tag:blogger.com,1999:blog-88979977669316331862024-03-12T00:51:24.271-04:00Monetary FreedomMusings on economics and politics, with a special interest in free banking and monetary disequilibrium.Bill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger621125tag:blogger.com,1999:blog-8897997766931633186.post-3089296337402303682022-12-15T11:59:00.003-05:002022-12-15T12:29:16.918-05:00<p> Year To Date Inflation -- Not the Right Metric</p><p>During the Great Moderation, the Fed kept the inflation rate close to its target of 2%. However, there was substantial volatility month to month. One month, inflation would be higher than the target, but during the next month or two, inflation would be below target. During this period, looking at inflation over the last year allowed the monthly volatility to average out and each month's result would look close to target. In effect, inflation over the past year is an average of the monthly inflation rates for the last year. If that average was 2%, and if the inflation rate for the current month deviates from target, the "inflation from a year ago," will show 1/12 of the deviation. "Inflation over the last year" shows much less volatilty and suggests that the Fed is doing a better job than it is at keeping inflation on target. Of course, the actual increase in the price level for the month is much smaller (again, 1/12) of the annual rate of increase. </p><p>For example, last June's nearly 16% annual inflation rate was really a 1.3% increase in the price level. If that were reveresed by much lower inflation or even deflation the next month, it isn't as alarming as it might seem. If prices continue to rise at that rate for a year, it would be truly alarming. </p><p>However, when inflation has risen far beyond target, as it did in the aftermath of the COVID recession, and then it has come down as it has over the last four months, looking at inflation over the past year is not at all helpful. The inflation rate for the previous month (and really, the last few months,) is the best we have. Of course, future inflation is what is most important, but looking at the roughly 4% CEP inflaion we have seen for the last three months (along with the deflation from last July) suggest that inflation remains substantially above the 2% target, but it is a good bit lower than the 6% from a year ago. Looking at the inflation over the past year underestimates the progress that has been made. </p><p>Looking at the CPI figures, November's 1.2% inflation should be considered in the context of October and September's higher numbers that were closer to 5%. But looking at November's year to date, of 7.1% is really pretty worthless. </p><p>Yes, the changes in the year to date inflation tell us that inflation is slowing (slowly) but inflation for the last few months are really a much better indicator. Inflation is still too high, but nothing like 7%. </p><p>The Fed has increase its target for interest rates at each meeting, and it has added up. In retrospect, we know that real interest rates were very negative over the last year. The increase in the nominal interest rate and the decrease in the inflation rate has brought them close to zero. Comparing a nominal interest rate of 4% to a 7% year to date inflation rate greatly exaggerates the degree that the Fed continues to have a "loose" monetary policy. </p><p><br /></p><p><br /></p>Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-65426173078009935452019-04-10T09:21:00.001-04:002019-04-26T06:59:30.933-04:00More "Interesting" Thoughts about Socialist Monetary PolicyInterest income is forbidden in a socialist society due to socialist ideology. Someone is earning income on their money, when the only legitimate form of income is from labor.<br />
<br />
In a previous post, I described a socialist monetary policy that was based upon the issue of money to pay wages to government workers (which are all workers) and then money is absorbed as it is spent in government stores and shops (which are all of them.)<br />
<br />
If the workers are paid by crediting deposit accounts and their accounts are debited when they purchase consumer goods and services, then the payment of interest would be technically simple. Further, it would seem that interest rates could play something like the role they do in a market economy--including one with a monetary policy using interest rate targeting. Paying higher interest would reward workers for saving. The reduction in spending on consumer goods and services would allow for a reduction in the production of consumer goods and services without creating shortages. That would free up resources to produce capital goods, which would allow for the production of additional consumer goods and services in the future. Those added consumer goods would allow workers to both spend the amount they saved as well as any accumulated interest income. Those workers who saved would be especially rewarded for allowing an expansion in total future consumption. <br />
<br />
I was more concerned, however, with the use of interest rates as a tool of monetary policy. That is, the possibility of responding to a shortage of consumer goods and services by increasing the interest rate. As above, this should motivate additional saving and so reduced spending on consumer goods and services now. This seems to make an increase in the interest rate an alternative to increasing the prices of the consumer goods and services. Higher interest rates would reduce inflation--more or less.<br />
<br />
Interestingly, these interest payments would seem to increase the quantity of money. In the socialist economy without interest payments, all money is created by the payment of wages to workers. Paying interest on saving would be a new source of income and a new source of money creation. An increase in interest rates would entail an increase in income and money creation. This would seem to add to the demand for consumer goods and services and so tend to create more pressure to increase their prices to avoid shortages. <br />
<br />
Of course, this can be analyzed as an income and substitution effect. The income effect would be to increase the demand for consumer goods and services and exacerbate inflationary pressure. The substitution effect would be to reduce current consumption spending and expand future consumer spending as described above.<br />
<br />
In a market economic system, an increase in interest rates also increase interest income but directly reduces profits (at least accounting profits.) There is no particular reason to believe that total income rises. The use of monetary policy to raise interest rates typically involves a contraction in the quantity of money rather than an expansion. Even leaving aside the impact on private sector investment (which does not exist in the socialist economy described here,) an increase in interest rates reduces expenditure. (These "decreases" frequently involve a dampening or possible reversal of increases of consumption or investment due to other causes.) The situation is much more ambiguous in the sort of socialist economy described here.<br />
<br />
Can these considerations about the effects of interest payments on the quantity of money and income in a socialist economy be applied to a market economy? Or more especially, to a market economy in transition to socialism?Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com41tag:blogger.com,1999:blog-8897997766931633186.post-19891746460007103612019-04-08T12:26:00.000-04:002019-04-17T12:26:21.270-04:00Socialist Monetary PolicyConsider a command economy that doesn't fully dispense with money but rather pays wages to the workers in all of the nationalized industries and charges them prices for the consumer goods they buy in the various government owned and operated shops and stores. In other words, they are not quite ready to have people show up for work according to their perceived abilities and take away consumer goods and services as they need them. Those who fail to show up to work don't get paid, and those who don't get paid cannot buy consumer goods and services in the shops.<br />
<br />
In capitalist economies, monetary policy is typically managed by adjusting policy interest rates. For there to be interest rates there must be lenders and borrowers. The lenders earn interest income from the money they have accumulated and lent. They are earning income from property and not labor. This is exploitation and inconsistent with socialist principles.<br />
<br />
However, in a socialist economy money can simply be printed up and paid out as wages and then retired when it is spent on consumer goods and services. If money is credited and debited to deposit accounts of workers as they are paid and spend their incomes, then the creation and destruction of money would be literal. If wages are paid in currency and then paid over to government shops, it would be silly to shred currency when received and print it anew. Currency would need to be collected from the retailers and then distributed to the various agencies and departments employing workers. Worn bills would be shredded and new currency printed as needed.<br />
<br />
Would this system result in inflation? It would only create inflation if the government chose to raise the prices it sets for consumer goods and services in its shops. Inflation would be a choice by the government.<br />
<br />
What could happen is shortages of consumer goods and services at the prices set by the government. This depends on how many consumer goods and services are produced but also by the workers as they choose what and how much they buy.<br />
<br />
It would be possible to correct a shortage by raising prices resulting in inflation. However, those shortages could also be corrected by reducing the wages workers are paid. And finally, it would be possible to expand the production of consumer goods and services, perhaps by shifting resources from the production of additional capital goods, consumer services provided without charge like medical care or education or still other goods like domestic security or military preparedness. <br />
<br />
A socialist system would have no role for a "monetary policy" based upon the manipulation of interest rates. And while there is a quantity of money outstanding at any time and a demand to hold it by workers, it is doubtful that the quantity theory really applies. There is noting like gold mining or even trade surpluses resulting in additions to a stock of gold. Further, the usual vision of "velocity" of money being spent, received, and then spent again would play little role in a system where for the most part money is created to pay workers' wages and then received by government shops and extinguished.<br />
<br />
Now, the socialist system described above does allow workers to save. They can simply accumulate currency or else balances in deposit accounts. To the degree there is saving, the money created by the payment of wages will exceed the money absorbed by the sale of consumer goods and services. Saving would involve lower demand for consumer good and services than if there were no saving. That would allow resources to be devoted to the production of capital goods, expansion of products distributed at no charge like healthcare or education, or the military or security services.<br />
<br />
If deposit balances are used, it would be possible to pay interest on those balances. This would mean, of course, that workers who saved would earn income on their property, which is contrary to socialist principles. Leaving that aside, such interest might encourage saving and so free up resources from the production of consumer goods and services to allow the production of additional capital goods or perhaps expand "free" social services or even military or policing. Interestingly, if additional capital goods are produced, this could allow for an increase in the production of consumer goods in the future, providing additional goods and services for the workers who saved and earned interest to buy. <br />
<br />
Further, if a shortage of consumer goods and services were to develop, paying higher interest on deposits would encourage saving and correct the shortage without the need to raise prices or lower wages. Inflation would be controlled by higher interest rates to the degree it encourages saving.<br />
<br />
Collecting taxes on wages, of course, is just another way of describing a decrease in wages. Collecting some kind of sales tax on purchases is simply another way of increasing prices. In fact, aren't the prices paid for consumer goods and services really just a tax for taking the various consumer goods and services?<br />
<br />
Perhaps these principles can be applied to understanding the monetary system of a capitalist system? Or, more to the point, the transition of a capitalist system to the new socialist order! Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com8tag:blogger.com,1999:blog-8897997766931633186.post-26952234145648010112019-04-07T11:07:00.001-04:002019-04-15T12:14:35.224-04:00Government Default and MMTAdvocates of Modern Monetary Theory (MMT) have claimed that most economists have recently come around to their position that a government that borrows in terms of its own currency cannot default on its debt. It can simply create new money out of thin air and pay off its debt as it comes due.<br />
<div>
<br /></div>
<div>
This is hardly a novel idea. While a government could default on debt denominated in a currency that it can issue rather than create money to pay it off, the conventional wisdom among economists has always been that it is much more likely that a government that has no other way of paying debt as it comes due would likely issue money to pay it off. That is the principle behind the fiscal theory of the price level. </div>
<div>
<br /></div>
<div>
It is at least possible that section four of the 14th Amendment to the U.S. Constitution would be interpreted as mandating the issue of legal tender currency in payment of debt as a last resort. The provision was aimed at keeping southern representatives in Congress from blocking the payment of Civil War debt or trying to get Confederate debt paid with U.S. funds. But the plain language of the first sentence, "The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned," might be interpreted as prohibiting explicit default. </div>
<div>
<br /></div>
<div>
The creation of new money to pay off part of the U.S. national debt would be illegal. However, it would be legal for the Federal Reserve (the Fed) to purchase government bonds on the open market. As long as the Fed purchases bonds from investors that the Treasury is selling to them to refinance the national debt, there should be no problem in selling enough new bonds to pay off bonds that are coming due. The problem is that the Fed's legal mandate is to provide price stability and maximum sustainable employment. This puts significant limits on the amount of government bonds that the Fed can purchase. Of course, Congress could amend the Federal Reserve Act in any number of ways, including just requiring that the Fed purchase bonds directly from the Treasury if necessary to raise money to pay off existing bonds as they come due. </div>
<div>
<br /></div>
<div>
If budget deficits are so high that the national debt grows faster than the economy, then eventually interest on the national debt will outstrip the total income generated by the economy and necessarily outstrip total amount of tax revenue that can be raised, even leaving no provision of current public goods or any personal income to allow for taxpayer survival. Well before that point is reached, some kind of default is inevitable. To avoid such a default, before the point at which the interest burden becomes unbearable, the budget deficit must be reduced so that the national debt grows no faster than the economy. Such a budget deficit is sustainable.<br />
<br /></div>
<div>
On a positive note, slowing the growth of government spending to less than the growth of the economy and keeping the tax system unchanged will result in a shrinking budget deficit and eventually make the burden of interest on the national debt proportionately less severe and further eventually lead to a budget surplus that will finally result in there being no national debt at all. </div>
<div>
<br /></div>
<div>
On a negative note, if investors believe that the budget deficit will never be reduced enough to become sustainable, then they may immediately refuse to refinance the existing national debt by purchasing new bonds to pay off the old bonds as they come due. This is because when the inevitable default occurs at some future time, no investor wants to be caught holding government bonds. Immediately before that, no investor will buy government bonds. But if no investor buys government bonds, then the government cannot refinance its existing national debt and so the crisis occurs immediately. The logic of this situation is that a crisis could occur at any time due to a loss in confidence.</div>
<div>
<br /></div>
<div>
It certainly will make some difference if the government expressly defaults on the national debt, simply paying limited principal and interest as opposed to issuing new money to pay them off as they come due. The second option results in hyperinflation. The money used to pay off the bonds will be worth much less. However, this hardly matters. If the government is going to create a hyperinflation to pay off its national debt at some future time, no bond investor wants to be caught with the bonds when their real value is greatly reduced. This will make it impossible to refinance the national debt, requiring the hyperinflation in the nearer future and so on, such that it could happen at any time.</div>
<div>
<br /></div>
<div>
The primary difference between the two scenarios is that express default on the national debt would directly impact government bonds, while inflationary default would effect all contracts denominated in units of the government currency. While this more catastrophic result might motivate a reduction in the budget deficit to sustainable levels, my own view is that explicit default of the national debt is superior to hyperinflationary disaster. <br />
<br />
The Virginia School approach would require a monetary constitution that mandates some sort of price level stability. Inflationary default would simply be unconstitutional. And, of course the better known Virginia School approach would be that constitutional rules should limit the budget deficit so that it is easily sustainable. Basically, government spending should be funded by current taxation. Still, I also favor running a slight budget surplus when the economy is growing on trend, shifting to balance when the economy grows less than trend and budget deficits when the economy shrinks. I think raising taxes or cutting expenditures in a recession is undesirable. In my view, a constitutional debt limit, with the limit set so that the interest on the national debt is easily sustainable, is probably the least bad approach.</div>
<div>
<br /></div>
<div>
Anyway, the notion that excessive budget deficits will eventually lead to hyperinflation (without some reform of the monetary and fiscal constitution) is my view. I have not lost all hope that budget deficits will be reduced to become sustainable and I am not predicting imminent financial catastrophe. Still, that hyperinflation is a more likely scenario than express default is not something that I discovered after learning about MMT. I would also note that this purported insight from MMT hardly provides assurance that proposing massive new government spending programs to be paid for by money creation is responsible.</div>
<div>
<br /></div>
<div>
</div>
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com9tag:blogger.com,1999:blog-8897997766931633186.post-47577179905267987022019-04-06T19:13:00.000-04:002019-04-15T12:09:55.560-04:00Modern Monetary TheoryI believe it was Robertson who claimed that what was true in Keynes was not new and what was new in Keynes was not true. Much the same can be said of Modern Monetary Theory (MMT.)<br />
<br />
It is almost certain that a monetary system can be developed where the government creates money to fund its spending and uses its tax system to generally absorb sufficient money so that the price level and inflation vary only a limited amount. All that is necessary is that what is conventionally described as the budget deficit--government spending less tax revenues--be planned such that only a modest growth rate in the quantity of money occurs. Of course, tax revenues actually depend on economic activity and so the actual growth rate of the quantity of money would vary, but the result would be only modest variations in the growth path of the price level and so the inflation rate. Targeting the growth rate of the quantity of money, much less the growth path of the price level or inflation, by adjusting the tax system on the fly would be nearly impossible and adjusting government spending would also be difficult and likely politically impossible. <br />
<br />
However, the sale of interest bearing bonds to absorb money would allow for what amounts to a very conventional monetary policy. Excessive monetary growth could be offset by what amounts to open market sales--the sale of what would be newly-issued government bonds under this monetary framework. If it were necessary to contract the quantity of money to target the price level or inflation (or nominal GDP,) then this would simply require a sale of bonds of greater value than the current budget deficit. Some advocates of MMT apparently seek to avoid bond finance. This appears to be a matter of anti-capitalist ideology. Interest bearing bonds allow investors to earn interest income and investment income entails exploitation of the working class.<br />
<br />
None of this is new and simply reflects the "standard" view of the government budget constraint. Government spending must be funded by either taxes, borrowing, or money creation. Now, to the degree any advocate of MMT emphasized that government first spends newly created money and then absorbs it by taxes or bond sales, then it a bit silly. In reality, the flow of government spending over time is matched by the flow of tax revenues, bond sales, and money creation. Before or after is not really economically significant. <br />
<br />
The "Virginia School" approach to monetary theory almost entirely focuses on the need for a "monetary constitution" governing the creation of money. However, there have always been hints of "old Chicago" due to James M. Buchanan's influence. Fundamentally, government spending should be funded by taxes, so that voter/taxpayers can make a sensible decision regarding the allocation of resources between the production of private and public goods. However, the Buchanan approach to monetary institutions implies that there is usually some budget deficit funded by money creation. Some part of government spending is funded exactly as proposed by MMT. While this might make up a substantial portion of spending for a very frugal government, the usual assumption is that the appropriate rate of government funding by money creation is a small portion of government spending.<br />
<br />
For many years, following the lead of "new Chicago," or monetarism, Virginia School thinking assumed a very predictable nominal budget deficit reflecting a fixed growth rate for the quantity of money. However, the "old Chicago" approach assumed at least the possibility of a variable growth rate of the quantity of money. These changes would be necessary to offset changes in velocity, (or accommodate changes in the demand to hold money) and so maintain a stable price level. Interestingly, the Virginia School has little more interest in "bond finance" of budget deficits than MMT. However, the problem isn't any purported exploitation of workers due to interest income but rather concern that the current generation of voter/taxpayers would be using debt finance to fund current benefits at the expense of future generations of voter/taxpayers.<br />
<br />
Of course, the Virginia School advocates changes in public finance and monetary institutions. MMT claims that not only should the government fund all of its expenditures by money creation, but it also insists that is what really happens. MMT claims that under the monetary and fiscal institutions of the United States today, government spending is funded by newly created money and when taxes are paid, money is destroyed. Their distaste for government bonds may sometimes leave it unsaid, but they also claim that the sale of bonds destroys money too.<br />
<br />
There is more than an element of truth to their claim, but in the final analysis, government spending in the U.S. is funded by taxes and borrowing. So what is the element of truth? The U.S. Treasury has a deposit account at the Federal Reserve (Fed.) When the Federal government makes payments, the funds are drawn from its account at the Fed. Those receiving the payments generally deposit them at a bank (depository institution.) Funds are transferred from the Treasury's deposit account at the Fed to the bank's depository account at the Fed. It is apparent that this transaction simply transfers money from the Treasury's account to the bank's account. However, the Fed does not count the Treasury's deposit account as part of reserves and it does count the deposit accounts the banks keep at the Fed, so whenever the Treasury spends money, "reserves" increase.<br />
<br />
The opposite occurs when the Treasury receives receipts of either tax payments or bond sales. The Treasury deposits the checks or electronic payments it receives in its deposit account at the Fed. The Fed shifts funds from the deposit accounts of the banks used by the taxpayers or bond investors to the deposit account of the Treasury. Because the deposit account of the Treasury is not counted, "reserves" as reported by the Fed decrease.<br />
<br />
Reserves makes up a portion of the monetary base, which also includes currency held by the nonbanking public. The logic above suggests that when the government spends money, the monetary base increases and when taxes are paid or government bonds are sold, the monetary base decreases. This argument supposedly shows that MMT isn't proposing anything new but rather is simply a recognition of what the U.S. government already does--fund its spending with newly created money.<br />
<br />
If the Federal Reserve were to target reserves or the monetary base, then it would have to make offsetting transactions. Each time the government spent money, the Federal Reserve would need to make an open market sale. Each time the government received a tax payment or receipts from the sale of bonds, it would need to make an open market purchase.<br />
<br />
However, this is really not the most useful way to think about it. The government receives tax payments frequently and it receives proceeds from the sale of bonds more frequently still. It also makes payments frequently. These represent the flow of funds through the Treasury's account at the Fed. When the Treasury's balance at the Fed changes due to a mismatch between its receipts and expenditures, the Fed's measured reserves change in the opposite direction. The limit to the increase in the quantity of reserves reported by the Fed due to an increase in government spending not matched by tax revenue or bond sales is the Treasury's existing balance at the Fed. In other words, unlike other entities, if the Treasury spends the money it holds, this shows up as an increase in the quantity of money reported by the Fed rather than a transfer of money balances. Economically, the effect would be the same, the result being measured as an increase in the quantity of money rather than a reduction in the demand to hold money by the U.S. Treasury.<br />
<br />
As explained above, if the Fed targeted the quantity of reserves or base money, and it continued to measure it without including the Treasury's balance at the Fed, then changes in that balance would result in changes in the quantity of base money. The Fed would need to offset those changes by open market operations. If the Treasury reduced its balance at the Fed, the Fed would need to sell securities on the open market. If the Treasury increased its balance at the Fed, the Fed would need to purchase securities on the open market to leave the quantity of money unchanged. <br />
<br />
While the Fed could invest in private securities, if it follows its traditional policy (pre-2008, anyway,) then the Fed would be trading government bonds in place of the Treasury. If the Treasury reduced its balance at the Fed and the quantity of money increased and the Fed sells government bonds to reverse that increase, then it is the Fed selling government bonds on the market rather than the Treasury. Because the Fed is an independent agency of the Federal government, if the balance sheet of the Fed and the Treasury are consolidated, then government spending is being funded by bonds.<br />
<br />
It seems to me that it is unnecessary for the Fed to control the quantity of reserves and base money so tightly. If slight transitory fluctuations in the Treasury's balance at the Fed result in slight transitory variation in the quantity of reserves and base money, it would likely have little or no effect on spending on output, the price level, or inflation. Interestingly, if the Fed targets the federal funds rate, as it has for many years, then if the changes in reserves due to changes in the Treasury's balance have some impact on interbank lending, then keeping the Federal Funds rate on target would require that the Fed make the offsetting open market operations described above.<br />
<br />
When thinking about the flow of government spending, tax receipts, and the sale of government bonds, the impact of fluctuations in the quantity of reserves or base money due to variation in the Treasury's balance at the Fed are trivial. More importantly, the laws of the United States set up a tax system that generates revenue and the government creates a budget based upon spending that tax money. Any budget deficit must be funded by bond sales by the Treasury. There is a limit on the total amount of bonds that the Treasury may sell, a limit that is periodically increased by Congress. While Congress could change the laws, the fiscal institution existing today is that the Treasury must obtain funds from taxes or sale of bonds before it spends it. However, it would hardly matter if it were not necessary to first accumulate money in the Treasury account as long as bond sales matched the budget deficit over the budget period.<br />
<br />
Does the U.S. government fund any of its expenditure by money creation? The conventional wisdom among economists is that it does. The government generally does run a budget deficit, which it funds by selling bonds. However, some of those bonds are purchased by the government's own central bank, with newly created money. While it is illegal for the Fed to purchase government bonds directly from the U.S. Treasury, it hardly matters that the bonds must pass through some middleman. The Treasury sells bonds on the market and the Fed purchases some of them on the market. Since the Fed is an independent agency of the U.S. government, looking at their consolidated balance sheet shows that when the Fed owns U.S. government bonds, it is the government owing money to itself. From this perspective, the U.S. government funds itself largely through tax receipts, but also through the sale of bonds to private investors (and other governments) and finally through money creation with a sort of legal fiction that that it is borrowing money from its own central bank.<br />
<br />
While there is an important element of truth to this perspective and it reflects the Virginia School approach to the role of money in public finance, it is probably not wise to dismiss all the "legal fictions." If the Fed was bound to a money supply rule, especially a rule that implied a constant growth rate of the quantity of money and if the government runs a substantial budget deficit all the time, then this approach may be the best way to make sense of the situation. However, the Fed has never operated according to such a rule. In recent years, it has targeted the inflation rate and its legal mandate is to seek price stability along with maximum sustainable employment. This mandate has generally resulted in a growing quantity of base money, but a policy of offsetting changes in velocity (or in other words, accommodating changes in the demand to hold money,) to stabilize prices implies that sometimes the quantity of money must decrease. As a practical matter, while the Fed may typically accumulate more and more government bonds, it may sometime accumulate an unusually large amount to offset a transitory decrease in velocity. But it would then need to be able to sell those bonds to decrease the quantity of money when velocity rises again to a more normal level. <br />
<br />
Of course, the Great Inflation occurred during a period in which the Fed had the same legal mandate as today. And 2% inflation is hardly a literal interpretation of stable prices. Further, there has been serious discussion of raising the target inflation rate without any consideration of changing the Fed's legal mandate. However, consider a central bank that takes its legal mandate seriously--something more than a suggestion. Then in a very real sense what is supposedly "fiat money" amounts to type of borrowing. <br />
<br />
This would especially apply to the Virginia School approach of a monetary constitution mandating a stable price level. Under such a rule, a temporary decrease in velocity would require an increase in the quantity of money. However, there would be a legal requirement that such money be later withdrawn from circulation when velocity recovers. The best way to frame this situation is that the extra issue of money represents increased borrowing and when it is later withdrawn, it would be paid back. If there were an existing national debt made up of outstanding government bonds, then a decrease in velocity would require open market purchases, replacing some of those bonds with money. The best way to understand that is that interest-bearing debt that is not suitable for use as money is replaced by debt that can be used as money. When velocity rises again, then the quantity of money must be reduced by open market sales. But what that means is that interest bearing debt that is not suitable as money replaces debt that is suitable for use as money. <br />
<br />
Debt that can be used as money can be issued in some amount at a zero interest rate. Interest is hardly ever paid on hand-to-hand currency. Since "fiat money" is frequently identified with such paper notes, lack of a nominal interest return is sometimes taken to be a defining characteristic of money. Of course, most money takes deposit form which can pay interest. That includes the reserve deposits banks hold at the Fed. They can, and since 2008 have, paid interest.<br />
<br />
If the price index to be stabilized was simply the price of gold, then it would be obvious that this would be a gold standard. The monetary constitution would require changes in the quantity of "fiat money" so that the price of gold is stable. The issuer must stand ready to withdraw it from circulation if the demand to hold it falls so that its value relative to gold would remain fixed. If the rule was enforced by requiring that paper money be redeemed with gold, then paper money would plainly be a type of debt instrument.<br />
<br />
From this perspective, even with only a weak commitment to an inflation target, the money issued by the Fed can be seen as a type of debt. Abandoning its inflation target would be a kind of default. Currency bears no interest but reserves do. The Fed has a balance sheet that includes both government debt and private debt, particularly mortgage backed securities. The Fed earns more than than it pays and generates revenue. It uses some of the revenue to cover its expenses, but transfers most of it to the U.S. Treasury. From this perspective the U.S. government is not funding part of its deficit by monetary creation. It is rather that one source of government revenue is profit from its central bank.<br />
<br />
Suppose the U.S. balanced its budget and so spent no more than it collects in tax revenue. The Fed would still earn profits and transfer them to the U.S. Treasury. If the demand for base money increased, then the Fed could issue more. It must do so to keep inflation on target. The Fed would typically earn more profit on its larger balance sheet. If the demand for base money were to fall, for example, due to financial innovation, the Fed must stand read to shrink its balance sheet. It would pay part of the money it issued back by selling off some of its assets. As a result, it would typically make less money for the Treasury.<br />
<br />
So, there is an element of truth in the claims of MMT. It is certainly possible to have a monetary institution where the government creates money when it spends it and destroys money when it collects taxes or sells bonds. A relatively conventional monetary policy would be possible by selling bonds as needed to keep the quantity of money and the price level and inflation under control. However, it is not the way the U.S. fiscal and monetary institutions operate now. If the Fed is truly committed to keeping inflation on target, then it is probably best to see government spending as being funded by taxes or else borrowing. In other words, the "legal fictions" requiring bond finance of budget deficits reflect a more fundamental reality. <br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com3tag:blogger.com,1999:blog-8897997766931633186.post-78735858445708949072018-02-04T13:06:00.001-05:002018-02-06T14:21:08.478-05:00What is the "Right" Corporate Income Tax? Zero! The recent tax bill signed by President Trump reduces the corporate income tax rate from 35% to 21%. This was a positive change, but really, just a step in the right direction. The corporate income tax rate should be zero.<br />
<br />
All corporate income belongs to people and it is the people that matter. My point here is different from the economic theory of tax incidence. To the degree people change what they do to reduce their tax burden, part of that burden is shifted to other people. Usually, total income and welfare is also reduced. When a tax is reduced, the reverse of that logic is that effort to reduce the burden is curtailed and part of what was shifted disappears. This benefits someone against whom the tax was not directly assessed while increasing total income and welfare. <br />
<br />
There is almost certainly some shift in the incidence of the corporate income tax, but the first step is to understand that the immediate burden of the corporate income tax is on the owners of the corporation--that is, the stockholders. There is little reason to have a special tax on the income stockholders earn from businesses organized using the corporate form and certainly no reason for a high tax of 21% much less 35% or even more.<br />
<br />
While the average income of those owning shares of stock is relatively high, there are many stockholders who have quite modest incomes. Most obviously, many with defined contribution retirement plans use savings to purchase stock, sometimes indirectly through stock index funds. The corporate income tax reduces the return on these stock investments and so the income available to working people when they retire. Since this impacts the amount of saving necessary to generate an acceptable retirement income, it adversely impacts the consumption and welfare of average working people in the present. To avoid imposing unfair and unreasonable tax rates on people of modest means it is necessary to stop taxing corporations and instead tax the people who own the corporations. Those with lower incomes can then be taxed at a more modest rate.<br />
<br />
Suppose a corporation pays out its profit as a dividend to its stockholders. Assume the share of the profit due to a stockholder is $100 The tax paid by the corporation was $35, leaving $65 for the stockholder's dividend. A individual with an average income might be in a 15% personal income tax bracket, leaving about $56. The government has taken nearly half of the share of the profit belonging to this taxpayer. After the recent decrease in the corporate tax rate, this would instead be $79 for the dividend. After paying the 15% tax rate on personal income, that would leave $67. The government is taking about 1/3 of the original $100 profit. But why? <br />
<br />
Why shouldn't this average worker solely pay the 15% on this $100 as he or she would pay on any other income? While for most people that is wages, it also includes interest and profit generated from other business forms such as a proprietorship or a partnership.<br />
<br />
It would be possible to impose an especially high tax on people earning high incomes from businesses organized as corporations, but that really doesn't make any sense either. Before the reduction in the corporate tax rate, the $100 profit would allow for a $65 dividend, which after the 39.6% top tax rate would result in about $40, so that the government is taking about 60% of the earnings. After the tax cuts, with the new lower corporate tax rate and the slightly lower top tax rate on personal income, the government will take slightly more than 1/2 of the earnings. <br />
<br />
However, why should income from corporate profit be taxed at 50% while interest from bonds (including corporate bonds) or profit from proprietorships or partnerships be taxed at 37%? While I think the new top tax rate is too high rather than too low, having an especially high tax rate for income from corporate profit is unreasonable and unfair.<br />
<br />
There is an important complication that could result from taxing personal income at a higher rate than corporate income. With no corporate income tax and a personal income tax, there is an incentive to use the corporate form to accumulate wealth without paying any tax. Conceptually, this can be corrected by allocating all corporate profit to the stockholders whether they are distributed as dividends or held as retained earnings. An alternative approach is to continue to tax corporations but to provide a refundable tax credit against each stockholder's personal income tax. <br />
<br />
However, there is a good case to be made for expanding the ability to accumulate wealth without paying tax. From that perspective, the problem would be that the ability to do so is limited to those who buy and hold stock in a particular corporation. It should also be possible to accumulate wealth tax free for those who shift funds between corporations or keep money in a savings account or purchase bonds. Perhaps the easiest way to accomplish this administratively would be to remove the limits on deductions for contributions to IRA accounts as well as the penalties for early withdrawal. The result would be a shift from a tax on personal income to a tax on personal consumption.<br />
<br />
Some would complain that taxing consumption is unfair because we all must spend some of our income on consumption and those with higher incomes have more left over that can be saved and so avoid tax. I suppose the argument just takes the tax rates as given, though I think that those making this claim are typically assuming a proportional consumption tax. That would be true of a typical sales tax. <br />
<br />
However, a personal consumption tax can be applied at different rates. I favor a digressive rate structure. That is a tax system that includes two rates-- 0% for some initial level of consumption (or income) and then some other rate that applies to the rest. Of course, it can be equally described as a single tax rate that is applied after a standard deduction. So for example, a 10% tax rate applied on all consumption greater than $20,000. Such a tax system is progressive relative to consumption, because average tax rate rises with the level of consumption. With the given example, consumption of $10,000 would be taxed at a zero rate, consumption of $25,000 would be taxed at a .1*(25,000-20,000)/25,000 = 2%, consumption of $50,000 would be taxed at .1*(50,000-20,000)/50,000 = 6%, and consumption of $100,000 = .1*(100,000-20,000)/$100,000 = 8%. As consumption rises, the average tax rate approaches in common marginal rate of 10%. <br />
<br />
How a tax on consumption relates to the income earned by the taxpayer would depend on the saving rate. However, be increasing the zero bracket and the tax rate, the average saving rate can be offset so that the tax system is progressive relative to income as well. <br />
<br />
While it might seem that taxing consumption biases the tax system towards saving, the conventional wisdom in economics is that instead taxing income creates an inefficient bias towards current rather than future consumption. Economics assumes that the purpose of production is consumption. Income reflects contributions to production with its purpose being consumption now or in the future. Saving and the accumulation of wealth is the mechanism by which current production is used to provide for future consumption. Basically, the notion that taxing consumption is inefficient ignores that future consumption will be taxed as well, and that taxing investment income implies an excess burden from choosing to consume in the future.<br />
<br />
While that argument is true as far as it goes, a given tax revenue requires a a higher tax rate on consumption than income (assuming private saving is positive in aggregate.) That higher tax rate on income will tend to discourage other economic activity--like working to earn income--compared to a lower tax rate.<br />
<br />
Still, my own view is that earning income measures contributions to society and consumption is what is taken from society. I think it is better to tax what people take than what they contribute. I don't really agree with the principle that those who contribute and take more should pay more taxes, but I do believe that it is wrong to heavily tax people who take very little, especially when that is because they are unable to contribute much. <br />
<br />
Regardless, taxing corporations because those who mostly own them are buying yachts and limousines is a mistake. It is possible to reform the tax system to greatly reduce the resulting unreasonable and unfair burdens placed on others.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com8tag:blogger.com,1999:blog-8897997766931633186.post-7018571294182616282017-10-08T10:37:00.000-04:002019-04-07T11:54:12.537-04:00Buchanan, Calhoun and Rothbard--More of MacLean's FolliesNancy MacLean's <u>Democracy in Chains</u> follows its fictional introduction , the imaginary "Meeting in Dixie" with a prologue, "The Marx of the Master Class." There she claims that Calhoun was James Buchanan's "lodestar." As has been pointed out by others, there is a serious problem. Buchanan never cited Calhoun. He was hardly developing and elaborating on Calhoun's political insights.<br />
<br />
Murray Rothbard, however, does cite Calhoun. He was quite gushing about some of Calhoun's ideas. Charles Koch at one time provided financial support to Rothbard and he also provided support for Buchanan. Surely, then, Rothbard and Buchanan's views can be conglomerated together as all so much propaganda for the Koch cause?<br />
<br />
However, Rothbard and Buchanan were not at all on the same page. Phil Magness and Art Carden's <a href="https://object.cato.org/sites/cato.org/files/serials/files/regulation/2017/9/regulation-v40n3-8_7.pdf#page=11">review</a> in Regulation cites private correspondence where Rothbard absolutely rejected Buchanan and Tullock's analysis in the Calculus of Consent. <br />
<br />
More importantly, the very book by Rothbard that MacLean cites, <u>Power and Market</u>, includes Buchanan in its index. What did Rothbard say about Buchanan there? It is in the preface:<br />
<blockquote class="tr_bq">
"In recent years, economists such as Anthony Downs, James Buchanan, and Gordon Tullock (many of them members of the Chicago School of economics) have brought economic analysis to bear on the actions of government and of democracy. But they have, in my view, taken a totally wrong turn in regarding government as simply another instrument of social action, very much akin to action on the free market. Thus, this school of writers assimilates State and market action by seeing little or no difference between them. My view is virtually the reverse, for I regarding government action and voluntary market action as diametric opposites, the former necessarily involving violence, aggression, and exploitation, and the later being necessarily harmonious, peaceful, and mutually beneficial for all."</blockquote>
MacLean apparently missed Rothbard's claim that his approach was totally different from that of Buchanan, and instead cites a section of his second chapter "The Fundamentals of Intervention" where he discusses Calhoun's analysis of taxation. Rothbard included a long quotation from Calhoun. From a "Virginia School" perspective, the quoted analysis of taxation is very incomplete. There is no mention of the benefits generated from whatever government service is being funded. From his earliest work in the late forties, Buchanan followed Wicksell in emphasizing the relationship between the benefit of the public expenditure and the tax cost to each person.<br />
<br />
The only "benefit" mentioned by Calhoun is the receipt of tax funds. To use a 19th century example. suppose the government levies a tax to fund the construction of a fortress to protect a port. The contractor who builds the fort may also be subject to the tax, but if the total revenue from the government payment is greater than the amount of taxes he paid, then this contractor is a net tax consumer according to Calhoun. Meanwhile, suppose a cotton planter sells some small part of his crop to the government which uses it for the flag that goes on top of the fort. While the planter receives some tax money from the sale of this small amount of cotton, if the total amount of tax paid is greater than the amount earned from the cotton used for the flag, then this planter is a net taxpayer in Calhoun's view. According to Rothbard, the building contractor is necessarily exploiting the cotton planter.<br />
<br />
What about the benefits provided by the fort? Perhaps it is protecting the port from pirates, resulting in lower shipping fees and increased income for the planter who uses the port to export cotton. And while it is certainly true that the particular contractor building the fort benefits from this business, determining the net benefit is not primarily a matter of subtracting off the contractor's tax payments but rather his opportunity cost--the value of the other construction projects the contractor has forgone. While the scenario of perfect competition that would reduce this net benefit to zero is unrealistic, in a competitive market the net benefit to the contractor might be quite small. Further, the added demand for construction services may increase the incomes of contractors doing private sector work, even though they receive no direct payment of tax monies.<br />
<br />
Calhoun, of course, was no economist. Rothbard has less excuse for ignoring the opportunity costs of those selling to the government. However, the question is not really whether Calhoun or Rothbard (and Rothbard's more devoted libertarian followers) provided a reasonable analysis of taxation. The question is what does this have to do with Buchanan and public choice economics?<br />
<br />
In the pages MacLean references, Rothbard accuses other free market economists of failing to see that taxation should be counted as intervention in the market. Surely, this should have signaled to MacLean that Rothbard wasn't simply repeating some standard view that could be attributed to any other economist, much less Buchanan. In fact, few economists share Rothbard's goal of defining and defending strict laissez-faire. Most economists, even those with free-market views, are not worried about whether taxation counts as government intervention. Few economists indeed would feel a need to argue that taxation is not government intervention in the market because if it were, it would be illegitimate. How many economists would argue that <b><i>all</i></b> government intervention is necessarily illegitimate? (My view is that taxation is government intervention, but that doesn't mean that it is not sometimes a necessary evil--the least bad option. I believe Buchanan would say that if it is the least bad option, then it cannot be described as any kind of evil, necessary or not, and instead must be described as a positive good, or at least optimal.)<br />
<br />
It is difficult to separate Rothbard's analysis of taxation from his anarchism. MacLean quotes Rothbard as stating that Calhoun is correct that public finance is the "keystone." However, Rothbard's stated rationale is that all the other government intervention is funded by taxation. The implication is that if there were no taxation, then there would be no illegitimate government activity, which according to Rothbard, is all government activity. Obviously, whether or not Calhoun really believed that his analysis of taxation was any kind of "keystone," his rationale would be quite different. Calhoun was no anarchist. <br />
<br />
MacLean almost immediately takes off into Calhoun's well known support for slavery as a positive good, implying that Rothbard (and Buchanan) would agree. Again, in the very section she cites, Rothbard expressly includes slavery as a type of "binary" intervention into the free market, just like taxation. Rothbard plainly rejected slavery as illegitimate.<br />
<br />
Further, Rothbard begins the chapter cited by MacLean, not with Calhoun, but rather with Franz Oppenheimer. A few pages before the pages cited by MacLean, Rothbard's shares his true "lodestar." It is Oppenheimer's distinction between the "economic means" of obtaining wealth through production and exchange in contrast to the "political means" of obtaining wealth through theft and exploitation. Rothbard does little more than introduce the terms in <u>Power and Market</u>, but in his later and more popular work, <u>For A New Liberty</u>, he makes it plain that he sees the genesis of the state in conquest with the feudal overlords exploiting the newly enserfed peasantry (p.61) For Rothbard, slavery is the epitome of the illegitimate political means of obtaining wealth. <br />
<br />
Buchanan undoubtedly shared Rothbard's highly negative views regarding various despotic regimes both in the past and in the present. However, Buchanan's fundamental vision of constitutional democracy is that it is a way for people to come together and provide for the production of desirable public goods.<br />
<br />
For Rothbard, government is always the master exploiting the slave. As Rothbard's quote from his preface makes clear, he recognized that this is completely different from Buchanan's basic view of government and democracy. Too bad MacLean failed to take note.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com5tag:blogger.com,1999:blog-8897997766931633186.post-42728935978400821202017-09-03T21:15:00.000-04:002019-04-07T11:58:26.917-04:00Jeff Friedman on James Buchanan and Libertarianism.Jeff Friedman's new blog <a href="https://niskanencenter.org/blog/public-choice-theory-politics-charity/">began with an attack on libertarians and James Buchanan</a>. The context was MacLean's book, <u>Democracy in Chains.</u> Friedman argues that MacLean's work fails as a work of history. He cites a variety of instances where she misrepresents libertarians. <br />
<br />
However, his major criticism of her work is that it exhibits manicheanism. Her opponents on the right must be entirely evil. Friedman claims that libertarians, and Buchanan in particular, do the same. They treat their opponents as wholly evil. Friedman uses this to share his view that manicheanism is a serious problem of our time. It is common, even typical, to impute base motives on political opponents. This would be as opposed to considering their views being some sort of intellectual error that might be corrected through discussion.<br />
<br />
Well...<br />
<br />
Friedman identifies libertarian in a narrow way. Perhaps it is best known as the position advocated by Nozick in <u>Anarchy, State, and Utopia</u>, but I describe it as Rand/Rothbard libetarianism. In his premier blog post, Friedman asserts a key position--taxation as theft. But more fundamentally, coercion is counted as an absolute wrong. And that includes violations of property rights. According to Friedman, libertarians are not reflective regarding property rights. Libertarians just assume that private property rights must be inviolate.<br />
<br />
Some of this discussion is all about claiming that MacLean just cannot believe that anyone could possibly believe such absurd notions and that explains her view that all the libertarians are being paid by rich people. These rich people benefit from keeping government from taking their private property. <br />
<br />
If, instead, "libertarian" is understood in a more inclusive way--including, for example, the view of James Buchanan, then all of this just falls apart. Milton Friedman, F.A. Hayek, Ludwig Von Mises, and Buchanan all supported private property and market exchange because it is beneficial to just about everyone. All of them believe that taxation is appropriate for some purposes.<br />
<br />
In other words, none of them just assume that private property rights exist and their violation is evil coercion and none of them take the position that taxation is immoral and must be abolished. <br />
<br />
While Buchanan's policy views are in many ways typical for a mainstream libertarian, his political philosophy is a bit unusual. There are no property rights or market exchange in the Hobbesian state of nature, so it is the social contract that creates property rights and freedom for the more mundane contracts that allow for market exchange. According to Buchanan, all must be willing to agree to the social contract that generates the constitutional order. Buchanan favors private property rights and freedom of contract because it will benefit everyone and so it would be sensible for them to agree to it as part of the social contract.<br />
<br />
But that doesn't mean that the agreed constitution would prohibit the government from imposing any regulation or collecting any taxes--it is just that everyone benefits from a system with private property and market exchange and with necessary taxation and regulation limited by constitutional rules. <br />
<br />
It is also important to understand that in Buchanan's view a sensible constitution will allow for regulation or taxation without a unanimous vote. It is true, however, that 50% plus 1 is not essential. Depending on the issue, it could be more or it even could be less. Not every political decision will benefit everyone, but the system as a whole should be something that benefits everyone so that they are willing to agree to it.<br />
<br />
Buchanan strongly believed that constitutional rules should be designed to protect against selfish voters, politicians, and bureaucrats. While such rules may interfere with the ability of well meaning voters, politicians and bureaucrats to do good, he believed that it is sensible to protect against the threat of serious harm by political actors with venal motives.<br />
<br />
Does public choice assume that all voters, politicians, and bureaucrats are self interested? That is the near universal analytical assumption as best I can tell. What would happen if they were? And does that pattern of activity fit the data? It is no different from the economic approach to understanding markets. What if firms all maximized profits? What would happen if they did? Does that fit the data?<br />
<br />
My view, which I don't think is unusual in the "Virginia School," is that most people are mostly selfish. Analysis based upon the assumption of selfishness will explain much of what happens in society, but not all. <br />
<br />
A constitution that will work well if everyone is public spirited but fails in the face of selfishness is a disaster waiting to happen. A constitution that will meet the test of selfish voters and ambitious politicians is not only a safeguard against disaster but will work tolerably well with real people. <br />
<br />
My understanding of the market economic system is that it will work tolerably well, even if people are entirely selfish. It is much better than a system of production and consumption that would only work if most people were mostly public spirited. And a market system is better than the alternatives with real people, most of whom, are mostly, though not totally, selfish. I agree with Buchanan that a proper constitution constrains voters, politicians and bureaucrats in a similar way, as best can be managed.<br />
<br />
<br />
<br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com5tag:blogger.com,1999:blog-8897997766931633186.post-16526826086990168072017-07-26T07:29:00.000-04:002017-07-30T10:23:58.356-04:00Is Democracy in Chains Good for Buchanan's Legacy? My impression of Nancy MacLean's <u>Democracy in Chains</u> is that it is primarily an attack on Charles Koch. The Koch brothers are hardly an unusual target. What is special about MacLean's "contribution" is that she uses James M. Buchanan as a club. Yet another reason for the perfidy of the Koch's is that they are promoting and spreading the ideas of wicked Buchanan. And what is wicked about Buchanan? His ideas are at base little more than strategies to fight civil rights and maintain Jim Crow segregation.<br />
<br />
False, but....<br />
<br />
Does this book help or harm Buchanan's legacy?<br />
<br />
For those of us who would like to see Buchanan's body of work become more influential, I think the answer is that it helps.<br />
<br />
There is no such thing as bad publicity. At least that is what P.T. Barnum said. <br />
<br />
Friedman and Hayek were subject to hatchet jobs. Buchanan is joining the club of late libertarian Nobel-winning economists. (Bringing the level of attention Buchanan's ideas receive to that of Friedman and Hayek is a good thing in my opinion.)<br />
<br />
That a left (far left?) historian trashes Buchanan can hardly hurt him on the right. A leftist tries to paint him as a racist? That is practically a badge of honor.<br />
<br />
Surely, the field of intellectual battle is on the center left. And MacLean's careless errors makes her argument against Buchanan very weak.<br />
<br />
Her status as an award winning historian at an elite university is more damaging for the reputation of academic history than to Buchanan. The more historians and humanities academics defend her--even claiming that making things up is good practice--the more they destroy their credibility. <br />
<br />
I realize that academics seeking Koch money for some kind of university center will see MacLean's book used against them. Maybe it will be the motivation--filtered through leftist professors--for student protests. I admit that these are costs. But let faculty senates discredit themselves. Let university presidents do their jobs.<br />
<br />
Is Buchanan some shadowy figure with a secret agenda? Of course not. His actual views can withstand honest scrutiny. <br />
<br />
Picking apart MacLean's book is necessary. But don't get mad. See the opportunity.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com1tag:blogger.com,1999:blog-8897997766931633186.post-10391680024419175282017-07-11T21:15:00.002-04:002017-07-30T10:24:14.931-04:00What James Buchanan Told Me....<br />
<img alt="Image result for james m. buchanan" src="data:image/jpeg;base64,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" /><br />
<br />
... and everyone else in class.<br />
<br />
I took two classes with James M. Buchanan. The first was in the late seventies at Virginia Tech and the second in the early eighties at George Mason. He was also a member of my dissertation committee. <br />
<br />
Anyway, in class he explained that when he was in the Navy in WW2, he learned to follow instructions completely. After the war, when he was at Chicago, he was given a complete bibliography of Public Finance and he took it to be the class reading list, and so he read it all. (Well, maybe he didn't say he finished it all, but he was working at it when the instructor explained that it wasn't intended to be the reading list for his course.)<br />
<br />
Included on that list was a work by Knut Wicksell. Wicksell is a quite famous monetary economist, but he also wrote a book on public finance. Buchanan was especially taken by Wicksell's "A New Theory of Just Taxation." He told us that his contributions to Public Choice were little more than an elaboration of Wicksell's approach.<br />
<br />
I think he was being more than a bit too modest, but he didn't mention John C. Calhoun or the Southern Agrarians as inspirations. Looking at his early <a href="http://oll.libertyfund.org/pages/buchanan-a-bibliography-of-his-writings">publications</a>, sure enough, soon after graduate school in the late forties and early fifties he appeared to be applying the Wicksellian insights.<br />
<br />
The Thomas Jefferson Center for Studies in Political Economy started in 1957. <a href="http://www.coopercenter.org/sites/default/files/autoVANLPubs/Virginia%20News%20Letter%201958%20Vol.%2035%20No.%202.pdf">Here</a> is Buchanan's contemporary description of what it was about.<br />
<br />
Nothing there about protecting states' rights or the desirability of segregation. I find it hard to see anything "between the lines." There is just an express support for individual liberty and the free enterprise system. <br />
<br />
Nancy MacLean's Democracy in Chains is not consistent with the James Buchanan I met in the late seventies and I have seen nothing that suggests that the early Buchanan was much different.<br />
<br />
<br />
<br />
<br />
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-12481541257694751082017-07-11T08:37:00.002-04:002017-07-26T09:38:03.395-04:00NGDP Targeting and a Small Open EconomyIHS and the Mercatus Institute had meeting about monetary policy in San Diego on June 25th. I was fortunate to attend. <br />
<br />
Scott Sumner was interviewed by David Beckworth for <a href="https://macromusings.com/tagged/podcast">Macro Musings</a>. I suppose we were the live audience. (As I write, the interview isn't up yet.)<br />
<br />
In the question and answer period, Sumner was asked whether it would be possible to test out Nominal GDP targeting in some smaller country--say Kenya--rather than hold out for the Fed or the ECB. Sumner said that he was not sure that NGDP targeting is appropriate for a small open economy. The problem is that they may be too specialized in producing a commodity with an unstable world price.<br />
<br />
When I spoke to him later, he said that for countries in that situation it is probably better to stabilize nominal labor income. Of course, Nominal GDP is hardly ideal even for a country like the U.S. either. Changes in indirect business taxes, for example, could create problems. A stable growth path for something like total labor compensation might be better for the U.S. too.<br />
<br />
But I would like to explore the small open economy issue a bit more. While I can imagine scenarios where shifts in commodity prices might cause problems, I think that the problem isn't really specialization in commodities with unstable world prices. <br />
<br />
For example, suppose everyone in a country is a coffee farmer. The country stabilizes the growth path of nominal GDP, so regardless of world coffee prices or local coffee production, nominal income from coffee sales grows at a stable rate.<br />
<br />
How is this possible? If world coffee prices rise, the value of the currency rises enough so that the domestic price of coffee remains the same. Nominal incomes remain the same and imported goods become cheaper. <br />
<br />
If, on the other hand, coffee prices fall, the value of the currency falls enough so that the domestic price of coffee is unchanged. Nominal incomes are the same, but imported goods become more expensive.<br />
<br />
Complete specialization in producing a commodity with an unstable price looks like no problem--other than menu cost of all of the shops changing the prices of imported consumer goods.<br />
<br />
Now, lets add a bit more realism. Who is operating the shops full of imported goods? What about haircuts? What about home construction? <br />
<br />
If the world price of coffee rises, at first pass, the currency rises in value so that the domestic price of coffee is the same. Nominal income for the coffee growers and nominal income in the nontraded sector is unchanged. The imported goods in the shops are cheaper. If the income and substitution effect for nontraded goods exactly offset, then that is all. In other words, if the increase in the demand for nontraded goods due to the higher real incomes is equal to the decrease in quantity demanded due to their higher relative price compared to imports, then the distribution of nominal income and the allocation of resources remain unchanged. <br />
<br />
However, if the income effect is greater than the substitution effect, the currency must rise more than in proportion to the world price of coffee so that the domestic price of coffee falls, reducing nominal income in the coffee sector. The profitability of coffee falls a bit, freeing up resources to provide more nontraded goods. If nothing else, somebody is going to have to handle the increased volume of the imported goods coming in. Nominal income in the nontraded sector increases.<br />
<br />
The less pleasant scenario for this nation of coffee growers is a decrease in the world price of coffee. The currency falls in value and, at first pass, the domestic price of coffee is the same as is nominal income in the coffee sector. Imported goods in the shops become more expensive. If the income and substitution effects exactly offset, nominal incomes in the nontraded sector are unchanged, but real incomes fall just as they do for coffee growers. There is inflation of consumer goods prices--particularly the imported ones. If income effect is greater than the substitution effect, the currency will fall enough to raise the domestic price of coffee, making coffee growing more profitable, expanding the demand for labor and other resources no longer needed in the nontraded good sector.<br />
<br />
The situation where the substitution effect is greater than the income effect is a bit inconsistent with the conventional terminology of "nontraded goods sector." The analysis is no different from a situation where there are import competing industries. If the world price of coffee rises, the currency rises, and the now cheaper imports result in lower demand and lower nominal incomes in the import competing sector. The currency, therefore, must rise less than in proportion to the world price of coffee, such that domestic coffee prices and nominal incomes in the coffee sector rise an amount that offsets the decline in the prices of import competing goods and the resulting decrease in nominal income in that sector. Profitability in the coffee sector rises drawing resources from the import competing sector into the production of coffee for export. Of course, import prices are cheaper, making the effect on real incomes in the import competing sector somewhat ambiguous, but real income rises in aggregate because of the improved terms of trade.<br />
<br />
If the world price of coffee falls, the currency decreases in value. The demand for import competing products rises, resulting in higher prices and higher nominal incomes in that sector. The decrease in the value of the currency is dampened then, so that there is a decrease in price and nominal income in the coffee sector that offsets the increase in spending and nominal income in the import competing sector. The increased profitability of the import competing sector creates an incentive to pull resources away from coffee production to the production of goods for domestic consumption. With the higher prices of imported goods, real incomes in the import competing sector are ambiguous, though aggregate real income falls with the less favorable terms of trade.<br />
<br />
It is these considerations that suggest to me that nominal GDP targeting might well be appropriate for a small open economy specializing in the production of a commodity with an unstable world price. What is Sumner's concern?<br />
<br />
Consider a situation where our small open economy has a giant copper mine or maybe a giant diamond mine. The product makes up approximately all exports and a substantial portion of GDP, but directly generates little employment.<br />
<br />
If the world price of copper increases, then the value of the currency increases, the domestic price of copper is unchanged and imported goods are cheaper. If the income effect is greater than the substitution effect for nontraded goods, then the price of copper rises somewhat less so that the domestic price of copper is less and so nominal income generated by copper falls, making it slightly less profitable to produce so that fewer workers are needed and they can be shifted to the nontraded sector where prices and nominal incomes rise. Of course, with the assumption that there are very few copper miners anyway, and the other resources useful for copper mining might not be very useful in other endeavors, this adjustment in relative nominal incomes might provide what is superficially the correct signal and incentive to reallocate resources, but there just is not much reallocation possible. There has just been a pointless inflation in the nontraded goods sector.<br />
<br />
If the world price of copper falls, this problem is even more apparent. The value of the currency decreases. At first pass, the domestic price of copper is unchanged. Imported goods are more expensive. If the income effect is greater than the substitution effect, the value of the currency decreases by less, the domestic price of copper actually rises a bit, nominal income in the copper industry rises, and nominal income in the nontraded sector decreases. This provides the signal and incentive to shift resources from the nontraded sector to copper production. But if copper production generates few employment opportunities, the result is that there is really just a pointless deflation of prices and wages in the nontraded sector. Compounding the pain in the nontraded sector, there is substantial consumer price inflation due to higher import prices.<br />
<br />
Inflationary recession in most of the economy, while the copper mine earns more nominal profit. If the copper mine were privately owned, this would be a political disaster.<br />
<br />
If there are import competing industries, these problems are exacerbated. With an increase in the world price of copper, the value of the currency rises, with nominal income rising in the copper sector while falling in the import competing sector. While this provides a good signal and incentive to shift more resources to copper production, by assumption that happens to a minor degree. Again, there is mostly just a pointless deflation of prices and wages in the import competing sector. <br />
<br />
If the world price of copper falls, the currency falls in value. Prices and nominal income in the import competing sectors increase, while the domestic price of copper and nominal income in the copper industry decrease an offsetting amount. While this provides the proper signal and incentive to shift resources from copper production to import competing industries, by assumption, there is little opportunity for such an adjustment. The result is just an unnecessary inflation in prices and wages in the import competing sector. Of course, rising import prices imply consumer price inflation anyway.<br />
<br />
If there are other export industries along with copper, for example, fruit, an increase in the world price of copper and the resulting increase in the value of the currency will reduce domestic prices and nominal incomes in these other export industries. While this would provide an appropriate signal and incentive to shift from the production fruit to copper, again, the possibility for such a reallocation of resources is limited by assumption. With a decrease in the world price of copper, the reduction in the value of the currency will result in higher domestic prices and nominal incomes in other export industries.<br />
<br />
Consider a scenario where the copper mine is on a distant offshore island. The mining is done by a foreign multinational with expatriate workers from other parts of the world. Leaving aside any income the government collects from this enterprise, does it make any sense to include the nominal output of this operation when determining an appropriate monetary policy for the mainland? It would seem more appropriate for monetary policy to stabilize nominal GDP for the mainland while ignoring what is happening in what is effectively a foreign industry. <br />
<br />
Sumner's suggestion that total labor compensation be stabilized would probably help solve the problem where an export generates a substantial part of GDP and little employment. But more generally, the problems I see with nominal GDP targeting in this context involves the specificity or substitutability of resources in production of various goods. My coffee example assumed labor and resources could be shifted between coffee and other products-nontraded, import-competing, or other exports. My copper example assumed that this was nearly impossible.<br />
<br />
I believe this is related to the notion of an optimal currency area. The example of the copper producing island causing pointless disruption on the mainland makes this plain. The island and mainland do not make an optimal currency area. Regardless of its geographical location, however,, the same issues apply. Regardless of the location of the copper mine, perhaps it is better to stabilize the growth path for nominal production for the rest of the economy (nominal GDP less final copper output.)<br />
<br />
But nominal GDP targeting, does not, in general, result in problems when countries are specialized in the production of a commodity with an unstable price. In the extreme, where all that is produced is such a good, it works quite well. And it also works even better when resources can be shifted between the export sector, the nontraded sector, the import competing sector, and other export sectors.<br />
<br />
Now, it might be that stabilizing the growth path of nominal labor compensation would do ever better. But nominal GDP targeting would work better than stabilizing the exchange rate or consumer price inflation.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com1tag:blogger.com,1999:blog-8897997766931633186.post-76320019180585171762017-07-08T15:47:00.000-04:002017-08-12T19:01:58.205-04:00Employer Power? I recently read a claim that employers have unfair bargaining power relative to employees. The reason is that the employees need money right away while the employers don't need workers right away. I have certainly heard such a claim before, but it recently struck me that it is silly.<br />
<br />
I certainly agree that many workers need a job right away. And I also agree that many employers are unlikely to be desperate to fill a vacancy--particularly if an employer has many employees. <br />
<br />
Of course, this is not always true. Not all workers are so desperate and some employers may be brought to a standstill without a key employee.<br />
<br />
But let us suppose that a currently unemployed worker accepts an unfairly low wage because he needs the money now and cannot hold out for a fair wage. The employer would be willing to pay more, and if the employee just waited a bit, the employer would offer more. But the employee cannot. He must eat. <br />
<br />
Now, the unemployed worker is employed. Earning an unfairly low amount by assumption, but presumably no longer desperate. <br />
<br />
So now the unemployed worker can look for a new job. He doesn't have to quit, become unemployed, and then look for a new job. He can seek this new job while continuing to work. <br />
<br />
Now, the claim that the workers have nothing and need money right away no longer applies. This worker can continue to work at his current pay until a better offer comes along. <br />
<br />
Is this realistic? Do firms actually hire the employees of other firms? Do people accept a new job while they are currently working for an employer? Or is that sort of thing quite rare, with employers generally hiring those who are unemployed and most employees only obtaining a new job if they have been laid off or fired from their previous job?<br />
<br />
There about 150 million people employed right now in the U.S. and there are about 7 million unemployed people. Hires are over 5 million per month. More people are hired in two months than are unemployed today. <br />
<br />
Quits are about 3 million per month. That is 36 million per year. <br />
<br />
Do all of these people become unemployed? Of course not. For the most part, these are people who have been hired while they already have another job which they then quit.<br />
<br />
There are many reasons why someone might quit one job and take another, but a key reason is better pay and benefits. Of course workers leave one employer and go to another that offers a better deal. Of course employers will hire currently employed workers. In fact, there is evidence that they discriminate in favor of the currently employed.<br />
<br />
If the desperation of unemployed workers to take anything was important to employers you would expect that they would be most anxious to hire the unemployed. But they aren't. That suggests that employers do not obtain a benefit from this sort of bargaining power.<br />
<br />
Layoffs and other discharges are about 1.6 million per month. Almost certainly, they add to the pool of unemployed. (In 2009, layoffs and discharges were almost 2.5 million per month.) If it weren't for new hires, in 10 years, everyone would be unemployed! But, more people are hired than lose their jobs. That is why employment grows. In the last decade or so, it rises about 200,000 each month because total hires are greater than total separations.<br />
<br />
The point of these figures is to understand that the labor market cannot be identified with people losing their jobs, being desperate to find work, and then employers finally hire the unemployed. While that is part of the story, workers being hired away from one employer by another is very significant--more significant.<br />
<br />
The pace of new hires is very important. In 2008 and 2009, new hires dropped significantly. While there was plenty of hiring--3.5 million a month--that is a lot less than 5 million. During the year or two when it was worst, something like 70 million people were hired. But these days more than 100 million people would be hired over a similar period of time. That makes a big difference.<br />
<br />
As mentioned above, layoffs jumped up too--close to the number of hires. But the rest of the story is that quits dropped off tremendously, to less than 2 million per month. Why? Most likely because firms were hiring less, and that mostly means hiring fewer people away from other employers. Current employees quit less often since there are fewer new, better job to take.<br />
<br />
When labor demand is strong and growing, wages rise from employees switching employers. When labor demand is weak and there are few hires, then wages stagnate. <br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com1tag:blogger.com,1999:blog-8897997766931633186.post-52792369524678083312017-07-08T13:29:00.000-04:002017-07-26T09:29:09.957-04:00Entrepreneurial GoalsI suppose it is almost the definition of entrepreneurship that profit is sought and loss avoided. As soon as time is considered, this transforms into maximizing the value of the firm--accepting losses now in exchange for anticipated profits in the future. But the very logic of value maximization separates the individual entrepreneur from the firm. Sacrificing profits now for future profits only makes sense if it is possible to sell the firm, or more plausibly, sell an interest in future profits.<br />
<br />
However, there is no presumption that a specific individual will save any part, much less all, of his or her income so as to maximize the increase in wealth. Yet the notion that such a motivation is central to "capitalism" is common. Weber's Protestant ethic explained economic growth in northern Europe due to the supposed Calvinist view that earning money was a sign of God's favor but spending it on luxuries reflected a sinful worldliness. This was in contrast to the supposed Catholic view that the whole point of earning money was to use it for something. (I think this "Catholic" view is more sensible and theologically sound, as well as being more consistent with modern economic reasoning.) <br />
Even before, Marx more or less treated the income from profit as the same as saving and forecast eventual economic disaster because the growth of wealth will outstrip the investment, really industrialization, entailed by the inevitable development of the material productive forces. Hegelian hocus pocus really doesn't fit in well with modern economic thought.<br />
<br />
Still, it is certainly possible that entrepreneurs would save a substantial portion of their profit. It seems that many entrepreneurs find their work enjoyable. They are really too busy to enjoy anything like the consumption they could afford. To the degree that effort and commitment are more likely to lead to success than a more dilatory approach, many of the most notable entrepreneurs will in fact have that characteristic. "Why waste my time on lavish consumption activity when I can plow money back into business activity have some real fun!" Some tycoons, including the President of the United States, have claimed that money is just a way of keeping score. On this view, the goal is to raise one's standing on the Fortune 500 list--perhaps to reach the top and win the game of life by earning the greatest net worth.<br />
<br />
Since earning profit and avoiding loss generates value, value that is typically much greater than what the entrepreneur earns, it would seem that the rest of society is getting something for nothing. Fundamentally, if someone consumes income then resources must be devoted to produce the goods that are to be consumed. If the income is never consumed, then the resources can continue to be used for other purposes.<br />
<br />
However, this scenario involves the entrepreneur saving all of this additional income, so it isn't available for anyone's consumption in the present. Presumably, it will be available for someone's consumption when the entrepreneur dies. So, if an entrepreneur doesn't consume profit but reinvests for fun, and these investments remain profitable, consumption is moved to the future. Leaving aside inheritance tax, whose future consumption can be increased is determined by the entrepreneur's bequest.<br />
<br />
If the relevant comparison is to luxurious consumption by the entrepreneur now, it is difficult to see how this result is any worse. Of course, some might argue that some of these profits should be taxed and the proceeds transferred so that others might consume more now. <br />
<br />
Suppose, however, that that entrepreneur does not use these funds for direct investment, but simply saves them. There is no longer some story about an entrepreneur using the funds to enjoy business activity, but still, net worth increases as would more passive investment income. If financial markets function properly, any funds saved result in matching investment by some firm or other. The greater future output generated by that investment allows for additional consumption for whomever the entrepreneur leaves a bequest.<br />
<br />
Unlike the situation where the entrepreneur is directly investing saved profits, these other avenues for saving leave the possibility of some kind of breakdown in financial markets such that saving and investment do not match with full employment of resources. "The" market interest rate might fail to fall enough to match "the" natural interest rate that coordinates saving and investment.<br />
<br />
This sort of problem is always monetary broadly understood. Saving might occur by accumulating money, and if prices and/or wages are sticky, real output and employment will decline. In my view, an appropriate monetary regime avoids this perverse result. And so, the entrepreneur who has no interest in consumption but solely wants to save profit to "win" by accumulating the most wealth only causes problems if there is a less than ideal monetary regime.<br />
<br />
That our driven entrepreneur allows for added consumption in the future for whomever he makes his bequest points to an alternative motivation. The entrepreneur might reduce consumption from what would be possible now with the intention of allowing for added future consumption for his descendants. But rather than simply allowing his children to consume, I would like to consider another motivation. The notion that his descendants will permanently earn sufficient capital income to maintain a high level of consumption forever.<br />
<br />
While this seems reasonable enough on its face, I think this goal is better motivated by cultural factors that existed prior the modern market system. As the market order came to dominate, the aristocrats inherited a system that had evolved such that they earned rental income from land. There was no requirement that aristocrats do much to manage their land, much less become actively involved in business activities. Aside from living a life of leisure while being doted upon by many personal servants, the only real duty was to participate in what can be broadly understood as governance. The initial rationale of this system involved military service, and a norm of service as officers in modern armies was really a holdover. <br />
<br />
While the time when this income must be rents from land is long past, the notion that one's children and grandchildren and so on can be set up to live in that fashion is a plausible motivation for saving. So, the entrepreneur earns profits and consumes little immediately, mostly saving. The point is to leave a sufficient bequest to provide for an adequate (high) income for ones children, They will then pass on a similar bequest to their children, and so on.<br />
<br />
This motivation, however, does not result in capital income being saved in perpetuity. Once set up properly, the family must avoid dipping into principal (or capital,) but otherwise, the income is spent on consumption that may be lavish by the standards of many people but typical of the upper class.<br />
<br />
The entrepreneur consumes less than he otherwise could and saves. The amount saved is never intended to be consumed, but rather is to form a principal that will generate an income that is intended to be consumed.<br />
<br />
This motivation does not require that the entrepreneur enjoy making money or have any particular interest in direct investment. Still, any notion that this somehow results in too much saving is still less plausible. The saving is transitional. Considering the "cultural" factors, the notion that the traditional aristocracy had more income than they could use is pretty implausible. Quite the contrary. Even so, if this transitional saving did outstrip investment, any problem with maintaining employment would still be a consequence of an inadequate monetary regime. <br />
<br />
What would be the implication of a negative natural interest rate for entrepreneurs saving their profits? Assuming that the real market interest rate matches this natural interest rate, then the entrepreneur making money to "keep" score, will provide a bequest to someone that allows for less real consumption than the entrepreneur could have enjoyed. Of course, if the entrepreneur continues with direct investment, he may well earn more than the natural interest rate. This is really only relevant with a more passive investment strategy. If the nominal interest rate is positive, but the real interest rate is negative due to inflation, then I suppose some entrepreneurs would count their nominal gains as making progress in the game. If the nominal interest rate is negative, however, simply holding onto wealth would be clearly counter-productive. <br />
<br />
For the motivation of providing a bequest sufficient for one's descendants to earn a sufficient capital income, it would seem that a permanently negative natural interest rate would make it impossible. In such a scenario, refraining from consumption now provides no benefit and would earn no reward. Providing for one's children and more distant descendants would be possible, of course. But without a positive real interest rate, eventually the wealth will be gone. However, as is much more likely, the natural interest rate would only be transitionally negative and likely only for the shortest and safest assets. <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com2tag:blogger.com,1999:blog-8897997766931633186.post-44798918022294745212017-04-01T09:51:00.000-04:002017-08-12T19:15:15.617-04:00Must Capitalist Economies Grow?I ran across a claim that a "capitalist" economy must grow. <br />
<br />
I believe that one of the key benefits of a market economy is creative destruction. Entrepreneurship leads to innovation and growth. Profit and loss incentives motivate each firm to introduce new products and methods of production that create a system where larger amounts of better goods and services are produced. Successful innovation generates greater profit. Perhaps more important, innovation by competitors can result in reduced profits and perhaps losses and even bankruptcy. This creates a powerful incentive to innovate in order to "keep up with the competition."<br />
<br />
A somewhat different consequence of profit and loss incentives is to allocate resources to produce whatever goods and services for which people are willing to pay the most. Competition for resources results in resource prices that communicate opportunity costs--the value of the most important goods and services sacrificed by the use of those resources in production. If buyers are willing to pay more for products than the opportunity cost of the resources used to produce them, then a firm profits. If, on the other hand, people are willing to pay less for a product than the opportunity cost, any firm producing that product suffers losses--motivating it to produce less. Profit and loss creates an incentive to produce more important things and avoid "wasting" resources in producing less important things.<br />
<br />
But does any of this mean than capitalist economies <b>must </b>grow?<br />
<br />
One "micro" argument would be that larger firms are always more efficient. This would seem to imply that only one firm can survive competition. During the competitive process, then, each firm is racing to be the biggest, and so most efficient, which will allow it to increase its lead and eventually "win" the competition by becoming a monopoly. <br />
<br />
I am not sure how seriously to take such an argument. If a new production technique is introduced that exhibits economies of scale, and there were many firms using some prior approach with fewer such economies of scale, then something like the above process would occur. Depending on the economies of scale and the demand for the product, it could be that the result is a natural monopoly--a single firm can produce the amount of the product demanded at the lowest cost. But this is not necessarily true. It is not always most efficient to produce output in a single giant plant. It is more common to have many factories or plants even if they are all owned by a single firm. Having many factories managed by a single firm is not necessarily more efficient than having multiple independent firms in competition. Organizations have many problems, which generally are described as the cost of bureaucracy. One key benefit of the market system is that it allows for large scale cooperation without a single massive bureaucracy. There can instead be many, somewhat smaller, more manageable bureaucracies.<br />
<br />
A second argument is "macro." Here there is a behavioral assumption that is supposed to be a defining characteristic of capitalism. Firms make profit. While the owners of the firms consume something, this can be ignored as a practical matter. The profits are all reinvested making the firm grow. "Capital," understood as the value of the firm, increases. "Capitalism" is an economic system that maximizes the growth of capital by maximizing profit. The greater capital is intended to result in greater profit and so greater increases in capital. Critics of capitalism claim that this system must eventually collapse. I read Marx as making an argument along these lines.<br />
<br />
I think there are some advocates of the market system who defend it with something like the first part of the argument. They justify profit based upon how it is used. Profit is justified because it is reinvested and that creates more growth (and maybe even "more jobs.") I suppose for a leftist critic of capitalism, reading such claims by their opponents, gives them the impression that everyone agrees that capitalism entails constant growth in capital. And if these advocates of capitalism focus on the benefits of more capital and justify profit on that ground, then this explains their opposition to policies that reduce profit--such as higher wages.<br />
<br />
I think that most economists, including those who are very sympathetic to the market, really don't focus on how profits might be used. As I mentioned in my first two paragraphs, the profits and losses both motivate innovation and also the allocation of resources to produce what particular goods and services people want to buy the most. If anything, the assumption is that the entrepreneurs use this source of income to enjoy greater consumption of goods and services. That is the reward they obtain for their successful innovation or reallocation of resources. I think allowing entrepreneurs to obtain profit and suffer losses is desirable because the prospect of profit and losses motivates them to do desirable things--innovate and reallocate resources to produce what people want to buy most.<br />
<br />
Of course, entrepreneurs may well save part of the income they earn. Perhaps they will save a substantial portion of it. Still, any identification of profit with saving and capital accumulation is simply not a key element of modern economics. Instead, it is common to identify "capitalism" with a "market economy." My basic framing of the economic problem includes consumption being the purpose of production. So, as I consider capitalism, I don't start with profit and capital accumulation, must less with a "goal" of maximum aggregate profit and maximum accumulation of capital. Rather, it is about people achieving their goals, with an emphasis on producing the goods and services they most want to consume. Perhaps I have some slight idiosyncratic twist to my thinking on this, but I think it is pretty much consistent with mainstream economics. In my view, this is just a restatement of the centrality of scarcity in economic thinking.<br />
<br />
Starting with this notion that the purpose of production is consumption helps make sense of the view that saving is about reducing consumption in the present and increasing it in the future. For an individual in a market system, to save is to spend less on consumer goods and services now than the income earned now, so that more can be spent on consumer goods and services later than the income earned later. Suppose someone works for many years and spends just part of their wage income on consumer goods and services. The saving each year is income less consumption. This person's wealth, or net worth, grows with that saving over the years. Eventually, this individual retires from work and no longer has any wage income. However, they continue to purchase consumer goods and services out of their accumulated wealth. Each year, wealth decreases due to dissaving. That is, consumption greater than income.<br />
<br />
Entrepreneurs earn profit, which is a form of income. Unless they have some other source of income, they must use some of it to purchase consumer goods and services. If they earn a very high income, then they can purchase lots of consumer goods and services. However, like anyone else, they certainly can save. Still, the basic framing here is that they save by spending less income from profit on consumer goods and services now in order to spend more than their income in the future.<br />
<br />
Under most circumstances, both the worker saving for retirement or the entrepreneur saving profit and building a fortune can earn capital income on their wealth. The worker might put savings in a bank and earn interest. The entrepreneur might reinvest his saving in his own firm, purchase additional capital equipment, and earn additional profit. This capital income reduces the amount the worker must save while working to have sufficient consumption when retired. The already luxurious consumption an entrepreneur could afford now is compounded in the future by the additional income earned on accumulated wealth. <br />
<br />
However, this doesn't mean that there is some kind of "system" that has the goal of maximizing aggregate profit with all of it being saved to accumulate as much wealth as possible to increase profit as much as possible. <br />
<br />
In my view, the fundamental reason for capital income is productivity. If fewer resources are used to produce consumer goods and services now, then those current resources can be used in ways that allow for additional production of consumer goods and services in the future that not only replace those sacrificed now, but exceed them. Generally these techniques involve the use of various sorts of durable tools--machinery, equipment and the like. More elaborate--more expensive and productive--tools can be used if more resources are available to produce them.<br />
<br />
The capital income earned by the worker putting money in a bank for retirement or the entrepreneur reinvesting profit into his or her own enterprise captures part of this additional output as added income. That it is desirable that people earn capital income is not based on some notion that they will always reinvest such income and accumulate even more wealth which also implies that more valuable and productive capital equipment will be produced and utilized. Or rather, I don't think of it that way. It is rather that the prospect of earning such income in the first place motivates people to save more than they otherwise would, resulting in more total output and income than would otherwise exist. <br />
<br />
To me, and most all economists, growth is about increases in the production of goods and services. It isn't about increases in aggregate profit or wealth or the capital stock. Profit and loss generates powerful incentives for growth, however, nothing in the market system, that is "capitalism," requires such growth. If no one was interested in any new good or service or there were no better ways to produce the existing ones, then there would be no more innovation. One of the key reasons why profit is desirable would no longer exist, though there would still be the second reason--producing the proper mix of existing goods and services in the already discovered most efficient ways.<br />
<br />
Most economics is done in the context of a growing population. This requires some net saving and investment so that a growing work force can utilize the same types and amounts of capital equipment and that there will be more consumer goods and services for the additional people to enjoy. Such growth could occur with each person and generation enjoying unchanging consumption per capita. A market system could coordinate that scenario.<br />
<br />
If the population were to be constant or even shrink, the market system could coordinate that scenario too. With a constant population, constant consumption and sufficient capital (tools and the like for each worker) could be maintained with no net saving or investment. With a shrinking population, the market system could coordinate a shrinking capital stock through negative saving and investment-net dissaving and net disinvestment. The output of consumer goods and services would shrink over time, reflecting the reality that there would be fewer people to enjoy them.<br />
<br />
Or suppose people wanted to enjoy more leisure. They might prefer shorter workdays, work weeks, longer annual vacations, or perhaps start work later or retire earlier. If they valued this more than the goods and services that they would not be producing and could no longer afford, then the market system could coordinate that. Better yet, in the context of creative destruction and growing productivity it is perfectly possible to take the benefits in reduced work time. Further, a market system could coordinate a mixed result where more consumer goods and services are produced for people to enjoy along with additional leisure time to enjoy them. <br />
<br />
If everyone wanted to consume all of their income, so that there was no net saving and no net investment, then wealth would not grow nor would the capital stock. However, if creative destruction continued, the capital equipment might well improve, and substantially change as old capital goods wear out and are replaced. Consumption could grow or leisure could expand without any increase in wealth or capital. (The scenario of no net saving or investment and a growing population is more challenging.)<br />
<br />
Nothing in a market system requires constant growth in output. Nor does capitalism require that profits be saved and used to increase net worth and increase the capital stock. <br />
<br />
A separate question is whether a practice of entrepreneurs always saving their profit so that profit always adds to net worth and the capital stock is harmful to the market system. It is not necessary for capitalism to exist, though it is plainly consistent with capitalism if people behave this way. What happens? Does that practice, which some seem to think is an essential defining characteristic of capitalism, have some calamitous consequence? <br />
<br />
More later.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-53066528818158502582017-03-14T18:09:00.000-04:002017-04-02T08:45:45.240-04:00The Trade Deficit, National Income Accounting and Aggregate DemandPeter Navarro has been using the national income accounting identity to argue that policies that reduce the trade deficit must increase the production of goods and services in the U.S. There have been various efforts to dismiss his claim as absurd. Interestingly, he appears to be following in Keynes' footsteps by being a little confused about the relationship between identities and equilibrium conditions. But the best way to interpret Navarro's claim is to see it as a very simple Keynesian approach. On this view, aggregate real output in the U.S. is driven by aggregate demand for goods and services produced in the U.S.<br />
<br />
U.S. GDP is a measure of the production of goods and services in the U.S. The textbook accounting identity is Y = C+I+G+X where Y is GDP, C is consumption, I is investment, G is government spending, and X is net exports. Net exports are exports minus imports. If there is a trade deficit, then X is negative, so it subtracts from C+I+G. The bigger the trade deficit, then, the smaller is GDP. A smaller trade deficit, or better yet, a larger trade surplus, implies a larger GDP. Navarro claims that this means that policies that encourage exports or discourage imports will raise GDP.<br />
<br />
The argument that this is just an identity points out that the C, I, and G refer to goods and services categorized as consumption, investment, and government in the U.S. regardless of where produced. Imports are subtracted to get the goods and services produced in the U.S. Exports are added to account for the goods produced in the U.S. that are not categorized as U.S. consumption, investment, or government because they are accounted for as C, I or G in some other country.<br />
<br />
However, I think this is an unfair characterization of Navarro's view. Navarro's point is that GDP is equal to spending by U.S. residents on domestically produced U.S. output plus foreign spending on domestically produced output. The process for calculating GDP is to add up all spending by U.S. residents on different categories of goods and services and then subtracting off spending on foreign produced goods. This provides spending by U.S. residents on goods and services produced in the U.S. Spending by foreigners on all types of U.S. output is added back. The result is total spending on U.S. goods and services. This is nominal aggregate demand.<br />
<br />
Navarro's theory is the simple Keynesian one that the various categories of spending are determined, and if it becomes more costly to purchase foreign goods, then spending will be shifted to purchase domestically produced output. For example, if total spending on consumer goods and services by U.S. residents is $12 trillion, and $2 trillion of that would be spent on foreign consumer goods and services with relatively open markets, a policy of banning all imports would result in U.S. consumers spending $2 trillion more on consumer goods or services produced in the U.S. The same would be true for investment--purchases of newly-produced capital goods by U.S. firms as well as purchases by various levels of government. Therefore, a smaller trade deficit (or larger surplus) would be associated with more aggregate demand in the U.S. <br />
<br />
Navarro emphasized the possibility of an increase in exports. Trump's threats to impose higher taxes on imports from Mexico would result in Mexico agreeing to purchase more U.S. products in order to be allowed to continue to export to the U.S...Assuming that spending by U.S. residents on consumer goods, capital goods, and government in aggregate is unchanged, this increase in the demand for U.S. goods by Mexicans increases total spending on domestically produced U.S. goods and services. Again, the trade deficit is lower and aggregate demand is higher.<br />
<br />
In the simplest Keynesian model, output is solely determined by aggregate demand. If trade policy can expand exports and reduce imports, these "deals" that reduce the trade deficit (or expand a surplus) will increase aggregate demand and so production in the U.S.<br />
<br />
This Keynesian model is most plausible when there is unemployment of labor and excess capacity in most sectors of the economy. The increase in demand both results in more production and more employment. <br />
<br />
In a world with near universal price floors, and a quantity of money such that equilibrium prices are below those fixed prices, this Keynesian approach would apply. If the floors instead apply to wages, the result would be similar. Of course, rather than hoping for "better" trade deals to raise aggregate demand, it would be possible to repeal the price floors or else increase the quantity of money. <br />
<br />
Fortunately, the U.S. does not have anything like universal price floors. However, in the short run at least, it seems that prices and wages do not immediately adjust so that real aggregate demand equals productive capacity. In fact, they appear to have some perverse momentum that is only gradually dissipated. Prices and wages continue to rise even when market conditions suggest they should fall. Only very gradually does the rate of increase of prices and wages slow. <br />
<br />
It is possible then, that during a recession, tough trade negotiations would boost aggregate demand and hasten a recovery. This is not an argument that reduced imports and expanded exports will permanently increase output and employment. In other words, Trump's approach might have made sense in 2008 and 2009, but no longer. The Fed has already started raising interest rates to restrain the growth of spending on U.S. output. Policy that reduces imports and expands exports would reduce the trade deficit, but it would it would have no impact on aggregate demand or employment. It would instead just result in higher interest rates.<br />
<br />
Even in recession, restrictions on imports can easily backfire. That is because exports are not fixed. For a "small" country, this might not be a problem. But if the U.S. restricts imports, the result could easily be a recession in other countries, which will result in fewer U.S. exports. The foreigners demand fewer U.S. goods when their economy suffers recession. This results in reducing income to those producing the exports, which likely would result in reduced demand for both domestically-produced goods and services, and imported goods. Casual empiricism suggests that triggering a recession in the U.S. is the best way to reduce U.S. imports and so the trade deficit!<br />
<br />
For a small country, the amount that it imports from the rest of the word is small, and so reductions have little impact on the world economy. For such a country, the only problem is "retaliation," where foreign governments restrict imports from the small country and so reduce its exports. <br />
<br />
As a Market Monetarist, I believe that the monetary regime can and should target a stable growth path for nominal GDP--spending on domestically produced output. What I think is the most reasonable interpretation of Navarro, that trade policy can reduce trade deficits and increase aggregate demand which might hasten the recovery of output and employment in a recession and avoid the need for disinflation, is unnecessary and inappropriate. Under the current monetary regime, better monetary policy by the Fed would make this unnecessary.<br />
<br />
Regardless, thinking of our current situation, and the long run across many business cycles, it is not sensible to have a trade policy that is about expanding aggregate demand to hasten recover from a recession. The long run analysis must take into account that a trade deficit is matched by a net capital inflow. The result is a lower natural interest rate and more investment. That is, the demand for capital goods, including domestically produced capital goods, is higher than it would be if the trade deficit was lower. <br />
<br />
If some policy does manage to reduce the trade deficit, the result may well be more domestic production of goods and services that would have been imported and more goods produced for export, but there would be fewer capital goods produced. The result is a change in the composition of demand and the allocation of resources, but there is no increase in aggregate demand.<br />
<br />
Worse, the long run effect of any restriction in the production of capital goods is a lower growth path of productive capacity and so future real GDP will be lower than it otherwise would have been. <br />
<br />
And that points to the fundamental determination of trade deficits--the relationship of domestic saving and investment to world saving and investment. It would be great if foreign governments would reduce barriers to trade and this allowed for increases in U.S. exports. However, this could easily result in more U.S. imports, leaving the U.S. trade deficit the same. Americans would earn more from exports and use the extra income to purchase more imported goods. That is the key reason to export goods and services--getting imports in exchange. But that also ignores international investment.<br />
<br />
If the world interest rate is below the interest rate that would coordinate U.S. national saving with U.S. domestic investment, then foreigners will be motivated to invest in the U.S. to obtain higher returns. The amount of this net capital inflow must be matched by a trade deficit. Foreigners will export goods and services to the U.S., not to buy U.S. goods and services and take them home with them, but rather to buy capital goods in the U.S. or else claims to capital goods--like stocks or bonds.<br />
<br />
It is important to understand that this is not foreigners buying up a fixed quantity of assets. The U.S. can and does produce additional capital goods to sell to foreigners. U.S. workers and firms are building a plant for Volvo in the South Carolina lowcountry. These new capital goods increase future production in the U.S. A reduction in the trade deficit, then, means that increase in future production does not occur. That doesn't mean that production doesn't grow over time. It probably would grow, but its level at any future time would be lower than if there had been a larger trade deficit, net capital inflow, and investment.<br />
<br />
The foreign investors expect a return, and the reduction in the growth path of real GDP would not be entirely a decrease in the growth path of real GNP. Less will be produced in the U.S. in the future than otherwise, but less income will be paid out to foreign investors. Still, this is unlikely to benefit U.S. workers--even foreign owned capital goods are a complementary factor of production which would tend to raise their incomes. <br />
<br />
It is incomes that foreigners earn from U.S. investments that leads some to describe a net capital inflow as an increase in U.S. indebtedness to the rest of the world. While foreigners could hold deposits in U.S. banks or purchase corporate bonds or U.S. government bonds or even accumulate paper currency, they in fact also purchase equity--stocks--or make direct investments. If everything goes as planned they can earn income from all of these investments and even repatriate the money they invested at some future time. But foreign equity investments in the U.S. are not debts of any U.S. resident.<br />
<br />
Now, I favor a reduction in the U.S. budget deficit, shifting it to a modest surplus. This would result in an increase in U.S. national saving. The result should be a slightly lower trade deficit in the U.S. Further, I favor social security privatization, shifting from a pay-as-you go system to a fully funded system. That will increase U.S. private saving. This also would tend to reduce the trade deficit. I favor ending excessive regulation of business in the U.S. (A goal I share with Trump.) This should increase domestic investment in the U.S., which would tend to raise the U.S. trade deficit.<br />
<br />
So, I think Navarro isn't just confusing an identity with an equilibrium condition. He may seem to. And maybe he is a little confused. But I think the best way to understand his view is that he is making a simplistic Keynesian argument--acting as if production is always constrained by demand while ignoring key role of productive capacity. My Economics 201 back in the day emphasized the simple Keynesian Cross. Advanced Macroeconomics (first year graduate school) was a bit more sophisticated. Perhaps it was different at Harvard in Navarro's day. But I suspect he is using a very simplistic approach that most economists understand quite well.<br />
<br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-1217302764651913462017-01-31T15:21:00.001-05:002017-02-24T06:36:41.255-05:00Trump's Ban When Trump ran for President he proposed a total ban on Muslim's entering the U.S. until our representatives figure out what is happening. The last part was foolish and the first part was evil. That he would propose such a thing was something that made him unacceptable.<br />
<br />
Before long, he came up with a different proposal. This time, it was not Muslims that would be banned but rather people from countries that are sources of terrorism and rather than the ban lasting until we figure out what was going on, people from those countries will be subject to "extreme vetting." <br />
<br />
Trump's executive order appears more consistent with this second approach, which I think is sensible. The administrative incompetence was incredible. There was no need for a rush. How hard would be to slow down new visas? How difficult is it to devote more resources to investigation?<br />
<br />
Of course, this would not involve some dramatic "action" by Trump. It just would have modestly improved security. <br />
<br />
It is just difficult not to see Trump and his advisors as being both incompetent and cruel.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-79516477187995755952017-01-21T08:44:00.000-05:002017-01-23T06:40:43.655-05:00Tariffs and Exports If the Trump administration imposes a tariff on imports, it will result in a contraction of trade--both imports and exports. Frequently, it is claimed that this will only occur if foreign governments retaliate to tariffs on their exports to the U.S. with tariffs on U.S. exports to their countries. However, that is not correct. There is a market process that brings this about even without "retaliation."<br />
<br />
The most direct process occurs with floating exchange rates, which is at least approximately the U.S. regime. The tariff reduces the amount of dollars paid for imported goods. This reduces the supply of dollars on foreign exchange markets and so requires an increase in the value of the dollar for the market to clear. This partly offsets the tariff by making the dollar prices of imported goods less, but it also makes U.S. exports more expensive for the foreign buyers. This results in a decrease in exports. <br />
<br />
The U.S. currently has a trade deficit, and the stronger dollar will tend to reduce it. While an expectation of an increased value of the dollar will encourage foreigners to invest in U.S. financial assets, once the dollar is higher, U.S. real assets will be more expensive for foreigners. So, the result will tend to be a lower trade deficit as well as reduced exports. <br />
<br />
The U.S. could use monetary policy to prevent the dollar from rising in value. This is done by increasing the quantity of money. The equilibrium consequence of this policy is higher inflation in the U.S. The higher prices in the U.S. will make foreign imports more attractive, partially offsetting the effect of the tariff, but will also make U.S. exports more expensive for foreigners, causing them to purchase less. Similarly, U.S. assets will be more expensive for foreigners to purchase, so that the trade deficit will be smaller.<br />
<br />
Like most market monetarists, I think that prices are sticky, and that includes wages. The inflationary process would not be instantaneous or smooth. The increase in demand though out the economy would likely result in increases in output and employment. Wages are also very sticky, even in an upwards direction, so real wages would be depressed which should help employment. That effect would be especially strong in weak areas of the economy--including import competing manufacturing. Only in "the long run" would higher prices and wages result in a return to equilibrium. <br />
<br />
It would be possible for the central bank to keep keep the dollar from rising while avoiding inflation by sterilization. The Federal Reserve would need to sell off dollar assets it holds while purchasing foreign exchange--foreign assets. This can last as long as the Fed has U.S. assets to sell. The result should be a reduction in imports and a reduced trade deficit. Unfortunately, the expansion in demand for the products of U.S. import competing industries will be offset by a reduction in the demand for the products of interest-sensitive industries--construction and capital goods. Once the Fed runs out of U.S. assets, allowing the dollar to rise would result in financial losses to the Fed. Perhaps this would lock in the inflationary equilibrium. <br />
<br />
It would also be possible to blame the increase in the value of the dollar on currency manipulations by foreigners. A higher dollar is at the same time a lower pound, euro, yen, and renminbi. How dare they devalue their currencies to offset the effects of the tariffs? <br />
<br />
Foreign nations could prevent their currencies from losing value by contracting their quantities of money. In the long run, this would result in them having lower prices and wages, and so U.S. buyers would find their imported goods cheap and they would find U.S. exports expensive. While that process would likely be long and painful, the effect on U.S. exports would be prompt. The recession induced by their monetary contraction would result in reduced U.S. sales in their markets.<br />
<br />
Finally, they could keep their currencies from losing value by selling off any U.S. assets they hold and instead accumulating other sorts of foreign exchange or else each their own domestic assets. This would tend to shrink the U.S. trade deficit by reducing the amount of foreign funding of U.S. investment. This could last until they run out of U.S. foreign exchange. Again, any expansion in the demand for import competing industries will be offset by a reduction in demand in interest sensitive industries in the U.S.--construction and capital goods.<br />
<br />
Changes in the composition of the Fed's balance sheet or the balance sheets of foreign central banks could shield U.S. exports from the decrease in imports for a time. It is only if such adjustments are made that a contraction in U.S. exports would only occur due to retaliation of increased tariffs.<br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com2tag:blogger.com,1999:blog-8897997766931633186.post-53644442802039178262017-01-15T14:04:00.002-05:002017-01-16T11:56:35.794-05:00Border Adjustment Tax Congress has proposed several reforms of the corporate income tax. One reform is a border adjustment tax. This means that corporate "profit" will be calculated with no deduction for the cost of imported goods and with a deduction of revenues from exports. <br />
<div>
This has been characterized as a tax on imports and a subsidy for exports. Of course, it isn't actually the payment of a bounty for exported goods, but rather a relief from corporate income tax on profit generated from exports. Still, the economic impact should be similar to a more transparent tax and subsidy scheme.<br />
However, a tariff on all imports and subsidy for all exports has approximately no effect on trade. A tariff on a single import tends to restrict demand for that imported good, but the resulting appreciation of the dollar expands the demand for other imports while reducing exports. Trade shrinks. <br />
A subsidy for a particular export will tend to expand the production of that export, while the appreciation of the dollar will slightly contract other exports and expand imports. Trade expands.<br />
But if you tax all imports and subsidize all exports the same, there is no reallocation between various imports or various exports nor is there any expansion or contraction of trade. The dollar rises, leaving the allocation of resources unchanged.<br />
The result is not a reduction in the trade deficit or increase in the trade surplus unless the tax impacts saving or investment. For a trade deficit country, either investment must decrease or saving increase for the trade deficit to decrease. While possible, this is a second order effect. <br />
The rationale for the border adjustment tax is to shift from taxing profits from production in the U.S. to instead taxing profits from selling in the U.S. The result should make the tax system neutral regarding location decisions for firms seeking to sell products in the U.S. <br />
The tax proposal has other characteristics that also are inconsistent with a tax on profit. All capital expenditures are to be expensed rather than depreciated. That means that if a corporation invests its profit in capital equipment, it pays no tax on the profit. Also, interest expense is not deductible. That means that corporations will be paying tax on the income they pay out to bondholders, so that all investors, whether stockholders and bondholders will be taxed the same. This should make the tax neutral regarding the financing of corporations by the issue of stocks or bonds, taking away the existing artificial encouragement of leverage (borrowing.)<br />
And the corporate tax rate is to be reduced to 20% rather than the unusually high 35% that exists today.<br />
A true value added tax is a tax on income. However, the typical value added tax allows expensing of investment, which makes it a tax on consumption. Border adjustment taxes are typically applied, so that the consumption of imports is taxed just like the consumption of domestically-produced goods. Exports are exempt, because there is no intention of taxing foreign consumption.<br />
A national sales tax is more transparent, and would involve the taxation of final sales of consumer goods and services. (A tax on the sale of all final goods and services would be an income tax.) Consumption of imported goods would be taxed the same as domestic products, and there would be no taxation of exports. <br />
The proposed reform of the corporate income tax, then, moves it in the direction of a consumption tax, but the process is not complete because payroll expense will still be deductible. It would seem, then, that the proposal is a tax on consumption of capital income from sales in the U.S.<br />
While the tendency for the dollar to rise could occur through a prompt adjustment of the nominal exchange rate with the inflation rate unchanged, this could be prevented by open market purchases of foreign exchange. This resulting money creation would raise the inflation rate. In the long run, equilibrium would return with prices and wages higher in the U.S. As U.S. prices rise, imports would expand and exports shrink, returning imports, exports and the trade deficit to its initial value.<br />
The use of sterilized foreign exchange transactions would be possible. Here, the Fed would sell off its holdings of U.S. assets and purchase foreign exchange. This would tend to reduce the U.S. trade deficit by reducing foreign funding of U.S. investment. It could last until the Fed runs out of dollar assets. This policy could be introduced at any time, though it would usually generate a decrease in the U.S. nominal exchange rate. That would tend to shrink imports and expand exports consistent with the reduction in foreign funded investment in the U.S. This might be more politically acceptable if it limits and restrains what otherwise would be an increase in the nominal exchange rate.<br />
Foreign exchange operations are the responsibility of the U.S. Treasury, so I suppose this could be implemented regardless of what the Federal Reserve wants to do. The Fed could either sterilize to keep to its inflation target or allow inflation to rise until the real exchange rate increases the necessary amount.<br />
My preference, of course, would be to allow the nominal exchange rate to increase enough. While I do not favor inflation targeting, nominal GDP targeting would be qualitatively similar in this situation.</div>
<div>
</div>
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-72594692770867190902017-01-04T09:08:00.000-05:002017-04-02T09:18:12.663-04:00Deindustrialization and Unionization The long run trend for U.S. employment is up. The unemployment rate fluctuates with the business cycle, but any trend is at best minimal. Still, there are constant complaints that imported goods are destroying jobs. Or perhaps it is just the "good jobs." And what are these good jobs? They are factory jobs were men of modest education can earn high wages and benefits. These jobs are supposed to allow those workers to be part of the middle class. <br />
Surely, this is why the loss of manufacturing employment is counted as a major concern. These middle-class jobs disappear and some of those losing the jobs, or perhaps just their children and grandchildren, must accept low paying jobs in the service sector. Of course, some that are more ambitious may accept more responsibility and risk, or at the very least, seek more formal education, allowing for more skilled work. Even so, people who are little different in terms of skills and attitudes from those who had "good jobs" in the past must now take substantially worse jobs.<br />
A simple model of unionization has the union increasing wages in the union sector. The quantity of labor demanded by the firms in that sector is lower, reducing employment. The workers who would have worked in the unionized sector seek employment in the nonunion sector. The increase in supply in the nonunion sector lowers wages in that sector. In the simplest model, the workers are identical, so the result is that identical workers earn differential wages depending on their industry. Wages are above the competitive level in the union sector and below the competitive level in the nonunion sector. <br />
In the nonunion sector, the labor market clears. In the union sector, there is a surplus of labor. Workers from the nonunion sector would prefer "good jobs" in the union sector. If the union sector is "manufacturing" and the nonunion sector is "services," then this would explain why manufacturing is identified with "good jobs" that are "scarce" and the service sector are "bad jobs."<br />
Unions took off in the U.S. during the Great Depression. In my view, this was mostly due to money illusion. There was massive deflation during the first part of the thirties, and substantial decreases in nominal wages. While real wages actually increased, workers became very interested in joining unions in order to fight the unfair pay cuts. Federal government policy changed to strongly support unionization, but the workers supported unionization to fight nominal pay cuts despite growing real wages.<br />
As time passed, the unionized workforce became less significant, mostly because the growth of unionization failed to keep up with the growth of the labor force. However, many years ago, someone from "management" once explained that there is little benefit for workers to join a union because employers provide pay and benefits for nonunion jobs that are competitive with union pay and benefits. There appears to be substantial truth to this notion, most obviously in industries and even firms that have both union and nonunion operations. Keeping pay and benefits low in the nonunion shop is just asking for an organization drive and the loss of the election.<br />
This suggests that the proper division in the simple model is not between the union and nonunion sectors, but rather between the "easy to unionize" and "difficult to unionize" sectors. If manufacturing is on the whole easy to unionize and the service sector is difficult to unionize, then manufacturing will provide "good jobs" that pay more than the competitive amount and the service sector will have poor jobs that pay less than the competitive amount. <br />
It is certainly plausible that manufacturing is easy to unionize because of economies of scale. There are also substantial sunk costs, which makes exit difficult, which in turn makes entry risky. In the rest of this post, I will assume manufacturing is easy to unionize and the result is higher than competitive wages in manufacturing. The service sector is difficult to unionize and so results in lower wages. <br />
This ties to trade because it is a way to bypass the inefficiency created by unionization. The reduced employment in manufacturing results in too low output and too high prices. The shift of labor to the nonunion sector results in too high output and too low prices.<br />
By importing manufactured goods, those in the service sector obtain products at lower prices. This raises their real income. The domestic manufacturing industry, which is already too small, reduces output further. However, the need to meet foreign competition lowers their too high prices. The reduction in employment in the manufacturing sector increases the supply of labor to the service sector, resulting in lower wages. <br />
Trade must balance, but it is possible to export services. Tourism is an obvious example, and there are various sorts of financial services that can be provided to foreigners. It is also possible that a net capital inflow could fund imports of manufactured goods. Foreign investment funding an expansion of the service sector would fit in well with this account. <br />
Certainly, this story does not account for all of the U.S. experience in the late twentieth century. The simple model ignores sorting in a labor market where workers are not all the same. Sectors with excessive wages and and a surplus of labor will tend to hire what they perceive to be higher quality workers. To some degree, workers left in the low wage sector may be less productive. Manufacturing output has generally increased in the U.S. and not disappeared. However, the "problem" of a lack of high paying jobs for workers with little education is not solved by a demand for highly-skilled workers in manufacturing.<br />
Still, I think it does tell us something about the "problem" of the loss of "good jobs." That just doesn't make much sense in a competitive labor market. We can image shifts in the share of income going to labor and capital due to changes in trade or technology. These changes could tend to depress real wages. These changes simultaneously expand real output so that the net result is ambiguous. But these processes do not appear to create the phenomenon of the loss of "good jobs" in import competing industries. <br />
If a single industry were unionized or were simply subject to unionization, those working in that sector would almost certainly benefit. They would receive a larger share of a very slightly smaller pie. When all manufacturing is unionized or even subject to unionization, the loss in total efficiency is more substantial. The unionized autoworker pays more for shoes produced by union labor. The expansion of imports similarly has ambiguous effects. The union shoe maker can buy a cheaper Korean car, while the union autoworker can buy cheaper Mexican shoes. Still, the analysis treating "manufacturing" as an aggregate provides some element of truth. Those keeping the unionized or unionizable jobs get cheaper haircuts and the barber pays more for cars and shoes. An expansion of imports allows the barber to get cheaper cars and shoes, even if there are more former autoworkers and shoemakers who want to set up barber shops.<br />
Globally, a pattern of international trade that develops because of unionization is inefficient. World output and income may be higher than without the trade, but it would be higher still if wages in the unionized and unionizable sector were competitive with wages in the service sector. That is, if workers in the service sector did not covet "good jobs" in manufacturing, and workers in manufacturing did not see service sector jobs as undesirable. To the degree this makes the domestic production of manufactured goods more profitable and expands the manufacturing sector at the expense of the service sector, the result would be improved global efficiency. <br />
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-4187058834798358222016-12-28T12:14:00.001-05:002016-12-31T11:51:06.680-05:00Sumner vs. White on Fiat Money vs. the Gold Standard I enjoyed this short video of Scott Sumner and Larry White discussing fiat currency versus the gold standard. Check it out <a href="https://www.youtube.com/watch?v=FbDZ0ObRXfE">here.</a><br />
<br />
Sumner's key argument is that a properly managed fiat currency can out perform a gold standard. Sumner is optimistic that central banks are learning to do a better job. White responds that central banks have not done better than a gold standard. Further, he argues that the very existence of central banks causes problems because they will seek to tinker with the monetary system causing more harm than good.<br />
<br />
I think Sumner pointed out the key problem with a gold standard, and that is its decent performance requires appropriate monetary policy by foreigners. White argues in favor of free banking. Suppose that his argument wins the day in the U.S., but China adopts the gold standard while rejecting free banking. Now the world economy is held hostage to the Chinese central bank's foolish notions. (Or, the world economy might be improved by wise policy by the Chinese central bank.)<br />
<br />
I don't really agree with White's emphasis on central bank mischief. A government has no need for a central bank to implement a monetary policy under a gold standard. The Treasury can sell newly issued government bonds for gold and create an economic contraction. Or, it can sell off gold and pay down its national debt and create an expansion. The contraction has an interest cost--it must pay more interest on outstanding government bonds than otherwise. And the inflation has an upward limit--the government's gold reserve. <br />
<br />
Of course, there is also the traditional government power of devaluation and revaluation. Interestingly, central banks have not had that power delegated to them. I suppose White just would like to forbid that power to government. My own view is that devaluation would be the least bad response if some foreign central bank pulled a France--accumulating gold reserves. <br />
<br />
Consider how President-elect Trump would respond if a gold standard China were to devalue its currency and build up as a gold reserve the resulting gold inflow? Tariffs? Or is this an act of war? <br />
With a free banking system, the resulting U.S. recession (depression) would almost certainly result in the exercise of the option clause. The interest penalty for the banks would motivate a measured deflation. I think the answer is for the government to devalue so that there is no deflation and instead try to guess on a new price of gold so that nominal GDP would continue to stay on its trend growth path.<br />
<br />
Irving Fisher long ago explained how regular devaluations and revaluations of gold would provide price level stability in the context of a gold standard. Of course, the compensated dollar is hardly a gold standard at all. It would seem that gold can be dispensed with (though the emphasis of central bankers on interest rates and the odd bicycle nature of interest rate targeting suggest that the compensated dollar might have its uses.)<br />
<br />
And it is that sort of thinking that makes the concept of "fiat currency" defended by Sumner problematic. It creates the habit of mind where paper currency plays the role of gold. With free banking, paper money is instead a debt instrument. Removing gold and using another nominal anchor doesn't change that. Even under current institutions, paper money is better understood as a kind of government debt. In my view, the key problem with gold as a nominal anchor is that it serves as a tolerably good money itself. And changes in the demand for it, from anywhere in the world, results in tremendous economic disruption.<br />
<br />
That is why I prefer free banking to be tied to some other nominal anchor. Slow and steady growth in nominal GDP looks to be the least bad option to me.Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com2tag:blogger.com,1999:blog-8897997766931633186.post-31221638061987872182016-12-21T12:36:00.003-05:002017-04-02T09:29:28.317-04:00Global Warming Boom I think that Trump's election has greatly improved the prospects for real economic growth by reducing the prospect of stringent controls on greenhouse gases. I think it likely that the resulting increase in the production of greenhouse gases will add to global warming, so this is the "global warming boom."<br />
<br />
The alarmist rhetoric that mainstream Democrats have adopted regarding global warming would suggest the necessity of highly restrictive regulation of the production of carbon dioxide. Cold-turkey pollution control is (or should be) a textbook example of a supply-side recession. If there really were a prospect of planet Earth turning into Venus, a Great Depression scale contraction of real output and real income would be possible and justified.<br />
<br />
Of course, few elected officials would support such a policy Much more likely would be a gradual tightening of regulations so that real output grows more slowly. Over time, the growth path of real output and real income would be substantially lowered, but at least in terms of design, there would be no periods where regulation would cause it to actually drop. There would be no supply-side recession, but just simply slower growth. Given the very slow increase in per-capita real income at best, the result could easily be stagnation in material standards of living.<br />
<br />
If the pollution in question were noxious gases emitted into the atmosphere or poisons disposed into rivers, lakes, or oceans, the benefits of a cleaner environment would be plain. It is possible that the sacrifice of material goods and services would be worth it--even a rapid Great-Depression scale contraction of real output. It seems likely to me that a supply-side recession would be efficient at least in parts of China. That measures like GDP fail to fully capture changes in human welfare should not be a major concern. This is just one of many circumstances where the rough rule of thumb that higher and more rapid growth in per capita real GDP improves human welfare fails.<br />
<br />
That reduced emission of greenhouse gases into the atmosphere provides a less immediate and obvious benefit does not necessarily mean that it does not increase human welfare on net, but the sacrifice of material goods and services still remains as a cost. How much benefit from less future climate change will appear in the present?<br />
<br />
For all of the apocalyptic rhetoric, there hasn't really been all that much regulation as of yet. And so, the current economic impact was about expectations of future regulations and somewhat less global warming. The surprise election of Trump has now caused any increased regulation to recede into the more distant future while the global warming is more likely to be slightly worse.<br />
<br />
Anticipated regulations that will reduce real income from what otherwise would be will tend to increase saving. Current consumption is reduced to cushion the blow to future consumption due to lower future incomes. However, expectations of global warming should also increase saving. Consumption is reduced now so that future consumption is protected perhaps from the impact of lower income but also from the need to use future resources to mitigate against problems caused by climate change. While this implies an ambiguous result for saving, the more immediate and certain cost of the future regulation versus the more distant and speculative effect of global warming suggests more saving now on net.<br />
<br />
The impact on investment is more important. The likely introduction of strict regulation of carbon dioxide in the near future would immediately depress investment in durable capital equipment that generates substantial carbon dioxide. This would be especially true for efficient regulations that penalize existing capital goods, such as a carbon tax. Command and control regulation that applies solely to new investment would not have such an effect. Quite the contrary, there should be a rush to invest before the regulation is applied. Cap and trade could have a similar effect if the caps reward those firms that currently emit the most carbon dioxide.<br />
<br />
While the prospect of regulation of carbon would make investment in capital equipment that emits relatively little carbon dioxide more profitable, there seems little reason to purchase any of it until just before the new regulations will begin to bite. It would seem that the most sensible strategy would be to refrain from new investment, including regular replacement of existing equipment, accumulate short term financial assets, and then purchase "environmentally-friendly" capital equipment right before the new regulations are implemented.<br />
<br />
What kind of investment would be encouraged by some decrease in the intensity of global warming in the future? More building in coastal areas? Agricultural buildings? Planting fruit trees? <br />
<br />
It seems to me that the most likely effect of the prospect of intense regulation of greenhouse gases would be an increase in the saving supply and decrease in investment demand. This results in a lower natural interest rate. <br />
<br />
This would be somewhat temporary. After the regulations are implemented, the supply of saving would decrease in an effort to maintain consumption. <br />
<br />
The demand for investment is ambiguous. The opportunity to replace capital goods that generate substantial regulatory costs with new capital goods that emit less carbon dioxide and other greenhouse gases would increase investment demand. However, these techniques would have already been more profitable if they were more effective in producing output. This suggests that the reduction in investment demand must be at least partially permanent.<br />
<br />
Still, there is good reason to believe that the natural interest rate would temporarily decrease before the regulations are implemented and then at least partially recover after carbon emissions are more strictly regulated. If the prospect for regulation recedes, then the result should be a decrease in saving supply and increase in investment demand and so a higher natural interest rate.<br />
<br />
The impact of an increase in saving supply and decrease in investment demand on the allocation of resources between the production of consumer and capital goods depends on which changes more and the interest elasticity of saving supply and investment demand. At first pass, there is no effect at all--while both changes reduce the natural interest rates, they have opposite impacts on the allocation of resources. While I would usually think the interest elasticity of investment demand is much greater than for saving supply/consumption demand, in this situation I would anticipate that the effort to save for the future would fail and firms would still postpone investment in capital equipment. In other words, assuming the interest rate coordinates properly, the result would be increased production of consumer goods and services and fewer carbon-dioxide emitting capital goods.<br />
<br />
More troubling is the possibility that the market rate fails to match the decrease in the natural interest rate so that at least part of the reduced investment demand and increased saving supply simply results in idle resources. Further, the fear of these costly regulations, by deterring investment now one way or another, will begin to adversely impact growth of labor productivity.<br />
<br />
Removing the threat of these regulations, then, would have the opposite effects. The increase in investment demand will quite plausibly generate a substantial increase in investment and the addition to the capital stock will enhance labor productivity. <br />
<br />
That the Fed prefers to target short and safe interest rates has resulted in almost a decade of poor policy because short and safe interest rates are so low. If firms begin to spend off their large holdings of short and safe securities and instead purchase capital goods, this problem will be greatly relieved. The "Taylor rule" should begin to work somewhat better.<br />
<br />
Finally, if we had the sort of massive contraction of real output that appears justified by the alarmist rhetoric of the Obama administration, the consequences for employment would very much depend on the monetary regime. The direct and immediate effect of these stringent regulations would be to make the production of goods and services more difficult. The reduction in supplies would tend to increase the prices of products. A policy of strict inflation targeting would require that this be offset by reduced demand. Equilibrium would require a substantial decrease in nominal and real wages. It is difficult to see how anyone could pay off existing debts in such an environment, and so widespread bankruptcy and financial reorganization would be necessary. In other words, inflation targeting implies that a supply-side recession has an impact qualitatively similar to a demand side recession.<br />
<br />
With nominal GPD targeting, the decreases in the supplies of various goods and services that require the emission of carbon would result in increases in their prices and so a transitionally higher inflation rate. Real wages and real debts would be decreased. With such a wrenching change in real production conditions, there would be substantial structural unemployment and business failures. However, the collateral damage due to unnecessary bankruptcies and unrealistically high real wages would be greatly mitigated.<br />
<br />
The implication of inflation targeting in the more realistic scenario where the regulations are implemented gradually so as to solely limit growth would have similar effects, but much less severe. Spending growth must slow to prevent the slower growth in productivity/supplies from creating inflation and nominal and real wages must grow more slowly as well. Stagnation in real wages is a real possibility given how slowly they grow anyway. <br />
<br />
When it is simply a matter of the prospect of more stringent regulations in the future, there is no immediate tendency for supply to be depressed other than the gradual impact of reduced investment on the capital stock and labor productivity. If the market rate has failed to fall with the natural interest rate, inflation might well remain low. Even so, nominal wages would need to grow more slowly in order for employment to be maintained.<br />
<br />
Nominal GDP targeting would allow result in in modestly higher inflation when real output growth is slowed due to the gradual tightening of regulation. Since nominal wage growth appears to have substantial momentum, the higher inflation will slow the growth of real wages and so tend to reduce any unnecessary reductions in employment. The inflation will also modestly reduce real interest rates, and so help avoid the scenario where the market rate fails to decrease with the natural interest.<br />
<br />
And if the threat of these regulations recedes into the distant future? The need for a lower real market interest rate and slower growth in nominal and real wages disappears.<br />
<br />
The global warming boom--more investment, more productivity, more rapid growth in real and nominal wages, and more employment. And a somewhat greater threat of harm from global warming.<br />
<br />
<br />
<br />
<br />Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-54940097519919311362016-12-20T08:52:00.000-05:002017-01-04T07:37:32.184-05:00Moving Jobs to Mexico President-elect Trump and other critics of NAFTA seem especially concerned about U.S. firms moving manufacturing operations from the U.S. to Mexico and then exporting their products to the U.S. U.S. domestic production is decreased and U.S. imports are increased. <br />
<br />
The concern is especially described as a transfer of jobs from the U.S. to Mexico. U.S. workers lose their jobs and Mexican workers obtain jobs. One of the common economic fallacies in the notion that "jobs" are a limited resource and this appears to redistribute some of the scarce jobs from Americans to foreigners. <br />
<br />
Of course, it is labor that is scarce rather than "jobs." Shifting production of some good from the U.S. to Mexico is only efficient if there is a comparative advantage in Mexico relative to the U.S. That means that the opportunity cost in Mexico is lower than the opportunity cost in the U.S.<br />
<br />
Perhaps it is a matter of too much abstraction in my thinking, but the process by which Mexican production of some good partially or fully displaces U.S. production of that good would involve entry by Mexican entrepreneurs with lower production costs who then drive the higher cost U.S. producers out of business. Having the U.S. producers promptly shut down and open a new facility in Mexico would seem to be a more efficient means of accomplishing the same end.<br />
<br />
The logic of comparative advantage is that the expansion of Mexican production comes at the expense of other Mexican industries with relatively higher opportunity costs. Labor and other resources are pulled away from the production of products where Mexico does not have the comparative advantage. <br />
<br />
Further, the contraction of this U.S. industry frees up labor and other resources to produce products with relatively lower opportunity costs. Resources are pushed into the industries where the U.S. has the comparative advantage.<br />
<br />
However, the "moving jobs" to Mexico scenario combines this with a shift of capital resources from the U.S. to Mexico. Imagine the factory is loaded onto a giant truck and hauled across the border. Capital would literally move from the U.S. to Mexico.<br />
<br />
The shift of capital resources away from the U.S. would typically reduce the demand for complementary factors in the U.S., in particular U.S. labor. While this would tend to lower wages and labor income, the reduction in the supply of capital in the U.S. would tend to result in a higher rate of return on capital in the U.S. When combined with the earnings on foreign investment, total income would rise. The result would tend to be lower U.S. GDP but higher U.S. GNP.<br />
<br />
This process of factor income equalization is not tied to the trade flows that depend on comparative advantage. Suppose there were no trade in goods and services between Mexico and the U.S. They could still put the factory on a truck and shift it over the border and sell their product in Mexico. The remaining U.S. producers would earn more profit and there would still be lower U.S. wages.<br />
<br />
The primary effect of combining the two processes--shifting U.S. capital to Mexico while importing products from Mexico is that U.S. consumers and workers benefit from lower import prices while seeing some increase in imputed labor demand from export industries. GDP is decreased by the shift of capital resources but increased due to the reallocation of resources according to comparative advantage. The effect on domestic production and labor income is ambiguous while the effect on capital income, when including the return on foreign investment, is positive. <br />
<br />
Now, in reality, the U.S. has a net capital inflow. While the shift of factories from the U.S. to Mexico is a capital outflow, it is more than offset by other shifts of capital to the U.S. We know this from observing the U.S. trade deficit which is matched by a net capital inflow. Real interest rates in the U.S. are at historically low levels, suggesting that U.S. labor incomes are not suffering due to a process of international factor price equalization. <br />
<br />
The process of factor price equalization--the transfer of capital resources from where the returns are low to where they are high--raises world output and income. It raises income from capital on the whole. But it does tend to reduce labor incomes in those areas that had what in hindsight was an over-abundance of capital. <br />
<br />
However, the phenomenon of convergence, by which lower income countries grow rapidly and approach the level of per capita income of high income countries, is not primarily a matter of comparative advantage or capital flows. The key is rather adopting better technology. This should be understood broadly to include new products and production techniques, but also methods of organization and even policies and social norms. This allows what were desperately poor people to produce more, earn more, and consume more. For the most part, they demand the added products they supply.<br />
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com1tag:blogger.com,1999:blog-8897997766931633186.post-2657524390685624582016-12-08T09:28:00.000-05:002016-12-10T06:34:58.863-05:00Trump and CarrierTrump has made a variety of statements associated with the Carrier deal. It might be a mistake to take what he says (tweets) too seriously. Still, I find myself thinking about the effects of a policy of imposing tariffs specifically on firms that close a plant in the U.S. and relocate it outside the U.S.<br />
<br />
The actual Carrier deal appeared little different from standard state-level economic development programs. State governments have long offered special enticements to large firms considering opening a plant. The different state governments see themselves in competition with other locations--other states and other countries. When firms are considering a move away from a state, this same apparatus frequently kicks in. What can state and local government do to convince a major employer to stay? For the most part, what is unusual with the Carrier deal is that normally the governor of a state and various local elected officials takes credit, but we now have a President grandstanding. The other complication is that Carrier's parent company, United Technologies has federal defense contracts, and some think that Trump threatened future defense contracts.<br />
<br />
No, it is not the enticements included in the actual deal that are interesting, but rather Trump's proposal for a special tariff on firms that move outside the U.S. It is not at all clear that this was a threat that worried Carrier or United Technologies. <br />
<br />
But what would be the effect of such a policy? I think the presumption should be that such a policy would have no effect. Uneconomic plants located in the U.S. would still be closed. New plants would still open in other countries for the purpose of exporting products to the U.S. <br />
<br />
A special tax on the products imported from firms that have "moved" from the U.S. would simply result in an end to talk about <strong><em>moving. </em></strong> A firm opens a new plant in Mexico and then a year or two later, closes the U.S. plant. Open the new plant during the expansion, and close the U.S. plant during the recession. Of course, if the policy is nothing but window-dressing, then just open one plant and close another. Just don't say it is a move.<br />
<br />
Sufficiently draconian controls could stop a particular firm from shifting operations across national borders. If a firm closes a plant in the U.S., then tariffs are imposed upon any of its product from other countries that it seeks to export to the U.S. <br />
<br />
But in the extreme, the result could simply be that a new firm, or perhaps a subsidiary of a French or German firm, opens in Mexico producing a product such as air conditioners. Profit and depreciation costs from the uneconomic U.S. plant are paid out to the Carrier stockholders, who purchase stock in the firm that operates in Mexico--whatever its name. <br />
<br />
It would seem that all the Trump approach can hold hostage is the brand name "Carrier." And I suppose I shouldn't be surprised that Trump puts a lot of stock on brand names. Since they do have value, it should have some impact of delaying the shift of operations from less economic domestic production to more economic foreign production.<br />
<br />
Of course, a policy of imposing tariffs on imported air conditioners would have a greater impact than simply punishing U.S. firms that "move" production of air conditioners to Mexico. And all of these policies have approximately no effect on the total employment in the U.S., but rather shift the pattern of employment in the U.S. in a way that reduces total U.S. and foreign income and output. Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-82855586503809113082016-10-01T10:41:00.000-04:002016-11-04T12:44:51.290-04:00Selgin on Kocherlakota regarding Discretion vs. RulesGeorge Selgin was highly <a href="http://www.alt-m.org/2016/09/22/rules-discretion-audacity-critique-kocherlakota/">critical</a> of Kocherlakota's <a href="https://www.brookings.edu/wp-content/uploads/2016/09/1_kocherlakota.pdf">claim</a> that the Fed's response to the 2008 recession was hampered by its devotion to the Taylor rule and that we would have been better off if the Fed had exercised more discretion.<br />
<div>
<br /></div>
<div>
Selgin properly points out that the Fed has exercised plenty of discretion and has not slavishly adhered to the Taylor rule by any means. However, I still think Kocherlakota has a point. </div>
<div>
<br /></div>
<div>
In my view, coming up with a simple formula relating a setting for the federal funds rate to past deviations of inflation from target and output gaps is a fools errand. Of course, I favor a level target growth path for nominal GDP rather than a target for inflation and an effort to minimize output gaps. But I don't think coming up with a fixed rule for changing the federal funds rate based upon past or even forecasted deviations of nominal GDP from target is wise. Nor do I favor coming up with a fixed rule for adjusting the quantity of base money according to past or even forecasted deviations of nominal GDP from its target level.</div>
<div>
<br /></div>
<div>
In a market economic system, setting prices and quantities is an entrepreneurial decision. It cannot be distilled into a rule. I do think that an economy needs a nominal anchor. But no one is proposing that the federal funds rate serve as a nominal anchor. And Taylor-type rules don't make the quantity of base money into the nominal anchor either. (The two percent inflation target is the only nominal anchor with a Taylor rule.) </div>
<div>
<br /></div>
<div>
I don't think the Federal Reserve should worry about the federal funds rate at all, but it should adjust the interest rate it pays on the reserve accounts held by banks and the quantity of base money it creates. It should also adjust the interest rate it charges for loans to banks. Its goal should be to keep the quantity of base money equal to the demand to hold it. Changes in the interest rate it pays will influence the demand. Open market operations and lending to banks will determine the quantity. The decision on interest rate and quantity needs to be forward looking, like all entrepreneurship.</div>
<div>
<br /></div>
<div>
The demand for base money also depends on nominal GDP and so these decision do need to be constrained by the need to keep nominal GDP on target. But the rule should relate to the commitment to the nominal anchor, preferably a target growth path for nominal GDP--not the level of base money or the interest rates the Fed pays or charges. The Fed's only commitment should be that it will set interest rates and a quantity of base money consistent with nominal GDP being on target in the near future (for example, one year from now.) The Fed should make no commitment as to what either these interests rate or the quantity of base money should be.</div>
<div>
<br /></div>
<div>
Of course, the Fed has a monopoly on the issue of base money. But even so, I don't think that means that its pricing and quantity decisions should be based upon some mechanical rule. It needs to be understood to be entrepreneurial like all such decisions, even when a producer has a monopoly on the provision of an important product. Just because a firm has a patent on a lifesaving drug doesn't mean that its price and quantity should adjusted by some mechanical rule.</div>
<div>
<br /></div>
<div>
Putting all of the entrepreneurial eggs in a monopolist's basket is not the ideal course. Introducing competition so that interest rates and the quantity of money are determined competitively, arising out of the decisions of many entrepreneurs should be the goal. But can that be combined with the constraint of a decent nominal anchor?</div>
<div>
<br /></div>
<div>
I have long argued that the Fed should float its interest rates--paying less and charging more than market-determined short term interest rates. It should adjust the quantity of base money to try to meet the demand to hold it at market determined interest rates In effect, the determination of the interest rates that Fed sets would be farmed out to a competitive market. Of course, changes in the quantity of base money will influence market interest rates in the short term and so indirectly the interest rates the Fed would charge and pay. The institutional framework would be consistent with the Fed gauging its open market operations to keep short term market interest rates at a level it believes is consistent with a quantity of money adjusting to the demand constrained by the nominal anchor.</div>
<div>
<br /></div>
<div>
I have also advocated the complete privatization of hand-to-hand currency. The quantity of that important portion of what is now base money would then be jointly determined by competitive forces. Each bank would entrepreneurally determine its issue of currency and the total quantity of currency would be the sum total of those decisions. </div>
<div>
<br /></div>
<div>
However, since I believe it is both desirable and highly likely that any such currency would be redeemable with the remaining portion of base money--reserve deposits at the Fed--this would not take away the key Fed monopoly and the Fed's need to act entrepreneurally to determine the appropriate quantity of reserves. That is, meeting the demand by banks to hold them at market determined interest rates and consistent with the nominal anchor. </div>
<div>
<br /></div>
<div>
I believe that it may be possible to design a clearing mechanism that uses index futures convertibility to enforce the nominal anchor without there being any base money at all. The position of each bank on the futures contract would vary with its net clearing balance at the clearinghouse. If any net debit balance would be secured by specified securities (like T-bills) and the interest rate charged on net debit balances is more than that generated by the securities and the interest rate paid on net credit balances is less, then desired balance for each bank would be zero. Under such a system there would be a quantity of reserves. It would be the total of the net credit balances of banks and always matched by the total of the debit balances of other banks. It is just that in equilibrium the quantity would equal the demand to hold them which would be zero. The system is disciplined by the index futures contract so that if nominal GDP is expected to stray from target, the private interests of the banks participating in the system will drive changes in both the market determined quantity of money (largely checkable deposits) and market determined interest rates to return it to target. It is all just a variation on the mechanics of clearing in the Black-Fama-Hall system developed by Greenfield and Yeager years ago.</div>
<div>
<br /></div>
<div>
Well, maybe it won't work. But that brings me back to Kocherlakota. He seemed to be criticizing a mechanical rule relating the federal fund rate to inflation and output gaps. But his substitute is that the Fed should remain strongly committed to its goal. To me, that rings true. I think that the Fed, or our monetary institutions generally, should be strongly tied to the nominal anchor. The Fed should not be able to adjust the nominal anchor on the fly. For me, that is, it should not be able to adjust the target growth path for nominal GDP period by period. But it should not be tied to any mechanical rule for manipulating market interest rates or broad conglomerations of monetary assets or even the interest rates it pays or charges or the quantity of the monetary liabilities it issues. Taylor type rules are a bad idea.</div>
<div>
<br /></div>
<div>
Kidland and Prescott's model has the Fed changing the nominal anchor period by period to exploit a short run phillips curve and obtain modest decreases in unemployment. This would be like having the Fed raise the target growth path for nominal GDP period by period to try to create temporary booms in real output. That is a bad idea. </div>
<div>
<br /></div>
<div>
Kydland and Prescott didn't show that keeping the quantity of money growing at a constant rate despite fluctuations in velocity is better than adjusting the quantity of money to keep nominal GDP growth, inflation, output and employment more stable. Nor did they show that manipulating interest rates according to rule based upon past inflation and estimated past output gaps when shifts in investment demand or saving supply are causing changes in the natural interest rate are better than adjusting interest rates in a way that keeps nominal GDP, inflation, real output and employment more stable. </div>
<div>
<br /></div>
<div>
Selgin points this out as well, noting that older arguments for rules as opposed to discretion emphasized the difficulty in forecasting velocity and the natural interest rate. I grant that, but I think that a fixed rule for manipulating interest rates or base money are really just nonstarters. </div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
<div>
<br /></div>
Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com0tag:blogger.com,1999:blog-8897997766931633186.post-71768282638002170142016-09-21T06:36:00.002-04:002016-09-21T06:36:36.458-04:00Selgin on the Fed's Money Supply ProcessGeorge Selgin has a great post on the money supply process <a href="http://www.alt-m.org/2016/09/20/monetary-policy-primer-part-7-monetary-control/?fb_ref=Default">here</a>. Mayor Bill Woolseyhttp://www.blogger.com/profile/15439136665155575382noreply@blogger.com1