consequences.

One, A person no longer needed to have a dozen children to be assured of a secure retirement.  Birth rates dropped.

Two, Children did not need to stay on the farm or at home to support their parents.  They could plan their lives, go to school, follow their dreams without the constraint of worrying about Mom and Dad.

Three, A new tax regime came into being, one fully supported by citizens, who viewed Social Security payroll taxes as the payment to a retirement plan.  While not correct from an accounting standpoint, it is correct from a programmatic standpoint.  The contract has proven solid to this day.

But before we go any further, we should specifically dispel the notion that Social Security is on shaky financial footing.  As a program, under conservative assumptions (though who knows what will happen if the market fundamentalists crash the economy again), under conservative assumptions, quote "all social security benefits are now expected to be payable in full on a timely basis until 2033, when the trust fund reserves are projected to become exhausted.  At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits."  unquote.  These are the assumptions used by the Social Security Administration.  The Congressional Budget Office offers more optimistic numbers.

There is no imminent crisis.  At least not in the funding of this retirment program.  Maybe in Europe or in the banks or in climate change, but not in Social Security.

Ah, the Trust Fund.

The Social Security Trust Fund

(a) Reserves are projected to grow to $3.1 trillion by the end of 2020.

(b) Of course, there is a Trust Fund, because the demands on Social Security are completely transparent, being a function of demographics, and hence are entirely actuarially anticipated.

(c) The Trust Fund is composed of special US Treasury bonds which everybody and his brother would love to have in their 401(k)'s.

The only crisis is if we fail to pay off the bonds that sit in the Social Security Trust Fund.  Will that happen?  Default on the debt owed to seniors would have to mean default on debt owed to a range of other bond holders.  Perhaps the rogue Republicans will shoot us all in the foot.  But there is no other way than willful refusal to pay.  As listeners know by now, the Treasury can meet all its dollar denominated debts.

Why the hysteria, then?  And you have to admit there is hysteria.

Let's go back to 1982, when the long-term financing of Social Security was fixed quote-unquote under the Greenspan Commission.  Yes, that is the same Alan Greenspan who previously served as head economist to Gerald Ford (remember the WIN - Whip Inflation Now -- button?) and who later as Fed Chairman for so many years played such a pivotal role in removing regulation and enabling the credit needed for the Great Financial Crisis.  The Greenspan Put.  The Greenspan Commission raised taxes in 1982, or actually January 1983 was when it came out with its report. Yep.  Raised taxes.  Ronald Reagan cut income taxes. Reagan after the Greenspan Commission raised payroll taxes.  Substitute regressive for progressive and call it prudent.

But another thing happened about then.  The Social Security Trust Fund was included in the budget.  That meant all taxes -- payroll taxes which are dedicated to the trust fund included -- were included in the revenues for surplus-deficit calculations.  This was the so-called "Unified Budget" which exists to this day.  That is, selling bonds to the public was accounted for as borrowing.  Selling bonds to the Social Security Trust Fund was ignored.  After all, it was still the government.  Yes, the official deficit -- including the much-ballyhooed surpluses of the Clinton years -- were rosier by far for the surplus the Social Security trust fund was building in anticipation of the retirement of the baby boomers. Is that clear?  The operating budget was actually far more out of whack than the public realized because its true deficit was masked by the payroll taxes.

Now we see the hysteria.  The operating budget, and taxes to support it, were healthier in appearance only during the years the trust fund was growing.  Now that the growth has slowed or reversed, the operating budget has to finance itself, has to come out from behind the curtain, and -- Whoa Nellie -- the sky is falling. Those folks so in favor of tax cuts in any climate now see the huge debts emerging from behind the curtain.  Rather than blame their own profligacy, they blame Social Security for being too generous.

When you hear things like "100% of the budget will go to pay entitlements," this is because the payback to the trust fund is in operation.  Repayment of that borrowing is now counted as expenditure.  This is the legacy of the Unified Budget.

You may remember Al Gore and "putting Social Security in a lock box."  He got pilloried for that at the time.  It was thought of as a constraint on needed government spending by the Left.  It was considered taking the candy away by the Right.  That was then -- 2000. This is now -- when apparently we have to cut Social Security to prove our prudence.

Had we funded the operating budget in the meantime, that argument might carry more weight.  But no, we ran a deficit and fought two wars without raising taxes, grew a defense establishment that grows more entitled, provided tax cuts for the rich, and now it is not prudent to run a deficit -- oops, not now, but twenty years from now -- it will not be prudent to run a deficit for the retirement of our old people.  You see how there is no argument.

The argument for prudence has to begin with the operating budget.  But further, if it were so much healthier for the economy to run a surplus, you would think it would reinforce itself as a policy.  But it is not healthy, it is impossible.  The more we try, the more the economy fades.  The whole argument is and has been a continuing attack based on the household metaphor.  In the early 2000's, it was privatization, because, Lord knows, or the Lord knew then, that financing Social Security the way it had been done for 70 years could not last.  Privatization collapsed with the collapse of the stock market and all those 401(k)'s which depended on stocks growing at 7% per year.  Today it is the same attack using new ammunition.

But they cannot come out and say Social Security is the cause of the current malaise, because it plainly is not.  Nor Medicare.  The malaise had the bad manners to show up before the budgetary problems hit -- and in fact caused much of them -- along with the wars and tax cuts.  But the implication is left behind in the room is, "We have to deal with entitlements or we will have real problems."  We HAVE real problems.  We need to deal with those, and not this non-problem.

The self-styled adults in the room, the Bowles Simpson crowd, are not adults, they are simply cranks whose schemes have fallen apart, and who must find another scapegoat.

We could go on, but it is really beating a dead horse.  There is simply no functional problem with Social Security.

But pretend we do need to act now.  What would the appropriate solution be?  Would it be to inflate the trust fund so the operating side could borrow through the back door some more?  No.  Simply remove the cap.  A cap on earned income subject to payroll taxes is currently set at around $110,000.  Remove it.  Doesn't entirely reverse the great regressive-i-zation of the Reagan years, but it goes part way.  And it solves the entirety of the crisis till the end of time.  And raising taxes on the rich does address the economics of the times.

But before we move from the financing and budgeting into the economics, we should give a shout out to the politics.  Everyone agrees, say the attackers, that we need to cut Social Security and Medicare.  The problem is the politics.  By this they mean that hundreds of millions of average Americans have formed a special interest group that promotes their interests. They are invested in the program as it exists and as it has been promised.  They make it a political problem because they can vote, not necessarily because they can donate billions to favored candidates.  Thank goodness for them. 

The functional effect of a transfer program like Social Security, which is the transfer from current workers to current retirees, with the balancing of a trust fund informed by basic actuarial accounting, the functional effect is to reduce the level of savings.  Workers reduce their savings because their income is lower on account of the taxation and transfer and also because they count their expected benefits from Social Security as retirement income and do not save in proportion to the amount they expect to receive.  As we have discovered in our exploration of economics over the past five or six years, this is a good thing.

Our problem in an advanced economy, particularly one where austerity is the rule for the public sector, is too much savings.  More savings than can be absorbed by productive investment.

When savings cannot be absorbed by productive investment, it is experienced as dropping income.  You remember how it is investment that produces savings, not savings that produces investment.  Investment produces the extra income from which savings is generated.  When people want to save more than prudent investment can absorb, it is either a reduction in someone else's income, and it goes to bidding up financial assets and creating bubbles.

John Maynard Keynes was right about a great deal, but he was wrong when he projected the euthanasia of the rentier, whom he called a largely functionless and passive creature.  Instead, the rentier, or the CEO acting in his name and the political party devoted to his interests, is conducting a coup.  The rentier has become the bond vigilante.

The rentier is not satisfied with zero percent on his money, so he goes into stocks, which tank, and which must be kept afloat by the central bank.  When his investments in banks go south, he must be bailed out in full. The Greenspan Put has become the Bernanke Put and the Draghi Put because the rentier will go apoplectic if the investments do not pay positive returns. It is the end of risk.

The point is that savings converted to investment in productive enterprise employs people and keeps the economy running.  Likewise spending on goods and services employs people and keeps the economy running.  Savings converted to cash or other financial instruments and held does not employ people and does not keep the economy running.  You may call it prudent.  And for an individual or household it may be prudent, but for an aggregate economy, it is decay.

It is as Leon Keyserling said, there is more savings than the available productive investment can absorb. Keyserling's solution in 1950 when he was chief economist to Harry Truman was to promote housing as investment.  That did a fine job for many years.  It became the preferred economic development strategy in later years to promote investment by making it cheaper, through the tax code.  The preference to the corporate sector.  Corporate income taxes dropped from 50% of revenue to 11% today. That led to over-investment and the pickle we are in right now, where it is going to take a heckuva lot more than a kick start to restart investment in any meaningful way.  We're not going too far in that direction today.  We've done that in the past.

But the point is that Social Security as a generational contract does a great deal to solve the over-savings problem.

So the transfer associated with Social Security helps this.  But raising taxes on the rich would also help.  Rich people save more of their incomes than poor people, or the middle class. When there is a cohort of, say, the top 20% saving a quarter of their incomes, it creates a huge burden for the rest of the economy.  Lumped together, the savings rate may be 4%, 5%, but disaggregated it is 20%, 25% by some and negative or none by a great deal of others When we make people richer, they just save more, particularly when they are able to take advantage of interest rates the rest of us can only look at through the window.  They are saving in the form of cash, bonds, stocks and real estate.  These are the activities of the rentier, not the entrepreneur.

The public sector is basically a eunuch in service to the corporation, so this sort of savings means disaster for the rest of the population.  That is, the public sector refuses to invest despite the sad state of public goods and the great and obvious need. People are getting shoved off the ship to make room for larger staterooms and told to swim.

And finally, imagine what life -- and DEMAND -- would be absent these programs.  We have described in the past that the floor of demand in the crisis, what was really the safety net of the economy, is the set of programs centered on Social Security, Unemployment Insurance and Medicare.  These are not only the safety net for the individual, they are what kept the economy from continuing to a deeper and more tragic bottom.  Saving the banks did nothing for demand.  All the money we shovelled there stayed there.

So, that in response to listener mail.  Don't let it discourage you.  demandside@live.com

Tuesday, July 9, 2013

Transcript 583-586: Bad Economics from the Fed, Good Economics from Dirk Bezemer

Audio of Dirk Bezemer on Money:
Part 2
Part 3
Part 4
Amazingly bad economics out of San Francisco this week, with San Francisco Fed president John Williams exposing himself in a paper entitled  A Defense of Moderation in Monetary Policy. From the abstract:
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This paper examines the implications of uncertainty about the effects of monetary policy for optimal monetary policy with an application to the current situation. Using a stylized macroeconomic model, I derive optimal policies under uncertainty for both conventional and unconventional monetary policies. According to an estimated version of this model, the U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent uncertainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. As a result, output and inflation return to target levels only gradually. This analysis highlights three important insights for monetary policy under uncertainty. First, even in the presence of considerable uncertainty about the effects of monetary policy, the optimal policy nevertheless responds strongly to shocks: uncertainty does not imply inaction. Second, one cannot simply look at point forecasts and judge whether policy is optimal. Indeed, once one recognizes uncertainty, some moderation in monetary policy may well be optimal. Third, in the context of multiple policy instruments, the optimal strategy is to rely on the instrument associated with the least uncertainty and use alternative, more uncertain instruments only when the least uncertain instrument is employed to its fullest extent possible.
Let me translate that for you.

This paper defends current monetary policy by applying outdated thinking to current conditions which may or may not exist on another, perhaps hypothetical planet, which we will call "Absent Uncertainty."  Large and persistent demand shocks mean the models we use cannot explain the crash and stagnation.  These come from another planet outside our models and concern.  "Absent Uncertainty" is the only place where, presumably, inflation and GDP obey the instructions in the primitive static models of this paper.

In the real world we pretend monetary policy -- although it has not worked relative to output, employment, or inflation -- will eventually work somehow.  Our important insights:  One, even in the presence of considerable uncertainty about the effects of monetary policy the optimal policy nevertheless responds strongly to shocks:  uncertainly does not imply inaction."

I'm sorry, I cannot translate this. It seems to make no sense.  It may mean, "We do something."  It seems to confuse uncertainty by economic actors over future economic conditions with uncertainty over whether the Federal Reserve knows what it is doing.  Perhaps the two are related, since the Fed is holding tight to a steering wheel that is not connected to a chassis or engine or wheels, like a strange scarecrow standing in a barren field.

Likewise, we cannot translate the other two important insights, since they are likewise obscured behind excessive use of the word "uncertainty."

Calculated Risk says in response to this:
"Currently inflation is below the Fed's target (and is forecast to remain below the target), and unemployment is significantly above target (and forecast to remain above target). In general the current situation and forecasts would suggest more accommodation."

Which is in effect to ignore everything the Fed president said and shrug. The Fed is doing what it is doing, it's not making much difference, so they'll probably continue.

We don't need to get too far into the paper, thank goodness, but offer you this, quote:
"The claim that the Fed is responding insufficiently to the shocks hitting the economy rests on the assumption that policy is made with complete certainty about the effects of policy on the economy.  Nothing could be further from the truth.  Policymakers are unsure of the future course of the economy and uncertain about the effects of their policy actions...."

And so on.  So maybe it is the policy-makers at the Fed who are the bearers of the uncertainty.

The rest of the paper offers some models, which put Greek letters to uncertainty, expectations and other amorphous psychological states, and ... sorry, enough.

Now may be a good time to repeat our analysis.  Our basic forecast and explanation is that we are bouncing along the bottom with downside risks, burdened by excessive private debt and unwillingness to return to full employment via the public sector, even though we have essential tasks going undone.  And the bottom is sloped downward.  Official policy is aimed at the big banks and the securities markets. It has failed to produce recovery in spite of happy talk, and has actually exacerbated the inequality that is another serious burden to progress.  Policy makers are stuck in a fantasy world, unable to correct their course, by reason of ignorance on one hand and political pressure from the corporate elite on the other.

Now we're going to introduce the first of four relays from Dirk Bezemer on money.  Those of you on the legacy site can find the second, third and fourth of these episodes via the website, demandsideeconomics.net.

We'll be back next week with commentary on this presentation, which is good, but not complete.  Certainly it compares favorably with the nonsense from the Fed, being clear, simple and accurate.  Plus, it does not suggest that the sick economy is the result of "shocks" from other planets, but results from conditions within.

Dirk Bezemer.

Oh, first, all is brought to you by Demand Side the Book.  Yes, we are still selling copies.  Check out DemandSideBooks.com.  One year ago it was published.  Don't need to change a word.  Well, maybe a word.  But it is still a useful introduction to demand side analysis.

Now Dirk Bezemer