Potpourri
==> Nick Rowe agrees with me that Steve Landsburg’s analysis of paying down government debt is only true if we assume perfect certainty. (Steve I think would totally agree, and that’s why I said in my original post that this was an argument over specifying assumptions for the reader, not about the implications of those assumptions.) Incidentally, if you have never seen Rowe in action, just skim the comments section, only reading his posts. You literally could learn a lot of economics just reading him patiently arguing with people. (In contrast, I am so sarcastic in my comments section that even my allies aren’t quite sure what my point is.) The other good thing about Nick is, he’s pretty humble. So you walk away thinking, “It’s not that this Canadian guy is all that smart, it’s just he’s been studying this stuff longer than I’ve been alive.”
==> Speaking of debt, I’m pleased to announce that for once, I agree with Daniel Kuehn on the government debt stuff! I don’t think Arnold Kling’s response to Krugman’s “we owe it to ourselves” position really got at the fundamental problem. To be clear, it’s not that Kling said anything wrong, and in fact he is highlighting one of the serious, real-world problems with deficit finance. But Krugman really did handle this type of thing by admitting upfront that government debt could have distributional implications for future generations. The stuff Kling is talking about doesn’t really show that Krugman is just flat out wrong for focusing on “we owe it to ourselves,” the way Buchanan/Boudreaux/Rowe did.
==> Poor Ron Paul gets ambushed at 13:30 by this host asking about the Murphy-Krugman Debate.
==> It’s kind of interesting: Someone in the comments of my post about Keynesians and consumption pointed to this Krugman article, where he definitely talks about the limitations of the “paradox of thrift” etc. But if I wanted to be a jerk, I would say, “So you prove to me that Keynesians don’t focus much on consumption, by pointing to Paul Krugman chiding Keynesians for focusing too much on consumption?” Anyway in the interest of holiday charity let me say that actual Keynesian economists are not quite the mindless champions of “consume consume consume!” that their critics sometimes attack, but there is no doubt that the caricature is based on a germ of truth: Even Krugman admits as much in the opening paragraphs of that linked article. So it’s not this right-wing myth the way Gene Callahan and Daniel Kuehn are suggesting.
Yes Gene, Keynesians *Do* Focus on Consumption More Than Investment
Gene Callahan is mystified:
So, I’m teaching Keynesian economics for the second time. And once again, I’m telling my students that, per Keynesians, recessions occur when intended investment falls short of savings. And the best way to fix this, per Keynesians, is for the government to invest in roads, bridges, parks, education, etc.
I’m fine with explaining all that. What I can’t figure out how to explain is why there are people saying Keynesianism is all about consumption and takes no account of investment.
Jonathan Finegold has some gentle remarks at his blog. Let me point out that Keynesians do stress the “paradox of thrift”–meaning it screws things up in a depression if people try to “be responsible” by consuming less and saving more–and of course there’s the “Marginal Propensity to Consume.”
If you’ll permit me, I suggest this article is relevant:
When Consumers Capitulate
By PAUL KRUGMAN
Published: October 31, 2008The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.
To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.
…
So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.
Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.
Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.
Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.
In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.
At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.
I’ll bet you can guess what’s coming next.
For the fact is that we are in a liquidity trap right now…
The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.
The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.
No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.
Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.
If you put that article under a microscope, you get the faintest whiff of Krugman focusing on consumption as being really important for the US economy to not sputter.
Did Milton Friedman Win Two Nobel Prizes?
UPDATE below.
I was googling some stuff to prepare for my second lecture in my Mises Academy class on the Great Depression, and I was skimming Princeton University Press’ blurb on the famous Friedman/Schwartz monetary history of the US. I was surprised to see this: “Milton Friedman won the Nobel Prize in Economics in 2000 for work related to A Monetary History as well as to his other Princeton University Press book, A Theory of the Consumption Function (1957).”
UPDATE: OK I need to recalibrate my humor meter. I thought it was common knowledge that Milton Friedman couldn’t possibly have won the Nobel as late as 2000. I stand corrected.
Noah Pinion Shows Yet Again That Economists Will Be Strung Up Right After Investment Bankers
[UPDATE below.]
I knew right off the bat that Noahpinion was doing something wrong in this patronizing post on inflation, but it took me a minute to figure out where the error was creeping in. But don’t worry, I finally got it. Here’s Noah:
Inflation is one of those things that almost nobody who isn’t an economist seems to understand…
Or the other day, someone on Twitter asked me: “How is it possible for inflation to help debtors when wages are going down? If wages are going down, doesn’t inflation just make it harder for people to pay off their debts?”
The answer is no. Here’s why. Suppose you make $50,000 a year and you have $50,000 in debt. Your debt-to-income ratio is 1. Also, just for convenience, let’s say the general price level starts out at “1”.
Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 2 = $50,000. Your debt is still $50,000. Your debt/income ratio is still 1.Situation B: -50% real wage growth, 0% inflation.
In this case, the new price level is 1. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1 = $25,000. Your debt is still $50,000. Your debt/income ratio is now 2.Situation C: -50% real wage growth, 50% deflation.
In this case, the new price level is 1/2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1/2 = $12,500. Your debt is still $50,000. Your debt/income ratio is now 4.So as you can see, even if your real wage is going down by 50%, it’s better to have inflation than no inflation if you are a net debtor. Inflation erodes the value of your debt no matter what is happening to your real wages.
So what’s going on here? Why do so many people misunderstand inflation? Maybe it’s a form of “Stockholm Syndrome”. Inflation-hawkish economists have been bellowing, so loudly and so vehemently, that inflation is Satan – this goes back at least a hundred years – that non-economists just can’t help believing it. People end up trying to think up reasons why inflation must be bad after all. When you offer them freedom – when you tell them that sometimes inflation can erode debt, relieve balance sheet recessions, and help stimulate the economy – they don’t want to take it. , and they come up with more brilliant ways to identify with their captors. Or something like that.
My reply in the comments:
Mr. Pinion, in my humble opinion you have totally overanalyzed the Twitter question and ended up speaking nonsense. The guy wasn’t asking you about real wages, he was asking about actual nominal wages.
So his point was something like this:
“Hey Noah, I get how if all prices double, including my hourly nominal wage rate, then it becomes easier for me to pay off my fixed debt. But if I’m having trouble making ends meet and keeping up with my loan repayment plan, then my employer actually cuts my nominal paycheck, and then on top of that the price of food and health insurance goes up, how in the world does that make me better off?!”
It doesn’t. By interpreting your Twitter guy to be speaking of real wages, you completely dodged his simple question.
Why is it that so many economists can’t understand simple questions about inflation? Must be political.
UPDATE: So in the comments, it turns out that not 1, not 2, but 3 of my clever critics think I’m missing Noah’s “point.” OK watch this. I’m going to paste Noah’s 3 scenarios, and then add one more that is done in exactly the same style, but with a 200% 300% (price) inflation rate. Watch what happens:
Suppose you make $50,000 a year and you have $50,000 in debt. Your debt-to-income ratio is 1. Also, just for convenience, let’s say the general price level starts out at “1”.
Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 2 = $50,000. Your debt is still $50,000. Your debt/income ratio is still 1.Situation B: -50% real wage growth, 0% inflation.
In this case, the new price level is 1. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1 = $25,000. Your debt is still $50,000. Your debt/income ratio is now 2.Situation C: -50% real wage growth, 50% deflation.
In this case, the new price level is 1/2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1/2 = $12,500. Your debt is still $50,000. Your debt/income ratio is now 4.[Added by RPM:] Situation D: -50% real wage growth,
200%300% inflation.
In this case, the new price level is 4. Your new real wage is $25,000. Your new nominal wage is $25,000 x 4 = $100,000. Your debt is still $50,000. Your debt/income ratio is now 1/2.
Wow, I just proved Noah’s point even more so, right? Look at that, the guy’s debt/income ratio dropped from 1 down to 1/2. So clearly 200% 300% inflation is even better than 100% inflation. Noahpinion FTW!
Oh wait a minute. By using Noah’s technique, and picking an inflation rate of 200% 300% rather than Noah’s (completely arbitrary) 100%, now I’m making the guy get a pay increase from his employer. This is clearly NOT what the Twitter guy had in mind, proving that Noah is answering a different question.
This is really simple, everyone: If I am struggling to pay my bills, including fixed-rate debt payments, and then you’ll tell me prices are going to go up by 10% next year, I don’t care what happens to this particular fraction called “debt/income.” What I want to know is, will my nominal paycheck go up by 10% as well? If so, then I’m golden. If it goes up, but by less than 10%, I conceivably could still be better off–it depends how big a fraction my fixed-rate debt payments originally are of my total budget.
But under NO CIRCUMSTANCES would I want to see prices go up, if at the same time you tell my wages are going to go down too. Instead of that outcome, I would rather see prices stay the same.
Putting it another way: For a given nominal wage and nominal debt payment, I am better off if prices go down. Duh. I don’t care if that raises the “real burden of my debt.”
If you want to say this guy’s question doesn’t understand basic price theory, and that it’s kind of goofy to assume prices could rise while leaving blue collar workers in the dust, OK…but that’s the narrative progressives have been telling about Ronald Reagan-George W. Bush’s America. I actually think that’s what prompted the Twitter guy’s question. He was having cognitive dissonance on why the Keynesian heroes were simultaneously championing inflation to help debtors, but also worrying about income gains accruing largely to the fat cats.
Question on Financial Repercussions of Secession
[Second UPDATE below.]
[UPDATE below.]
Something is puzzling me here. People who are willing to have a war to prevent secession argue that they are trying to prevent secessionists from imposing costs on everybody else.
But what are the actual calculations to yield this result? Let’s take Texas for example. Depending on which estimate you look at, the actual GAAP net worth of the US federal government right now could be negative $75 trillion. Texas in 2011 had 8.2 percent of the US population.
So a back-of-the-envelope calculation (disregarding demographic of Texas vs. other states, relative income, etc.) suggests that if Texas left the Union and forfeited its citizens’ claims on future federal entitlements, the rest of us would be instantly $6.2 trillion wealthier.
Moreover, we would be able to slash military spending with no problem, because now there would be a nice big neutral country on our southern border, armed to the teeth. No outside army is invading the leaner US going through the Republic of Texas.
What am I missing? What could possibly justify bombing the Texans and killing thousands of them (many of whom would be children) in order to “save the Union”, if (by assumption) a majority of them wanted to secede?
UPDATE: Apparently a bunch of you are going to have a heart attack, because you don’t realize that when people refer to the “unfunded liabilities” of Social Security and Medicare, they are taking into account expected payroll tax “contributions.” That’s what the “unfunded” means. Also, to the extent that certain services (I’m using the term loosely of course, just to play the game) provided by the US federal government are proportional to population, that type of thing should be a wash. The only possible issue would be “public goods” that are cheaper per person, the greater the US population. I dealt with the military–what would seem the most obvious one–and think I showed if anything, it will be cheaper per person to provide actual defense (as opposed to maintaining a global empire) if Texas seceded.
However, Blackadder did point out one major omission: I forgot that the outstanding Treasury debt is a fixed obligation of the US government, regardless of population. So let’s adjust for that now:
I’m not relying on Shadowstats or some other controversial estimate. The 2012 Trustees Report says that Social Security and Medicare have $38.6 trillion in negative present discounted value (I think it’s over a 75-year window, but don’t quote me on that). So to repeat, that number already takes into account the expected payments into the systems from future workers and employers, and is saying the benefits due to recipients are so much higher, that even discounting those discrepancies means their present value sums to negative $38.6 trillion. I’m also pretty sure–but don’t quote me here either–that number treats the US federal government as a unified budget, i.e. it ignores the Social Security “trust fund.”
OK the net federal debt held by the public (meaning we’re not worried about the Treasury owing money to another government entity like Social Security) is $11.45 trillion in late 2012. So even if Texas doesn’t pick up a dime of the existing, outstanding Treasury securities held by the public, that’s still a savings of at least ($38.6 trillion – $11.5 trillion = $27.1 trillion) x 8.2% = $2.2 trillion for the rest of us, instantly. This is an extremely conservative figure, taking the official estimates of government actuaries at face value. And like I said, I think any reasonable calculation of ongoing expenditures for the US federal government (not counting entitlements) would be close to a wash. What other “public goods” besides military spending does the USG provide, that would make the rest of the US poorer because Texas seceded?
UPDATE #2: Some people in the comments can’t see what all the fuss is about. If some people in a state want to secede from the Union, all they have to do is ask for permission from the US government, and for all we know, that feds might grant them permission. In that case, no war is needed. So why all the whining?
Well right, I don’t think anybody is interested in the case where the US government allows people in a state to secede. After all, not even General Sherman said to Lincoln, “You know what would be hilarious Mr. President? Tell the Confederate States they have your blessing to leave, then we’ll invade and slaughter them anyway! Ha ha I’m such a jokester.”
No, the tricky issue occurs when a majority of people in a state want to secede, but the federal apparatus tells them “no.” Then the people in that uppity state–perhaps believing in “self-determination” or some such cockamamie notion–get it into their heads to go ahead and leave anyway. Now the tough question: Do the Americans in the other 49 states really want to start killing those people in Texas (say) until they see the error of their ways? I am astounded that so many people would apparently answer “yes” to that question.
Potpourri
==> Over at Laissez-Faire I explain my Chevy Chase moment.
==> On carbon taxes, I report you decide.
==> My podcast with “Gadsen Rising.”
==> My podcast on “Patriot’s Lament.”
==> Markets in Everything: An insurance policy for libertarian activists.
Libertarians Love Homesteading Theory Except If God Exists
I don’t want to link to our comments because nothing he said was unusual, but last week I got into it with a critic here about God violating people’s natural rights. In other words, my critic was claiming that we can use our reason to derive rights that human beings possess, and that’s how we can know it’s wrong to murder, steal, etc. We certainly don’t need a God in order to understand right from wrong. Moreover, my critic continued, the God as described by the Christian Bible (or at least, as vocal Christians today talk about Him) violates such rights all the time, if He actually does the types of things Christians attribute to Him.
I think this is balderdash. If you want to say, “C’mon Murphy, your ‘God’ doesn’t exist, give me a break!” OK I understand that; at least your objection is coherent. But it makes no sense for someone who believes in Rothbardian-type natural rights to say that the Christian God initiates aggression against humans.
If the Christian God exists, then He created everything; He is the author of the entire physical universe, as well as our very souls or essences. He created the very idea of you and me. In this context, it makes sense to say He gave us reason, and using that we can define our natural rights. It would be immoral and a crime for James to shoot Billy out of the blue. However, no matter how Billy dies, there is a sense in which God made that happen. So either God murders no one in a criminal sense, or He murders everyone; but zapping someone at age 31 because he dropped the Ark of the Covenant, instead of zapping the guy’s heart at age 120 because he was a pretty obedient servant all his life, doesn’t really give a reason for libertarians to condemn one and praise the other.
For an analogy: It makes sense to say that Anakin Skywalker committed an atrocity when he wiped out his colleagues. It makes absolutely no sense to say that George Lucas committed an atrocity when he “made” Anakin “choose” to do that.
Look, guys like Walter Block love posing extreme thought experiments to make the point. Suppose some guy creates a new planet out of material that he justly acquired. He owns every molecule on that planet. Then you find yourself on that planet somehow (we’ll be vague on how you got there). Yes, perhaps the guy can’t shoot you. But he can certainly say, “Stop breathing my oxygen and stop standing on my rock. Get off my planet or I’ll evict you.”
Thus he ends up killing you, especially if it turns out he owns the whole physical universe except people’s bodies. And I’m pretty sure the straightforward application of standard libertarian theory says this hypothetical guy who owns the entire non-sentient physical universe, violates no one’s rights if he decides to let them all perish. Depending on the circumstances he’s probably a huge jerk of course, but he’s not violating anybody’s rights.
So if homesteading theory means anything, God arguably owns everything including your body, but for sure He owns every non-sentient thing. Thus He is perfectly within libertarian rights to set whatever rules He wants for our use of His property.
Steve Landsburg Thinks the Current Debt Level Is Juuuuust Right
Steve Landsburg and I can have a perfectly civil discussion on theology. He agrees not to mock me (to my face) for thinking a guy can walk on water, and I don’t make fun of him for worshipping irrational numbers. But when it comes to government debt, I think Steve and I might just have to agree never to talk about the subject. Today he writes:
How high should taxes be? High enough to cover expected outlays going forward — but no higher.
That’s because any additional revenue would be used to pay down the federal debt, which is a bad idea. It was almost surely a mistake to run up this much debt in the first place, but now that we’ve got it, the best thing to do is to keep it forever.
Here’s why:
Every $100 in outstanding debt commits the government to making payments with a present value of $100, and hence to collecting tax revenues with a present value of $100. In a world where the interest rate is 3%, the options include collecting (and paying off) $100 immediately, or $50 this year and $51.50 next year, or $11.38 a year for ten years running, or $3 a year forever. Because deadweight loss (i.e. the economic damage due to the disincentive effects of taxes) is roughly proportional to the square of the tax rate, it turns out that the latter — the policy of paying interest forever without ever making a principal payment — is (at least roughly) the policy that minimizes the present value of deadweight loss.
…
In other words, as far as the existing debt goes, we’re hosed no matter what we do — it’s painful to pay it off, and painful to keep paying interest forever. But at least if we pay interest forever, we’re minimizing the deadweight losses associated with raising taxes.
As usual with Steve, I think he is probably correct as far as the strict mathematics of the argument. However, I have the opposite intuition. Now the ground rules of this game (even though Steve didn’t say so) are presumably that we rule out government default on its debt as cheating, and we don’t worry about the ethics of taxation per se. In that framework, I would certainly recommend that the US government start paying down its debt, both in terms of outstanding Treasury securities but also in terms of paying people lump sums to renounce their future Social Security and Medicare claims.
Now the tricky thing is, I suspect if we spelled out our assumptions a little more, Steve and I would end up agreeing. I could even imagine after 5 emails, Steve saying, “Yeah, we’re basically saying the same thing.” And yet, it sure doesn’t seem like that, does it?
To see what I mean–that I think Steve and I are actually closer than it first appears–consider that of course I would NOT [added!–RPM] recommend raising taxes, to start paying down the debt. Rather, I would recommend slashing spending tremendously. Then the other subtlety is that you would want to allow for emergency situations where deficits occurred temporarily in the future. So by paying the debt down today (and as a general rule), you were actually just giving yourself breathing room so that the debt down the road didn’t end up higher than where you’re starting today.
In other words, Steve is saying that if the debt is 85% of GDP today, then in a century he wants it to still be 85% of GDP. (For sure that’s what he’s saying if GDP is constant; in the comments of his post it wasn’t clear if he actually wants to maintain constant dollar amount of debt, or constant debt/GDP ratio.)
Suppose I too want the debt/GDP ratio to be the same in 100 years. But, I predict that there will be periods between now and then when the deficits will be so large that the debt/GDP ratio will grow during those years. In order then to reach my target, there must be periods when debt/GDP shrinks. And unless I happen to think the present is a time that requires growing debt/GDP, why wouldn’t I start paying it down right now?
(This is a little awkward because presumably right now–coming out of the financial crisis–is an “emergency” time when tax revenues are depressed and you could expect the government to run a budget deficit. But, that’s not really important for Steve’s argument. He would have written the same post in 1984 I believe.)
Anyway, the above is just to get your wheels turning. The real problem with Steve’s analysis–by which I mean, the assumption that makes his conclusion right, but which is a bad assumption to make–is this:
Note: The above assumes that spending policies and tax policies can be set separately (subject to the constraint that tax revenues are at least high enough to cover interest payments). Things of course get more complicated if you believe that debt levels and/or tax rates constrain future spending through some political mechanism. I’ve often heard this alleged, but I’m unaware of any strong evidence for this assertion.
How about this Steve?
(The footage is from a riot in Greece earlier this month.)
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