Transcript: 355 Notes from and responses to listeners

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Today on the podcast, we turn with appreciation to our listeners and their questions.  

Here from Greg F

Hello Alan,

You have mentioned a possible correlation between oil prices and inflation and I believe I heard both you and Steve Keen separately mention a basic definition of prices.  I believe Keen said it was labor + margin (google Q&A?) and you said it was labor + energy costs.  I vaguely remember an undergrad definition as labor + capital (CoC).  If nothing else, it is cost of inputs (material, labor, energy, CoC) + margin.  On to my question.....

Given that real wages have declined from the late '70s and labor is a major component of the retail model, has the undocumented (underpaid) workforce acted as a drag on inflation?  More succinctly, what is the relationship (if any) between the undocumented workforce and inflation?

Some additional background.... I live in California.  The general feeling here, particularly among the conservatives is that illegal aliens are a drain on the economy.  I am not so sure.  I believe that while illegal and poor people generally use more of the public goods than they "pay" for, I believe they provide a net economic benefit to the economy (i.e. the goods and services they produce have a higher economic value than their wage).

Thank you for doing what you do.  Still trying to unlearn my neo-classical education.

Best regards,

Greg F

Greg,

Everybody is right in your assumptions paragraph except me.  Keen's labor plus margin and Minsky's labor plus markup are good, but What is in the margin and markup?  I don't know about Keen, but he probably follows Minsky, who had a very narrow view of labor input as strictly confined to that labor technologically required for production.  His markup included overhead costs like advertising, design, administration and financing costs.

Your formulation with costs of inputs (material,labor energy, CoC) + margin is okay.

My labor + energy was not intended as a description of prices, but as a description of the technologically required costs of production, the first three of your inputs, folding "material" in because it is ultimately labor and energy applied to an earlier link in the supply chain.  My point was that input costs defined this way lead to the inevitable conclusion that to hold input costs constant, when the price of one goes up, the price of the other must go down.  And secondarily that one will be substituted for the other in some circumstances.

This is separate from the discussion of inflation, which is technically a general rise in prices, but which we have come to mean a rise in total weighted prices, often driven by a large increase in one or another specific price.   

This margin, markup and particularly the "cost of capital" element was key to Minsky's thinking.  Relatively little business activity or investment is actually financed straightforwardly, by allocating a portion of output to service the debt and having one long loan.  This would be very healthy.  But more is done on speculative terms, financing and then rolling over the debt.  Bubbles are financed by Ponzi financing (Minsky's term), with the actual increase in asset prices, not any portion of the product, as the means of financing capital.

But to the point of prices.  Businesses have financing structures, i.e., a strategy of financing their activity.  The price has to cover these structures, not only for the business to proceed on course, but to validate capital investment.  In fact, to stimulate further investment -- which our form of capitalism must have or it stagnates (as now) -- there has to be extra for profits.

Rather than write forever, let me just say in response to the second part, your undocumented workforce and inflation.

Yes, this is a drag on inflation in the sense it bids down low-skilled labor.  I -- like you -- think these people contribute more than they "cost," that their product is greater than their wage.  

As for using more public goods than they pay for.  It seems to me the more your income in this country, the more you are benefiting from its public goods.  Even health care and education, which flow first to the individual, end up benefiting the whole in terms of workforce, skills and societal stability.

It was in fact NAFTA and its favoritism to U.S. industrial agriculture that decimated the Mexican agrarian economy and brought many of those people here.  I think we could produce an outflow of Jack in the Box counter clerks if we would -- as your Jerry Brown  once suggested -- invest in Mexican public goods.

I warned Greg that I was going to use his question, and invited him to challenge, question, clarify or offer more detail.  He wrote back.

regrettably we abbreviate some

Your comment on investing in Mexico's public goods got me thinking.  My interest in your podcast was originally due to the name, "Demandside."  I believe that best solutions for public policy issues tend to be found on the demandside.  For instance trying to reduce the demand for undocumented workers by going after employers seems to be a more effective and realistic solution as opposed to the supply side solution to build a fence.  Or going after demand for addictive drugs via education as opposed to supply.  Have you explored expanding the demandside principles to other social sciences?  Or would the public policy solutions to undocumented workers or drug addiction still fall under the discipline of economics? 

I appreciate your time.  

Thanks,

Greg

Greg:

Well, I think your point is well taken here, and I don't think these are out of the realm of economics.  The point is well enough made.  I might go further, and say, that legalizing drugs and taxing them  is a good way to get rid of crime, since it eliminates the demand through illegal channels.  If we wanted to assume that we are going to have a dependent drug-addicted population anyway, legal or illegal, then we could at least get rid of the crime.  Such as we did by ending Prohibition.  

These are ways of using demand to reduce unwanted things.  On the positive side, both Johnathan Frost -- I can never use his preferred name Jack Frost -- and Robert Pollin of the PERI institute have both pointed out that we can produce what we want by providing the market through the public sector.

Pollin points to the Defense Department's production of space age weapons as an example of the industrial policy he proposes.  But it is really an extension of Frost's advance commitment procurement, where you say, this is what we want and if you produce it, we will buy it.  It creates the market demand for the specific thing the society needs.  This is really much, much better than open-ended R&D tax credits and ... well, let's leave that there.

Here is another letter, from Nathan T., and I use their last initials only because I didn't get express permission to identify them by full name.

Is this Alan Harvey's e-mail?

if so, i was wondering if you had any suggestions for a good
undergraduate economics program. also i wanted to know if you have
read any of the neo chartalist stuff lately

Nathan,

Yes, well, perhaps that's why we don't get more letters, messages.  We are so leery of being targeted by the unwanted, irate and uninformed that we have not provided a good e-mail spot.  But on behalf of Nathan, here we do.  It is demandside one word at live dot com.

To Nathan's second question, I have a less substantial response.

I'm sorry I cannot suggest a good undergraduate program.  I would go to Berkeley if I could get in.  Other good academics are James K. Galbraith at the University of Texas Austin, Joseph Stiglitz, of course, or check out the action at University of Missouri at Kansas City,   Mark Thoma at University of Oregon has an open mind.  If you can connect with a professor or instructor of similar bent early on, that is best.

You might check out the faculty web site at target universities.  Their descriptive bios often have good indications of their attitudes and interests.  If they know you are of the same mind, they often will be eager to tap you for unpaid time doing tedious stuff.  Be sure to check out the "political economy" departments, often connected with political science departments, as there is often a more real world bias.

Sorry.  Academic economics is sadly lacking.  I recommend reading Steve Keen's DEBUNKING ECONOMICS in tandem with any undergraduate curriculum.

Good luck,

Nathan wrote back

thank you very much. i have a teacher that is looking into an
internship with an economist for me luckily. i was wondering if you
have read any chartalist (also called modern monetary theory) material
and what you thought of it. your podcast is very good but you seem
very worried with u.s deficits (in the long run at least) and i have
never seen you address how government financing actually works or what
particularly about running a government deficit you find bad.

And I said 

Nathan,

I have knowledge of chartalist theory only through Marshall Auerback and some odd posts on websites.  So I don't have a good grounding in it.  My take is that however true it may be, the gulf to employing it in practice, at least overtly, is immense and would require a wholesale re-education of the population.

As to deficits. They are bad in my view only because they offer cover for restricting government spending.  I follow James K. Galbraith's line that the government is not constrained financially when it needs to spend, particularly the U.S. government, whose dollar is the reserve currency.

But as a block to spending, deficits are working very well politically.

Filling the deficits with tax revenue has the effect of shifting the society's product from private to public goods.  The great problem with the past decade is the misallocation of resources to housing and not going after global warming, infrastructure disrepair, undereducation and the development of backward nations.  If these productive enterprises are pursued, everybody does better.  If only the private goods are pursued, some people may do better than others, but even they do less well than they would in a vital society.

Good luck on your undergraduate program.    Then when you stop agreeing with him/her, find the next one.  Instructors and professors are often much more juiced by their own research than they are about teaching undergraduates.

My good friend Kathryn has questions, too, that I am tempted to include here, but maybe next time.  

In the interest of completeness, and to advertise his excellent comments, I would have hoisted something from the blog by David Lazarus, but here, he wrote me something.  "Check out BBC World Business.  The good part starts about 5:40."  It's commentary from stock market analyst Robert Prechter, basically echoing what David wrote in the comments section last week, and parallel to what you have heard here about the end of the bear market rally.

PRECHTER

Ah, there was so much more on the agenda.  Remember demandside one word dot live dot com