Sunday, August 25, 2013
Krugman - Still pacing the halls of his ignorant tower.
Rather that me attempting to write a long post about Paul Krugman's lack of understanding endogenous money, I'll let Naked Capitalism do it for me: http://www.nakedcapitalism.com/2013/08/james-tobin-versus-paul-krugman.html
Wednesday, June 5, 2013
"Price Gouging": Both Sides Get It Wrong
I was reading my facebook feed recently and someone mentioned something about how firms that price gouge (like gas stations) are shameful, etc. etc. etc. This reminded me that the topic is one of my favorite microeconomics topics. So I thought I'd write about it. Price gouging is defined differently by the various State laws covering the term, but generally it is a situation in which a firm raises prices of a necessity good(s) (like gasoline) during a short-term shock (emergency - like a weather disaster) that is not easily justified by the cost of producing or exchanging said good.
To most conservatives or economists the very term "price gouging" is misleading and far from being a 'bad' thing, it is a necessary component to capitalism. IE, it's just supply and demand. When a hurricane hits, supply of gasoline falls, demand rises, so profit-maximizing firms raise their prices. It's not outside of supply and demand - it IS supply and demand. [the example/link given by the way is just an example and is not what I would technically define as a true price gouging situation unless you view bullets to be a necessity ;)]
Nevertheless, laws were put in place to protect consumers: to block price increases for situations when otherwise prices would increase based on reasons that cannot be explained by supply. In other words - to prevent firms from increasing prices based on a demand spike (caused by people trying to flee a disaster). The intentions are obvious and mostly on moral grounds. The idea is that people are already suffering enough, it is not right to hit them financially during these times in life.
Consumerists have it correct that there is something morally amiss about jacking up prices during emergencies on necessity goods. But their solutions are inelegant and target the wrong problem: unfairly targeting businesses. Essentially they are telling profit-maximizing firms to temporarily stop profit-maximizing and to somehow only increase prices based on supply and not demand pressures, as if that is a simple napkin calculation during such times. And if they don't comply, they could be fined.
Conservatives/Economists have it correct that it is all just supply and demand but they err in assuming that 'efficiency' (as defined in economics) is something society values or should value in time of emergency. Consider an emergency where everyone is trying to fill up their tanks to leave the site. The 'efficient' way to allocate resources is via the price mechanism - using supply and demand. In other words 'price gouging' is efficient. But the problem there (or at least a problem) is that only the well off are then able to flee, leaving the poorer members of society to suffer. The rich full up their tanks and the top 5% flees while the 95% dies. Whereas, in a disaster, sometimes it makes more sense to ration or do something less 'efficient' to ensure safety and fairness. (So instead of the rich filling up, everyone fills up just enough to escape). Demand, remember, is about the willingness AND ability to buy a good. In other words, efficiency is not always welfare-enhancing or moral.
But here is why both groups, the conservatives/economists and the consumerists talk past each other. In short, they both are correct, but missing the main problem. The main problem is that we, as a society, don't like capitalism in all situations. We particularly don't like it during emergencies. (And many of us don't like it with regards to necessity goods in general - think health care). But instead of altering our system to accommodate such emergencies (or even attempting to do so) we just pass these laws that essentially tell businesses to stop being themselves for some undefined amount of time. In other words, price 'gouging' is not the problem, it is a necessary effect of capitalism. The problem is that we chose to ignore that fact.
To most conservatives or economists the very term "price gouging" is misleading and far from being a 'bad' thing, it is a necessary component to capitalism. IE, it's just supply and demand. When a hurricane hits, supply of gasoline falls, demand rises, so profit-maximizing firms raise their prices. It's not outside of supply and demand - it IS supply and demand. [the example/link given by the way is just an example and is not what I would technically define as a true price gouging situation unless you view bullets to be a necessity ;)]
Nevertheless, laws were put in place to protect consumers: to block price increases for situations when otherwise prices would increase based on reasons that cannot be explained by supply. In other words - to prevent firms from increasing prices based on a demand spike (caused by people trying to flee a disaster). The intentions are obvious and mostly on moral grounds. The idea is that people are already suffering enough, it is not right to hit them financially during these times in life.
Consumerists have it correct that there is something morally amiss about jacking up prices during emergencies on necessity goods. But their solutions are inelegant and target the wrong problem: unfairly targeting businesses. Essentially they are telling profit-maximizing firms to temporarily stop profit-maximizing and to somehow only increase prices based on supply and not demand pressures, as if that is a simple napkin calculation during such times. And if they don't comply, they could be fined.
Conservatives/Economists have it correct that it is all just supply and demand but they err in assuming that 'efficiency' (as defined in economics) is something society values or should value in time of emergency. Consider an emergency where everyone is trying to fill up their tanks to leave the site. The 'efficient' way to allocate resources is via the price mechanism - using supply and demand. In other words 'price gouging' is efficient. But the problem there (or at least a problem) is that only the well off are then able to flee, leaving the poorer members of society to suffer. The rich full up their tanks and the top 5% flees while the 95% dies. Whereas, in a disaster, sometimes it makes more sense to ration or do something less 'efficient' to ensure safety and fairness. (So instead of the rich filling up, everyone fills up just enough to escape). Demand, remember, is about the willingness AND ability to buy a good. In other words, efficiency is not always welfare-enhancing or moral.
But here is why both groups, the conservatives/economists and the consumerists talk past each other. In short, they both are correct, but missing the main problem. The main problem is that we, as a society, don't like capitalism in all situations. We particularly don't like it during emergencies. (And many of us don't like it with regards to necessity goods in general - think health care). But instead of altering our system to accommodate such emergencies (or even attempting to do so) we just pass these laws that essentially tell businesses to stop being themselves for some undefined amount of time. In other words, price 'gouging' is not the problem, it is a necessary effect of capitalism. The problem is that we chose to ignore that fact.
Friday, May 3, 2013
Part Time for Economics Reasons: Hardly Obamacare
The quacks are out in force suggesting that our economy is undergoing a transformation whereby we have less full-time workers and more people forced to work part-time. That part is true. The part that isn't true is the reason often given as the main cause: Obamacare and the uncertainty of regulations.
The truth is something different. As you can see, the issue of part-time employment taking the place of full-time employment became an issue well before the health care legislation ever even become a law.
In fact, since Obamacare was signed into law the overall number of part-time employed for economic reasons has fallen a bit, just as our unemployment rate overall has been slowly falling.
Despite the obvious evidence that the phenomenon is almost solely attributable to the financial crisis and resulting recession, it hasn't stopped some economists and conservatives from blaming Obamacare (which by the way I don't disagree that Obamacare is being rolled out poorly, but to blame the entire employment situation on it is counter to the evidence):
here and here, for example.
Never-mind the fact that employment numbers have been revised upward and the unemployment rate continues to drop at a steady, albeit slow pace. Consumer confidence continues to rise along with the stock markets. The naysayers still insist that Obamacare is dragging everything down.
And it may yet be true that it might....but the data presently shows that it is the continuing effects of the crisis that are dragging us down. Anyone who suggests otherwise is likely talking more out of politics than economics. Yes, U-6 did tick up ever so slightly (unemployment rate including part-timers that would rather work full-time and discouraged workers) but as I've said before on this blog, you should never take one month's report and assume it is a new trend. It is likely Obamacare will cause a slightly further shift to part time employment but only marginally, and for my money, we should be concerned about the mountain, not the mole hill.
The truth is something different. As you can see, the issue of part-time employment taking the place of full-time employment became an issue well before the health care legislation ever even become a law.
Despite the obvious evidence that the phenomenon is almost solely attributable to the financial crisis and resulting recession, it hasn't stopped some economists and conservatives from blaming Obamacare (which by the way I don't disagree that Obamacare is being rolled out poorly, but to blame the entire employment situation on it is counter to the evidence):
here and here, for example.
Never-mind the fact that employment numbers have been revised upward and the unemployment rate continues to drop at a steady, albeit slow pace. Consumer confidence continues to rise along with the stock markets. The naysayers still insist that Obamacare is dragging everything down.
And it may yet be true that it might....but the data presently shows that it is the continuing effects of the crisis that are dragging us down. Anyone who suggests otherwise is likely talking more out of politics than economics. Yes, U-6 did tick up ever so slightly (unemployment rate including part-timers that would rather work full-time and discouraged workers) but as I've said before on this blog, you should never take one month's report and assume it is a new trend. It is likely Obamacare will cause a slightly further shift to part time employment but only marginally, and for my money, we should be concerned about the mountain, not the mole hill.
Wednesday, May 1, 2013
Continuing Evidence: Mainstream Economists are Just Politicians in Disguise
On the right
and
On the left
The point of disagreement is disguised as being a disagreement over the Keynesian multiplier: is it 1, is it less than 1, is it greater than 1 (recall the multiplier is simply the effect of a $1 cut or increase in spending on GDP)....
But really, economists' views on the multiplier have almost nothing to do with scientific inquiry and have almost everything to do with where they lie on the political spectrum. Mankiw, being a Republican thinks the multiplier is small (big surprise) and that therefore the cuts won't hurt GDP or employment much. Goolsbee (for example) being a Democrat thinks the multiplier is bigger - and that the cuts may in fact take a noticeable chunk out of GDP and employment.
The point is, all these economists pretend their differences are a matter of math and science, when they really are almost soley a difference of politics.
[Not to mention that both sides are ignoring that the Keynesian multiplier says nothing about employment - it only says what the effect of spending cuts on GDP is. To the degree that GDP and employment are not 100% correlated (which of course they aren't), the multiplier itself says very little about employment.]
From Keynes' General Theory, Chapter 20:
and
On the left
The point of disagreement is disguised as being a disagreement over the Keynesian multiplier: is it 1, is it less than 1, is it greater than 1 (recall the multiplier is simply the effect of a $1 cut or increase in spending on GDP)....
But really, economists' views on the multiplier have almost nothing to do with scientific inquiry and have almost everything to do with where they lie on the political spectrum. Mankiw, being a Republican thinks the multiplier is small (big surprise) and that therefore the cuts won't hurt GDP or employment much. Goolsbee (for example) being a Democrat thinks the multiplier is bigger - and that the cuts may in fact take a noticeable chunk out of GDP and employment.
The point is, all these economists pretend their differences are a matter of math and science, when they really are almost soley a difference of politics.
[Not to mention that both sides are ignoring that the Keynesian multiplier says nothing about employment - it only says what the effect of spending cuts on GDP is. To the degree that GDP and employment are not 100% correlated (which of course they aren't), the multiplier itself says very little about employment.]
From Keynes' General Theory, Chapter 20:
"It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand ... is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent."
Saturday, February 23, 2013
Wednesday, January 30, 2013
Economics Not the Problem in Egypt, Freedom Maybe
Many in the media make the claim that Egypt's original uprising and continued discontent has more to do with economics than anything else (poverty, income inequality, etc).
However, something I stress in my macro class, is that statistics don't seem to bare a lot of that out - particularly when you compare Egypt to the Untied States (where there is no US Spring).
Egypt has less income inequality as measured by GINI (the data is a decade or two old but I don't think that affects the analysis much):
However, something I stress in my macro class, is that statistics don't seem to bare a lot of that out - particularly when you compare Egypt to the Untied States (where there is no US Spring).
Egypt has less income inequality as measured by GINI (the data is a decade or two old but I don't think that affects the analysis much):
The Egyptian economy, additionally, has grown by 25% as measured by GDP per capita from 2000-2008 - before the Arab Spring. During this same time, the US has grown by a measly 9%.
The unemployment rate in Egypt in 2009 leading up to the Arab Spring was 9%, which was actually less than the unemployment rate in the United States during the same time-frame. Even looking at just youth unemployment - the rates in Egypt are not really that out of line compared to its neighbors or even the United States.
So, I for one simply don't buy into the fact that the Egypt uprising is economic. It is far more likely that it is more about political freedoms than anything else. I think that that is supported by the new uprisings taking place - which are stemming from the government failing to create legitimacy among the people.
Either that or this begs the question - why aren't WE in uprising?
Wednesday, January 9, 2013
Average Joe Doesn't Understand Economics
The press flowing (and comments made from that press) from the 'new' idea of the US Treasury minting a new $1 Trillion coin has made me come to the unfortunate conclusion that the press and the average Joe commenter doesn't really understand economics. This is despite the fact that I'm sure many of them took macroeconomics in school. Actually, it's probably because of it.
Things that people don't understand:
First, in neoclassical macro texts, teachers tell students how there is a limited supply of funds and that if the government spends it must be taking real resources out of the private economy. This ignores the fact of course that our 'funds' (ie. money) can be created at will by the US. government as the sovereign controller of its own fiat money. Fiat meaning that the money is backed by faith, not by any commodity like gold, silver or platinum. In the real world, the only reason the government borrows money at all is purely due to institutional constraints to the treasury and Fed. Presently, when the government spends money, it needs to issue bonds. So the treasury issues bonds, floats them on the private market, and 'borrows' from private citizens or other governments etc. The US then has an obligation to pay interest on those bonds, but it can always do so, because again, the money can simply be created by the government But the system need not be set up in such a confusing way. Were it not for this constraint, there would be no reason the treasury can't just make the funds appear out of thin air, walk over to the Fed, and use that coin to pay for it's spending. Public 'debt' can be wiped out with a click of a keyboard - no bonds needed.
Enter the $1 Trillion coin!
There is a loophole that says the treasury can mint and use platinum coinage at its discretion and there is no limit to the amount of dollars that coin can represent. This is a kind of power that the treasury doesn't typically have. Here comes thing #2 that people don't get about economics. We are not on the gold standard anymore. Our money doesn't have to be or be backed by equal value of a commodity. One platinum trillion dollar coin does not have to be made by or backed by $1 trillion worth of platinum. It can be a simple small coin the size of a dime, with $1 trillion etched on it - for the very same reason that our $100 bill is not made out of $100 worth of paper and ink. So, shame on NBC. And the sheep. But particularly, all real blame goes to the economics profession for failing these people!
But won't that cause inflation?
Here is thing #3 people don't understand: money doesn't cause inflation. Demand (spending) pressure exceeding supply pressure (production / productive capacity) causes inflation. When demand exceeds supply, people start circulating more and more money around the system, but for a given level of real output, all that does is raise prices. The misunderstanding here is that most neoclassical mainstream economic textbooks assume that the more money the government makes, the more borrowing and spending that happens. But that is ridiculous. One need only see the massive amount of money the government has put into the banks to see that banks don't loan more money just because it's there. This is classic chicken / egg problem. Textbooks say more money means more spending. Reality says more spending means more money. Spending over our means is a problem - but not one in our present depressed economic environment.
In any case, the $1 trillion coin could not possibly create inflation anyway, even under the textbooks' models, because it will never even reach the private banking industry. The treasury would use it to pay it's debt, accounts would be credited and debited, and the coin could be melted down. The coin is just a legal means to get the Fed to allow the treasury to pay down a portion of it's debt. The actual end result is simply someone at a computer changing two sides of a ledger.
Why do we get taxed at all then if in reality the government can just make 'funds' out of nothing?
Because in a modern market driven largely by complex financial business, market functionality is inherently unstable and prone to speculative bubbles and bursts. One way these bubbles form is when people have access to too much liquidity via credit and go on a spending spree with their credit cards that they can't really afford. This kind of thing often results in certain markets being significantly over-priced (like housing in the early 2000s) and then when a crash happens it can obviously wreak havoc on everything and everyone, around the globe, much as it did in 2008-2010.
Taxes, aren't really sources of 'revenue' for the federal government. The only real purpose they serve is to regulate demand (spending pressure). Higher taxes reduces spending pressure (particularly on investment) and reduces potential bubble creation. This is thing #4 that people don't understand and it's probably the most counter-intuitive. In most neoclassical macro texts, taxes are treated as a part of national savings - part of a pool of limited funds from which to draw from for spending. But it really isn't. Taxes aren't needed to fund federal spending, and therefore taxes are not revenue, and therefore taxes are not a 'pool of funds' used to pay for anything. Their sole purpose is to regulate the economy and redistribute income - to keep it from getting too hot or too cold - and to ensure that the inequality wealth gap does not get out of hand.
The real culprits....
...are the mainstream economists who continue to tell outdated or just flatly wrong tales about how our economy actually functions. In the sense that many politicians take their cue from these economists, it's actually economists that are then to blame for our political problems. The $1 trillion platinum coin can solve our economic problem, but it can't solve the political problem that has been created. That takes something more than money.
Things that people don't understand:
First, in neoclassical macro texts, teachers tell students how there is a limited supply of funds and that if the government spends it must be taking real resources out of the private economy. This ignores the fact of course that our 'funds' (ie. money) can be created at will by the US. government as the sovereign controller of its own fiat money. Fiat meaning that the money is backed by faith, not by any commodity like gold, silver or platinum. In the real world, the only reason the government borrows money at all is purely due to institutional constraints to the treasury and Fed. Presently, when the government spends money, it needs to issue bonds. So the treasury issues bonds, floats them on the private market, and 'borrows' from private citizens or other governments etc. The US then has an obligation to pay interest on those bonds, but it can always do so, because again, the money can simply be created by the government But the system need not be set up in such a confusing way. Were it not for this constraint, there would be no reason the treasury can't just make the funds appear out of thin air, walk over to the Fed, and use that coin to pay for it's spending. Public 'debt' can be wiped out with a click of a keyboard - no bonds needed.
Enter the $1 Trillion coin!
There is a loophole that says the treasury can mint and use platinum coinage at its discretion and there is no limit to the amount of dollars that coin can represent. This is a kind of power that the treasury doesn't typically have. Here comes thing #2 that people don't get about economics. We are not on the gold standard anymore. Our money doesn't have to be or be backed by equal value of a commodity. One platinum trillion dollar coin does not have to be made by or backed by $1 trillion worth of platinum. It can be a simple small coin the size of a dime, with $1 trillion etched on it - for the very same reason that our $100 bill is not made out of $100 worth of paper and ink. So, shame on NBC. And the sheep. But particularly, all real blame goes to the economics profession for failing these people!
But won't that cause inflation?
Here is thing #3 people don't understand: money doesn't cause inflation. Demand (spending) pressure exceeding supply pressure (production / productive capacity) causes inflation. When demand exceeds supply, people start circulating more and more money around the system, but for a given level of real output, all that does is raise prices. The misunderstanding here is that most neoclassical mainstream economic textbooks assume that the more money the government makes, the more borrowing and spending that happens. But that is ridiculous. One need only see the massive amount of money the government has put into the banks to see that banks don't loan more money just because it's there. This is classic chicken / egg problem. Textbooks say more money means more spending. Reality says more spending means more money. Spending over our means is a problem - but not one in our present depressed economic environment.
In any case, the $1 trillion coin could not possibly create inflation anyway, even under the textbooks' models, because it will never even reach the private banking industry. The treasury would use it to pay it's debt, accounts would be credited and debited, and the coin could be melted down. The coin is just a legal means to get the Fed to allow the treasury to pay down a portion of it's debt. The actual end result is simply someone at a computer changing two sides of a ledger.
Why do we get taxed at all then if in reality the government can just make 'funds' out of nothing?
Because in a modern market driven largely by complex financial business, market functionality is inherently unstable and prone to speculative bubbles and bursts. One way these bubbles form is when people have access to too much liquidity via credit and go on a spending spree with their credit cards that they can't really afford. This kind of thing often results in certain markets being significantly over-priced (like housing in the early 2000s) and then when a crash happens it can obviously wreak havoc on everything and everyone, around the globe, much as it did in 2008-2010.
Taxes, aren't really sources of 'revenue' for the federal government. The only real purpose they serve is to regulate demand (spending pressure). Higher taxes reduces spending pressure (particularly on investment) and reduces potential bubble creation. This is thing #4 that people don't understand and it's probably the most counter-intuitive. In most neoclassical macro texts, taxes are treated as a part of national savings - part of a pool of limited funds from which to draw from for spending. But it really isn't. Taxes aren't needed to fund federal spending, and therefore taxes are not revenue, and therefore taxes are not a 'pool of funds' used to pay for anything. Their sole purpose is to regulate the economy and redistribute income - to keep it from getting too hot or too cold - and to ensure that the inequality wealth gap does not get out of hand.
The real culprits....
...are the mainstream economists who continue to tell outdated or just flatly wrong tales about how our economy actually functions. In the sense that many politicians take their cue from these economists, it's actually economists that are then to blame for our political problems. The $1 trillion platinum coin can solve our economic problem, but it can't solve the political problem that has been created. That takes something more than money.
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