John Maynard Keynes' central observation was that the economy is a closed loop: your spending is my income and my spending yours, and so forth. If someone chooses, for whatever reason, to spend less, the whole economy suffers by exactly that amount. The economy is big and can tolerate a little of this, but if we all do it at the same time, for example as a consequence of a bank run, we get a recession. Keynes called this "The Paradox of Thrift". Thrift is individually a good policy, but if everybody does it, it's a catastrophe.
Keynes formalized the earlier recognition by JP Morgan and others that a central bank can reduce the impact of these crises of thrift and provided a prescription: If savings are too high and business declining, we know that there's not enough demand in the economy, and inflation is necessarily low. You can stimulate personal and business spending by lowering interest rates--printing money, controlling interbank lending, a variety of mechanisms. If rates are low, people looking to start or grow a business can borrow cheaply, and people looking to invest will look for businesses to invest in rather than put it in something that pays minuscule interest. Similarly, if savings are too low and you fear a bubble which might pop, you can do the reverse: raising rates, withdrawing money, etc. investors will pull back from riskier investments and go with safer interest that's just as profitable.
The best way to do this is always to manipulate rates. Fiddling with the money supply creates inflationary pressure and people are terrified of that.
Nearly all recessions, and all depressions, are crises of
demand. People stop buying because they're afraid of something, and
that decline in demand propagates through the economy. By reacting
quickly and strongly enough, the central bank can prop up demand through a small
recession by cutting rates. But there are some recessions, such as the oil and grain crises of the 1970s, which are supply shortfalls. In these cases, the thing to do is to raise rates. This will lower demand, hopefully to fall in line with the supply. It's a slower process, because the changes in production need to propagate through the economy.
But there's a case where there's no further manipulation possible: if business is still declining and interest rates are already below inflation, further lowering can't work. People (i.e. banks) won't pay for the privilege of lending money. Keynes called this a "Liquidity Trap", or sometimes zero lower bound or "balance sheet recession". But as long as money is available for those low rates, business can still borrow cheaply. And therein lies Keynes most important insight: If banks won't do it, and businesses still want to expand, somebody else needs to step in. In 1907, JP Morgan and a few of his friends were able to do it, but he knew the days where that would be possible were ending. That somebody else can only be government.
It's impractical for government to set itself up as a lending bank for ordinary business, for a lot of reasons, so if government literally wanted to make money available to business, they'd need to go through the banks. But it's the banks that aren't lending, so giving them more money to not lend is unhelpful. (but the bankers themselves love it!) So government needs to go more directly to business and buy their products. Government has a great many needs for products: Roads, teachers, public safety workers and materiel, weapons, etc. Government, with its inherently perfect credit rating, can borrow for cheap and pour money into business. It doesn't matter much if it's only some businesses--those businesses and their employees buy from others and it pretty quickly is spread widely through the economy.
Demand crises, especially liquidity traps, all have a specific cause--a specific thing the banks and well-funded businesses are afraid of. In the case of the subprime crisis, about 10% of the $10T mortgage market was untenable: a shortfall of about $1T. A Keynesian stimulus therefore had to create at least $1T of demand for housing, which means about $3T of total stimulus after multipliers are factored in. The stimulus we got was spectacularly inefficient: most of it went directly to banks (who are still not lending). After multiplers, the three big bills (2008 TARP, 2009 ARRA and the 2010 "deal") and the three rounds of QE put under $1T into the economy and about $3T into banks and big businesses, for a net effect of about a third of what we needed, and a cost to taxpayers of about $1.5T. Many Keynesian economists were complaining about this at the time. (The crisis was actually mostly about leverage: those $10T of mortgages were leveraged over 5:1, which allowed bad mortgages to hide and created huge demand for mortgages, any mortgages, good or bad)
added 2 apr 13
A common misconception is that the money in circulation and the money supply are the same thing. They are not. Same thing with saving and investing. To most ordinary consumers, a savings account was all the investing they were ever likely to do, especially back in the days when such accounts paid interest. Investing actually involves doing something real with the money: building a house, buying new equipment for a business, starting a new business. This is the stuff that grows the economy. Putting money in storage (or investing in low, low government bonds) really isn't. The money that's actually being spent paying for stuff, including investing, is the only money that's in circulation. Parking money in savings really isn't. It's part of the total money supply. Only money in circulation is contributing to inflation. This is why QE and the three stimuli had no discernible impact on inflation. They did have a small effect on demand (very small, relative to the amount of money they cost), and they may have kept us from having deflation
31 March 2013
29 March 2013
Tyrany of the Majority
The one pervading evil of democracy is the tyranny of the majority, or
rather of that party, not always the majority, that succeeds, by force
or fraud, in carrying elections.
--Lord Acton
The rights of the minority should never be subjected to the whim of the majority --Sara and Tegan
Individual rights are not subject to a public vote; a majority has no right to vote away the rights of a minority; the political function of rights is precisely to protect minorities from oppression (and the smallest minority on earth is the individual)
--Ayn Rand
In republics, the great danger is, the majority may not sufficiently respect the rights of the minority.
--James Madison
All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.
--Thomas Jefferson
--Lord Acton
The rights of the minority should never be subjected to the whim of the majority --Sara and Tegan
Individual rights are not subject to a public vote; a majority has no right to vote away the rights of a minority; the political function of rights is precisely to protect minorities from oppression (and the smallest minority on earth is the individual)
--Ayn Rand
In republics, the great danger is, the majority may not sufficiently respect the rights of the minority.
--James Madison
All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.
--Thomas Jefferson
27 March 2013
Redefining Words
Chief Justice Roberts says that it seems like Gay Marriage supporters are trying to redefine the word "marriage". Of course they are. Words affect the way we think about things. Benjamin Whorf argued persuasively that we cannot really think about anything for which we do not have words. We define new words, and redefine old ones, to represent new concepts and ways of thinking all the time. It's how language evolves. The word "gay" is an example. A century ago, it meant something similar to "happy". But about 50 years ago, it became a codeword for homosexual and before very long that use was "outed". No longer does it mean what it meant when it was used to describe "The Gay Nineties".
I think if there was a collection of words which meant, concisely and unpejoratively, gay marriage, hetero marriage and nonspecific marriage, the issue of the moment would be much less controversial. The number of people who are opposed to fully recognized civil unions is much smaller than those that object to redefining of the word. I have some sympathy for that objection. "Hetero marriage" is awkward and will refer to 95% of marriages from here on out. But I think that battle is lost and "marriage" is now redefined as inclusive. Do we really need words that refer to the specific types? Not really. Most uses of the word will remain as they were and in the very rare cases where we need to be more specific for some reason, the awkward version will suffice. I think most people who grew up with the old definitions will be a little startled for the rest of our lives when a man refers to his husband or a woman to her wife. But this surprise will eventually wane, and in a few decades it will be gone entirely.
I think if there was a collection of words which meant, concisely and unpejoratively, gay marriage, hetero marriage and nonspecific marriage, the issue of the moment would be much less controversial. The number of people who are opposed to fully recognized civil unions is much smaller than those that object to redefining of the word. I have some sympathy for that objection. "Hetero marriage" is awkward and will refer to 95% of marriages from here on out. But I think that battle is lost and "marriage" is now redefined as inclusive. Do we really need words that refer to the specific types? Not really. Most uses of the word will remain as they were and in the very rare cases where we need to be more specific for some reason, the awkward version will suffice. I think most people who grew up with the old definitions will be a little startled for the rest of our lives when a man refers to his husband or a woman to her wife. But this surprise will eventually wane, and in a few decades it will be gone entirely.
21 March 2013
An Insurance Company with an Army
Government's role, it seems to me, is to do two things:
#1: to regulate. The goal is to maximize freedom and opportunity. This means keeping markets working smoothly, preventing thieves and fraudsters from stealing from us, preventing psychos and angry folks from hurting us. Markets are capable of powerful things when they're operating properly. For example, insurance companies have more stringent rules and have done more careful studies of things like fire safety than government has, because it's in their interest to do so. Other things being equal, less regulation is better: it gives more opportunities and freedom. But other things are rarely equal. There's an optimal level of regulation in most things and it's rarely zero. it's almost never 100% either. Everything is different and needs its own level.
#2: to serve as a backstop when #1 fails. We need things like armies, fire departments, police departments, etc. All of these things have been tried as private enterprises and failed1, so we now provide them as public services. Public funding of roads and other infrastructure has worked spectacularly well. Private enterprise has always seen opportunities to build thoroughfares, but never very many. There was a lot more private tolling of natural thoroughfares, such as rivers2, than building new thoroughfares. Government has succeeded spectacularly at this, subsidising railroads, building highways, dredging seaports and canals. Building the road is good business, employing thousands, albeit at taxpayer cost. But having the road for everybody to use is even better, generally providing positive ROI after only a year or two and continuing on for decades.
For one reason or other, sometimes the free market falls into a morass of gouging or racing to the bottom, serving only their short term bottom line, against the public interest or even their own long term interest. At the present moment, there are four industries that are the poster child of this failure: Health Care, Banking, Fossil Fuel and Broadcast Media. This last is the most scarey, because it is the major host of the fourth estate. Five companies own over 95% of all mass media3, and one is in open collaboration with a pro-monopoly political movement.
There's a solution. In 1911, Standard Oil dominated the oil industry. Breaking it up into more than 20 pieces was incredibly good for for the little pieces, and for America. They've been allowed to coalesce again, and the gouging and corruption are back. AT&T once owned 90% of the telephone market. Strictly regulating it was incredibly good for it, and for America. These regulations have been lifted and now the gouging and corruption are back. At the start of WWI, there were hundreds of railroads, competing in a race to the bottom, providing barely adequate service at high cost and low profit. During the war they were nationalized, and became vastly more profitable and efficient, and this lasted until changes too big for them to adapt to occurred after WWII. The race to the bottom has returned, and instead of solving the problem, they've been allowed to coalesce.
Basically, there are two ways to win in the market. The good one is to have a better product than your competitors. The bad one is to become big and powerful, so your competitors, including those who have a better product, can't compete. This opens the door for gouging and poor service. There's a third way, which is really just a perversion of the second, which is where a bunch of very similar competitors fight each other for a limited, or very slowly growing market. Nobody has a clear advantage, so it becomes a race to the bottom on price. Quality and service suffer, because attempting to provide better puts you at a price disadvantage.
Once in a while, an enlightened executive will see this happening and figure out how to provide a better product. But that's very rare. Government intervention seems to be the only way.
1A good case can be made that the Roman Empire fell and plunged Europe into a millennium of dark ages because the armies were private. There were other causes too, but Roman armies seeking their own interests, often against those of Rome, were a big part of it.
2A favorite scam was for a band of armed men to offer to guard you through a known dangerous passage, for a fee. If you didn't pay, the same men would appear on your trip as bandits.
3Disney (ABC), NBC/Comcast (GE), NewsCorp (FOX), Viacom/CBS, TimeWarner,. #6 is Clear Channel, which controls over half of radio, but is less than 1/4th the size of #5 TimeWarner. Viacom and CBS are technically separate corporations but a majority of both is owned by the same holding company, Sumner Redstone's "National Amusements"
#1: to regulate. The goal is to maximize freedom and opportunity. This means keeping markets working smoothly, preventing thieves and fraudsters from stealing from us, preventing psychos and angry folks from hurting us. Markets are capable of powerful things when they're operating properly. For example, insurance companies have more stringent rules and have done more careful studies of things like fire safety than government has, because it's in their interest to do so. Other things being equal, less regulation is better: it gives more opportunities and freedom. But other things are rarely equal. There's an optimal level of regulation in most things and it's rarely zero. it's almost never 100% either. Everything is different and needs its own level.
#2: to serve as a backstop when #1 fails. We need things like armies, fire departments, police departments, etc. All of these things have been tried as private enterprises and failed1, so we now provide them as public services. Public funding of roads and other infrastructure has worked spectacularly well. Private enterprise has always seen opportunities to build thoroughfares, but never very many. There was a lot more private tolling of natural thoroughfares, such as rivers2, than building new thoroughfares. Government has succeeded spectacularly at this, subsidising railroads, building highways, dredging seaports and canals. Building the road is good business, employing thousands, albeit at taxpayer cost. But having the road for everybody to use is even better, generally providing positive ROI after only a year or two and continuing on for decades.
For one reason or other, sometimes the free market falls into a morass of gouging or racing to the bottom, serving only their short term bottom line, against the public interest or even their own long term interest. At the present moment, there are four industries that are the poster child of this failure: Health Care, Banking, Fossil Fuel and Broadcast Media. This last is the most scarey, because it is the major host of the fourth estate. Five companies own over 95% of all mass media3, and one is in open collaboration with a pro-monopoly political movement.
There's a solution. In 1911, Standard Oil dominated the oil industry. Breaking it up into more than 20 pieces was incredibly good for for the little pieces, and for America. They've been allowed to coalesce again, and the gouging and corruption are back. AT&T once owned 90% of the telephone market. Strictly regulating it was incredibly good for it, and for America. These regulations have been lifted and now the gouging and corruption are back. At the start of WWI, there were hundreds of railroads, competing in a race to the bottom, providing barely adequate service at high cost and low profit. During the war they were nationalized, and became vastly more profitable and efficient, and this lasted until changes too big for them to adapt to occurred after WWII. The race to the bottom has returned, and instead of solving the problem, they've been allowed to coalesce.
Basically, there are two ways to win in the market. The good one is to have a better product than your competitors. The bad one is to become big and powerful, so your competitors, including those who have a better product, can't compete. This opens the door for gouging and poor service. There's a third way, which is really just a perversion of the second, which is where a bunch of very similar competitors fight each other for a limited, or very slowly growing market. Nobody has a clear advantage, so it becomes a race to the bottom on price. Quality and service suffer, because attempting to provide better puts you at a price disadvantage.
Once in a while, an enlightened executive will see this happening and figure out how to provide a better product. But that's very rare. Government intervention seems to be the only way.
1A good case can be made that the Roman Empire fell and plunged Europe into a millennium of dark ages because the armies were private. There were other causes too, but Roman armies seeking their own interests, often against those of Rome, were a big part of it.
2A favorite scam was for a band of armed men to offer to guard you through a known dangerous passage, for a fee. If you didn't pay, the same men would appear on your trip as bandits.
3Disney (ABC), NBC/Comcast (GE), NewsCorp (FOX), Viacom/CBS, TimeWarner,. #6 is Clear Channel, which controls over half of radio, but is less than 1/4th the size of #5 TimeWarner. Viacom and CBS are technically separate corporations but a majority of both is owned by the same holding company, Sumner Redstone's "National Amusements"
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