Sunday, June 25, 2017

James Buchanan on general equilibrium

James Buchanan, quoted by Peter J. Boettke in Don’t Be “a jibbering idiot”: Economic Principles and the Properly Trained Economist:
A solution to a general-equilibrium set of equations is not predetermined by exogenously-determined rules. A general solution, if there is one, emerges as a result of a whole network of evolving exchanges, bargains, trades, side payments, agreements, contracts which, finally at some point, ceases to renew itself. At each stage in this evolution towards solution, there are gains to be made, there are exchanges possible, and this being true, the direction of movement is modified”.

Sounds like an asymptotic approach to perfection. The "gains" get smaller and smaller as progress is made, until finally the gains add nothing at all. At that point economic nirvana is reached, general equilibrium, and the economy "ceases to renew itself."

In other words, change comes to an end. Yeah, I don't buy that at all. Seems to me the most significant words in the Buchanan quote are "if there is one".

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%.

Monday, June 12, 2017

Maybe more links will solve the problem

I thought it was a mistake: three links to stuff about the insufficiency of 2% inflation:

Not a mistake. Apparently, Thoma likes what DeLong and Kocherlakota have to say.

The first link -- Rethink 2% -- is a copy of a letter to the Fed, signed by Kocherlakota and DeLong and Mark Thoma and a bunch of other economists with lots of name recognition. The letter opens with an uninspiring account of our economic troubles:

The end of this year will mark ten years since the beginning of the Great Recession. This recession and the slow recovery that followed was extraordinarily damaging to the livelihoods and financial security of tens of millions of American households. Accordingly, it should provoke a serious reappraisal of the key parameters governing macroeconomic policy.

One of these key parameters is the rate of inflation targeted by the Federal Reserve...

They open with the ten-year complaint? Why would anyone read on, unless to criticize it in a blog post? (Note, for example, that "This recession and the slow recovery" are two things, not one thing; so maybe the letter should say This recession and the slow recovery were damaging rather than "was" damaging. Where is Paul Romer when you need him?) The second paragraph continues:

In years past, a 2 percent inflation target seemed to give ample leverage with which the Fed could lower real interest rates. But given the evidence that the equilibrium interest rate had fallen substantially even prior to the financial crisis, and that the Fed’s short-term policy rate remained at zero for seven years without sparking any large acceleration of aggregate demand growth, a reassessment of this target seems warranted...

So their concern is that two percent no longer provides enough room for rates to fall, should the need arise. And that the "equilibrium" rate has fallen, and that two percent inflation has not solved the problem.

The second paragraph concludes with a call for "moderately higher" inflation.

My problem with the views expressed in the letter is that inflation is not a solution to economic problems. Higher inflation may change the shape of the problem, from one acceptable to the 1% to one acceptable to the 99%, but it does not solve the problem.

You might say that a problem 99% of the people can live with is better than a problem 1% of the people can live with. Okay, but it's still a problem: It's not a solution. Anyway, the 1% of the people have 99% of the money, so they can put things back in their favor easily. We'll get higher inflation for a while, and then we won't, and the problem will remain.

Note that the letter considers it a "given" that the equilibrium rate has fallen. This is unacceptable. According to the letter, the fall in the equilibrium rate appears to be an integral part of the problem. If that's the case, you don't accept it as a "given" and turn to moderately higher inflation as a coping mechanism. No. You investigate the fall in the equilibrium rate. You look at its causes rather than its consequences. And then you explore solutions that might reverse the causes of the fall of that rate.

And that's just for starters. You have to trace the problem to its origin. It is not enough to find the proximate cause of the problem. It is never enough to find the proximate cause.

Mark Thoma's second link is The Fed Needs a Better Inflation Target by former Fed bank president Narayana Kocherlakota.

Kocherlakota opens with a reference to the "Rethink 2%" letter:

Today, a group of economists published a letter urging the U.S. Federal Reserve to consider a monumental change in policy: raising its target for inflation above the current 2 percent.

I signed the letter. Here's why...
His explanation sounds very much like the opening of the letter itself, with its concern about having room for interest rates to fall:

The inflation target helps define how much stimulus the Fed can deliver when it lowers interest rates to zero...

Same page. But Kocherlakota spends the rest of the paragraph explaining his thinking, which is the worst thing a writer can do. He does get in a couple of decent hyphenated terms, but explanations are always dreary. And then Kocherlakota ends the paragraph by explaining that three percent is "a full percentage point" more than two percent. Reminds me of the "six is greater than one" TV commercial.

Kocherlakota writes:

The issue is all the more important because periods of zero nominal rates are likely to be more frequent.

More frequent than in the past.

Why? Because of "a lowering of the 'natural' interest rate consistent with full employment and stable inflation". You know:

the equilibrium interest rate had fallen substantially even prior to the financial crisis
The "given". Again.

So, the same story from two sources. But prob'ly not two sources. Prob'ly one source with two outlets, to make it seem like many people had the same thought independently.

Anyway, Kocherlakota says that the fall of the equilibrium rate

might require the Fed to be at the zero lower bound about 30 percent to 40 percent of the time.

So don't you think we might want to figure out what caused the equilibrium rate to fall, and reverse the causation, and get that rate back up again? But no: Like the letter, Kocherlakota says we should cope with the problem by raising the inflation target.

Kocherlakota again:

Of course, there's also a case against raising the inflation target. That’s why the more important part of the letter is its call for “a diverse and representative commission” to re-examine the monetary policy framework -- a much more open and transparent approach than the Fed usually takes. When the policy-making Federal Open Market Committee (of which I was a member) chose the 2 percent inflation target in January 2012, its deliberations were completely hidden from the public. As a result, the target has little buy-in from the public and Congress.

Bullshit. The 2% target has "little buy-in" because it didn't work.

Mark Thoma's third link is Why the Fed Should Rethink Its 2%/Year No-Lookback Inflation Target by Brad DeLong.

Oh! I thought it was going to be "same pile, different foot" again; but maybe not. DeLong says his contribution to the discussion was "to set out what the arguments on the other side are—and why we do not find them convincing".

Well, good. I'm not "on the other side", but I don't favor raising the interest rate target as a solution to anything, because it isn't a solution to anything. So, maybe DeLong will address my concerns and educate me. We'll see.

DeLong says he sees four "other side" arguments, all of which are wrong. I'll just look at the first one:

"Even at the zero lower bound," the Fed has other tools, and does not need to raise the inflation target. That argument is wrong, DeLong says, because the other tools have not worked. His evidence is the low employment and low production of the past decade.

Okay, but that doesn't mean that raising the inflation target will solve the problem. I'm willing to admit that a sufficiently high inflation rate would probably boost spending and employment and production. But I'm not willing to admit that the low levels of those things are the problem. Oh, sure, they are a problem for people. But you don't fix the economy by fixing people's problems. You fix the economy by fixing the economy's problems. When the economy is working right, people's problems get fixed more or less automatically.

Since the time of Carter and Volcker and Reagan, many things have been done to the economy to "fix" things. Bringing the inflation rate down was only one of those things. Where is DeLong's call for a reversal of all the other things? Why does he only want to reverse the lowering of the inflation rate?

The impediment then was the same as it is today: Economists and policy-makers look at outcomes and try to improve them. What they need to do is look at outcomes and correctly determine the causes of those outcomes. Then maybe they'll have to look upon those causes as if they were outcomes, and chase down their causes. And when they discover the causes, maybe they'll have to do it again. They have to track the problem to its source.

They don't do that. They didn't do it in the Carter/Volcker/Reagan era, and they're not doing it now. As I said, a higher rate of inflation could boost employment and production without solving the problem that made employment and production go low.

No one is saying the problem is that prices are too low. A higher rate of inflation would fix that problem -- but that isn't the problem.

Sunday, June 11, 2017

The cost of debt and the cost of credit are two different things

The title grabbed me immediately: Capital Controls and the Cost of Debt.

Not capital controls. It's the cost of debt that caught my eye. I still don't know what "capital controls" are. I still don't even know what "capital" is. But the cost of debt, yeah, that one I know. So I clicked the link (it's the loader page for a PDF) and read the first sentence of the abstract:

Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads.

I see now how difficult that sentence is to read. Too long. On the first read, the last three words stuck in my head: "corporate bond spreads."

Interest rates. Spreads are interest rates, differences in interest rates. That's not the cost of debt.

Interest rates are the cost of credit, the cost of borrowing. The cost of debt is something entirely different. The cost of debt is the cost of the whole accumulation of borrowings. And the size of that cost depends primarily on the size of the accumulation. Not on interest rates.

Interest rates affect the cost of the next dollar borrowed. That's entirely different.

For example:

These days, the cost of debt is high and the cost of credit is low. That much, I know.

Thursday, June 8, 2017

I can do simplistic, too

At the New York Times N.Gregory Mankiw offers A Tax Cut Might Be Nice. But Remember the Deficit.

Anyone who reduces the problem to taxes and deficits is a complete ass. Yeah, that means most everybody. But maybe it's not Mankiw; maybe it's his editor. Can't say. So I started reading the article to see what I can say.

Mankiw's first sentence includes this question: "Should we have a tax cut that increases the budget deficit?" And his last sentence is "In this era of alternative facts, it would be far too easy to pass irresponsible tax cuts and hand the bill to future generations." So yes, Mankiw reduces the problem to taxes and deficits. Therefore, Mankiw is an ass.