Wednesday, March 17, 2021

Back to the 60s.

Marginal revolution links to a great read on contemporary macroeconomics from J.W. Mason. It's mostly wrong, I think, but very thoughtfully puts together the wrong ideas behind contemporary policy macroeconomics.  

Briefly, debt doesn't matter and there are no effective supply constraints. Borrow, spend without limit is the key to prosperity. 

The fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift.

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.

It really does seem that on the big macroeconomic questions, our side is winning. 

I have noticed the same thing. Few Republicans mention the idea that today's spending has to be paid by tomorrow's taxes, and consequently today's stimulus must be repaid by tomorrow's prosperity. His "side" won.  Until the well runs dry. (I also resist the assertion that economics must have political "sides," rather than an objective truth.)

But my interest in this particular post is to think about what it says about how thinking about economic policy is shifting, and how those shifts might be projected back onto economic theory.

The post is brilliant for systematizing the emerging view of economics in the Biden Administration, in much of the Fed, and its academic  allies. 

The conventional view

Mason is captures refreshingly well the other "side," conventional macroeconomic wisdom that emerged after the debacle of the 1970s: 

Over the past generation, macroeconomic policy discussions have been based on a kind of textbook catechism that goes something like this: Over the long run, potential GDP grows at a rate based on supply-side factors — demographics, technological growth, and whatever institutions we think influence investment and labor force participation. Over the short run, there are random events that can cause actual spending to deviate from potential, which will be reflected in a higher or lower rate of inflation. [and also temporarily higher or lower output] These fluctuations are more or less symmetrical, both in frequency and in cost. The job of the central bank is to adjust interest rates to minimize the size of these deviations. 

That's an excellent description of post 1970s, Lucas, Prescott, Sargent, Friedman macroeconomics. Unlike some other commenters from the "left," one cannot accuse him of ignorance. "Catechism" is a deliberate insult, as the view came from substantial theory and evidence, but let's leave that alone. 

Here's a graphical version. 


In the 1960s, macroeconomists thought that recessions were just "shortfalls" of "aggregate demand." The point of policy was to fill the valleys with aggregate demand, as indicated by the dashed line of the top graph. In the conventional reading, they tried it in the 1970s, and got inflation. They discovered that economies can run too hot as well. Thus, the objective shifted, as in the bottom graph. Now the job is to stabilize output, if not in the middle, at least below the top.

As one way of thinking about it, the dashed lines represent "supply." That's a bad word, as it is really the combined supply and demand of an economy working normally. How can an economy run "too hot?" Well, if your boss asked you to work 7 days a week 12 hours a day with no vacations to finish a special project, you could. But you would not want to do that forever. The economy as a whole can similarly push above what is long-run sustainable for a little while. 

But at the same time, economists realized that the growth rate of "supply" is not a given, but instead heavily influenced by policy. So we should put more attention into the incentives for long-run growth, which all comes form the "supply" side -- capital, technology, productivity, efficiency. 

Mason continues on the standard "catechism" 

at any given moment, there’s a minimum level of unemployment consistent with price stability. 

Milton Friedman, 1968. And that level is not zero. Try to push it too low, and you get inflation. 

Smoothing out these fluctuations has real short run benefits, but no effects on long-term growth. 

I.e. the best "demand" policy can do is the black dashed line in my lower graph.  

large fiscal deficits may be very costly. Finally, while it may be necessary to stabilize overall spending in the economy, this should be done in a way that minimizes “distortions” of the pattern of economic activity and, in particular, does not reduce the incentive to work.

Correct again. To us, that pesky growth comes from incentives and lack of distortions. 

The new view 

But that's all over.  

Policy debates — though not textbooks — have been moving away from this catechism for a while. Jason Furman’s New View of Fiscal Policy is an example I often point to; you can also see it in many statements from Powell and other Fed officials, as I’ve discussed here and here. But these are, obviously, just statements. The size and design of ARPA is a more consequential rejection of this catechism. Without being described as such, it’s a decisive recognition of half a dozen points that those of us on the left side of the macroeconomic debate have been making for years.

So, let's see the left side. 

The balance of macroeconomic risks is not symmetrical. We don’t live in an economy that fluctuates around a long-term growth path, but one that periodically falls into recessions or depressions

.. demand shortfalls are much more frequent, persistent and damaging than is overheating. And to the extent the latter is a problem, it is much easier to interrupt the flow of spending than to restart it. 

This is my graph of filling the valleys. It's not new economics, it's back to 1960s economics. 

But that's just the beginning. The real paradigm shift, or flight of fancy depending on your "side," is on debt and supply: 

3. The existence of hysteresis is one important reason that demand shortfalls are much more costly than overshooting. Overheating may have short-term costs in higher inflation, inflated asset prices and a redistribution of income toward relatively scarce factors (e.g. urban land), but it also is associated with a long-term increase in productive capacity — one that may eventually close the inflationary gap on its own.

This assertion will surprise survivors of the 1970s, when overheating manifestly did not lead to greater productive capacity, and the inflationary gap did not close on its own. 

Shortfalls on the other hand lead to a reduction in potential output, and so may become self-perpetuating as potential GDP declines. Hysteresis also means that we cannot count on the economy returning to its long-term trend on its own — big falls in demand may persist indefinitely unless they are offset by some large exogenous boost to demand. Which in turn means that standard estimates of potential output understate the capacity of output to respond to higher spending. 

Now here we  have something genuinely new. Demand creates its own supply. (It's a shame Larry Summers is denigrated at the start, as he was early to the game on hysteresis and secular stagnation, for better or for worse.*)  

5. Public debt doesn’t matter. Maybe I missed it, but as far as I can tell, in the push for the Rescue Plan neither the administration nor the Congressional leadership made even a gesture toward deficit reduction, not even a pro forma comment that it might be desirable in principle or in the indefinite long run. The word “deficit” does not seem to have occurred in any official statement from the president since early February — and even then it was in the form of “it’s a mistake to worry about the deficit.” 

I concur with that impression about current policy thinking, though not with its validity for this planet. 

6. Work incentives don’t matter. For decades, welfare measures in the US have been carefully tailored to ensure that they did not broaden people’s choices other than wage labor. 

This is lovely for its clear statement, and repudiation of 250 years of economics. The "stimulus" bill is full of additional work disincentives. Earn a dollar, lose a dollar's worth of benefits. And more are coming. 

9. Weak demand is an ongoing problem, not just a short-term one.

This is 1939 "secular stagnation," Keynesian economics before growth economics came along in the 1950s.  Just why weak demand is permanent remains a mystery. Prices and wages are not permanently sticky. 1940s Keynesianism thought so, but was pretty clearly not about a "long run."  

If the child tax credit will cut child poverty by half, why would you want to do that for only one year? If a substantial part of the Rescue Plan should on the merits be permanent, that implies a permanently larger flow of public spending. The case needs to be made for this.

This is a good and logical point. If you take it seriously, though, it should show the illogic of the whole edifice. I found this claim that the child tax credit will cut child poverty in half illuminatingly ludicrous, not enticing. Really, that's all it takes? Why not spend $4 billlion and eliminate child poverty forever? Why not spend $8 billion and eliminate adult poverty? It hilarious that after the "war on poverty" declared in 1965, people could actually say with a straight face that the only reason "child poverty" remains in America is that we didn't pass a little tax credit.  

It gets better: 

What would a macroeconomics look like that assumed that the economy was normally well short of supply constraints rather than at potential on average, or was agnostic about whether there was a meaningful level of potential output at all?

My emphasis. Spend  and goods will come. Don't worry about who makes it and why. Is there no constraint at all, as the MMTers seem to think? Yes, but it slips a derivative: 

One idea that I find appealing is to think of supply as constraining the rate of growth of output, rather than its level... A better story, it seems to me, is that there is a ceiling on the rate that employment can grow — say 1.5 or 2 percent a year — without any special adjustment process

More broadly, thinking of supply constraints in terms of growth rates rather than levels would let us stop thinking about the supply side in terms of an abstract non monetary economy “endowed” with certain productive resources, and start thinking about it in terms of the coordination capabilities of markets. I feel sure this is the right direction to go. But a proper model needs to be worked out before it is ready for the textbooks.

It sure does need a new model! The standard textbook model starts with potential output = technology x function of capital and labor, y = Af(k,l). There is only so much the economy can produce, and once everyone who wants to work is working, the only way to improve is better technology or more efficiency, A. Mason is basically repudiating this fact. y = infinity, "there is always slack" in Stephanie Kelton's words, but dy/dt is limited by "frictions." (The first paragraph was about increasing L, but the second goes far beyond." 

Labor rather than technology is at the heart of the vision -- as if we all got insanely richer than our ancestors by working more, not (as in fact) less. 

The textbook model of labor markets that we still teach justifies a focus on “flexibility”, where real wages are determined by on productivity and a stronger position for labor can only lead to higher inflation or unemployment. Instead, we need a model where the relative position of labor affects real as well as nominal wages, and  in which faster wage growth can be absorbed by faster productivity growth or a higher wage share as plausibly as by higher prices.

Productivity does not come from hard-won technical progress, corporate efficiency, the relentless pressure of competition. If you force companies to pay more, they will find whatever higher productivity it takes to generate the money to make that payment. Wow, millennia of misery could have been so easily avoided. 

,how do we think about public debt and deficits once we abandon the idea that a constant debt-GDP ratio is a hard constraint? One possibility is that we think the deficit matters, but debt does not, just as we now think think that the rate of inflation matters but the absolute price level does not. 

Mason recognizes the fact -- policy has moved here, and economics mops up to defend political choices. That's what's brilliant about this post

In short, just as a generation of mainstream macroeconomic theory was retconned into an after-the-fact argument for an inflation-targeting central bank,

This is not accurate, as calls for inflation targeting were there decades before it happened, but it's a nice metaphor 

what we need now is textbooks and theories that bring out, systematize and generalize the reasoning that justifies a great expansion of public spending, unconstrained by conventional estimates of potential output, public debt or the need to preserve labor-market incentives.

My emphasis.  

For the past generation, macroeconomic theory has been largely an abstracted parable of the 1970s, when high interest rates (supposedly) saved us from inflation. With luck, perhaps the next generation will learn macroeconomics as a parable of our own time, when big deficits saved us from secular stagnation and the coronavirus.

I would be very curious to hear what the alternative parable of the 1970s and 1980s is!  

I was surprised to find one element of complete agreement. Mason may just be unaware how far contemporary labor economics has advanced from the policy world's fixation on the unemployment rate -- people without jobs who are looking for jobs.  

1. The official unemployment rate is an unreliable guide to the true degree of labor market slack, all the time and especially in downturns. Most of the movement into and out of employment is from people who are not officially counted as unemployed. To assess labor market slack, we should also look at the employment-population ratio,

...there is not a well defined labor force, but a  smooth gradient of proximity to employment. The short-term unemployed are the closest, followed by the longer-term unemployed, employed people seeking additional work, discouraged workers, workers disfavored by employers due to ethnicity, credentials, etc. 

Beyond this are people whose claim on the social product is not normally exercised by paid labor – retired people, the disabled, full-time caregivers – but might come to be if labor market conditions were sufficiently favorable.

...Those who are most disadvantaged in the labor market, are the ones who benefit most from very low unemployment. The World War II experience, and the subsequent evolution of the racial wage gap, suggests that historically, sustained tight labor markets have been the most powerful force for closing the gap between black and white wages.  

This is actually a good description of contemporary .. what do we call ourselves? Neoclassical? Neoliberal? Market? Incentive? ... economics. Labor economics has been focusing on the employment-population ratio for years. Ed Lazear harped on its decline. Casey Mulligan's book "redistribution recession" excoriated Obama policies precisely on labor force decline. Most labor economics focuses on employment.  Labor economists largely pay little attention to the unemployment rate, calling it "job search." 

There is indeed nothing like a booming, competitive labor market to help the disadvantaged. I thought this was a neoclassical point, made proudly by the Trump CEA! 

But you see a gaping hole of logic. 

6. Work incentives don’t matter. For decades, welfare measures in the US have been carefully tailored to ensure that they did not broaden people’s choices other than wage labor. 

Well, if so much employment is on an active margin, people choosing employment or not, what other than incentives gets people to choose work? Work is not fun, especially jobs that the disadvantaged can aspire to. Since you must eat somehow, all the margins Mason mentions are exactly the margin between work and social program.  So this (correct in my view) analysis of the labor market, with a large number of people on the margin of work or not, and a large number of employers who need a booming market to employ less skilled workers, flies completely in the face of "incentives don't matter." No, incentives are everything, precisely because of Mason's own well articulated view of labor force participation as the central margin. 

The key problem of benefits is the disincentive posed by means testing -- earn more money, lose the benefits. A paragraph starts 

8. Means testing is costly and imprecise.

and then wanders off without point. I think the point is, we should not means test at all. That sure cures the disincentives, but you had darn well better believe that debt doesn't matter! 

All in all, this is a post worth reading carefully. This is indeed where we are going, and this is a nice effort to put economic logic to it. If you find the logic wanting, well, then you know more surely that it will end badly. 

*Update: I removed a link to a paper on hysteresis, as there are many and they come to differing conclusions. 


76 comments:

  1. "Briefly, debt doesn't matter and there are no effective supply constraints. Borrow, spend without limit is the key to prosperity."

    That sounds more like back to the 1980's (Ronald Reagan) than back to the 1960's.

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    1. Ah, for better or for worse, Reagan is linked to "supply side" and incentive economics, to hard money and inflation control, the exact opposite of everything advocated by Mason and company.

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    2. The hard money aspect (if you want to call it that) can be credited to Volcker / Greenspan, not Reagan. In fact Volcker recounted the following meeting with Reagan and James Baker before he passed away:

      https://www.businessinsider.com/ronald-reagan-fed-chair-volcker-trump-2018-10

      And did "hard money" stop Reagan and the supply siders from running up the federal debt?

      If incentives truly matter, then where do the incentives lie for a government bond holder? If cutting spending and entitlements really matter, then where does interest on government bonds fall in terms of entitlements and spending?

      I tend to agree with everything that Reagan was trying to accomplish (lower inflation, higher employment, lower taxes, AND reduced debt). The problem was that Reagan was misinformed - or rather his Treasury Secretaries Donald Regan and James Baker were misinformed.

      A government (any government really) is quite capable of and legally permitted to sell equity instead of borrowing (selling bonds). No one bothered to relate this simple fact to former President Reagan.

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    3. "A government (any government really) is quite capable of and legally permitted to sell equity instead of borrowing (selling bonds). No one bothered to relate this simple fact to former President Reagan."

      What would be the description of this financial contract or product that provides you with a government-equity position?

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    4. Unknown,

      First, what does it mean to borrow. If I borrow an apple from you, I expect to receive an apple in return (not an orange or a banana). And so, if government borrows money from me, I expect to receive money back.

      So, whatever financial contract the government sells me cannot be settled with money at the end of contract.

      What the government can sell me (or you or anyone) is a receipt for taxes paid in advance. Obviously to get anyone to buy these receipts (equity), the government is going to need to offer a rate of return.

      So for instance, I give government $100 dollars and government gives me receipt indicating that the $100 dollars I give them now will discharge $200 of tax liability five years from now.

      Notice, the government has not borrowed the $100 dollars from me. They are not returning any money to me after the 5 year period.

      The reason that these receipts can be considered equity is that it carries more risk than a government bond. If I buy the receipt today and five years from now, I have no taxable income (and thus no tax liability) I earn zero returns on the money I invested.

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    5. This comment has been removed by the author.

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  2. The problem for alleged deficit hawks in the US they appear to only exist when the Democrats get into power.
    Where were they for instance when Trump vastly increased the structural deficit when the country was at full employment.

    some have made loud noises about the horrors of deficits only to be badly wrong. Yes I am looking at you!

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    1. Not Trampis,

      It's not the deficit, it's the debt. Microsoft, Ford, Google, Facebook, Boeing, etc. all run deficits. That is why capital markets (debt and equity) exist.

      The problem that debt creates for a government is that payments must be made on that debt (via tax revenue) irrespective of economic conditions (growth, recession).

      President GHW Bush learned that the hard way with his "No New Taxes" pledge, then had to reneg on that pledge because of the outstanding federal debt and the 90-91 recession.

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    2. This! The (very good) arguments of JC somehow are not made when a Republican is in power, and that hurts the very credibility of these arguments.

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    3. This statement is simply false. I'm a debt hawk in all cases. I hesitated hard on the delete button, but I guess I should allow lies about me in the name of free speech, though I also have the right to set it straight.

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    4. John,

      Haven't you in previous articles recommended that the Treasury?
      1. Sell longer dated bonds
      2. Sell perpetual bonds
      3. Sell floating rate bonds

      That doesn't sound very hawkish to me. I can't recall an article written by you that offers an alternative means of government financing other than debt / bonds (maybe I missed it).

      And so I will ask again:

      If incentives truly matter, then where do the incentives lie for a government bond holder? If cutting spending and entitlements really matter, then where does interest on government bonds fall in terms of entitlements and spending?

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    5. The size and composition of debt are separate issues. Yes, for a given reasonable (50% of GDP, say) government debt, it should be real and nominal perpetuities, and a lot of fixed-value floating rate (I,.e. reserves) debt. Use swaps to manage risk exposure. But better debt does not mean more debt!

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    6. John,

      "I'm a debt hawk in all cases."

      What part of ALL cases am I missing?

      And you still didn't answer the question:

      "If incentives truly matter, then where do the incentives lie for a government bond holder? If cutting spending and entitlements really matter, then where does interest on government bonds fall in terms of entitlements and spending?"

      Delete
    7. "But better debt does not mean more debt!"

      From an incentive perspective there is no such thing as better debt.

      Delete
    8. This comment has been removed by the author.

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    9. So you are a debt hawk when debt is 51% of GDP, but a debt dove when debt is 49% of GDP?

      Shouldn't the amount of debt be a function of risk tolerance?

      With high risk tolerance in an economy, debt as a percentage of GDP should fall, with low risk tolerance, debt as a percentage of GDP should rise.

      And risk tolerance goes beyond the publicly traded equity stocks on Wall Street - that's your blind spot.

      When a government chooses to sell equity, it can then be purchased by individuals who could really care less what stocks are doing - teachers, farmers, fire fighters, small business owners, etc.

      You are so blinded by the big city lights of the Manhattan skyline that it has clouded your economic judgement.

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  3. @FRestly writes "It's not the deficit, it's the debt. Microsoft, Ford, Google, Facebook, Boeing, etc. all run deficits. That is why capital markets (debt and equity) exist."

    Funny, I am a Microsoft shareholder and carefully scrutinize their SEC filings. Surprisingly, their balance sheet shows over $40B in net income for FY 2020. If this is running a deficit, I may not be reading their statement of accounts correctly.

    I cannot vouch for any of the other companies you mention as I don't have equity holdings and am not familiar with their accounts.

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    1. If Microsoft always ran a surplus, then they would have no need to sell shares.

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    2. That’s a silly statement which makes no sense.

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    3. That doesn’t make any sense FRestly. Who is “they”? Shareholders can have many reasons to sell shares which have nothing to do with raising funds for the company. People own corporations.

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    4. The Donk,

      "That doesn’t make any sense FRestly. Who is they? Shareholders can have many reasons to sell shares which have nothing to do with raising funds for the company. People own corporations."

      Why would Microsoft NEED to sell shares if it always ran a surplus? Sure, there are reasons Microsoft could sell shares even while running a surplus, but if Microsoft doesn't NEED the money obtained in the share offering, what other NEED is fulfilled?


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  4. Alas, I believe this is fundamentally a psychological problem, not an analytical problem, for these guys:

    They wish to believe, and do believe, that we are in the 1930's, a period which even these guys don't understand.

    Religions promise free stuff in the after life, conditional on good behavior. These guys promise free stuff now, conditional on good policy.

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  5. How much of this line of thinking pervades mainstream econ faculties? If you think about it, it lines up with their incentives. How much power and influence would you have writing a paper(or telling a politician) that the magic of economics is mostly free markets and minimally invasive interventions for market failures versus..."Markets by themselves need proper steering via technocrats like us"

    I maintain, the discipline's existence is built on the foundation that free markets are inherently wrong and they need the expertise of professional economists to save us from their ills.

    All I can say is, we are all fortunate that the economics profession was still its infancy when the founders started this country.

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    1. It strongly depends on the department. As a whole, about 2/3 of the economics profession leans left in academia -- the figure comes from a survey dating back to 2014 or so, if I recall. That's about as balanced as it gets in social sciences -- or academia, for that matter. My limited personal experience as a PhD student also fits this broad description.

      Generally speaking, most economists working in academia are neither excessively favorable or excessively hostile to intervention and genuinely appreciate objections during and after presentations.

      As for the statement you made, although there is so truth to it, the ideal scenario for the profession would be a very complicated mixed account of interventions where the answer is sometimes 'yes,' sometimes 'no,' and where this might vary a lot depending on the subject concerned. If the answer is 'always do what the left wants,' you don't need us.

      Fortunately, life is complicated. Some interventions work, others don't and the nature of consequences may change with the scale of the intervention.

      There's a dumb way to criticize free market solutions and there's also a dumb way to defend them.

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  6. Put it another way: "What is the value of money, when the government is dependent upon the central banker's printing press to maintain the government's solvency?"

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    1. More to the point - What is the value of a central banker that can't understand that the solvency of a government is never in question?

      Governments can face a cash flow crisis (current year expenditures including interest payments are larger than revenues) but never a solvency crisis (liabilities exceed all assets and projected cash flows). Solving a cash flow crisis using only bonds is simple - switch to zero coupon bonds and extend maturity.

      The present non-discounted value of all of the tax revenue the US federal government is ever going to collect can be considered infinite. You and I, our children, grandchildren, great grand children, etc. will all be dead and the federal government will still be collecting tax revenue.

      Government debt isn't about solvency, it's about incentives. To me, interest paying government debt is not much different from any of the other "entitlement" programs (Social Security, Medicare, Medicaid, etc.). At least with Social Security you have to work for a living to receive the benefits.

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    2. The government still has to meet payroll, every week. An open economy, such as the U.S.A., has to manage the value of its currency relative to other currencies. A country whose currency serves as a 'reserve currency', such as the U.S. dollar is, is doubly required to manage the value of that currency relative to other currencies.

      The Republic of Argentina, and the Weimar Republic (post WW-I Germany), are prime examples of what can happen to a country's economy and its terms of trade when the country becomes insolvent (i.e., when it cannot service its debt obligations as those become due). Debt obligations include international trade payment obligations as well as its funded non-domestic debts.

      You are correct in pointing out that the U.S.A. has non-financial assets that can serve as collateral. Those assets include, for example, the State of Hawaii, the State of Alaska, the island dependencies (Guam, etc.) that can be transferred to U.S. creditors in partial settlement of U.S. debts. It was the Reichsmark which was backed by German soil (land and other real assets) that replaced the disgraced Weimar-issued Mark, and brought the raging hyper-inflation in post WW-I Germany to an abrupt halt.

      The question that would need to be addressed, however, is whether the American people would be willing to surrender the Hawaiian Islands, the State of Alaska, or the Pacific Ocean dependencies to the People's Republic of China in settlement of debts owing to that sovereign. The answer would appear to be obvious, but one never really knows until the proverbial writing is on the wall and the shoe is about to drop, does one?

      Theory is abstract. Almost other-worldly, divorced from real world complexities and constraints, it might guide us in a general way to a least-worst solution to a concrete but intractable problem. We appear to do better in the physical sciences than we do in the social sciences. Why do you suppose that is so?

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    3. Old Eagle Eye,

      "The Republic of Argentina, and the Weimar Republic (post WW-I Germany), are prime examples of what can happen to a country's economy and its terms of trade when the country becomes insolvent (i.e., when it cannot service its debt obligations as those become due)."

      Post World War I Germany's debt payments were written in terms of gold. Obviously it's going to have problems paying those debts if it has a shortage of gold.

      "You are correct in pointing out that the U.S.A. has non-financial assets that can serve as collateral."

      I never even mentioned non-financial assets. I simple stated that the total value of all the tax revenue the federal government is ever going to collect can be considered to be infinite as far as you or I are concerned. US Government debt payments are made from that tax revenue.

      "We appear to do better in the physical sciences than we do in the social sciences. Why do you suppose that is so?"

      Because social scientists are terrible at math?

      Here is some simple math for social scientists - capital markets are composed of both debt and equity. When any enterprise (private or public) sells equity, it's debt (all other things being equal) is going to fall.

      And don't ask me to explain what I mean by government selling equity. I have already explained it to you three times.

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    4. 'The present non-discounted value of all of the tax revenue the US federal government is ever going to collect can be considered infinite. '

      No. The present non-discounted NOMINAL value may be infinite, but the REAL value isn't; and to pretend governments 'cannot go broke because they can always print more money' is, at best, casuistry - a government that inflates away debt has defaulted on it.

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    5. Pyrmonter,

      Agreed. I was referring to the nominal value of tax revenue.
      But I never said anything about a government "printing money".

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  7. Mason's argumentation is, at root, specious.

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  8. For those reading the comments and curious about point 6, here’s the context that John deliberately left out so that he could attack the strawman of “incentives don’t exist:
    “ 6. Work incentives don’t matter. For decades, welfare measures in the US have been carefully tailored to ensure that they did not broaden people’s choices other than wage labor. The commitment to maintaining work incentives was strong enough to justify effectively cutting off all cash assistance to families without anyone in paid employment — which of course includes the poorest. The flat $600 pandemic unemployment insurance was a radical departure from this — reaching everyone who was out of work took priority over ensuring that no one was left better off than they would be with a job. The empirical evidence that this had no effect on employment is informative about income-support programs in general. Obviously $300 is less than $600, but it maintains the priority of broad eligibility. Similarly, by allowing families with no wages to get the full benefit, making the child tax credit full refundable effectively abandons work incentives as a design principle (even if it would be better at that point to just make it a universal child allowance.) As many people have pointed out, this is at least directionally 180 degrees from Clinton-era “welfare reform.”

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  9. Professor Cochran,
    I have been enjoying your blogs and share some of your ideas: Neo-Fisherism, monetary policy ineffectiveness, inflation is independent of money supply....

    J W mason is not 100% right. But most of his points are correct. People who are mostly wrong are Milton Friedman, Robert Lucas, Edward Prescott.....

    By the way, fiscal theory of price level is wrong. Just look at the data for the last 300 years and last decade.

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    1. For starters, if you are going to be critical of serious research, you will have to be hell of a lot more precise than saying something is "wrong" and suggesting one should "look at the data." The right way to do it would be to point to a robust prediction of such a theory -- that is, an implication of the theory which cannot be easily circumvented -- and to specific evidence to establish this is going to be hard to reconcile with all the relevant facts.

      At another level, you're talking to a professor of economics who just wrote a book several hundreds of pages long on the subject. Take a hard look at the assumption you're making about what he checked or did not check before burying hundreds of hours of work on a book: does it seem reasonable to assume he didn't look? That is ridiculous.

      As for Mason, until the day someone can bring up quantitative models we can test, I am afraid we cannot say much besides that his claims conflict with much of the existing theoretical work. Some of it doesn't make sense to me, but short of seeing a rigorous treatment I don't know exactly how those intuitions will pan out.

      The Kydland and Prescott approach of using DSGE models does rely on a fiction, but it has been an incredibly fruitful fiction as evidenced by the differences between their original paper and more recent work. It is internally consistent, it allows you to obtain clear predictions regarding key moments you can measure in the data and you can see what happens when you combine many factors in the same place.

      Out in your head, everything can make sense. On a computer, some forces cancel out and others magnify each other. Others still have side effects that force you to dampen them if you want to match key factors... and that's the power of a DSGE approach. It's almost the only game in town. If Mason doesn't like what we have to say, we are all waiting for someone to provide us with better tools. That would be exciting, but it won't happen in spite of bold claims.

      Delete
  10. So far the Fed and the Government have gotten away with creating money at an incredible pace. Maybe they have discovered the Fountain of Youth or the Perpetual Motion Machine. Maybe they haven't.

    I think we should take Bob Marley's warning seriously:

    “Every day the bucket a-go a well, one day the bottom a-go drop out.”
    https://www.youtube.com/watch?v=2XiYUYcpsT4

    ReplyDelete
  11. One thing I feel is missing from the debates over debt levels is the interest payments. Even if you maintain that debt levels of US-style 100%-of-GDP or Japan-style 200%-of-GDP are something you are comfortable with what about the costs of servicing that debt? With debt of 200%-of-GDP even if the interest rate is a very low 1.5% you are still having to spend 3%-of-GDP per year in debt servicing costs, which for the US would be almost 10% of total government spending that would be just disappearing on interest payments. What about the politics of these interest payments if much of the debt were held by foreigners?

    ReplyDelete
    Replies
    1. Anonymous,

      "What about the politics of these interest payments if much of the debt were held by foreigners?"

      Yep, you got it.

      And that is a big difference between the US and Japan.

      Delete
    2. The debt, whether paid domestically or internationally, is still denominated in dollars. That means either way it must end up in the US. So from an economic perspective, I don't see the difference. However, this fact among others seems to escape Politicians and most humans.

      Delete
    3. James,

      "So from an economic perspective, I don't see the difference."

      The decision to make the payments on the debt is a political one.

      If all of the US government debt was owned overseas, how many taxpayers, voters, and ultimately politicians would continue to support making payments on it?

      The 14th amendment to the Constitution secures payments on the debt of the United States. That amendment (with enough political will) can be repealed.

      Delete
  12. Very nice post. Still, seems to me there are a couple of elephants in the room.

    1. Japan's central bank has bought back one-half that nation's national debt, which is equal to 250% of GDP. Japan is now in mild deflation, as they have been one-and-off for 20 years.

    So, is Japan truly "running up debts"? Not only do the Japanese people owe the money to themselves, the government owes the debt (half of it) to the government. This is like a Mobius strip of credits and debts.

    Add on: Does not this QE action by the central bank ease the debt-load on the government?

    2. OK, Martin Feldstein and Paul Volcker, smart guys, spent 40 years (each) predicting higher rates of inflation and interest rates. Instead the opposite happened.

    This time...well, I am worried. The lockdowns have cut off some supply, while demand is being propped up. That is a recipe for inflation.

    But, if this go 'round does not lead to inflation, do we finally have to sit down and say, "Maybe Japan is the model. How can we explain Japan?"

    ReplyDelete
    Replies
    1. Ben,

      That depends on how you feel about the private commercial and investment banking and insurance sector of the economy. Why do you need private banks or insurance companies if the government / central bank is willing to directly provide money to an economy, insuring any loss.

      "Maybe Japan is the model."

      Sure, if you don't mind putting ALL of these people out of work:

      https://fred.stlouisfed.org/series/CES5552000001

      Delete
    2. Ben,

      "Maybe Japan is the model."

      Also:
      https://en.wikipedia.org/wiki/Lost_Decade_(Japan)

      "Broadly impacting the entire Japanese economy, over the period of 1995 to 2007, GDP fell from $5.33 trillion to $4.36 trillion in nominal terms,real wages fell around 5%, while the country experienced a stagnant price level."

      If Japan is the model, it's not a very good one.

      Delete
    3. @Frank

      Can you indulge me and explain why the actions that Japan's Central Bank took in Ben's first paragraph appeared to change nothing? Maybe I'm making this comment out of ignorance, but usually when a CB monetizes a large fraction of the debt, it should lead to inflation?

      At the very least, the fact the CB did this should send some shivers to future and existing bondholders that the demand for these bonds on the open market is worrisome.

      Delete
    4. James,

      The simplest explanation I can give is Japanese culture.

      https://en.wikipedia.org/wiki/List_of_countries_by_gross_national_savings

      #60 - Japan (2016)
      #100 - United States (2016)

      I can't find any articles saying this, but I recall that when Japan went through it's "Lost Decade", it was said that the best selling purchases by the Japanese were home safes.

      Delete
  13. "Over the long run, potential GDP grows at a rate based on supply-side factors... Over the short run, there are random events that can cause actual spending to deviate from potential." Mason's summary confuses the determinants of real output from those of "spending," a nominal magnitude. There is no such thing as a "potential" level of spending, unless it's infinity. Nor are supply shocks responsible for fluctuations in spending. How spending behaves depends fundamentally upon central bank conduct. Finally, instead of there being any tendency of spending to revert to a stable "potential" value, there is a tendency for the price level to eventually adjust in response to persistent spending changes.

    ReplyDelete
  14. I should add that many of Mason's criticisms of orthodox macro rest upon his confusion of the orthodox view of the roughly symmetrical distribution of supply-side based deviations of real output from trend with a supposed believe that output deviations stemming from disturbances to "spending" are as likely to be positive as negative. This latter supposedly "orthodox" position is in fact precisely the opposite of what Milton Friedman, for one, held. His "plucking" view instead supposes that adverse real output changes due to downward spending deviations are of far greater import. To anyone familiar with this aspect of Friedman's thinking (or his and Schwartz' Monetary History, which informs it), Mason's suggestion that only those " those of us on the left side of the macroeconomic debate" recognize that "The balance of macroeconomic risks is not symmetrical" and that we instead "live in an economy that fluctuates around a long-term growth path, but one that periodically falls into recessions or depressions" where "These downturns are a distinct category of events," must seem utterly perverse.

    ReplyDelete
    Replies
    1. The very first comment on Mason's post is mine bringing up the "plucking model". He responded by saying Friedman seems closer to Keynes (though I think Post Keynesians would disagree about conflating Keynes with Neo-Keynesianism) nowadays. Perhaps if friction-free RBC is the only alternative you can imagine.

      Delete
  15. Here goes some history, more than "what is the right economic policy."

    Ronald Reagan (yes, President Ronald Reagan), exasperated with Volcker's tightness at the Fed, advocated placing the Fed under the wing of the Treasury. Central bank independence?

    https://www.nytimes.com/1982/09/18/us/reagan-suggests-tighter-control-of-central-bank.html

    For a long while, Reaganauts and others referred to Volcker as Carter's Fed Chairman, as he was originally appointed by Carter. Volcker was not popular among Republicans, who thought he was undermining Reagan's chance of re-election.

    Reagan's team also implemented the 1985 Plaza Accord, which mechanically depreciated the US dollar against the yen and mark.

    "The Plaza Accord (Japanese: プラザ合意) was a joint–agreement signed on 22 September 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche mark by intervening in currency markets."

    Oh, that.

    And, yes, Reagan ran fiscal deficits, although John Cochrane says the primary deficits were shrinking under Reagan's tutelage. Well, okay.

    Reagan has also been sacralized as a free-trader, but the Cato Institute didn't think he was (at the time---later, hagiographers set in).

    https://www.cato.org/policy-analysis/reagan-record-trade-rhetoric-vs-reality

    But, I actually liked Ronald Reagan. Iran-Contra was a mess, and he liked to consult astrologers, but he kept the US out of major foreign entanglements, and Reagan was seemed to like people, was not divisive.

    Trump could have taken cues on the Reagan personality.


    ReplyDelete
    Replies
    1. Trump could have taken personality cues by anyone not a psychopath.

      Delete
  16. The unemployment metrics are terrible in my mind. We need to separate out full time workers and part time workers, because there are those in the part time bucket who are chronically underemployed. Lumping everyone who "works" into the "employed" bucket is not a version of reality that tells the whole story. I wonder how NAIRU would be modified if there were finer buckets. Would it also call for a separation of the LFPR, too, with these finer buckets? I think so as well.

    Also as a side note on the 1990s the GINI Coef. was .40ish in the US. We're very close to .50 (.48 now and .49 just before that). Would it be possible to correlate internal changes among quintiles to reclassification of employment buckets? My spider sense says yes.

    ReplyDelete
    Replies
    1. One problem with any idea for new measures is the issue of data continuity. Can you go back in the past and refine existing measures? Because, if you cannot, new measurements introduced today will be useful for macroeconomic analysis only indirectly through micro studies for a long time. 30 years of monthly data isn't all that much data, less still at quarterly frequency.

      Delete
    2. Of course it's difficult to go back in time as you suggested. However, that doesn't mean we shouldn't refine our measures. We should, especially given the Fed's dual mandate. I wish I had it bookmarked but there was a study done at one of the Ivies that found that rising income inequality was highly correlated with rising underemployment...and they used historical data.

      All I'm suggesting is splitting the two groups between full time and part time. I think the Fed's dual mandate would require retweaking of NAIRU which historically has been a 5% UNRATE. But that UNRATE is a terrible measure given how much the Fed relies on "data" for steering the macroeconomy. Perhaps NAIRU needs to include the UNRATE and some integration of part time workers, some of which are the underemployed. The fiscal side is a whole different animal as it relates to specific and general skill acquisition subsidies. ..that's for another day. But first things first - get a finer picture of employment so at least monetary policy can make better decisions. That's the hope at least.

      Delete
  17. What is your time limit on seeing adverse consequences from this that you are sure will come? And what will they look like; not exactly but at least ballpark figures? From both the demand side and the supply side.

    ReplyDelete
  18. Thank you. I retired 5 years ago but thought I was keeping up. Reading Mason I thought I was Rip Van Winkle and had missed the last 20 years.

    ReplyDelete
  19. It's amazing that "The American Rescue Plan as Economic Theory" exactly coincides with "The American Rescue Plan that Politicians Would Implement if They Were Completely Freed from Economic Theory." How convenient.

    ReplyDelete
  20. It seems to me that much of his macro framework is consistent with Friedman's Plucking Model

    ReplyDelete
  21. A very interesting point/counter-point description of the debate happening in macroeconomics: I enjoyed it and found it informative. Thanks for posting it.

    On Point #6 ("Work incentives don't matter"), do you think Mason is just exaggerating for rhetorical effect? Similar to how MMTers often say "deficits don't matter" to catch your attention, but then further reading reveals that what they actually believe is that the deficits in fact do matter, but not until they reach a level waaaaaaay higher than any prior school of economic thought assumed?

    I'm probably not on board with Mason's position either way, but it would be interesting to see your response to a less extreme version of the point. Obviously taken literally "work incentives don't matter" is beyond silly. But I suspect the intent was more along the lines of "work incentives don't matter... in the context of the size of payments at issue in the U.S. welfare debate" or something along those lines.

    ReplyDelete
  22. ‪Perhaps the US has not undergone a period of hysteresis, because it has responded to each recession with fiscal expansion? Whilst in the UK, we have been through an (almost decades) long period of brutal austerity, with dismal productivity numbers. It would be highly surprising if there wasn’t at least a small effect‬.

    ReplyDelete
  23. Your comment on child poverty confuses me. Children, like the retired, have 0 market income. The only way to get their poverty rates down is to increase transfer payments to them.

    For a long time, it has been difficult politically to transfer income to children whose parents have 0 market income. But since the Biden child benefits plan does start to transfer to these children, poverty is reduced. Makes sense, no?


    And as for the 1970s, I think the argument that it was due to the oil price shock is getting more and more popular. Meanwhile today, we are completely energy independent

    ReplyDelete
    Replies
    1. Yes, the political madness that led to an oil embargo was an economically exogenous event designed to cause economic harm. Unemployment may have been very low at that time just before the embargo, leading to stagflation, but what it points to is that economics can't predict these kinds of events well that have economic effects. Ironic.

      Delete
    2. Not to speak for John, but I think he was just poking fun at the idea the enhanced child tax credit in the latest stimulus bill is going to cut childhood poverty in half. That is either blatantly false, or highly misleading.

      If we could actually cut childhood poverty in half for $12B (not sure where John got $4B, but the argument is the same either way), there's not a sole in Washington on either side of the aisle who wouldn't vote to make the credit permanent.

      To be fair Mason didn't come up with the 50% claim he's just repeating it, but it's absolutely preposterous to anyone with even the slightest notion of federal budgeting. Apparently even smart folks like Mason can fall for fake news at times.

      Delete
  24. It is shocking that we are not discussing what is (to me) the very obvious reason why inflation is not rising the way we expect. This looks to everyone like a free lunch. Government can spend to infinity without consequence.

    The massive factor that would seem to be driving all this is demographics. More specifically, all the big savings exporting countries, from China to Korea to Japan to Germany all have very low births and formation and sharply aging populations. What this means is that while they still have very high economic productivity, they are consuming at far below the level that they 'should' be. Those age 45-75 or so are in their peak savings years while family formation, which would drive consumption, are way down.

    Let's take the example of South Korea. The latest fertility numbers from the most recent quarter are 0.75 births per woman, only 1/3 of replacement. At this rate, each cohort would be 1/3 the size of the one before, 1/10 in two generations. Other saving countries are less extreme but the declining population situation extends across almost all the countries that are sending their savings. These countries all have inverted population pyramids, which for the time being means huge savings and much less spending.

    But this also means that the present situation of low inflation is not sustainable. As the workforces in these countries retires and are replaced by much smaller cohorts, the capacity to save must simply be much, much less.

    These much smaller cohorts of savers will not be able to absorb all these bonds at almost any price and there must be a currency crisis.

    ReplyDelete
  25. It is shocking that we are not discussing what is (to me) the very obvious reason why inflation is not rising the way we expect. This looks to everyone like a free lunch. Government can spend to infinity without consequence.

    The massive factor that would seem to be driving all this is demographics. More specifically, all the big savings exporting countries, from China to Korea to Japan to Germany all have very low births and formation and sharply aging populations. What this means is that while they still have very high economic productivity, they are consuming at far below the level that they 'should' be. Those age 45-75 or so are in their peak savings years while family formation, which would drive consumption, are way down.

    Let's take the example of South Korea. The latest fertility numbers from the most recent quarter are 0.75 births per woman, only 1/3 of replacement. At this rate, each cohort would be 1/3 the size of the one before, 1/10 in two generations. Other saving countries are less extreme but the declining population situation extends across almost all the countries that are sending their savings. These countries all have inverted population pyramids, which for the time being means huge savings and much less spending.

    But this also means that the present situation of low inflation is not sustainable. As the workforces in these countries retires and are replaced by much smaller cohorts, the capacity to save must simply be much, much less.

    These much smaller cohorts of savers will not be able to absorb all these bonds at almost any price and there must be a currency crisis.

    ReplyDelete
  26. Macroeconomics ― still dead after 80+ years
    Comment on Mason/Cochrane on ‘The American Rescue Plan as Economic Theory’

    How can you know that both Mason's and Cochrane's macroeconomics is proto-scientific garbage? Search for the term profit and you will come up with nothing. So, both economists are doing economics without ever mentioning the foundational concept of economics. That is like doing physics without ever mentioning the concept of energy.

    For this reason alone one can forget the whole discussion. Keynes messed up macroeconomics 80+ years ago because he was too stupid for elementary algebra.#1, #2 But economists have not realized anything to this very day.

    The 3-sector macroeconomic Profit Law Q≡(G−T)+(I−S)+Yd implies Public Deficit = Private Profit. Therefore, the current policy of massive deficit-spending/money-creation will result in a profit explosion (the other factors taken out of the picture for the moment).

    What unfolds before our eyes is that the Oligarchy pulls off the biggest redistribution of income/wealth in recent history. Deficit-spending/money-creation pushes up macroeconomic profit. So, private financial wealth grows in lockstep with public debt. WeThePeople owes the debt and is taxed for the interest payments to the Oligarchy in all eternity. The debt, to be sure, is rolled over and grows permanently. The rest happens beyond the time horizon.

    Mason/Cochrane agree on: ‘what we need now is new textbooks and theories.’ It does not occur to them that we need to get rid, first of all, of scientifically incompetent economists.

    Egmont Kakarot-Handtke

    #1 Macroeconomics: Economists are too stupid for science
    https://axecorg.blogspot.com/2019/04/macroeconomics-economists-are-too.html

    #2 The GDP-death-blow for the economics profession
    https://axecorg.blogspot.com/2020/11/the-gdp-death-blow-for-economics.html

    ReplyDelete
  27. I submit that Reed Hastings did not found Netflix for shits and giggles, and that Ford does not make cars for fun, but because they intended to sell those goods and services to consumers who demanded them.

    As technology and declining birth rates have effected massive levels of deflation (compare the spend required to consume a single film from Blockbuster @ 7 USD, 2000, to unlimited movies per month for 15 USD 2021, and take a look at the age of the population in each year), without purposefully creating inflation, we will have deflation.

    As Jerome Powell noted this week, you can only go out to dinner once. Consumers are fully sated on Soylent Green and watching TV. It is only by producing optional luxuries in greater quantities that supply can now entice any spending - for what do I want for entertainment? My entertainment budget is now spent 90% in my Robinhood account. I don't wake up with a hangover, and I can spend as much or as little as I like on it.

    The old wisdom of economics was that the profession was nessecary because there is scarcity - human desires are unlimited, but resources are limited, thus tradeoffs. I will see no trouble fulfilling my desires by living frugally within my means, and all my millenial and gen-z friends agree.

    Dr Cochrane, when we have the replicator and the holodeck, will you be there insisting that we must run on the hamster wheel several hours per day lest "The Economy" crash?

    Technology is progressing as Keynes predicted. Most jobs are bullshit, or securitization and financialization of bullshit. We're very close to fully automated luxury gay space communism, because most humans don't want luxury cars and private jets. They want the ability to feed themselves and their families and a reasonable amount of leisure time. Now we spend our money on digital goods with no scarcity (Twitch, Youtube, Netflix, OnlyFans), and the claim is made that we're about to blow it all up with inflation.

    Work is for robots. There is no supply constraint, there's a massive demand gap, and it will grow.

    ReplyDelete
  28. Anonymous,

    "Dr Cochrane, when we have the replicator and the holodeck, will you be there insisting that we must run on the hamster wheel several hours per day lest The Economy crash?"

    I like the Star Trek reference. But what isn't shown is the massive amount of energy required to power the replicator and holodeck not to mention the amount of time and human energy required to develop and build such things.

    "The old wisdom of economics was that the profession was necessary because there is scarcity - human desires are unlimited, but resources are limited, thus tradeoffs."

    The old wisdom of economics isn't wrong, it just needs updated for the 21st century.
    The only truly "scarce" resources for every person are time and energy. Everything else is secondary. We each live a fixed lifespan and will never individually have direct access to the full energy output of something like a star. As an example, see:

    https://www.news18.com/news/buzz/gold-mining-in-space-nasas-psyche-spacecraft-to-study-asteroid-worth-10000-quadrillion-2795127.html

    And this asteroid is within our own solar system. The only thing separating us from it is time and energy.

    "Work is for robots. There is no supply constraint, there's a massive demand gap, and it will grow."

    Ah, the old Democratic Party line. 200 years ago Democrats were saying that work is for slaves. Funny how time changes but the motivations stay the same. As long as we are making movie references, try any of the Terminator movies before fully committing to robot slavery.

    ReplyDelete
  29. Fundamentally true. In our forthcoming book, we tried to use the mechanical intuition of the functioning of a Bicycle in order to draw distinctions between what one call the place of the Physicists consideration of the functioning of the economy (short term fluctuations and long run-growth) and that of policy. We show indeed why the mainstream model failed to serve as policy experimental lab to guide decision during The Great Recession and the Pandemic Recession. One of the keys failure in which we focused on is the misleading account of the labor market in these class of models, something that you also discuss in this bloc. Our Physicists consideration of the pandemic point out that there are indeed some cyclical patterns in historical account of the recession in the US and policies should instead seek to match with this natural framework as the opposite will lower the speed of the recovery and add further distortions. We indeed pointed out that the place of policy is to speed the pace of the recovery (Bouncing back the cycle), avoiding the jobless growth recovery (which occurred under a misleading use of either fiscal or monetary interventions).

    ReplyDelete
  30. The problem with robots boils down to this - From As Good as It Gets (Jack Nicholson, Helen Hunt):

    Receptionist: "How do you write women so well"
    Melvin Udall (Nicholson): "I think of a man, and I take away reason and accountability"

    I have the same concern about robots:
    1. A robot's ability to reason / make rational decisions is limited by it's programming (see movies 2001, Alien, War Games, Blade Runner, Ex Machine, I-Robot, etc.).

    2. Robots have no legal accountability. So if I design and program an autonomous robot and the robot outlives me, who is held legally culpable if that robot malfunctions and goes on a killing spree?

    ReplyDelete
    Replies
    1. Your estate, followed by whomever inherits it.

      Delete
    2. You are assuming I left a will and / or have heirs.

      I could have just left the robot to go along on it's own without passing down ownership to anyone.

      Delete
  31. Robots and legal culpability:

    https://www.wlns.com/news/tesla-on-autopilot-crashes-into-state-police-patrol-car-in-lansing/

    The article mentions that the occupant of the vehicle was cited for driving with a suspended license, but he wasn't actually driving the vehicle.

    ReplyDelete
  32. On inflation: ""but it also is associated with a long-term increase in productive capacity — one that may eventually close the inflationary gap on its own.""

    Inflation REDUCES investment in productive capacity not increases. Investors move capital from productive investments to unproductive investments in hard assets like land, gold, silver etc and starve the economy of business investment. It is no coincidence that the end of the 1970s coincides with rising inflation and slowing real GNP growth

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  33. I wonder if the current runup in Bitcoin might have anything to do with people fleeing the dollar, or at least hedging. I don't own it (yet) but it no longer seems crazy.

    To this non-economist, adherence to Modern Economic Theory looks like a way to explain away the need to be disciplined in spending and taxation. One could imagine someone inventing Modern Dietary Theory to avoid the hard work of exercise and controlling food intake.

    ReplyDelete
    Replies
    1. Jerry,

      I think it has everything to do with short term interest rates at 0% across a number of countries.

      Delete
  34. As an increasing fraction of all expenditure and demand is targeted at digital goods with a near-zero marginal cost and labor for additional production, it seems plausible that productivity and production becomes increasingly a function of demand, and that, indeed, supply elasticity gets higher and higher. That doesn't mean infinite supply, but it could mean, for example, supply slack equal, to, say, 5000% of current GDP, if only five percent of demand is directed towards finite physical goods. For one thing.

    For a second thing, in a globalized labor market, it seems like the global unemployment rate is as much or more significant than the national unemployment rate in forecasting the limits of the available labor pool, at least for exceptionally wealthy nations.

    Subtract the functional scarcity of both digital goods and labor, and you're left with the occasional hiccup of physical commodity extraction limits, with inflation limited to discrete sets of goods, driven by physical and temporary scarcities that can't be substituted (for the time being), making little impact on the services and non-physical goods that constitute the majority of the median American's budget requirements.

    ReplyDelete
  35. This really misses the mark. "Really, that's all it takes? Why not spend $4 billion and eliminate child poverty forever?" - yes, of course you can and should eliminate poverty by giving those families $4B! Poverty is straightforwardly a *lack of cash*, and easy to solve at the bottom of the distribution.

    "Now here we have something genuinely new. Demand creates its own supply" is just a simplified reading of Ch. 3 of the General Theory. Underemployment/underconsumption equilibrium is by no means a new idea, and provides a clear understanding of the financial crisis and ensuing household balance sheet overhang. Do we really believe we hit capacity at any point over the last 12 years?

    "This assertion will surprise survivors of the 1970s, when overheating manifestly did not lead to greater productive capacity, and the inflationary gap did not close on its own" has merit regarding inflation, but I'd point you to a great example in the semiconductor industry on how demand side stimulus can boost supply and capacity: https://employamerica.medium.com/a-brief-history-of-semiconductors-how-the-us-cut-costs-and-lost-the-leading-edge-c21b96707cd2

    ReplyDelete

Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.