In Hoisington’s Second Quarter Review (not yet posted online), Lacy Hunt takes on the widespread Keynesian belief that government spending boosts real (inflation adjusted) GDP.
Hunt states the multiplier is negative over time and short-term gains are an illusion. Here are a few key snips from an excellent report.
Deficit Spending Restrains Economic Growth
Negative multiplier. The government expenditure multiplier is negative. Based on academic research, the best evidence suggests the multiplier is -0.01, which means that an additional dollar of deficit spending will reduce private GDP by $1.01, resulting in a one-cent decline in real GDP. The deficit spending provides a transitory boost to economic activity, but the initial effect is more than reversed in time. Within no more than three years the economy is worse off on a net basis, with the lagged effects outweighing the initial positive benefit.
More negative. Although only minimally negative at present, the multiplier is likely to become more negative over time since mandatory components of the government spending will control an ever-increasing share of budget outlays. These outlays have larger negative multipliers. In 2015, the composition of federal outlays was 68.3% mandatory and 31.7% discretionary; the composition was almost the exact opposite in 1962, around the time this data series originated (Chart 1). Mandatory spending includes Social Security, Medicare, veteran’s benefits and the Affordable Care Act. All of these programs are politically popular and conceptually may be highly laudatory. However, federal borrowing to sustain these programs does not generate an income stream for the economy as a whole to pay for these programs. As history has evidenced, the continual taking on of this kind of debt will eventually cause bankruptcy.
Due to the aging of America, the mandatory components of federal spending will accelerate sharply over the next decade, causing government outlays as a percent of economic activity to move higher.
The rising unfunded discretionary and mandatory federal spending will increase the size of the federal sector, which according to first-rate econometric evidence will contract economic activity. Two Swedish econometricians (Andreas Bergh and Magnus Henrekson, The Journal of Economic Surveys (2011)), substantiate that there is a “significant negative correlation” between the size of government and economic growth. Specifically, “an increase in government size by 10 percentage points is associated with a 0.5% to 1% lower annual growth rate.” This suggests that if spending increases, the government expenditure multiplier will become more negative over time, serving to confound even more dramatically the policy establishment and the public at large, both of whom appear ready to support increased, but unfunded, federal outlays.
Debt
Deleterious Levels. Federal debt has subtracted, to at least some degree, from U.S. economic growth since about 1989 when debt broke above 50% of GDP, a level to which this ratio has never returned (Chart 2). The macro consequences of the debt are becoming increasingly significant. This may seem surprising to many because of confusion about the scholarly work of Carmen Reinhardt and Kenneth Rogoff (R&R) in their 2009 book, This Time is Different.
The misinterpretations pertain to a key point in R&R’s book and accusations of data inaccuracies in the statistical calculations. R&R said debt induced panics run their course in six to ten years, with an average of eight years. The last panic was in 2008, so according to their early work the time span has either ended, or is close to ending. However, the six to ten year time reference does not apply when debt levels continue to move higher over that time period. In the latest quarter, gross federal debt was 105.7% of GDP, compared to 73.5% in the final quarter of the 2008 panic.
Government Spending and GDP
The formula for GDP is: Y = C + I + G + (X − M).
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).
Keynesian Silliness
By definition, government spending adds to GDP, no matter how ridiculous the expenditure. If the government paid people to spit at the moon, it would add to GDP.
But the long term consequences of such ridiculousness should be obvious.
Japan is proof enough. The country has nothing but massive amounts of debt and slow growth to show for decades of building bridges to nowhere.
Space Aliens to the Rescue
Let’s assume for a second there is dangerous dearth of consumer demand and inflation is too low. What should we do about it?
In a 2011 CNN interview video Paul Krugman proposed Space Aliens Could Fix the Economy.
Krugman: “It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. If we discovered that space aliens were planning to attack, and we needed a massive buildup to counter the space alien threat, and inflation and budget consideration took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops we made a mistake … There was a Twilight Zone episode like this in which scientists faked an alien threat in order to produce world peace. This time we need to ignore it to get some fiscal stimulus.”
Apparently, if we fake a space alien threat, then we can create inflation and save the world from the alleged evils of falling prices and insufficient consumer demand.
Seen and Unseen
No doubt we would see a huge jump in GDP if we fought the space aliens (real or imaginary). Then what?
Because the long-term effect of foolishly taking on totally unproductive debt is negative, Keynesian economists would demand more and more fiscal stimulus, just as Krugman does perpetually!
The “seen” of fighting space aliens would be a short-term boost to GDP. The “unseen” is the long-term net subtraction to growth that Keynesian economists never take into consideration.
The Trap
The trap is listening to Keynesian economists like Krugman because doing so only digs deeper and deeper debt holes.
The real solution is a writedown of unproductive debt, not increased fiscal stimulus.
Instead central banks attempt to cram more and more debt into a system clearly overloaded with debt.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
My post Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
In their attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse, setting off what they should fear – asset bubble deflations following a buildup of bank credit on inflated assets.
Asset Deflation
It’s asset deflation not CPI deflation that central banks ought to fear. Even the BIS agrees with that statement.
For discussion please see Historical Perspective on CPI Deflations: How Damaging are They?
Yet Keynesian economists and central banks alike remain united in their self-destructive goal of producing inflation.
The results speak for themselves: booms and busts of increasing amplitude over time.
Mike “Mish” Shedlock.
“The real solution is a writedown of unproductive debt, not increased fiscal stimulus.”
Mish, this is THE best sentence I’ve read of yours.
even better, it fits on a bumper sticker.
Plus real punishment of the criminals involved.
Yeah? Well, cut .gov spending in half and watch what happens. A Zombi apocalypse would pale in comparison. A deflationary depression at this juncture would likely bring on WW III.
The Deep State owns it all now. Currency devaluation is their only choice. It’s only a matter of when, and how much.
Currency devaluation?
How?
Japan has been trying to do that for years.
Until the $US loses its status as a reserve currency (and with military bases in over 100 countries and biggest baddest blue water navy in the world … fat chance anytime soon) … there won’t be a “zimbabwe moment”.
Even if US attempted something on a grand scale … what makes you think other countries would stand idly by?
Every country in a race to the bottom.
Set aside the idea of currency devaluation vs. other currencies , international debt and balance of trade , and look at it from the point of view of just one self contained country . As currency is issued (via low interest debt for example) , it is devaluing existing currency due to the increase in supply .
This is where I differ from Mish on his read of (CPI) inflation targets – I think the aim is to keep that inflation at a certain level so that asset valuations increase in nominal value , so that nominal debt is washed out and new debt based on asset value increases made available , so that asset owners (private and business) are rewarded with a further share , so that increasing government expenditure is able to be given an excuse and a means .
In short , in one way or another , everyone is participating and the central bank/government gets to pull the strings .
At some point though the equation enters into dysfunction , whether because the whole framework is too socialistic, or is understood as corrupt , or because the monopoly created makes markets and productivity unresponsive to necessity , because the value of the currency loses its meaning , and so on.
Isn’t the unspoken but real goal of the central banks to make repayment of sovereign debt easier? If so the rest is just noise.
Two of MISH’s readers approach Krugman. One offers him a can of soda for $0.50. The other offers him an identical can of soda for $1.00.
If he pays $0.50, he has contradicted his economic philosophies.
If he pays $1.00, he won’t have as enough money for cab fare home.
Which can of soda does Krugman purchase?
https://garveysoda.files.wordpress.com/2012/09/poop.png
Interesting chart, Mish. I see Lyndon Johnson’s Great Society Tit spewing its milk of goodness all over our great land.
Famous last words: “Unless debt produces an income steam, it equates to misallocation of funds”. The best this country and the banking system has done in the last 40 years is placing 2.3 billion of excess reserves in the tier 1 banking system.
Write down is another word for default. The problem with default is this takes credit money out of the economy. Lots of default is needed meaning lots of bank credit money will disappear. This is why we have extend and pretend now because the alternative asset price collapse is unthinkable. The best way to inject substitute money into the economy is a Jubilee in which every tax ID holder receives printed money and if you have debt this goes to pay that debt down. Poor people with no debt get a wind fall they are likely to spend thus increasing aggregate demand. Fair? Debatable. Necessary policy to correct our galactic screw up letting banks create this debt? I’m afraid so. Will helping the poor along with saving the rest of us from a second Great Depression really be the worst outcome possible? I think not.
“The best way to inject substitute money into the economy is a Jubilee in which every tax ID holder receives printed money and if you have debt this goes to pay that debt down.”
Helicopter drops come from legislative bodies. In the case of US, Congress would have to authorize Treasury to borrow ie: issue debt (which Federal Reserve could purchase) … but you are just adding to debt to GDP problem referred to above … the debt needs to be serviced.
And what happens when every poor schlub with a low end jobs receives free money? Business craters.
Good luck spending your free money at McDonalds when it is closed because all the employees quit.
“but you are just adding to debt to GDP problem referred to above … the debt needs to be serviced”
I think this is where negative interest rates and the War on Cash come in for Centrally Planned economies. The more debt you issue, the more negative interest money you collect. Goes beyond John Law’s wildest dreams. Even tops Ponzi in ingenuity. Self-financing debt. Kind of like a perpetual motion machine.
Of course, this also necessitates an increasingly Totalitarian Police State which besides its Wars on Poverty, Drugs and Terror will have to fight the War on Cash. Will be good for those who like wars, as you can finance Krugman’s War on Aliens, Hilary and the Neo-Con’s War on Russia, Libya II, Iraq III, Syria, China, Ukraine, and on and on and on. Only limits are creativeness in creating new wars.
Negative interest rates for self-financing debt issuance will necessitate nothing less than monitoring every transaction, which will have the side effects of disappearing freedom and slowing the economy in multitudinous ways. Totalitarian Police States in East Germany and the USSR had similar effects, and there does seem to be a Marxist commonality in this ban on cash to support negative interest rates (for sovereign debt financing). If negative interest rates extended to consumer loans and student debt, would be quite interesting.
So your answer is to keep paying off non productive debt – forever?
Mish has the right answer.
Write off all bad debt.
Some companies and people will go bankrupt.
Put the cronies and bankers in jail.
Put interest rates at 5%
Short but hard recession.
Then almost by magic…
Investments and borrowing will go to productive ideas with real ROI.
Jobs and inflation will follow…
With real economic growth.
The problem with this is it is massively inflationary. So that those who rang up huge debts to buy “assets”, will retain them debt free and now worth twice what they were before, at the expense of the poor the program is intended to help. Meaning, recklessly running up debt is still very profitable, the more the merrier. Just as it will always be when someone else is always going to be forced to pay for it.
Simplifying bankruptcy to the point where it has minimal friction cost in both time and resources, then just slamming on the brakes and let the chips fall where they may, will provide a much more final solution. If you took on too much debt, you lose whatever you own and that is that. For both better or worse, as you get around the economic dislocations caused by non-finality and debtors prisons, like non dischargeability of student debt and lawyertopia style legal battles locking up productive assets in uncertainty for almost ever. “Quick, rough and done, if you feel it’s unfair… sucks to be you, Next!” type bankruptcy proceedings will get the pain and it’s allocation over, the recovery started, and the incentives more properly aligned with reality, in as short an order as possible.
Owning nothing but being debt free, is hardly the end of the world. Plenty of people have been in that situation. Heck, most of the world probably still is. And asset prices are irrelevant anyway, since the actual assets will still be standing, to the extent they are assets, and not simply chimeras that only look valuable in the artificial glow of out of control thin air credit creation. Roads and railways will remain, as will power stations, hospitals and factories, as well as the military hardware required to bomb to smithereens anyone who might get the idea that Americans being bankrupt means they can no longer defend themselves.
The reason you hear so much about how asset price collapses will mean the end of the world, is because those with the most asset prices to lose, are the ones with massively preferential access to the media. Not because high asset prices are somehow a positive in and of themselves, any more than high consumer prices are, no matter how much the Keynesians insist so.
Everyone sees the inflationary effect of helicopter drops and I agree this is inflationary by currency dilution. What is underappreciated IMO is the reality that there is no way to reduce private debt that is not massively deflationary. The channel for this deflation is the destruction of bank credit money when loans are paid or defaulted. This will destroy the banks which unfortunately operate our payment system which we cannot live without. So if we go the route of debt write down and consequent bank failure instead of Jubilee designed to shrink the banks slowly we will have to print again to recapitalize our banks. Another obscene give away to powerful bankers and financiers. So we must choose who we are bound to print for. I choose regular citizens of all stripes. There is no painless path out of this mess. There are smarter and dumber paths. Paths that enrich financiers are IMO the worst.
The useful and important functions of banks, like operating payment systems, are a tiny, tiny fraction of the theft racket that is “finance” today. And is another thing that won’t disappear, simply because the mother bank goes nominally bankrupt. The networks and software and expertise needed to operate them, will still remain. Worst that could happen, would be a short term dryup of trade credit, but even that will work itself out quickly, since it is such an age old, well understood and relatively simple function. And one that will provide a windfall for quick movers, if supply really does dry up to where prices goes way high.
So, payment systems, as they are genuinely needed and desired, will be up and running in no time. Without all the other baggage banks are involved in today, which are neither needed nor desired by anyone other than those in on the racket itself.
The importance has to be put on making bankruptcy very quick, and indisputably final. The only way payment systems would remain dysfunctional for long, is if the bankruptcy process allows banksters and their lawyers and assorted sycophants to try holding them up, using them as ransom, to try to squeeze yet more bailouts out of people. As even many banksters realize that payment systems is the 1% of their entire racket that is actually socially and economically useful, and will try to lever it.
Jubilees, by rewarding those who ran up too much debt to begin with, will just ensure they’ll do it again. Next time under a slightly different pretext, again. Claiming “theeengz aree diiiferent thiiis tiiime. Weeee aree moooore scciiiiiienntiiiific noooow”, in true progressive fashion. Noone should ever, as in really ever, be forced at gunpoint to bail out anyone else. At the very least if those anyone else is not flat out hollow eyed and starving. As once that rule is breached, getting bailouts will again become the most lucrative game in town. And those higher on the scummyness scale, will again, slowly at first but then at an ever accelerated pace, reorient society so they can more easily prey on those less scummy.
“So if we go the route of debt write down and consequent bank failure instead of Jubilee designed to shrink the banks slowly we will have to print again to recapitalize our banks. Another obscene give away to powerful bankers and financiers.”
Sure, if you are referring to 2008 / 2009 style bailout.
What should have been done last go round.
POTUS schedules a press conference for 4pm est Friday. At the presser POTUS announces a bank holiday of a few days. The worst offenders of TBTFs would have been sent into receivership with equity wiped out / bondholders with MAJOR haircuts … THEN taxpayer $$s put into the breach to recapitalize. O would have had to spent much of presser calming folks and saying their bank … with same employees … will still be there when holiday over. Just that ownership changed hands (which could be spun off to public at later date). Of course, this would have caused much market carnage and made 2009 (and 2010) economically worse. But with banks now “clean” a true organic recovery could have occurred … lasting years.
The best way to inject substitute money into the economy is a Jubilee in which every tax ID holder receives printed money
This actually hurts banks. People will likely pay down their debts, thus reducing the assets of the lenders. Bush’s measly $300 income tax rebate sparked that very pay-down and the banks started whining about mark-to-market right afterwards.
Thank you. Yes a Jubilee actually hurts banks but at a controlled rate proportional to the magnitude of the drop. Here’s the thing. A debt deflation spiral which is what Mish is advocating uniquely feeds on itself in a run away feedback loop. The loop is :
1. Deflation occurs by credit money disappearance by debt default and bankruptcy.
2. Debt repayment becomes more onerous as purchasing power of those debt service payments grows.
3. More debtors realize they should default and deflation occurs by credit money disappearance.
Back to one.
In a Jubilee scenario this does not occur. No run away. We print a little. We drop a little. Currency is diluted a little. That’s bad but debt repayment in those dollars gets easier and aggregate demand increases so unemployment falls so safety net transfer payments get lighter and capital spending improves because more demand requires more capital base. None of these are destructive feed back loops. All of these are good except currency dilution. Why do our ruling elites fight even trying this a little? Why the brick wall in this direction? Let’s try it.
Stop paying a government roadblock drone and the economy gets a boost whether the drone takes productive employment or not.
It makes absolutely no difference how obviously flawed or downright stupid are their economic theories and policies. They are in charge and considering the abject economic ignorance of the average person, they always will be, all the way down the slow race to the bottom. Once the bottom is reached, the fingers will point everywhere but them and because of that aforementioned public ignorance, they’ll be able to get away with it.
Now, back to your regularly scheduled programming…
Wait! As former PM of Greek finance Yanis said…these folks know this shit doesn’t work but they have spent too much political capital to turn back. So guys like Freddy Kruggerman know their wrong but can’t say it. Just like it took nearly 40yrs before greenspank admitted he was wrong.
Nothing compares to blowing financial bubbles and calling it “growth.” The current misallocation of capital makes Government spending well nigh a non factor…although when the inevitable correction comes as it most certainly is in Great Britain right now the only thing business will have to fall back on will be that same Government largesse.
So I guess i would argue “hopefully your Government largesse is better than the other guy’s” becuse everybody is having their Governments spend like crazy right now.
Capitalism is about competition, and the very nature of competition is it lowers prices to compete for sales. Can’t understand why the fed doesn’t understand this and tries to work against it.
Go figure the FED is selling money (a.k.a debt nowadays) .
They are doing really well at reducing its cost , new technology and all that , they are just about ready to start giving it away …
Want some debt for free ?
Just sign here and that shop down the road will redeem it for real goods !
Oh , that is your shop .. ha ha … ha ha …
The FED is only interested its owners, member bank, and enabling government debt. There is no capitalism in that.
Debt should be measured against private sector GDP only because it is the private sector which will service all debt, its own and that of the public sector via taxes. So here in Norway total debt is around 350% of GDP, private sector is 50% of GDP so total private sector debt burden is 700%, plus NPV of future obligations.
Using GDP is hiding the truth. Look at Greece. Private sector GDP is around € 90 bn whilst public sector debt is approaching € 500 bn. So the 90 bn economy is supposed to support 500 bn of debt on top of the private sector living costs.
Taking the ‘G’ out of the GNP equation does not get you to the ‘private sector’.
Consider the following:
Person gets a welfare check from the gov’t and goes to the supermarket and buys $50 worth of food.
A prison spend $50 buying some food from a local farm.
Your idea would count the first as ‘private sector’ spending under ‘C’ and the second as gov’t spending under ‘G’.
But in both cases it is the private sector supplying the food.
“By definition, government spending adds to GDP, no matter how ridiculous the expenditure. If the government paid people to spit at the moon, it would add to GDP.”
Indeed it does as the equation you provided is the demand side of the economy. GDP is non-biased. What does the economy produce in a year? We don’t look at the products and try to make value judgments. Is the huge gov’t program to launch spit at the moon a waste? How about the millions who paid money to see the Godfather 3? How about last night when you ordered a large pizza but only ate 3/4 of it? Sure but wise decisions or not the economy was able to produce the products and services demanded of it hence GDP.
“But the long term consequences of such ridiculousness should be obvious.”
So it’s very simple but critics of Keynesian economics never seem to get it. You have the demand side and supply side of the economy. You can only stimulate if there’s room left in the supply side. If the pizza shop has extra dough, sauce, cheese and room in the oven, it can make you a large pizza instead of a medium one. It doesn’t matter if your order of a large pizza is stupid or not. If your order is indeed stupid, it doesn’t mean tomorrow the pizza shop cannot keep producing pizzas (assume for the sake of this argument the dough/sauce/cheese must be fresh each day so last night’s extra pizza doesn’t leave a shortage today of dough/sauce/cheese).
If your economy is very depressed, smart or stupid spending has a large multiplier just as it is easy for to make a pizza if the shop has no customers. If the economy is near full capacity trying to stimulate will just compete with all the other demands on supply and cause inflation just as trying to order extra pizzas when the shop is at capacity will just cause the owner to eventually raise prices. The multiplier therefore is a variable, the deeper into recession you are the higher it is and the closer you are to full employment the lower it is.
If your economy is at full capacity but you are still unhappy with its performance, then it is indeed possible the multiplier will be negative. When an economy suffers a supply shock, for example, and the gov’t tries to restore the previous status quo with endless stimulus, it will likely make things worse by sparking inflation and crowding out capital (which is needed to improve supply in the long term).
Your cite also seems to be double counting:
“Although only minimally negative at present, the multiplier is likely to become more negative over time since mandatory components of the government spending will control an ever-increasing share of budget outlays.”
This seems to be saying the multiplier is negative because $1 spent today means the gov’t will spend $1.50 next year, $2 the year after, $3 the year after that and so on. Therefore, you have to count hypothetical spending after the recession as part of the stimulus during the recession. Two problems:
1. This, of course, makes it impossible to sensibly calculation anything. Was the $800B Obama stimulus spending during Obama or was it left over spending from Bush? After all Bush spent a lot on the Iraq War so we must count future year spending as part of that. But if current spending is the result of past spending then how do you declare something spent today stimulus and analyze it as opposed to lumping it into previous stimulus.
2. The assertion that stimulus spending today turns into mandatory spending tomorrow doesn’t fit the data. The bulk of stimulus is so-called ‘automatic stabilizers’. Income and payroll taxes automatically go down when people lose their jobs, then go up when they gain them back as does spending on many welfare programs like unemployment and food stamps. The stimulus spending during the first Obama administration almost entirely disappeared. Republicans let tax cuts expire and much of the stimulus spending expired leaving no spending today related to the bill. Increased spending on Medicare and Social Security are not due to stimulus efforts during recessions but are a consequence of an aging population. The population will age regardless of whether or not the economy is in boom or bust.
Finally the author seems to be implying the mechanism of this negative multiplier is that gov’t debt causes ‘panics’. This may be the case when you have a gov’t trying to overstimulate the economy thereby sparking inflation. I could see why people holding lots of gov’t bonds will get nervous if inflation picks up without real economic growth. But we have had post after post from Mish bemoaning central banks owning more and more gov’t bonds with interest rates remaining negative. Why is an investor going to panic if gov’t debt goes up but another arm of gov’t owns a huge portion of that larger debt? And if an investor does panic what exactly is he going to do? Sell his bonds and put the money into private capital? That would seem to be great for the ‘I’ part of the GDP equation. Sell his bonds and buy canned food and build a bomb shelter? That’s great for the ‘C’ part of the GDP equation.
Well in something you might call a fair model I understand that supply and demand compete against each other on an individual basis to set a price that is a balanced accord, money being neutral. Too much unsold pizza, you lower prices… or did I forget that the the whole world of prices is now programmed into debt redemption, with that debt having been expanded to absurd levels just to make sure the pizza house accounts work?
Why would you give someone else outside of your transaction the power to completely adjust the value and quantity of money you use in a purchase, because they know how to manage it all for the better?
Show me how this world would be without that? Not possible.
And so the argument will remain, where proponents of Keynesianism will continue with their hand in the jar while trying to convince everyone that it is for their own good.
Seriously, what do they know better than the next person.
Answer=0.
” Too much unsold pizza, you lower prices… or did I forget that the the whole world of prices is now programmed into debt redemption”
What exactly does this mean? By ‘debt redemption’ do you mean Central Banks are printing money to buy bonds up? OK so some who used to own bonds now have cash instead. If they buy pizzas, that will compete with your pizza order. Again if the pizza shop is getting tapped out, prices are going to increase but we are not seeing that.
“Why would you give someone else outside of your transaction the power to completely adjust the value and quantity of money you use in a purchase, because they know how to manage it all for the better? ”
In a world of 0% inflation how is this happening when I buy pizza? If anything money has been remarkably stable.
By ‘quantity of money’ are you referring to the total amount of money in the economy? Who cares? If I have $20 bucks in my pocket at 9 AM I still have it at 5 PM. Why do I or the pizza guy care about a hedge fund whose position changed from $50M in bonds to $50M in cash?
And please do not try to answer by telling me the price of stocks has gone up ‘artificially’. The economy does not produce ‘stocks’, it produces real goods and services. Stocks simply reflect who gets to own the income made from producing those goods and services.
“or did I forget that the the whole world of prices is now programmed into debt redemption, with that debt having been expanded to absurd levels just to make sure the pizza house accounts work? ”
What does this mean? The Central Bank prints money and buys bonds from the open market. Some people who used to own bonds now have cash instead. Does this impact the pizza shop? Well it does if those with cash decide they would like pizza, in that case cash will move from former bond holders to the pizza shop owner.
That doesn’t change the fact that the pizza shop can only make so many pizzas in a day. It is either at capacity or not. If it is not at capacity, the additional cash can cause more pizzas to be made than otherwise which means increased GDP. If it at capacity then the additional cash can only increase the price of pizzas that are already going to be made.
The Keynesian view is one of boiling the economy down to a simple equation, much like the theoretical physicists are desperate for a grand unified theory of everything. The problem is we humans don’t have perfect foresight. An example: a customer orders a pizza from Dominos every day for 10 years. Without warning he doesn’t. Someone at the store realized he wasn’t placing his daily order and contacts police. (http://fox8.com/2016/05/10/delivering-a-hero-how-dominos-pizza-workers-saved-a-customers-life/)
No way any economic model would have predicted that event (although ordering a Dominos pizza every day for 10 years might have predicted a medical issue), at least not to the degree necessary for a centralized command and control economy. Yet that’s exactly what the FED wants us to believe, that they have perfect knowledge and if not, well they just didn’t have “enough” data before the revision. But multiply that effect by millions of transactions per day and you can quickly see the “noise” quickly outpaces the “signal” that is measured.
Government spending is a way to help shore up the signal. By making the future spending public knowledge, it serves to provide some solid numbers for the bean counters at the FED, so if nothing else they can at least predict what the government’s budget will do to the economy. As the federal budget takes up more and more of the economy the economists will be “better” at predicting the future and be able to pat themselves on the back when they get it “right.”
1. No one has ever claimed any equation would predict an event like that.
2. It is hardly necessary to predict such an event.
If you think about feedback signals for a moment, you’d realize no such perfect knowledge is needed. Say Dominos raises its prices and some people stop ordering pizzas daily. Are all those lost sales due to the price increase? Maybe or maybe not. Dominos doesn’t need to know. If it raises prices and revenue increases despite lost sales, Dominos will be happy. If it raises prices and revenue goes down because it loses so many sales that the price increase cannot compensate it will not be happy. At the end of the day Dominos does not need to have perfect knowledge about every sale. Nor does the Fed need perfect knowledge about every transaction to apply a simple feedback mechanism like:
A. Print money.
B. Inflation increasing? Yes goto C, no goto A
C. Stop printing money.
For several years I’ve had a variant of the GDP equation above that notes that in the equation G is actually composed of Labor (L) and Non-Labor (NL). Labor spending is actually a negative to the value as all funds expended come from tax dollars which are accounted for elsewhere. To not remove G(L) is in effect, double dipping.
This then renders the equation as follows:
Y = C + I + (G(NL) – G(L)) + (X – M)
The result isn’t pretty.
Could you explain this a bit better? G is government purchases of goods and services. What goes G(L) mean? If the police buy a car is that G(NL) because a car is not labor or do you have to try to figure out how much of the car’s price is labor versus parts? If the police station pays the local mechanic to do oil changes on their fleet, is that G(L)?
In either case the fact remains the economy in the period in question has to be able to produce a car or produce oil changes for the local police station to buy these things so how would it be a negative?
“The ‘seen’ of fighting a global war on terror would be a short-term boost to GDP. The ‘unseen’ is the long-term net subtraction to growth that Keynesian economists never take into consideration.”
FTFY. Imagine what all those NSA programmers could have done with their lives instead of working on data mining projects? What about all the aerospace and telecommunications engineers designing drones that can be remotely flown from an Air Force base 1/2 way around the world? All the productive energy wasted by the TSA not finding weapons at the security theatre checkpoints?
Or would they all just be unemployed?
You could say the same about WWII. But then innovation and growth seemed to pick up after the Civil War, after WWI and after WWII.
The assumption you are making is NSA programmers would have otherwise dedicated their lives to making better iPhones. The reality I suspect is gov’t spending a lot on doing stuff drives innovations that later filter into the mass economy….after WWII for example we had a massive boom building out things large capacity airlines and jets that wouldn’t have happened without WWII’s massive defense spending. The defense spending probably both achieved full employment during the war and expanded supply so much after the war that it paid for itself.
To my knowledge there is no good economic theory for the dynamics of innovation, though. It would be nice if we could achieve huge innovation through non-war projects like a mars landing or huge scientific study. It very well might end up being that things like drones and body imaging/data mining which the War on Terror spurred will expand supply so rapidly that the actual cash costs of the war itself will be paid for in the long run.
“…an additional dollar of deficit spending will reduce private GDP by $1.01, resulting in a one-cent decline in real GDP.”
In other words, the bottom line is that stimulus not only doesn’t work, it ultimately harms economic growth.
“The results speak for themselves: booms and busts of increasing amplitude over time.”
Mathematically, the bigger the boom, the bigger the bust. Each boom needs to be replaced with a bigger boom after the bust, in order to continue the illusion of prosperity.
Just look at a chart of the percentage of home ownership from prior to the housing boom, through the housing boom and after the housing boom. Things wind up back where they started, as if the boom had never happened in the first place.
“As history has evidenced, the continual taking on of this kind of debt will eventually cause bankruptcy.”
Right there, you know Lacy Hunt doesn’t even understand how the American monetary system works. The rest is equal rubbish.
haha
Lacy Hunt is Spot On
CPI inflation is bank oppression of Joe average. CPI deflation is a blessing to shoppers, and improves their buying power over time. Printing gradually turns the economy into a banana republic, by misallocating capital.
Why is not CPI deflation also a ‘misallocation’ of capital?
“No doubt we would see a huge jump in GDP if we fought the space aliens (real or imaginary). Then what?”
In the event all other countries should be completely destroyed in the war, this policy would then allow the country that has any manufacturing capacity left standing, to thrive.
At that point, if this hypothetical country could get all other countries to accept its own currency as reserve, it would even make sense for the manufacturing country to lend massive amounts of money to the countries requiring reconstruction so as to be paid back on its goods and services thus simultaneously exporting its own currency devaluation to the countries being rebuilt.
… no…?
I think we are getting confused about what GDP is. It is not a score in an arcade video game. It is just a measure of output.
If, because of an alien invasion, we build thousands of spaceships that would be a lot of economic output….hence a lot of GDP. Other countries being destroyed has nothing to do with it.
I suppose I could imagine a type of violent protectionism where a country tries to boost exports by destroying other countries resources. If we poisoned sugar fields in South America, for example, America’s subsidized and protected sugar interests could see higher revenue. That’s not a Keynesian policy but a protectionist one.
The real solution is a writedown of unproductive debt, not increased fiscal stimulus.
No it isn’t since non-debtors have been cheated too.
The solution is Steve Keen’s “A Modern Jubilee” or similar and ethical fiat and credit creation.
And no gold-bugs, that doesn’t include expensive fiat but deprivileging the banks, including the abolition of government-provided deposit insurance and the allowance of inherently risk-free accounts at the central bank for all citizens, their businesses, State and local government’s, etc; the closing of the discount window and the prohibition of OMP’s in favour of equal fiat distributions to all citizens to lower interest rates and/or UNIFORMLY increase price inflation if desired to discourage money hoarding in favor of investment and consumption.
Are you kidding me?
Every person (all 320 million of them) can have an account at the Federal Reserve? How many thousands / millions of new government employees needed to provide service?
“equal fiat distributions to all citizens”? Who will bother to work?
“uniformly increase price inflation”? Oh, you mean price controls? Yeah, that is the ticket.
….
Actually, the current system would work find if not for bastardization. Break up the banks to manageable pieces (ie: not big enough to bring down whole system) and take away government prop. Commercial banks only conduct core business (no more trading desks). Bank’s risk management would be much improved when they know might fail.
How many thousands / millions of new government employees needed to provide service?
What? You think simple accounting and transactions are tabor intensive?
They aren’t. Local Post Offices with a couple extra employees should be able to provide all the services a central bank SHOULD properly provide and those don’t include lending (or paying interest for that matter).
“uniformly increase price inflation”? Oh, you mean price controls? Yeah, that is the ticket.
I said nothing about price controls. Equal fiat distributions to all adult citizens would mean that no one, unless you count foreign holders of our fiat, would be cheated by price inflation since every adult citizen would receive the new fiat at the same time.
Actually, the current system would work find if not for bastardization
Actually, the current system grossly violates equal protection under the law wrt fiat creation and credit. You can’t polish that turd with regulation or expensive fiat.
““equal fiat distributions to all citizens”? Who will bother to work?”
Yea right, if the Federal reserve issued me $1000 per year the first thing I’d do is quite my job and try to live the high life!
” How many thousands / millions of new government employees needed to provide service?”
Well just about every person in the US from baby to elderly person has a social security number plus there’s millions of taxpayer identification numbers issued to groups like businesses, charities, etc. They have about 60,000 employees. That is a lot but you could probably get some synergy from the fact that they have already issued account numbers and such an account would be vastly simplified (for example, say all you can do with it is leave it in your Fed account or transfer it out to your local bank or get a check issued to you…unlike a regular bank you won’t be getting an ATM card or debit card or online bill pay).
“uniformly increase price inflation”? Oh, you mean price controls? Yeah, that is the ticket.”
This aspect makes no sense to me. I suspect part of the problem is that you guys are milling about here with no coherent idea what price inflation means. Price inflation simply means the increase in price of goods and services. We don’t have price inflation at the moment.
“equal fiat distributions to all citizens”? Who will bother to work?
You mean at a job, don’t you? Since work does not necessarily require a job?
Many would still choose to work for others for the extra income.
The simple question to ask idiots like Krugman is: At what level of deficit gov’t spending do you believe would turn negative for the economy? $40T, $80T, $100T?!?! Common sense dictates that governments should not have debt except in a national emergency, and it should be paid off within 10 years max. PAYGO (pay as you go, balanced budgets, etc. for all levels of gov’t).
Common sense dictates that governments should not have debt except in a national emergency,
Common sense is wrong wrt to monetarily sovereign governments. Where do you think money comes from?
ans:
1) Deficit spending by the monetarily sovereign (eg. US Treasury).
2) Open Market Purchases by the central bank for the sake of the banks.
3) Loans by the central bank for the sake of the banks.
So you want all money (more precisely fiat, aka “reserves” in the case of banks) to be created FOR THE BANKS?!!
Or do you prefer no fiat creation at all so people can profit via risk-free money hoarding? Problem is, progress requires taking risks, not risk-free money hoarding.
The problem is not the National Debt but that it pays INTEREST and is thus welfare proportional to wealth, not need.
Except interest rates are negative so how does ‘money hoarding’ increase the welfare of the wealthy?
Because real (nominal interest rate – inflation rate) interest rates may still be positive.
Thank you. Boy. This consciousness raising is a full time job. The truth is we are the government. All 300 million of us. And we need money to run our economy. We can add money in a number of ways as noted by Mr Anderson. My preference is we all give ourselves the money directly by deficit financing a Jubilee or QE for the people. Checks go out to every tax ID holder with strings that if you have debt you must pay same down. Otherwise party on dude.
The banks hate this idea.
The rich and powerful hate this idea.
Personally I love this idea and you should too.
iMy preference is we all give ourselves the money directly by deficit financing a Jubilee peterblogdanovich
Mine too and let’s end all fiat creation except for the monetary sovereign (eg. US Treasury).
But Steve Keen’s “A Modern Jubilee” could trigger another boom-bust cycle (causing even more unjust wealth inequality) so it should be combined with de-privileging* the banks too.
*Eg. Abolishing government-provided deposit insurance and instead allowing all citizens, their businesses, State and local governments, etc. to have inherently risk-free accounts at the central bank itself.
“Because real (nominal interest rate – inflation rate) interest rates may still be positive.”
that’s a big ‘may’ here. Right now in the US with inflation a bit shy of 2% and interest rates that you can earn on ‘hoarded money’ being maybe 1% you are very close to breaking even at best. In Europe rates are clearly negative so ‘money hoarders’ are losing wealth.
And I’m also not clear how it is a problem that the national debt pays interest? Imagine a person with $10,000. He can either spend it today or not. If he spends it today he can enjoy whatever goods and services the economy produces for him to spend it on. If he doesn’t spend it today, the economy is free to produce goods and services today for someone else’s benefit.
That was what happened in WWII. In WWII it was very hard to spend money on consumer items. Many items like meat and butter were under ration. If you insisted on buying them, you’d end up paying black market prices or worse. Other products like new cars were simply not available at any price since the factories had been retooled to building war equipment.
A person who opted to use $10,000 to buy ‘war bonds’ was in effect accepting lower consumption today, thereby relieving inflationary pressure on the economy, in exchange for being able to consume more later, when the economy would not be as busy building stuff for the military. He was also accepting an element of risk. If the US lost the war, his bonds would likely be worthless (as happened to those were unlucky enough to have loaned money to the Confederate States in the Civil War).
So it seems pretty clear that interest is just another price. If the economy can easily handle more consumption today, interest rates should be very low since there’s little value in getting some people to delay their consumption for the future. If the economy is running at the max., interest helps by lowering consumption today until a time when it would be easier to accommodate.
So since deferring consumption is something valuable for the economy (just how valuable goes up and down), why is it wrong to ‘get rich’ off of providing it? How is someone who makes $1M in interest a year different than someone who is making $1M a year providing plumbing services or songs or witty commentary?
And I’m also not clear how it is a problem that the national debt pays interest?
Because a monetary sovereign has no need to pay interest in the first place.
Hence, any interest a monetary sovereign pays is welfare proportional to wealth and not according to need.
That’s obviously not good.
So since deferring consumption is something valuable for the economy (just how valuable goes up and down), why is it wrong to ‘get rich’ off of providing it?
Because beyond legitimate liquidity needs you’re free riding off the consumption and investment (risk-taking) of others.
See Matthew 25:14-30 if you think money hoarding is a good idea.
The banks hate this idea. peterblogdanovich
They’ll also hate the removing of their privileges* and insist they are necessary when they are clearly not.
*Such as government-provided deposit insurance instead of inherently risk-free accounts for all citizens at the central bank.
http://www.vox.com/2016/7/11/12149268/low-interest-rate-chart
Interesting point. If you look at rates from about 1860-1940 and draw a trend line from there you land at 10 yr rates of about 1.5%. That implies the 1960-2010 or so case was not the ‘normal’ for interest rates but the abnormal.
“Because a monetary sovereign has no need to pay interest in the first place.”
Are you aware of how bonds work? The gov’t issues a bond that says something like “whoever owns this paper will get paid $1000 a year from now” These notes are simply sold at auction to the highest bidder. If the bid is $1000 then the gov’t is paying no interest. if the bid is $900 then it is paying 11% interest.
The gov’t does not have to issue bonds. It could simply enact huge tax increases whenever needed to maintain a budget that is always balanced or it could simply ask the central bank to print whatever funds are needed to cover deficits.
Either policy would be a pretty radical break from the norm in democratic nations. But if interest is welfare I’ll note:
1. This ‘welfare’ has been trending down and down over the long run and is very low now.
2. The reason investors choose not to bid $1000 for a $1000 one year note (0% interest) is not because they want ‘welfare’. There are risks to tying your money up in bonds over long periods of time (one year notes are easy to analyze for discussion but bond investors are buying bonds that mature in 10, 20, 30 years sometimes even more than that). If interest rates go up dramatically you loose as an investor. If inflation goes up you also loose. If the gov’t becomes unstable (President Trump promising to ‘renegotiate’ the debt for example) you also can loose. Bond investors are taking on risk and a lot of pretty freaky stuff can happen in 30 years.
Bond investors are taking on risk and a lot of pretty freaky stuff can happen in 30 years.
Boo hoo. That still doesn’t justify welfare proportional to wealth and not according to need.
If investors go broke and become poor that’s what a generous safety net is for.
Yes, I understand bonds and inflation and yield risk. But too bad since the MOST interest a monetary sovereign should pay is 0%, unadjusted for price inflation.
If investors don’t like the current “dearth of investment opportunities” then they might consider that looting the population via government subsidies for private credit creation is a short-sighted, self-defeating not to mention DANGEROUS strategy.
You write as if interest is something gov’t is deciding to pay investors. The bonds are auctioned to the highest bidder. If the highest bidder still equals 5% interest, the only ‘decision’ by the gov’t here is to use debt financing rather than taxes or spending cuts.
You write as if interest is something gov’t is deciding to pay investors. Brian E Considine (@e_considine)
Of course it is deciding to pay investors since it need not hold bond auctions AT ALL but simply spend new, interest-free fiat into the economy.
The reason the US Treasury issues bonds is to remove reserves from the banking cartel to keep the overnight rate between banks from being driven to near 0%. Thus sovereign bond issuance is an interest rate control mechanism, not a means to finance the monetary sovereign.
However, the proper way to prevent more supply than demand for fiat is to remove all privileges for depository institutions and then the population will use fiat much more than it currently does.*
I have my differences with the MMT crowd since they refuse to countenance (so far) de-privileging the banks but their understanding of fiat and banking is far superior to the Austrians.
*Since currently the population may only use physical fiat (coins and bills) instead of being allowed inherently risk-free accounts at the central bank itself.
One last quip. Mr. Anderson, if you ever assume a nom de plume may I suggest “Neo”.
Really enjoyed and appreciate your posts. Food for thought.