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):

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?

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.

Government Should Borrow More, Not Tax More

Fiscal Cliff has been averted, at least for two more months where we will have an even bigger cliff to hurdle. Of course, I never liked the term 'fiscal cliff' since it implied there's some sort of inherent government insolvency issue even though that was never the issue.   It has been and will continue to be a political cliff - caused and created solely by inept politicians (congress).

Our present national public debt stands at around $12 trillion (76% of GDP roughly).  That number sounds big, but since the debt essentially represents money we owe ourselves, the number itself is relatively meaningless unless compared to other things.   This point is something radical (read: mainstream) Republicans don't seem to grasp.   The bill to avert the fiscal cliff for now passed but no thanks to 100+ of these mainstream radicals that are more concerned about this meaningless number than the ability of our fragile economy to continue to grow.

So, what should the number be compared to?  Well, if the government is racking up 'too much debt', interest rates will tend to rise and inflation will spiral out of control.   Interest rates, however, today, maintain themselves at all-time lows and inflation is tame and stable.   And, interestingly, if any real person in the market thought inflation posed a problem in the future, we'd see interest rates start to rise accordingly, but they aren't so that is why we know that neither are problems at all.   What about all that money the Fed pumped into the economy - won't that add to inflation?   No.   That money has been largely doing what it has been doing for the better part of 4 years - sitting there not being lent or borrowed as 'excess' bank reserves. Surely as the economy picks up, more of this money will be floated into the broader economy, but that's ok - because along with this money increase will be an increase in production and economic output - which will act to tame any inflation.

So, Republicans continue their airless rhetoric about 'imposing costs on future generations' and all that nonsense which has absolutely nothing to do with reality.

Democrats aren't much better - allowing significant back-breaking tax increases not just on the rich but on the average Joe.  We could have avoided not just the taxes on those making >$400K, but also the 2% social security payroll tax increase that hit most Americans' paychecks this week.  Both of these tax increases, it is estimated, may reduce the output of our fragile economy by nearly a whole 1% point of GDP in the coming year.  

The better alternative would just have been to continue to do what America does best: borrow.  There's never been a better time to do so in a market with record low interest rates after all!  Everyone wants our bonds as it is what with China continuing to be shaky and Europe still very much in a crisis.   Borrowing, at the end of the day is simply issuing US-denominated bonds for US currency, both of which can be converted into each other - hence the reason why government borrowing is like borrowing from oneself - the US controls its own currency after all.  There are certain technical political restrictions which make the intersection of our fiscal and monetary policy a bit convoluted at present, but there are those in congress and in academia advocating for a most realistic change to our system to accommodate the simple fact that 'debt' by the federal government is not really 'debt' at all.  

Policy Thought for Veterans Day

The present unemployment rate is 7.9%.   But as Iraq War veterans have been flooding back home and Afghanistan War veterans are expected to be coming home in droves over the next 2 years, some are having a tough time adjusting to the cruel ways of market capitalism - the onus is on them to find a job in this tough economy.   There are institutions out there that try to make it easier for vets to transition.   But these aren't widely marketed and don't guarantee anything other than an increased access to a chance to be hired.   That's not the same thing as a job.

Meanwhile, the unemployment rate of recent US veterans is 2% higher than the national average.    And for some categories of recent vets (women, 2001-present), it's almost 2X higher: 15.5% and this is projected to rise rapidly as the surge of vets finally come home.

What is our country to do to support these men and women?   We could continue our current track of offering lip service, or we could work to enact a real policy change that could have a real positive effect.  The only way to directly solve this problem is to enact a thoroughly non-mainstream economic policy (albeit on a smaller scale): jobs guarantee specific to our returning vets.  

A jobs guarantee program is exactly what it sounds like.  Instead of trying to indirectly get people back to work by stimulating demand/spending, or by providing more opportunities for interviews etc, the government literally guarantees a public job potentially offering a laundry list of positions including: beautification, public works, counseling service to fellow vets, etc.  In the past I've expressed concern about enacting a nationwide jobs guarantee program, and I still have those concerns:  creating another unproven permanent government bureaucracy with the potential to increase beyond its initial scope, promoting potentially nontransferable job skills, disrupting the private labor market, creating a moral hazard of labor, etc.   But, when we are talking about creating this on a much smaller scale, and for a specific segment: for recent veterans, most of those concerns become minuscule compared to the potential benefit - the necessary sacrifice we owe our returning soldiers.  The least we can do is guarantee them a minimum wage paying job while they are undergoing private sector job-search.  This point of this program would not be to give a solider a permanent job - but to give them temporary work, to more fully employ their expertise and resource, until they can find a better higher paying private sector job.

It's time to do this.  Stop wasting money on all these government services that don't get vets jobs - they maybe just get them in the door.   That's not good enough.  In the meantime, we waste precious expertise, talent and labor resource that could be adding to our GDP, and our tax revenue.   The other added benefit of this program is that it can act as a small-scale trial / test for a more broadened nationwide program.  Maybe it will prove the skeptics, like me, wrong.  And if it doesn't, if it does have unintended consequences, the scale of it means the costs are small relative to the potential debt we owe our soldiers.

Capital Gains Vs. Net Wealth

Yesterday stocks plummeted by the biggest % all year.   No one knows exactly why, but most think it's from a combination of things including the fact that Wall Street doesn't like our status quo politics, and they particularly don't like the looming fiscal cliff: the series of tax hikes and government spending cuts scheduled to kick in in a couple months.

It may be that investors are worried about what Obama might make them pay as he continually hammered during the election that people like Mitt Romney and Warren Buffet actually pay less in taxes relative to their income compared to a typical worker because their incomes are largely earned by capital gains.   Are capital gains tax increases destined to be part of any cliff negotiations ?

Classical economists (conservatives) generally don't like taxes on capital gains because it essentially acts as a negative incentive to save money.  Keynesians don't fret as much about that since in their view investment often leads the savings and wealth creation and investment decisions by firms are partially benefited by furthering demand (consumption).  Say's Law is rather outdated!

I'm against capital gains hikes personally much as I also dislike income tax hikes (or income taxes in general).  For one thing they are taxes on flows not stocks.  That is, you are taxed based on an annual increase or decrease in wealth via capital gains (or income).   Well I could be a billionaire but have one bad year in terms of my income and thus owe nothing to the government despite my wealth.  In fact, that was the case for many firms during the recession.   They had net operating losses and owed $0 to Uncle Sam.   Or, you could be a recent college grad making mad bank and therefore paying big taxes even though you are still young, have no wealth to speak of, have $0 in your 401K and have $100K in student loans.  Income taxes are stupid.

Similarly regarding capital gains, if the stock market takes a dive and they make no capital gains, then they don't pay the taxes.  If we care about distribution of wealth (and most conservatives don't, but I do) then we should care about this inherent loophole.  Another reason I don't like capital gains tax is that it creates a perverse incentive: it makes people want to save less for their futures.  If we want a populace that cares about its future and how it's going to pay for their golden years, then we should care about not promoting the next car purchase over the next Roth IRA purchase.   Notice this is not the same argument classical economists make.  Classical economists are pathological, and don't give a shit about you personally.

Some European countries use a net wealth tax, which to me is much more preferable (though perhaps not at the exorbitant rates as some of those countries) - it compares your assets minus your liabilities (stock variables) and the more you have, the more you are taxed.  Simple, efficient, dynamic.   So if I'm an average Joe, I won't feel queasy about saving for my future.  I might feel a little queasy if I'm a billionaire in terms of net wealth: if I have a McMansion on the hill, 10 porches, and private jet... but frankly, if you are a billionaire and you are queasy about giving back to society that has helped you so much to get where you are, then you are an asshole and I don't particularly care.

Get Out the Vote: A Scourge of Modern Politics

Many polls are open early across this country.   And everyone from celebrities, to Super PACs to special interest groups to politicians are pleading with the American people to get out and vote.  It's every American's civic duty, they say.

Even though most don't know what galaxy you are living in, Americans are told to vote on matters of domestic policy you likely know or care little about.

Even though a third don't know who the current Supreme Court Justice is, Americans are asked to decide the fate of judicial branch with your vote.

Even though half don't care to follow whether Obamacare was ruled constitutional or not, Americans are asked to decide the fate of it.

Even when one in ten think our sitting president is Muslim, they are asked to decide on the role of religion in our discourse.

Even though nearly half think that China is a greater economic power than the US, Americans are asked to decide the outcome of our foreign and economic policies.

Even though that scientists say that all the stupid Americans are dooming us with  voting, many will listen, and will cast uninformed biased votes based on what your friends, celebrities tell you, or what your gut feelings say to you, or the fact that your skin color matches the candidate....   These are not reasons to vote.  These are reasons to do your real civic duty and abstain from your vote.  

The saving grace for our country is that due to the corrupt nature of our modern political process, most votes likely will not count anyway.   Unless you live in Ohio or Florida or one of the few 'battleground' states, one should have no incentive to vote other than as a symbol.   Most of you that vote anyway, whether you are stupid or not, will use your vote to symbolize your belonging to either the Democrats or Republicans.   The rest will be disenfranchised - locked out from the process.  We will continue to have 2 overly-powerful parties beholden to their Super PACs and special interest deciding the fate of the future with little to no hope for process changes to how congress or our electoral system could operate more effectively.

My friends may not agree with me now on this broader point, but in time I hope they do.   The only solution is to demand real change from outside the system.   So I urge every American not to get out and vote, but to boycott our political system - shock it into changing.   Only when we eliminate the legitimacy of the system can we fix it.   We must sacrifice any individual gains via party-support for true long-run gains for our country.

Keen Connects to MMT

Continues to interest me:

or for a more encompassing version of lesser quality (sound):

Keen has a unique definition of Aggregate expenditure (closed economy):
=C + I + NetAssets + (G-T)

....he didn't explain that enough for me to fully understand what he's saying here.  But here is my take (updated since I previously mentioned I too was confused) since many bloggers are just outright calling Keen's work nonsense.  This is partly Keen's fault for not clearly defining things.

He goes on to say that:
Income + Change in Debt = Output + Net Asset Turnover

...which suggests to me he thinks that changes in assets (prices bubbles)are a result of changes in debt (a la Minsky, which makes sense).

From what I understand, what Keen means by Net asset turnover is speculative and ponzi financing.  That is, financing of financial instruments that do NOT have a backing of a physical good or service and therefore are not expected to fully repay the principal and interest of the financing absent bubble formation.

In this way, Keen income and debt partially financing real goods and services, but also partially financing speculative and ponzi investments (the value of which is not based in real output).

In this view, neoclassical economics ignores this new class in the usual Y = C + I + G formation.  The real question to me is then, why does he include G-T instead of just G in his above formula.  That is still unclear to me.

UPDATE: had a brief back and forth with Prof. Keen about why he nets out taxes in his effective demand function.  Not very insightful.   He just said it's "cash flow."....hope he describes his re-formulation of the usual demand function in a more user-friendly way in the future.... Maybe he's too in-the-weeds.