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It is time to get angry

Today I catch up on a number of threads that have been in the media in the last week or so. It is all bad. The focus is on Alan Greenspan’s extraordinary intervention into the policy debate declaring the financial sector unable to be effectively regulated. I have a solution for that! But as I read the data trends every day and listen to the politicians outlining their legislative ambitions I realise that there have not been many lessons learned at all. The neo-liberals are back in charge – unshamed – when they should have been driven out of every town in every land. Their leading lights are coming out of their rat holes and are once again lecturing us on how self-regulated markets are best and how we have to tolerate the occasional crisis as part of the wealth maximisation process. It beggars belief how this all is represented as credible policy input. It is time to get angry.

Did the crisis begin in the financial sector or the real economy? Or is this question too simplistic. There has been an interesting tussle going on between the different positions in this debate.

It is fairly easy to consider the crisis started in the financial sector as a result of excessive deregulation, greedy and corrupt behaviour by the largely unproductive financial institutions and overly-ambitious borrowers drunk on credit that had been pushed onto them by the financial engineers.

Once the safe risk tolerances were exceeded on a plethora of “financial products” the house of cards came crashing down and the fear and panic then spread to private spending which turned the financial meltdown into a real crisis (with rising unemployment and plunging GDP growth rates – the worst fall in real output since the end of WW2 in most places).

As an aside, I just love the expression financial product – the sheer audacity of it – a product is something that has value and typically requires artifice. I don’t consider the Zongo Bonds (?) that proliferated during the crisis stand beside a beautifully crafted piece of human craft.

In general, nomenclature is important and the neo-liberals developed a lexicon that purported to legitimise the illegitimate. Language and text is an interest of mine and I might write a blog about that.

Anyway, that is an intuitively appealing representation of what happened and clearly has elements of truth.

However, there are Marxists and the social structure of accumulation school that emphasises that the crisis was not of financial origins but emerged out of contradictions in the production process – that is, in the real economy.

Early in 2009 I wrote this blog – The origins of the economic crisis – which contains elements of both “extremes” in this debate. I won’t repeat the arguments in detail for they are well documented.

The two sides of the debate are integrated in my view by the way in which the rise to dominance of the neo-liberal paradigm and its total capture of the academy and public policy penetrated both the real and financial sectors in various ways.

The neo-liberals operated at all levels of policy – macroeconomic and microeconomic.

They first of all abandoned the Keynesian notions that aggregate demand mattered and could be manipulated by government policy and instead re-instated the supply creates its own demand rhetoric that ruled before the Great Depression.

They elevated inflation as the principle evil that had to be addressed and converted unemployment from being a policy goal (low) into a policy tool (to control inflation). The rise in unemployment in the 1970s that basically persisted in most nations from then on was then massaged in terms of the hocus NAIRU – that full employment was being continuously achieved and the rise in unemployment was the result of a combination of worker choices (to enjoy more leisure) and poor government policy (that allowed people to avoid searching for jobs). At any rate, we no longer had to be concerned about unemployment.

That cleared the slate for so-called “microeconomic reforms” which essentially amounted to cutting expenditures on public sector employment and social programs and dismantling what were claimed to be supply impediments (such as labor regulations, minimum wages, Social Security payments and the like). Privatization and outsourcing accompanied these policy shifts.

All this in the name of increased efficiency. During this period the TEPCOs and their ilk (think Enron etc) were allowed to “self-regulate” and it is clear that more intense regulation (if not nationalisation of TEPCO for example) would have saved a lot of angst and now major calamity. The corporate sector took advantage of this period of deregulation and lied and cheated their way to increased profits without any foresight into the nest eggs that we being laid.

Privatised companies collapsed and were absorbed back into the private sector or the bad bits were taken into the public balance and the good bits used to underpin more profit-seeking and speculation.

Relatively ineffective monetary policy (in terms of regulating demand) was elevated to primacy after the neoliberal assault on the use of fiscal policy, which began in the ’70s, with the rise of monetarism, saw policy makers buy the “budget surplus is good, deficits evil” narrative without criticism.

Politicians seized on the ideas of Milton Friedman to claim that their sole objective should be to control the money supply in order to manage inflation. Although various experiments at controlling the money supply failed dismally in the ’80s, the dominance of monetary policy in mainstream economics was complete. Fiscal policy was demonized as being inflationary and its use eschewed, depriving liberally inclined governments of the tools to advance a more progressive agenda.

The public justifications were all about creating more jobs and reducing poverty, but the reality was different. Since 1975 most nations have failed to create enough jobs to match their willing labor supply.

There has been a dramatic dislocation between facts and theory during this period. Consistently the data shows that the mainstream economics models are incapable of explaining what is going on – good and bad – but still the paradigm survives and remains dominant. When things get a bit sticky – some historical revisionism is engaged in.

Usually this involves the interpretation of bad events in terms of excessive government regulation or poor policy design, while good events are the results are interpreted as the outcomes of vigorous and self-motivated entrepreneurial activity that is continually being held back by pernicious rules and legal requirements created by governments.

Mainstream economists operate in advanced states of denial which they mediate with a exaggerated arrogance and a well developed intolerance for criticism.

As I explained in the blog noted above, the assault on regulation and the attack on workers’ rights brought about a growing gap between labor productivity and real wage growth. The result has been a dramatic redistribution of national income toward capital in most countries.

In the past, real wages grew in line with productivity, ensuring that firms could realize their expected profits via sales. With real wages lagging well behind productivity growth, a new way had to be found to keep workers consuming.

Here a link between the real economy and the financial sector emerged. The deregulation push not only affected the real economy (wages, conditions etc). The neo-liberals lobbied hard to ensure that policy makers also reduced their oversight of the financial sector. The myth of self-regulation leading to efficiency and optimal outcomes for all was generalised.

To keep consumption growing at the same time as the power elites were “stealing” more and more real output via the redistribution mechanism noted above, the financial sector became more sophisticated (which in this context doesn’t connote good or better) and we observed the rise of “financial engineering,” which pushed ever increasing debt onto the household sector.

It was such a lurk. Capitalists found that they could sustain sales and receive an additional bonus in the form of interest payments – while also suppressing real wage growth. Households, enticed by lower interest rates and the relentless marketing strategies of the financial sector, embarked on a credit binge.

The increasing share of real output (income) pocketed by capital became the gambling chips for a rapidly expanding and deregulated financial sector. Governments claimed this would create wealth for all. And for a while, nominal wealth did grow—though its distribution did not become fairer. However, greed got the better of the bankers, as they pushed increasingly riskier debt onto people who were clearly susceptible to default. This was the origin of the sub-prime housing crisis of 2007–08.

So you can see in my account of the crisis that there are structural elements that the (Marxists, structuralists, structural Keynesians etc) would find appealing as well as elements that are rooted in the financial sector (which would appeal to Minsky-ites). I think this integration provides a richer understanding of what happened and why it will happen again.

I was thinking about this today after re-reading Alan Greenspan’s article (March 29, 2011) in the Financial Times – Dodd-Frank fails to meet test of our times – which mounts an attack on the (weak) attempts by the current US Administration to regulate the financial markets after years of deregulating them.

I last wrote about Greenspan in this blog (December 2009) – Being shamed and disgraced is not enough. Nothing much has changed.

Greenspan claims that the regulations proposed (which are very modest) will create major distortions in financial markets and claimed that the increasing complexity of the self-regulating financial markets is necessary for robust growth. He clearly has fully understood what has happened over the last few years.

The literature on the link between the financialisation of the economy and the rate of growth (assumed by the mainstream to be highly positive) is not clear. The research is difficult to conduct in a controlled manner (that is, to make sure you are actually modelling the relationship in question) and the causality is likely to be two-way. That is growth stimulates depth in the financial sector.

But three things stand out from the research. First, a vast amount of the growth in the financial sector is unrelated to the real sector. For example, the acceleration of cross-currency speculative activity has not been remotely related to providing secure hedged positions for manufacturers/trading companies to reduce or eliminate exchange exposure. I have seen data suggesting less than 5 per cent of transactions are related to the real economy. So it is hard to imagine that the increased complexity has been good for growth.

Second, much of the increased speculation involved the housing industry which is largely unproductive although I acknowledge that people who have nice houses are likely to be more efficient than those who are forced to live in slums in cardboard boxes. Further, the speculative activity in commodities (hoarding oil, diverting food in fuel) has not been productive.

Third, the historically atypical growth in the financial sector which accompanied the large redistribution of national income over the last 20-30 years has not been associated with an era of high productivity growth or high real GDP growth rates.

Indeed, when the financial sector was more regulated, less complex, and less cross-border, real GDP growth rates were much higher and consistently so. That was the era that maintained full employment prior to the neo-liberal onslaught. The neo-liberal period that has fostered the dramatic growth in the financial sector has been associated with entrenched unemployment, rising household indebtedness, slow real wages growth, slow real GDP growth, and relatively subdued productivity growth.

The growth rates in the 1980s to now have been inferior to those during the 1950s and 1960s. Europe grew in those days!

Greenspan’s claims that the hot shots in the financial sector would leave their firms because of attempts to regulate their pay made me laugh. That would constitute a societal benefit.

But the pressure is on policy makers to avoid taking on the banks and the financial sector generally. The lobbies are powerful and are likely to win major concessions from corrupt and spineless governments.

I also was reading the UK Guardian account (April 1, 2011) – Jobcentres ‘tricking’ people out of benefits to cut costs, says whistleblower – which is like déjà vu to an Australian.

The story relates the way in which the Jobcentre staff (old employment agencies) in Britain are being subtly coerced by government to “trick” unemployed people:

… into breaching the rules so that benefits can be held back … amid growing pressure to meet welfare targets …

There is now a major push on from “big businesses handed contracts to get the long term jobless into work” for the government to “privatise jobcentres so that their firms could work with people who have been jobless for less than a year”.

This all has precedents in Australia when the last conservative government privatised the public employment service to create a “market” for the unemployment services. The Job Network as it is called has been a monumental failure yet it suits the dominant ideological position which constructs mass unemployment as a failure of the individual – who then – of-course, has to be “case managed”.

The neo-liberal era created a new industry not previously seen – the unemployment industry. All these private sector parasites who glean millions of government contracts for “managing case load” emerged and are now a lobby in themselves with the aim being to keep as many people unemployed as they can.

Further, the cutting back of benefits through foul means also occurred here. We called it “breaching” – lovely nomenclature isn’t it – and the most disadvantaged unemployed workers were increasingly penalised by the government for not satisfying work tests which were becoming increasingly onerous.

A major study – Independent Review of Breaches and Penalties in the Social Security System (2002) – among others evaluations, found that many of those “breached” were facing extreme disadvantage. For example, people who were thrown out of their lodgings for not having enough rent then didn’t receive the letter from the government demanding they attend the social security office – by not turning up to the “interview” they were deemed to have been in breach of their obligations and their income support was cut off.

Similarly, those with extreme mental issues – schizophrenics – who missed such interviews because they were episodic on that day (sometimes in hospital) were deemed to be in breach and lost their benefits. Breaching became an industry in itself and all the privatised operators were vehicles (pawns) in the government’s game for which they were rewarded handsomely.

None of them ever complained about government spending being wasteful or excessive. Their only complaints were that income support payments to the disadvantaged were overly generous and discouraged efficient job search.

After a career studying all this stuff you might wonder how I remain stable given my values. I wonder that too!

Anyway, the mean-spirited conservatives in Britain are now going down the same road, and probably are getting advice from those who had trodden that path before over here.

And then I read a report in the Irish Times (April 5, 2011) – Gap between tax take and spending soars to over €7bn – and wondered why anyone would be surprised by that.

That is, after more than two years of austerity which aimed to cut the deficit, the deficit is now soaring but the real economy is failing to recover. While the ridiculous bank bailouts continue to absorb public funds the automatic stabilisers are helping keep the budget in deficit and therefore propping up demand a bit.

While that is not the government’s intention it has to be that way. They could have had a smaller deficit by now (perhaps) by significantly expanding it when the crisis hit and nationalising all the banks (sacking all high paid executives). By committing itself to the austerity path when the real economy was in such bad shape they guaranteed the deficit would rise!

The Irish government is cutting hard where it can but expenditure in social policy departments like Health and Children and Social and Family Affairs has soared.

The thing the neo-liberals haven’t been successful in convincing governments about is the need to exterminate in camps those who are most disadvantaged by the crisis. At present, they are still fed! As a result the automatic stabilisers drive increased welfare payments no matter how hard the government works to avoid that reality.

The same thing will happen in the UK.

You might think I was jesting about the extermination quip. In part I was. But you might like to read this blog (from January 2010) – L’horreur economique – where I discuss the ideas of French writer Vivienne Forrester.

In her 1996 book – L’horreur Economique – she examines the proposition that governments fail to generate enough employment but at the same time promote a backlash against those who are jobless. Forrester says that:

The panaceas of work-experience and re-training often do nothing more than reinforce the fact that there is no real role for the unemployed. They come to realize that there is something worse than being exploited, and that is not even to be exploitable …

The book ventures into the notion that governments (elected by us) have made the unemployment dispensable to ‘capitalist production and profit’ and have instead been content to keep them alive. But soon, why would it not be implausible to declare this growing group of disadvantaged citizens totally irrelevant.

So when the unemployed also become aged – what then?

History tells us that rabid majorities put easily separable minorities onto cattle trucks and take them away for disposal. It is not too far-fetched.

But all this came to a head when I was thinking about the way that the UK economy is heading at present. Over last weekend, I read the UK Guardian article (April 2, 2011) – Ministers admit family debt burden is set to soar.

The article noted that:

Families will be hit by a spiralling debt crisis over the next four years that will see average British households plunge further into the red as the government austerity programme bites, official figures reveal.

The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing …

Economists say the figures show that George Osborne’s drive to slash the public deficit and his predictions on growth are based on assumptions that debt will switch from the government’s books to private households – undermining his claims to be a debt-slashing chancellor.

That is an extraordinary trend.

Go back to our sectoral balances. For a detailed derivation for those who are unclear please read the answer to Question 5 in the recent blog – Saturday Quiz – March 26, 2011 – answers and discussion.

I can write the balances as the private domestic surplus (S – I) equals the government deficit (G – T) plus the current account surplus (X – M).

The sectoral balances is another way of viewing the national accounts and provides empirical evidence for the influence of fiscal policy over private sector indebtedness. So the accounting identity drawn from the national accounts for the three sectoral balances is:

(S – I) = (G – T) + (X – M)

The Equation says that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

Now if the government is intent on running a surplus (G – T < 0) and the nation faces long-term external deficits (X – M < 0) then there must be a private domestic deficit. The national income adjustments will ensure that is the case. All these balances are sensitive to income changes (external via import sensitity; budget via the automatic stabilisers; and private domestic balance via saving (mostly)). A private domestic deficit means that the private sector overall is increasing its level of indebtedness period after period (as long as they remain in deficit). Under these conditions, the private and public sectors cannot simultaneously reduce their debt levels. It is impossible. Claims by neo-liberals that deleveraging can occur in both sectors if the government runs an austerity campaign and pushes the budget into surplus are false. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process and that is unsustainable. Eventually, a debt-originated crisis will arise and the real economy will then suffer from the loss of confidence and lack of credit availability - exactly in the same way as occurred in 2007. Greenspan's longing for the days prior to 2007 where Wall Street ran riot and the greed and dishonesty transferred massive volumes of real income to the financial sector require the private domestic sector to take on ever increasing levels of debt. Unless we regulate now and render the financial sector considerably smaller than it currently is then we will be defining the path to the next crisis which will make the current crisis appear moderate. Greenspan claims that:

The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate. We will almost certainly end up with a number of regulatory inconsistencies whose consequences cannot be readily anticipated.

My response is that most of this complexity is unproductive and not advancing public purpose at all. It might be too complex. Certainly, it became too complex for the boffins in the investment banks to manage – they didn’t have a clue in the end what risk exposures they faced. Well, as it turns out they didn’t really face much exposure themselves because they went cap in hand to the government and accepting bailout money.

Yesterday the US Federal Reserve were forced by the courts to finally release which banks etc received benefits from the US government. It is a fancy list of the high flyers who said they could self-regulate and produce optimal outcomes. They were supported by the same economists who now are claiming deficits are bad and the government should engage in fiscal austerity. Hypocrites, liars and parasites – the lot of them.

I would regulate the complexity away. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

But what is extraordinary, what began as a problem of unsustainable private debt growth, driven by an out-of-control financial sector aided and abetted by government deregulation, has now mysteriously morphed into an alleged sovereign debt crisis.

We are all stupid if we believe this. It is time to march in the streets and impose some sense of perspective on our self-serving polities.

I note the demonstrations in London at the weekend were aggressive and targetted. More are needed in all financial and legislative capitals.

Conclusion

In all this mayhem, I laughed (a sort of black laugh) when I read the UK Guardian article (April , 2011) – Private benefactors won’t be enough to balance the books – which tells us that:

Local councils trying to sell public libraries and museums to reduce their deficits may not be allowed to do so under the Literary and Scientific Institutions Act of 1854. That act was aimed at encouraging rich benefactors to make land over to the community; local authorities are apparently discovering that if such uses are discontinued, the law is that the land should revert to the original owners.

The point is that the neo-liberals get ahead of themselves – so blinded are they by their ideological pursuits. The recent crisis is a dramatic example of that. The fact they cannot privatise the libraries in the UK is a smaller example. We might laugh about the latter while crying about the former.

That is enough for today!

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    This Post Has 52 Comments
    1. “about is the need to exterminate in camps those who are most disadvantaged by the crisis.”

      No need to take an acute stance when chronic does the job for you. The disadvantaged form in camps of their own making and tend to die young.

    2. Greenspan et al, lame stream ‘economists’ that they are seem unaware of the inherent contradiction in their position;

      regulators have incomplete information and can’t be perfectly rational

      consumers have complete omniscient information and are perfectly ‘rational’, that is completely self-interested.

    3. There’s one of these creepy ’employment’ agencies here in scotland,whose totally un-selfconscious chosen name: triage, echoes Forrester’s fears.

      According to wikipedia, the triage process decides:

      Those who are likely to live, regardless of what care they receive;
      Those who are likely to die, regardless of what care they receive;
      Those for whom immediate care might make a positive difference in outcome.

    4. That’s a really good way to look at it Will, and highlights how dumb@ss Ricardian Equivalence really is. The ‘pros’, who have access to copious amounts of information, and who are supposed to have in-depth knowledge of their subject matter, don’t have a clue…..and yet the ‘average consumer’ is somehow supposed to have divine, Nostradamus-like foresight. Brilliant.

    5. Isn’t a massive factor in all of this that immediately after WWII there was real work to be done rebuilding the developed world. Once everyone has a house, a car, a refrigerator etc then perpetual economic growth becomes questionable. Greenspan said that all the oppertunities for economic growth in the developed world are now in the form of financialization and perhaps he has a point. The issue seems to me to be whether we want the economic growth. Is the point of it to ensure that we can out-buy the developing world because the economic growth strengthens the developed world currencies? Is that a justifiable aim? If economic growth in the developed world entails financialization and financialization entails impoverishment of the least well off developed world citizens and the only point of it all is to gain an advantage over the developing world- then I’ve got a “not in my name” attitude towards it.

    6. “Anger” seems the most valid response to those who, for many reasons, ever accepted the regulatory contradictions of our time. Anger isn’t excusable fir those who never ‘bought in’. As people de-couple from hysteria of ‘post-capitalism’ anger is needed to cope emotionally, and allow intellectual re-integration with common sense history.
      There are no Magic Beans; a service sector only economy is a poor one, self regulation is an invitation to theft, markets were originally established by, and require participation of, a sovereign power. Baysean or conditional models never changed any of that. For a historical understanding of the emotional impact of the mass delusion, look to the developement of the American West under the notion “water follows the plow” and the ghost towns it created.

    7. The growth rates in the 1980s to now have been inferior to those during the 1950s and 1960s.

      What do you make of Scott Sumner’s claim that although growth has been lower since the 80s in the developed world,
      those countries that implemented neo-liberal reforms (US, UK, HK, Chile) fared better in terms of growth of GDP per capita
      than those that didn’t?

    8. Can someone help me with this:
      Bill writes (S – I) = (G – T) + (X – M)
      It can be rewritten I=S+(T-G)+(M-X)
      Does this mean investment increases if the govt runs a surplus (T>G)?

    9. Markg My understanding is:

      There may be a short term building up of stocks. This is more of an adjustment I think that is classified as ‘Investment’ in the current period.

      Now think what would happen in real life in the subsequent periods.
      Are firms going to carry on investing when they are selling fewer widgets?
      Or will they just reduce their output (and employees) to match the lower demand for those widgets.
      It also deppends on whether consumers are willing to decrease their savings (increase private debt) to maintain the previous level of consumption and whether net exports are increasing.

    10. Mammoth “What do you make of Scott Sumner’s claim that although growth has been lower since the 80s in the developed world,
      those countries that implemented neo-liberal reforms (US, UK, HK, Chile) fared better in terms of growth of GDP per capita
      than those that didn’t?”

      – I think it is a fact rather than a claim but is GDP per capita what matters and are the gains purely parasitic off of the rest of the world? Ireland and Iceland were the premier examples of neoliberal reform -essentially ponzi schemes producing nothing for the rest of the world but providing a haven for asset price inflation so as to attract capital flows so as to enable Irish and Icelandic citizens to live off the labor and resources of the rest of the world. The UK and USA have been playing the same game for longer but in a less concentrated fashion. It may be a scam that works but if all other countries were to have joined in fully then I’m sure it would not have worked. It was just a zero-sum transferal of wealth from the rest of the world to the neoliberal reformed world. All ponzi schemes unravel in the end.

    11. What do you make of Scott Sumner’s claim that although growth has been lower since the 80s in the developed world,
      those countries that implemented neo-liberal reforms (US, UK, HK, Chile) fared better in terms of growth of GDP per capita
      than those that didn’t?

      Scott Sumner obviously doesn’t travel much if he equated GDP per capita (quantity of output) to standard of living (quality of life). Look at the distribution.

    12. Tom Hickey “Scott Sumner obviously doesn’t travel much if he equated GDP per capita (quantity of output) to standard of living (quality of life). Look at the distribution.”

      -In the case of the USA, the median wage failed to rise after the 1970s when adjusted for inflation BUT in Ireland neoliberalism did allow essentially all Irish people to live the high life. I think it is a big mistake to try and pretend that an entire nation can not get rich on the back of asset bubbles. The key point is that asset bubbles make the world as a whole poorer.

    13. I agree that GDP per capita might not reflect perfectly the standard of living of the whole population, but it is quite clear that despite the distributional aspects in general a higher GDP per capita is a sign of a better standard of living. Why wouldn’t it be the case about those countries Scott Sumner’s compares?

      I do think it can be true that those countries did better in improving the standard of living, but I also think it might just be an international race to the bottom where everybody ends up worse off than they could be, but the neo-liberal countries less so.

      There is also the question about the (false?) dichotomy between neo-liberal and welfare states, with Denmark given as an example of being both an open free market economy and a welfare state.

    14. Bill,

      Please explain why it is “impossible” for the private sector to reduce debt without running a sector surplus. Isn’t private debt reduction a horizontal transaction?

    15. markg: “Bill writes (S – I) = (G – T) + (X – M)
      It can be rewritten I=S+(T-G)+(M-X)
      Does this mean investment increases if the govt runs a surplus (T>G)?”

      Remember that the equation holds for a certain period of time, it says nothing about how an action at one time affects other actions in the future. It may tell us something about how things change together. For instance, if everything is the same between one time period and the next except T and I, then if T has increased, so has I, by the same amount. It still does not tell us why that has happened.

    16. Time to get angry – I think there are already a large number of people – probably time for revolt!!!

      It has been reported that the PM said that there are 2m people oustide of those recognised as being unemployed who could work but her only solution is to make it harder for them to get what ever benefits they get, rather than provide them with work. Can’t she do the maths – 195,000 job vacanies does go far for 2m+ plus unemployed people.

      And then there are the business groups like the Qld Chamber of Commerce saying that businesses can’t find workers because the dole is too high. The dole – based on a 38 hr week – works out at $6.40 per hour, but the minimum wage is $15/hr. So there must be some other reason – ie the business don’t want those partilcuar workers for another reason, for example farmers want fit and strong workers to pick fruit because of the physical nature of the work.

      I have noticed in the coverage of the anti-carbon tax rallies that there appears to be a portion who are opposed because it is a tax that will reduce their income and that they are already stretched financially, not because they don’t believe in global warming.

    17. You should read “Broke, USA: From Pawnshops to Poverty, Inc. – How the Working Poor Became Big Business”. It appears that the corporations in America aren’t satisfied with just screwing the people out of a reasonably wage; exploiting poor people is now big business for pay-day lenders, rent-to-own stores, pawnshops, and instant tax refund companies like Jackson Hewitt. The big banks look like angels compared to these guys.

    18. Prior to NeoLiberalism anyone that wanted a job could get a job. With Ne0-liberalism many millions of people are unable to find work and many that do have work are struggling to make ends meet.

      The share of income going to profits is increasing at a much greater rate than that going to wages.

      Bill has some nice little graphs floating around this site demonstrating these facts.

      Scot Sumners research merely demonstrates how unfairly income has been distributed via Neo-liberal reforms.

    19. “Isn’t a massive factor in all of this that immediately after WWII there was real work to be done rebuilding the developed world. Once everyone has a house, a car, a refrigerator etc then perpetual economic growth becomes questionable”

      ??

      There isn’t a limit to technological potential.

    20. scott sumner also suffers from what almost all economists suffer from, the assumption that real aggregate demand is unlimited when it is not.

    21. I’d rather do sectoral balances with what I see in the real world.

      savings of the rich = dissavings of the gov’t plus dissavings of the lower and middle class

    22. Max:

      I agree, it’s not impossible, just so improbable that it may as well be. The reason is that when the public sector is in deficit (due to gov surplus and/or trade deficits) there are basically two likely options: growth powered by private debt, or recession. Recessions cause government surpluses to collapse and turn into deficits.

      The third and unlikely option is that the private sector can de-leverage as well as grow is if one group of private agents started spending more than the other groups cut back to pay off private debt. So then basically an increase in the velocity of money that more than offsets the decrease in quantity.

      I think this is due to the fact that although GDP is a flow, and private debt is a stock, a reduction in debt stocks requires a reduction in GDP flow.

      That’s my badly worded take on it. Is it anywhere near correct, Bill?

    23. Dear Grigory Graborenko (at 2011/04/07 at 15:17) and Max (at 2011/04/07 at 8:14)

      It is impossible for the private domestic sector to be saving overall (a necessary condition to reduce its overall level of indebtedness) if the external sector is in deficit and the government is in surplus. It would violate the National Accounts.

      If both the private domestic and government sectors tried to reduce their net positions and push into surplus, while growth was being additionally drained by the external deficit, then the negative income adjustments would push one or both of them into deficit (depending on what was being cut and their starting positions). The private domestic sector would face reduced savings while the government sector would face lost tax revenue and increasing welfare payments.

      So it is impossible for them both to be paying back debt (in net terms) at the same time with an external deficit.

      best wishes
      bill

    24. MamMoTh, “There is also the question about the (false?) dichotomy between neo-liberal and welfare states, with Denmark given as an example of being both an open free market economy and a welfare state.”

      -The vision of the UK New Labour political movement was exactly that. Have the City of London doing its unbridled global vampire squid thing and then disperse the proceeds around the country via millions of new public sector service jobs aka Byzantine bureaucracy.

    25. Fed Up “I’d rather do sectoral balances with what I see in the real world. savings of the rich = dissavings of the gov’t plus dissavings of the lower and middle class”

      -I total agree with that. If the gov dissaves, then that seems to quickly go to the savings of the rich and actually empowers the rich to enforce even more extreme dissavings of the lower and middle class. That’s why I can’t see any way around the need to use an asset tax to re-balance the economy away from having ballooning savings of the rich.

    26. Maybe I’m slow, but I still don’t see it. Why is it necessary for the private sector as a whole to net save in order to reduce it’s indebtedness? That may make sense if the private sector is restricted to paying off debt out of income, but it isn’t. It can liquidate assets. It seems that this is a “flow” argument that ignores pre-existing “stocks”.

      I can reduce my mortgage debt by selling my house or running down my existing stock of NFA. Why is it impossible for the sector as a whole to do this? Surely the argument has to take into account initial conditions (stocks of NFA), not simply the sectoral flows within a period. A private sector with significant stocks of NFA built up from previous govt deficits is surely better able to pay down debt than one with little NFA stock. Initial stocks matter, not just the flows within a period. Right? Or am I hopelessly off track?

    27. Divide the private sector into debtors and creditors. Debtors need to save to reduce debt, but this can be balanced by creditor dis-saving. It’s not mathematically required that both debtors and creditors be saving.

    28. “What do you make of Scott Sumner’s claim that although growth has been lower since the 80s in the developed world,
      those countries that implemented neo-liberal reforms (US, UK, HK, Chile) fared better in terms of growth of GDP per capita
      than those that didn’t?”

      So what if you replaced “neo-liberal reforms” with “colonial subjugation by force of arms”? You might get the same result, but the rest of the world would be a worse place for it. In a race to profit at the expense of the rest of the world, the worst *rsehole wins (in the short term).

    29. I can reduce my mortgage debt by selling my house or running down my existing stock of NFA

      Chances are, that with your house worth less than the mortgage due, you have no NFA, only just some gross liquidity.

      A private sector with significant stocks of NFA built up from previous govt deficits is surely better able to pay down debt than one with little NFA stock.

      True, but you’ll also have to look at who owns those NFA by further disaggregating the private sector, until you find the reason for the apparent market imbalances. Division into private households, corporations and foreign governments may be helpful to see where previous (and current) NFA are disappearing down ratholes without much effect on outstanding (gross) debt mounds. And there will always be a gross position witrhin the private sector, so there will always be debt.

      You also have to acknowledge that many book losses are being sat out, instead of being realized, which may explain markets not clearing as you think they should. In that case, say when people stay in their homes, waiting for prices to rise, they will still have an appetite for net saving, which can only be achieved with new deficits.

      What you’d need to satisfy your demand would be to actively redistribute (tax) savings and ‘recycle’ them into indebted parts of the private while hoping this doesn’t effect investment negatively until the private sector as a whole has stopped delevering and starts expanding its books again.

      A blogger called Beowulf, who posts here often too, linked to this long, but very interesting article by William Vickrey at Mosler’s, which goes down that path. He uses the word recycling a lot.

      Hope that was helpful.

    30. should read: will still have an appetite for saving, not net saving. It’s the ‘net’ part that’s obviously missing most of the time :-).

    31. If net debt is defined as “financial liabilities – financial assets”, i.e. net debt = – NFA, then it’s trivially true that reduction of non-gov sector NET debt requires a govt sector deficit. I guess that’s what I was missing?

    32. markg,

      “Does this mean investment increases if the govt runs a surplus (T>G)?”

      This is yes always true…. but only for depraved morons! ;) (I saw your exchange over at economistmom )

      These people are obsessed with “I”. So obsessed that it looks like they believe the answer to your question is always true.

      Prof Wray hits this in a recent post here:

      link_http://neweconomicperspectives.blogspot.com/2011/04/modern-budget-cutting-hooverians-want.html

      Tom Hickey discusses Prof Wray’s post here:

      link_http://mikenormaneconomics.blogspot.com/2011/04/depression-blues-sung-by-randy-wray.html

      From Prof Wray’s post: “When an investment boom collapses—as it did in 2006-2007—GDP growth then falls and the government share of a smaller GDP will rise. Our Hooverians interpret that as “proof” that a rising government share does not help to fight unemployment.” (Think about their stupidity here.)

      So if you look at their equation for ‘I’, it looks like these simpletons believe that in the current situation, one can increase ‘I’ by simply decreasing ‘G’. For them, it is all about ‘I’ as they and theirs financially benefit in an over-sized way when ‘I’ is robust and rising. The greed factor is at work with them here and as usual, this can cloud judgement.

      Unemployment as a policy variable does not even enter into their thinking, they are really depraved souls.

      Keep up the fight Mark! Resp,

    33. You have to ask who’s liabilities? If they are government’s then they count as net to the private sector, if they are bank or corporate liabilities, they only count as gross liabilities to the private sector. But they are still liabilities to someone.

      The position between private and government is always private net financial surplus & government net financial deficit, no matter what private balance sheets say!

      The problem is, the new deficits being ‘spent’ into the private sector by government should be working towards reducing the stock of gross debt owed by, say households, to say banks but they’re not necessarily doing that because they’re not all going to households. So we can have an effect that government’s balance sheet goes further into deficit while private balance sheets do not contract. This process can go on until it, well reverses (…). And it also means that someone is profiting, at least to the extent that numbers in bank accounts count as wealth.

      Maybe one of the more formally trained economists can explain the public / private balance sheet movements during debt repayment more professionally than I can (and correct me, where I’m wrong, of course).

    34. Matt Franko: “So if you look at their equation for ‘I’, it looks like these simpletons believe that in the current situation, one can increase ‘I’ by simply decreasing ‘G’.”

      Interesting that they are not clamoring for increasing taxes. ;)

    35. Thanks Oliver, sorry I missed your earlier comment. No time to reply right now but appreciate your comments, they make a lot of sense. I think there’s a distinction somewhere between reduction of non-gov sector net debt (assuming my definition), which requires a govt deficit, and reduction of gross private sector debt, which doesn’t.

    36. on second thoughts: ‘non-gov sector net debt’ doesn’t make any sense. As I said, the private sector is always in a positive net financial position (= net assets) while government holds the negative (= net liability) position. The private sector’s own gross position can be seen more as an accumulation of a bets over potential future flows. These bets can ultimately only be settled (i.e. paid back) with net assets. Usually though they are rolled over into new bets or they can also be defaulted upon. Maybe this paper by Randall Wray or anything on sectoral balances under mandatory readings here or at Mosler’s will help. But I’ll stop now, because I think m econ vocabulary (and indeed my understanding) may be somewhat imprecise. Better not to pass on my own faulty thinking to others :-).

    37. In view of the exchange between markg and Matt Franko, let me extend my prevous remarks. :)

      For any given time period,

      I=S+(T-G)+(M-X)

      Let us consider two time periods, time0 and time1, and index the variables accordingly. Then we have

      I0 = S0 + (T0 – G0) + (M0 – X0) , and

      I1 = S1 + (T1 – G1) + (M1 – X1) , which yield

      (I1 – I0) = (S1 – S0) + ((T1 – T0) – (G1 – G0)) + ((M1 – M0) – (X1 – X0)) .

      Then, if it happens that S1 = S0, T1 = T0, M1 – M0, and X1 – X0, then

      (I1 – I0) = – (G1 – G0)

      So if we can reduce gov’t spending between the two time periods without affecting the other variables, then the increase in investment will equal the reduction in gov’t spending. (That’s a big if, of course.)

      However, it appears that the people arguing that a reduction in gov’t spending will increase investment are talking about something different, a reduction in gov’t spending as a proportion of GDP, which is brought to you by the letter Y. ;) I. e., G/Y.

      Let’s see what that does to our equations, as we divide both sides by Y0 and Y1.

      I0/Y0 = S0/Y0 + (T0/Y0 – G0/Y0) + (M0/Y0 – X0/Y0) , and

      I1/Y1 = S1/Y1 + (T1/Y1 – G1/Y1) + (M1/Y1 – X1/Y1) , which yield

      (I1/Y1 – I0/Y0) = (S1/Y1 – S0/Y0) + ((T1/Y1 – T0/Y0) – (G1/Y1 – G0/Y0)) + ((M1/Y1 – M0/Y0) – (X1/Y1 – X0/Y0)) .

      Now, if it happens that S1 = S0, T1 = T0, M1 – M0, and X1 – X0, it does not follow that

      (I1/Y1 – I0/Y0) = – (G1/Y1 – G0/Y0)

      Things are much more complicated. As Prof. Wray points out at link_http://neweconomicperspectives.blogspot.com/2011/04/modern-budget-cutting-hooverians-want.html , “By framing their argument in terms of ratios to GDP, the authors provide a misleading characterization of cause and effect.”

    38. Paradigm, I think I agree with you. Private debt being horizontal and net to 0, the private sector as a whole can be able to reduce the level of its internal debt even if it is in deficit (S-I<0) by an internal transfer of previously accumulated NFA. But if the private sector remains in deficit and keeps losing NFAs, it will become increasingly difficult to do it.

    39. Just being a simpleton for a moment.

      Tell me what way around should the identity be shown. I assume you would have (G-T) on the left as the ‘outcome’ but if (G-T) is being used as a tool by the state, (even mistakenly) where does that leave your argument? Even if you say in the long term the outcome (G-T) will be a result of saving and spending decisions in the non-government sector there is an assumption that government policy does not affect those decisions.

      An accounting identity is an accounting identity. I don’t think expressing it one way or another qualifies you as a simpleton because in that case there would be quite a few MMTers defined as such.

    40. Andy,

      Perhaps what I am saying is that trying to “manipulate” an accounting identity is not the correct way to approach policy; or an accounting identity is not a ‘policy tool’ per se.

      We should start with a “vision” first, a vision of robust, full employment outcomes, and then make the accounting work.

      Resp

    41. Figured I’d repost this without the link. Guess it’s late in Australia and Bill won’t moderate ’til tomorrow:

      In response to Paradigm at 0:39:

      on second thoughts: ‘non-gov sector net debt’ doesn’t make any sense. As I said, the private sector is always in a positive net financial position (= net assets) while government holds the negative (= net liability) position. The private sector’s own gross position can be seen more as an accumulation of a bets over potential future flows. These bets can ultimately only be settled (i.e. paid back) with net assets. Usually though they are rolled over into new bets or they can also be defaulted upon. Maybe this paper by Randall Wray or anything on sectoral balances under mandatory readings here or at Mosler’s will help. But I’ll stop now, because I think m econ vocabulary (and indeed my understanding) may be somewhat imprecise. Better not to pass on my own faulty thinking to others.

      Edit: The paper is called Money in Finance and you can find it at Levy (WP 656)

      Edit II: Another great tool for the more visually inclined is the balance sheet visualizer at econviz dot com by occasional blogger HBL

    42. A point that may be obvious, but is worth mentioning, I think. :)

      Suppose that in one time period investment as a proportion of GDP is I0/Y0, and in the next time period it is I1/Y1. Note that if I1/Y1 > I0/Y0, that does not mean that I1>I0. Therefore, increasing investment as a proportion of GDP does not necessarily mean increasing investment. Similarly, decreasing gov’t spending as a proportion of GDP does not necessarily mean decreasing gov’t spending.

      Therefore, increasing the ratio of investment to GDP is a strange policy target, and decreasing the ratio of gov’t spending to GDP is a strange policy means.

    43. stone said: “Fed Up “I’d rather do sectoral balances with what I see in the real world. savings of the rich = dissavings of the gov’t plus dissavings of the lower and middle class”

      -I total agree with that. If the gov dissaves, then that seems to quickly go to the savings of the rich and actually empowers the rich to enforce even more extreme dissavings of the lower and middle class. That’s why I can’t see any way around the need to use an asset tax to re-balance the economy away from having ballooning savings of the rich.”

      I’d rather put more people into retirement (funded with currency printing) to tighten up the labor market, but I’m not totally against something like that.

      The sectoral balances then become:

      savings of the rich plus savings of the lower and middle class = dissavings of the currency printing entity (with all currency and no debt) plus the balanced budget(s) of the federal, state, and local gov’ts.

    44. Paradigm Shift,

      Agree with you on financing deficits with asset sales instead of increase in liabilities and your points on talk of ‘net’.

      However note that there is another complication arising out of revaluations. When you do stock-flow consistent accounting or national accounts, you start with an opening stock of assets and liabilities, and then compile flows and before you compile the closing stocks of assets and liabilities, you calculate revaluation gains/losses.

      So it may happen that some sectors combined may run a deficit yet, indebtedness – depending on how you define – decreases rather than increases.

      This has happened a lot for the United States. Even though there is a current account deficit, the indebtedness of the domestic private sector and the government sector need not increase. So what you call NFL need not increase depending on how big/small the revaluations are.

    45. Oliver

      Are you sure the private sector can’t reduce gross debt levels without a govt deficit? Two private sector parties who are mutually indebted to each other can agree to cancel their debts, thus reducing gross debt levels. No deficit required.

      MamMoTh

      You neatly summarised what I was trying to say. Bill seems to be referring to ‘net debt’ in the sense of ‘net financial liabilities’ in relation to our sub-discussion on private sector debt levels. As you say, horizontal transactions can’t produce changes in private sector net financial liabilities.

      Ramanan

      Now my head really hurts… by revaluation gains/losses, do you mean mark-to-market accounting? I wouldn’t have thought that was stock-flow consistent? Maybe I should read Godfrey & Lavoie..

    46. Are you sure the private sector can’t reduce gross debt levels without a govt deficit? Two private sector parties who are mutually indebted to each other can agree to cancel their debts, thus reducing gross debt levels. No deficit required.

      I’m sure it can, as Ramanan said. The problem for private households is fluctuations in market values. If they sell their assets at below what they payed initially they will realize a loss, which they are understandably reluctant to do. So they end up trying to service their debt with what ever means they have, often at the expense of consumption, thus diminishing income for others to do the same. There is also the case of home values being below total outstanding mortgage debt, in which case I think repossession is sometimes even obligatory. In any case, I think the deficit argument starts with this assumption that it is economically beneficial to keep consumption and privately held real asset allocation as stable as possible. Under those conditions, it takes deficits to pay down debt. The fallacy I guess, is the belief that all three can happen without deficits which ends up making things much worse before they can become better.

      P.S. I may have misunderstood your definition of ‘net debt’ above. I’ll have another read later. Gotsta work…

      There I went again :-).

    47. Paradigm,

      Let us consider the situation. Year 2021. Let us say that at the end of 2020, all sectors (combined) of a nation with a currency $ hold $17T abroad and foreigners hold $21T of claims on various sectors of the nation.

      So the net foreign assets = -$4T.

      Let us say that in 2021 the current account deficit is $800B and assume the budget is a surplus of $500 and the domestic private sector is in a deficit of $1.3T.

      So surpluses of all sectors = surplus of the govt sector + surplus of domestic private sector + surplus of the foreign sector
      =$500B+(-$1,300B)+$800B=0

      Some cases to highlight my point:

      Case 1. No Revaluations. No depreciation

      The deficit in the external sector is entirely financed by selling foreign assets. End of 2021, Assets held abroad = $16.2T, Foreigners’ claims on domestic sectors = $21T.

      So even though foreigners’ claims did not increase, the net foreign assets fell from -$4T to -$4.8T.

      But it illustrates your points about ‘net’.

      Case 2. Revaluations but No currency depreciation

      Here, there is no sale of assets held abroad and foreigners’ claims increases from $21T to $23.8T due to payments to foreigners (which includes payment for imports) of $2.8T. Assets held abroad increases from $17T to $19T due to payments received from abroad (which includes exports).

      However, the assets held abroad make tremendous gains due to a bull run abroad and also due to a sudden change in the value of FDIs abroad (the investment finally paying off). So the lets say effect of revaluations is holding gains of $3T.

      So including revaluations, assets held abroad = $22T and foreigners’ claims on domestic sectors = $23.8T

      Hence Net Foreign Assets = -$1.8T.

      So in spite of the domestic sectors running a deficit of $1.3T, the budget being in surplus and the domestic sector being in deficit, net foreign assets has improved from -$4T to -$1.8T!

      Case 3. Revaluations due to currency depreciation

      Here, there is no sale of assets held abroad and foreigners’ claims increase from $21T to $23.8T due to payments to foreigners (which includes payment for imports) of $2.8T. Assets held abroad increase from $17T to $19T due to payments received from abroad (which includes exports). However, there is a depreciation causing a holding gain of foreign assets by $3T.

      (If currency depreciates, assets held abroad gain in local currency terms).

      So, assets held abroad = $22T, foreigners’ claims on domestic sectors = $23. 8T

      Again, in spite of the domestic sectors running a deficit of $1.3T (but budget in surplus and domestic sector in deficit), net foreign assets has improved from -$4T to -$1.8T!

      So in cases 2 and 3, the domestic sectors together have “managed” to reduce the indebtedness!

      What about the domestic private sector? (Assume that foreigners purchase government securities after getting paid and the government holds no assets abroad). The private sector ran a deficit of -$1.3T but made tremendous gains due to revaluations of assets held abroad and has managed to not increase its “indebtedness”.

      These are hypothetical numbers … but … the devaluation of the US dollar between 2002 and 2005 alone increased the value of the assets held abroad by $5T. Plus there were huge gains due to increase in valuations of assets abroad in the foreign currency terms itself.

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