Saturday, June 24, 2017

James Buchanan on markets


Peter J. Boettke of George Mason U, in Don’t Be “a jibbering idiot”: Economic Principles and the Properly Trained Economist, quoting James Buchanan:
“A market is not competitive by assumption or by construction,” Buchanan argued. “A market becomes competitive, and competitive rules come to be established as institutions emerge to place limits on individual behavior patterns.”
 
Surely this could be understood as support for regulation of, say, financial markets.

Thursday, June 22, 2017

A game for two players


SpaceX's Mars colony plan: How Elon Musk plans to build a million-person city


Elon Musk wants Mars? Sure, because everything on Earth will be owned by Jeff Bezos:


Amazon is buying Whole Foods Market in a $13.7 billion deal

Wednesday, June 21, 2017

The business cycle, bigger


Patterns of Growth and Decline in Western Civilization
Source: Greg Stevens                (Click Graph to Enlarge)

Recommended reading: Western civilization will completely collapse in the next 200 years.

Take that "200 years" as conceptual. Stevens does not say May 4, 2217 is the critical date. He says "I have no equation to give you that will spit out a number!" But determining the exact moment of our demise is not really the point. The point is that the cyclic pattern is a useful tool for thinking about the world.

Tuesday, June 20, 2017

Doublespeak at Bloomberg


Bloomberg: "While the expansion has been normal, 'output has been held back by woeful productivity growth and an unusual decline in labor-force participation'..."

You can't have it both ways. Either the expansion has been normal, or it has not. If output has been held back, then expansion has not been normal.


See Skipping a stone across recent years

Sunday, June 18, 2017

It's like that


As a follow-up to my two previous posts, I want to clarify one point: There is an imbalance between private and public debt, an excess of private relative to public, and economic growth will not improve until the imbalance is corrected.

My theory doesn't need 2% inflation to prop up the economy. And it certainly doesn't need three or four percent inflation to get better growth. I have no need of that hypothesis.


From Unveiling the Edge of Time by John Gribbin:
Newton himself had been baffled by one feature of the behavior of the planets. One planet on its own, orbiting the Sun, would indeed move in a perfect ellipse in obedience to Kepler's laws, under the influence of the inverse-square law of gravity. But with two or more planets, the extra gravitational forces of the planets acting on each other would tug them out of their Keplerian orbits. Newton feared that these effects might lead to instability, eventually tumbling the planets out of their orbits, and sending them either crashing into the Sun or drifting away into space. He had no scientific answer to the problem but suggested that the hand of God might be required, from time to time, to put the planets back in their proper orbits before such perturbations became too large.

In the mid-1780s, however, Laplace proved that these perturbations are actually self-correcting. Using the example of Jupiter and Saturn, the two largest planets in the Solar System, with the strongest gravitational pulls, he found that although one orbit might contract gradually for many years, in due course it would expand again, producing an oscillation around the pure Keplerian orbit with a period of 929 years. This was one of the foundations of what is possibly the most famous remark ever made by Laplace. When this work on celestial mechanics was published in book form, Napoleon commented to Laplace that he had noticed that there was no mention of God in the book. Laplace replied: "I have no need of that hypothesis."

Saturday, June 17, 2017

That tangent again


There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do see private debt as the problem seem universally to point to faster increase in public debt as the solution. But this solution is not quite right.

Those who call for faster increase in public debt are right in the sense that increasing the public debt reduces the imbalance between public and private debt. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt, making the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but rather to focus on limiting the increase of private debt.

Friday, June 16, 2017

The 2% solution


Neil Irwin is often good. But this post of his from 2014 disturbs me: Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

How did the 2% inflation target become global economic gospel? Irwin answers that question in the first paragraph, using an interesting twist of language:

Sometimes, decisions that shape the world’s economic future are made with great pomp and gain widespread attention. Other times, they are made through a quick, unanimous vote by members of the New Zealand Parliament who were eager to get home for Christmas.

He completes his answer in the second paragraph:

The practice was so successful in making the high inflation of the 1970s and ’80s a thing of the past that all of the world’s most advanced nations have emulated it in one form or another.

So the 2% policy was created by accident, by politicians less interested in governing than in getting home for the holidays. And 2% policy became the standard by dumb luck: It seemed to work, and everyone got on board.

This is not really good analysis on Irwin's part. He dumps on government, and everybody likes that, so he has an "in" at the start. No doubt there is another side to the story, a more respectable, more respectful side, which Irwin does not cover. Not that there's an audience for that side of the story.

Having created the picture of a shoddy foundation for 2% policy, Irwin proceeds to poke and prod us toward thinking that 2% is no good:

Yet even as the idea of a 2 percent target has become the orthodoxy, a worrying possibility is becoming clear: What if it’s wrong? What if it is one of the reasons that the global economy has been locked in five years of slow growth?

Note that his attack on 2% policy is based solely on "what if".

And again:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

What if they had set a higher target.

And again:

“Probably in the abstract had they settled on a somewhat bigger number, that would have been a better choice,” Mr. Blinder said.

That's "what if" in economist-speak.


By now I've criticized Neil Irwin's attack on 2% policy as baseless, and criticized his presentation of the higher-target argument as empty. So maybe you are thinking that I support the 2% policy. I don't. I'm not defending 2%. I'm criticizing Irwin's analysis.

For the record, I don't support 2% inflation. I support zero inflation. But not now, and not as a solution to anything.

Inflation is the economy's way of telling us that it has a problem: Inflation is the economy's way of fixing the problem. When we figure out what the problem is, and fix it, inflation goes away. That's why I favor zero inflation. Because it will be a sign that we fixed the problem.

Now you're mouthing the words "printing money causes inflation" and you think that I think that printing less money will get us to zero inflation. That's not it. Not even close. I did say "When we figure out what the problem is", remember?

To tie off this tangent, let me say what I think the problem is. We use money for money. And we use credit for money. But sometimes we use more money and less credit, and sometimes we use less money and more credit. And by "sometimes" I don't mean Tuesday versus Saturday. I mean, for example, the 1950s and '60s versus the 1990s and 2000s and since. The problem that our economy has is that we use too much credit for money, and not enough money for money. There is an imbalance between money and credit, an excess of credit use, an excess of debt.

There is an excess of private sector debt. This creates problems, in response to which public debt has increased. Almost everyone sees and objects to the increase in public debt. Few see and object to the high level of private debt that created the problems and caused the public debt to grow. Those who do point to private debt as the problem seem universally to point to faster increase in public debt as the solution. But that solution is not quite right.

There is an imbalance between money and credit. There is much credit, relative to money. If we say private debt is a measure of credit, and public debt is a measure of money, then there is too much private debt relative to public debt. This is the imbalance, the monetary imbalance that creates our economic troubles.

Those who call for greater increase in public debt are right in the sense that increasing the public debt reduces the monetary imbalance. But the analysis must not stop there. For in our economy, increases in the public debt lead to greater increases in private debt. This makes the imbalance worse. So the solution, as I see it, is not to focus on increasing the public debt, but to focus on limiting the increase of private debt.

That's not really as bad as it sounds, for we can limit the increase of private debt easily, by encouraging faster repayment of that debt. Policy-makers think credit is good for growth, and they make lots of policies that encourage the use of credit. As a result, our use of credit has increased. But policy-makers have not also created policies that encourage the repayment of debt. So our accelerated use of credit makes private debt grow at an accelerated rate, and no policy does anything to reduce the growth of private debt. This is where policy must be corrected.

So you can see that the optimum rate of inflation is not my main focus. Maybe you can also see that in my view, the 2% inflation target is most definitely not "one of the reasons that the global economy has been locked in five years of slow growth". And that a higher inflation target will not solve the problem.


I'm criticizing Irwin's analysis.

The argument about whether we should double the target inflation rate from 2% to 4% is an argument between two factions unaware that the problem lies elsewhere. Neil Irwin refers to the doubling as setting the target rate "a bit higher", and he quotes Alan Blinder calling 4 "somewhat bigger" than 2. But these misrepresentations do not disprove that 4 is twice as much as 2.

Irwin quotes Laurence Ball saying “Any adverse effects on the economy of having 4 percent rather than 2 percent inflation are trivial compared to the effects of having a horrible recession like we’ve been experiencing.”

Trivial? To whom? To the 99%, yes. To the 1%, no. To the 1%, seeing the value of their money halved in a generation must be no trivial matter. It's hard to sympathize with the 1%, I know. Still, they have the money, and the power that goes with it. So if you want to fix the economy, you'll have to do it in a way they can live with. Doubling the rate of inflation is not it.

Thursday, June 15, 2017

Forder & Friedman v Irwin, RE: 3 to 4% inflation is hardly memorable


Neil Irwin:

...inflation also hovered in the range of 3 to 4 percent through the mid-1980s, hardly remembered as an economic nightmare.


James Forder:

The question [Samuelson and Solow] were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.




Milton Friedman:

it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200AD to 5000... -- in other words a rate of between 3 and 4 percent per annum compound."

Wednesday, June 14, 2017

A Moving Target


According to Neil Irwin, Paul Volcker (Fed chairman from 1979 to 1987) liked the idea of zero inflation:

One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker, the former Fed chairman.

Irwin says New Zealand in 1989 was "the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action." By the end of that paragraph, though, Irwin drops the zero:

A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.

Then, after noting more recent events, Irwin writes:

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession...

So zero, and then zero-to-2%, and then 2%, and now 3-to-4%.