We must decide not to be too busy or stupid to understand some macroeconomics

[koganbot]

Emailed this to Dave and Mark the day after the election:

As for yesterday's election, it went even worse than I'd feared (though so far it looks as if the Dems held onto the governor's office in Colorado, though just barely). My only thought, which is not necessarily correct as far as winning elections goes, but:

Of the commercials I saw (mainly while trying to watch YouTube; watching, say, Spanish-language TV could've been a different story), the commercials for Mark Udall, the Democrat, and loser, in the Colorado senate race, mainly attacked his opponent on social issues (Gardner's long opposition to abortion, his confusion around birth control, etc.), while the Republican commercials, for Cory Gardner, consistently attacked Udall on his economic policy. Of course what the Repub ads said was wrong, but that's not my point. We Democrats need to be running against the Repubs on economic issues. But — this is my opinion and my wish, and I'm sure that lots of people would consider it unrealistic — this means that at some point the Dems have to decide that a significant portion of the electorate isn't too busy or stupid to understand some basic, comprehensible, but counterintuitive principles of macroeconomics, if we're willing to take minutes at a time to teach them. Otherwise, the Dems have no good response when the Repubs simulate being responsible and thoughtful by attacking us for running up debt and deficit and accuse us of burdening the future with our current profligacy etc. etc. Of course, most Dems don't know macro either (and I hardly do, but I've got some sense from Krugman of the basic principles), and whom I mean by "Dems" and “Democrats" and "we" and "us" in this paragraph isn't altogether consistent...

This means that a significant number of Democratic leaders themselves need to understand a few core macroeconomic principles and be willing to communicate them to voters, and a significant number of us rank-and-file Democrats need to understand those principles and communicate them to other Democrats and to the independents and Republicans who are willing to listen.

I'm not claiming to understand macroeconomics enough to truly evaluate the core principles, but I think I know a few of them:

(1) If, in order to save money and pay down debt, everyone is cutting back expenditures at once, none of them will succeed in cutting their own debt. This is because your spending is my income and my spending is your income; so when a lot of people are cutting back, your and my and everyone's respective incomes will fall as far or farther than our cutbacks, we'll turn out to be worse off, and the economy will go into a depression.

(2) In these conditions, cutting taxes on private industry and the very rich will have little or no stimulating effect. This is because private industry and the rich are not going to invest in factories, goods, and services when demand is falling. Instead, they'll sock their savings away.

(3) But a government can counteract the debt spiral and the savings glut by stepping up and spending money. This will get the economy back on its feet.

(4) In the conditions I described in 1 and 2 (so, in these conditions, not in all conditions), this extra government spending isn't going to cause interest rates to rise or cause excess inflation. Now, not having studied macro, I don't claim to understand all the reasons here. But, for example (I'm quoting Paul Krugman), since the private sector has excess savings that can't be invested, government borrowing "gives some of these excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending, at least not until the excess supply of savings has been sopped up." (See here and here.)

(5) Overall (so, now not just talking about current conditions), if the economy is growing faster than interest on government debt, we're not burdening future generations by government borrowing or by deficits. (Which doesn't mean we should always run deficits. But that's a different matter.) I'm sure I'm being too simplistic in the way I've written this point. But I hope it gives a gist and that it's correct.

As I've said, I'm not claiming the expertise to evaluate the ideas I've written here (which are basically my attempts to copy what I've read). But the thing is, it isn't that Republicans and pseudo-responsible centrists have counter-arguments to these points. They don't know that the points exist.* Neither do most lawmakers, and neither does most of the populace. And neither do most of the people likely to read my livejournal, I'm guessing. (Not that many people read my livejournal.)

Anyway, while we may have the constitutional right to be ignorant, it's time we weren't. And billions of people will suffer and millions will die if we don't decide to learn something, and communicate what we know.

*There are exceptions, of course. Ben Bernanke is a Republican, for instance.

Comments

[koganbot]

To add a little on point five, when the government borrows money, say in the form of bonds, those debts, those bonds, and the interest payments on them, are assets of the people the government borrowed from, the bondholders. And those assets also pass to future generations.

(Again, I'm not claiming that all govt. debt is good and that government spending never crowds out private spending. And I'm not pretending to understand all this.)

MMT (Modern Monetary Theory)

[rudipherous oxide (from livejournal.com)]

Frank, I don't follow your blog closely, but I too have been struggling to comprehend economics in recent years. I think you can do better than Krugman. For what it's worth, I strongly recommend checking out MMT (Modern Monetary Theory or Modern Money Theory). Some shorter summaries:

http://www.nakedcapitalism.com/2013/03/what-is-modern-monetary-theory-or-mmt.html

http://www.nakedcapitalism.com/2014/05/mmt-postcard.html

A lengthy primer here (I am currently trying to make my way through the print edition of this):

http://neweconomicperspectives.org/modern-monetary-theory-primer.html

Stephanie Kelton interview:

https://www.youtube.com/watch?v=Qnj1ofZ8S3w

Kelton recently was picked to be (minority, i.e., Democratic) Chief Economist for the Senate Budget Committee, which came as a surprise to me, since MMT is pretty far outside the mainstream.

This is pretty good as well:

https://www.youtube.com/watch?v=JGuNpqYBkZk

Related blogs (already linked to for specific entries above):

http://www.nakedcapitalism.com/

http://neweconomicperspectives.org/

Re: MMT (Modern Monetary Theory)

[rudipherous oxide (from livejournal.com)]

To see the rigor and logic (and perhaps audacity) in MMT, the following entry in the Modern Money Primer is a good place to start. I think this will appeal to your philosophical implications. Maybe it obvious stuff, but I find it fairly remarkable. (Anyway, philosophy often busies itself with stating the obvious with clarity.)

http://neweconomicperspectives.org/2011/06/mmp-blog-2-basics-of-macro-accounting.html

Re: MMT (Modern Monetary Theory)

[koganbot]

Thanks for posting. Whether or not I can do better than Krugman, I can certainly do wider than Krugman, if I get the time. So thanks for posting, and the links are helpful.

Re: MMT (Modern Monetary Theory)

[rudipherous oxide (from livejournal.com)]

I probably shouldn't be too dismissive of Krugman, since I've only read scattered articles of his; but I've been more impressed with some others. MMT can reasonably described as another Keynesianism, but it seems quite radical in certain respects, and it's arguments have a lot of force.

Since posting last night, I find this terrific talk Kelton gave at an Italian seminar on MMT. (I think she is speaking in such a way as to make it easier for the live translator barely audible in the background.) In particular, this section on sectoral balances is thrilling. It ends with an anlysis of the impossibility or near-impossibility of EU states that don't issue their own currency, to meet the neo-liberal demands they've agreed to, without destroying their private sectors. She jokes about the graphs (economists have to use graphs!) but they actually are quite effective:

https://www.youtube.com/watch?v=Yd6rGbO-ruU&feature=youtu.be&t=46m45s

FWIW, I'd probably recommend this over the videos I linked to above, because it is more focused.

(Not sure if html tags work here or I would linkify.)

Re: MMT (Modern Monetary Theory)

[koganbot]

Linkage works:

Summit MMT

A little more in response to part of your post

[rudipherous oxide (from livejournal.com)]

To try to respond to some of the content of your post (I did like "Anyway, while we may have the constitutional right to be ignorant, it's time we weren't"--and I am trying, within my limited means)--

"If, in order to save money and pay down debt, everyone is cutting back expenditures at once, none of them will succeed in cutting their own debt. This is because your spending is my income and my spending is your income; so when a lot of people are cutting back, your and my and everyone's respective incomes will fall as far or farther than our cutbacks, we'll turn out to be worse off, and the economy will go into a depression."

This makes sense to me. In its analysis of sectoral balances, MMT applies this same logic to the relationship between the public, private, and external/foreign sector: they can't all save at the same time. At least one sector has to run a deficit, at all times. Since the state is the only sector which can simply spend money into existence (as sovereign issuer of the currency), it is the obvious choice to be the sector to run a deficit. This is not just under emergency conditions, but in general. MMT's recommendation is that the government deficit been allowed to grow until reaching the point of full employment. Its representatives seem pretty confident than this can be done without massive inflation, but I'll admit I don't begin to understand the ins and outs of that.

There is a remarkable chart illustrating this principle of sectoral balances here, which also shows the unwelcome effect of the much lauded Clinton budget surplus:

Sectoral Balances 1952-2010 (http://www.netrootsmass.net/wordpress/wp-content/uploads/images/2010q4b-Sector-Financial-Balances-by-Scott-Fullwiler.png)

Unless the data has somehow been tweaked to make it fit the model, that's pretty powerful.

There is a podcast of a discussion about Krugman, from within the MMT camp:

Randy Wray on Krugman and the Frustration of the Heterodox (http://stephaniekelton.libsyn.com/randy-wray-on-krugman-and-the-frustration-of-the-heterodox?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+StephanieKeltonPodcasts+%28Stephanie+Kelton+%C2%BB+Podcasts%29)

(I guess I will give up on links. I've tried a couple different ways. "nice job" says the wise guy captcha bot.)

Re: A little more in response to part of your post

[koganbot]

Rudipherous, it may take me weeks or even months to actually give any kind of useful attention to the links you've posted, but nonetheless I definitely will get to them. This is typical for me, how other things take priority. I am frequently too busy or stupid to understand macroeconomics. (Still haven't listened to the "2 On" remix either, though quite likely that'll happen first.)

But that doesn't mean you shouldn't continue to comment. And while in general I realize I'm never going to be competent enough to evaluate the macro ideas I'm finding out about, there are some related aspects — you might want to call them "noticing concepts and assumptions," or something like that — where I consider myself as good as anybody in the world. And here's a link for that, in regard to the terminology used in discussing the issue of supposed microfoundations for macroeconomics:

Neither rational nor irrational

(By the way, don't let yourself get distracted down in the comments by the issue of Graeber, whom I've never read, and who may be worth reading even if he's all wrong. None of that's related to the strong point of my post.)

Krugman: wrong on the Ukraine

[rudipherous oxide (from livejournal.com)]

An irrelevant aside--except that it raises questions about where Krugman's political center is--Krugman is very wrong about the Ukraine:

Krugman, who is quickly jettisoning his reputation for thoughtfulness, published a second column on this topic in a row, showing that he has fully bought into all the propaganda “themes” emanating from the U.S. State Department and the compliant U.S. mainstream news media.

In Krugman’s mind, it was Putin who instigated the crisis with the goal of plundering Ukraine. Operating from that false hypothesis, Krugman then spins off this question: “why did Mr. Putin do something so stupid? … The answer … is obvious if you think about Mr. Putin’s background. Remember, he’s an ex-K.G.B. man — which is to say, he spent his formative years as a professional thug. Violence and threats of violence, supplemented with bribery and corruption, are what he knows.

“And for years he had no incentive to learn anything else: High oil prices made Russia rich, and like everyone who presides over a bubble, he surely convinced himself that he was responsible for his own success. At a guess, he didn’t realize until a few days ago that he has no idea how to function in the 21st century.”

But Krugman is not only operating from a false hypothesis – the reality was that the Ukraine crisis was forced on Putin, not that he went seeking it – Krugman also has a simplistic view of the KGB, which, like the American CIA, certainly had its share of thugs but also had a significant number of smart analysts. Some of those KGB analysts were in the forefront of recognizing the need for the Soviet Union to reform its economy and to reach out to the West.

https://consortiumnews.com/2014/12/22/the-liberal-idiocy-on-russiaukraine/

(Granted, Parry is no great shakes either.)