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d be that the golden age growth 1947 1973 gets the credit for driving down the poverty rate and that the economic recession which hit like a ton of bricks in 1974 explains the end of that decline the fact that poverty has not continued to decline as the graph shows would then be evidence that the economy never really recovered from that 1974 recession to complete the thought it is certainly true that the poverty rate could not have fallen much below the 8 8 bottom it did reach it could not fall below zero it would have had to start tapering off well before it hit zero nima s graph shows that the downtrend from 1967 1973 was less rapid than in the years before 1967 this likely was part of that tapering off but it was interrupted by the 1974 recession or by major welfare programs or something in my view the growing accumulation of private debt in the post wwii period reached a breaking point in 1974 it resulted in recession and the end of a golden age and the end of the keynesian consensus and among other things the end of the decline of the poverty rate in nima s view the end of the decline of the poverty rate was brought on by major welfare programs but i do not imagine that nima can attribute our myriad other problems to those same welfare programs i wish to point out that my argument i don t even know how to say this my one central causal factor is for me the cause of everything by contrast nima and others require an endless series of explanations to cover those myriad problems posted by the arthurian at 4 00 am 0 comments wednesday december 29 2010 supplyanddemand the troublesome economist has a good summary of the financial crisis as i read it the post lays out a good overview of what happened if you read it you may find a few things in the post that you disagree with good remember what those things are and then compare your reactions to mine below i start with two excerpts from allan schmid s post one from each end of it the too big to fail banks are blaming the financial crisis and the subsequent great recession on greedy home buyers when the big picture is grasped it is clear that the problem was not greedy home buyers but super greedy avaricious yes immoral brokers banks and bond raters yeah i want to leave out the word greedy for starters and if i can reduce the thought to a clear minimum we have banks blaming home buyers and schmid along with home buyers presumably blaming banks lenders blaming borrowers and borrowers blaming lenders supply blaming demand and demand blaming supply one of the key phrases in all of economics is the phrase supply and demand supply and demand without supply there is no demand without demand there is no supply this is one of the key concepts in all of economics and i think it s kinda sad that a hobbyist like me has to remind people of it there is no way we can ever solve the economic problem no less analyze it correctly if we insist on taking sides on things that are matters of supply and demand there compare that against your reactions to schmid s post i have a couple more points to make allan schmid writes profits on the difference between home mortgage rates and the lender s cost of money were too plebian for the high flyers of the financial sector so the commercial and investment banks packaged mortgages into bonds and resold them to other banks governments and pensions funds around the world the market for these derivative bonds was marked by use of absurd levels of leverage as high as 30 to one yeah idunno where the 30 to one comes from but i know i ve been looking at this graph for a long time long before that wiggle there in the early 90s and i know the line has been climbing for a long time and policymakers just let it climb and i know the financial crisis finally caused the trend line to start dropping in 2008 which created a peak in 2007 in 2007 there was 35 of debt for every dollar of money in circulation 30 to one 35 to one close enough and way way way too much debt but i guess everybody knows that already but that s not why i m showinya the graph i show the graph because i want you to look for some big burst of debt that would have made the trend line jump up suddenly there is no such big burst of debt visible on the graph there is only a continuous exponential increase in debt from 1947 to 2007 with some very inconsequential fluctuations in it there is one continuous increase in debt lasting 60 years this graph tells me that the debt of which allan schmid writes above the debt that created the financial crisis the debt that was created by the joint efforts of lenders and borrowers and policymakers this massive and troublesome debt was nothing but the continuation of a process begun at the end of the second world war there is nothing about now that you should focus on there is nothing about the last two or three years or the last 10 or 20 years for that matter in which you will discover the source of the economic problem for that matter you could go back to 1947 and look for the source of the problem and not find it the source of the problem is so deeply embedded in our thinking that we stand on it to look around for the source of the problem and that of course is why we cannot see the source of the problem we think we need credit for growth and the more troubled is our economy the more we do things to encourage and support access to credit well that was a good plan when our economy had little credit in use now that we have so much credit in use credit in use being measured as debt of course it is no longer such a good plan and yet we have policymakers continuing to do everything in their power to encourage greater use of credit to some people this looks like the government favoring the banks and maybe it is but i don t think their purpose is to favor the banks i think their purpose is to get the economy growing again but they think we need credit for growth and that is a plan which can no longer succeed at the other extreme we have people starting to say that increasing our output may not be such a good thing after all but i m with milton friedman on this one nothing is more important for the long run economic welfare of a country than to improve productivity the solution to the economic problem is to remember that while credit is good for growth debt is harmful to growth the one extreme excessive accumulation of debt kills the economy the other extreme rejection of credit use keeps it dead the solution is to avoid the extremes it s really not difficult to see final point in the 12 pages i wrote reliance on credit has driven the growth of the financial sector it has increased the cost of facilitation relative to the cost of production it has driven money out of productive work and into finance since 1990 ford has made more money from financial services principally automobile loans to consumers and dealers than from car and truck making operations the quote about ford was from a 1994 article in the new york times so already by 1994 already by 1990 we can see that finance was excessive debt was excessive credit use was excessive but the policies that promote credit use continued to be enforced and reinforced and so in reviewing the events of the last few years allan schmid would write everyone wanted in on the golden goose as firms like ge and gm who formerly made real goods switched to earning a big share of their profit on leveraged financial contracts we cannot solve the problems created by excessive reliance on credit by promoting policies that strengthen the reliance on credit we need to rely on non credit money to maintain economic activity in the existing economy and we need to use credit to expand the economy we need to use credit for growth not for everything it must be obvious by now and it must be policy when you put finance people in charge of policy they cannot see debt as a problem posted by the arthurian at 12 00 pm 0 comments rock and hard place smoke and mirrors gene hayward writes who is more selfish senior citizens who won t take reduced benefits to help young people financially or young people who won t pay more taxes to help old people financially good luck with that question gene s question and it s not just gene s question creates a front between young and old as though there is enough money for only one of the two groups and well yeah that is how it looks but if that s how it really is it s because we ve used the wrong economic policies and by economic policies i don t mean just the level of government spending and taxes that s the only part of policy that gets examined but it s not where the problem lies not long ago we were the richest country in the world if we re no longer on top we re still close to the top therefore there should be no reason we cannot afford both social security benefits and reasonable taxes all around no reason but bad policy earlier i covered a macromania post that set up a similar front on the one hand taxes sufficient to balance the federal budget while expanding stimulus spending on the other hand taxes sufficient to eventually balance the budget while expanding stimulus spending no we should not be lining up and taking sides on ridiculous issues like the timing of the tax increases needed to balance the budget we should be calling for policies to reduce the private sector debt that inhibits economic growth but we ll never even get to the discussion of private sector debt if we insist on focusing on trivia like taxing now versus taxing later posted by the arthurian at 9 00 am 8 comments no solution over at macromania david andolfatto takes a look at robert shiller s droll article on the balanced budget multiplier here is a christmas gift andolfatto writes to those of us who have been primed since youth to be receptive to this sort of message stimulus without more debt i point out david s remark because i m just a little too old and anti social to have got the message regarding the urgent need to avoid government debt 1 i took a course in macro back in 1977 using the 1975 edition of a textbook first published in 1963 there was a world of difference between the economy of the early 1960s and that of the latter 1970s the economics 101 i learned was from a time before the solutions arising since the mid 1970s had worked their way into the curriculum our final for the course was to look at the economic problems of the time and write up an analysis and some policy recommendations i ve been doing that ever since while economists and policymakers started inventing new stories about rational behavior and reinterpreting the words of david ricardo and such i was in the library searching through statistical abstracts photocopying data tables at 25 cents a page calculating ratios with a slide rule and creating graphs with pencil and paper when i read i read maynard keynes and adam smith i was pretty well isolated from the new ideas of the developing horde of new thinkers andolfatto quotes shiller on the idea of increasing taxes enough to cover enhanced stimulus spending an idea shiller supports in his article then andolfatto rejects a specific part of shiller s idea and offers an alternative what i have a problem with is in using some silly theory to support the notion for example that taxes should be raised to finance a large public capital expenditure now i m no expert in finance but it seems to me that a large capital expenditure should be financed with debt the debt service could be supported by toll revenue on bridges and roads and user fees in general taxes are distortionary and to the extent that they are needed to support public spending they should be spread out over time shiller defends the idea of using increased government spending as a stimulus to be paid by increasing taxes enough to keep the budget continuously in balance andolfatto defends the idea of using increased government spending as a stimulus to be paid by increasing taxes or fees at a more leisurely rate to bring the budget into balance but not immediately all very nice however only six times in the past 50 years have we been able to bring the federal budget into balance now or later both shiller s idea and andolfatto s are unrealistic and unattainable at least to the mind of this isolated thinker as it appears to me the whole notion of solving our economic problems by balancing the federal budget is unrealistic and unattainable as it appears to me the whole line of reasoning that first emerged in the 1970s is just bad economics to be blunt i don t think you can develop an economic argument piecemeal with tiny contributions from dozens or hundreds of individual economists i think what you get is a piecemeal patchwork argument held together largely by constant repetition what you get is a different argument for every little piece of the problem there is no overview no overall coherence and no viable solution notes 1 it s not that i favor expanding government debt not at all rather i do not let public debt cloud my judgment the way almost everyone else does return posted by the arthurian at 4 00 am 0 comments tuesday december 28 2010 the friedman factor this is a straightforward version of the roundabout calculation milton friedman used to make his graphs show similarity between money and prices milton friedman s famous graphs seem to show that inflation a general increase of prices is caused by an increase in the quantity of money relative to output i ll tell ya how he made the graphs look like that step 1 you take the total amount of money that we actually have in this country in people s pockets and in their checking accounts and also in their savings accounts step 2 you take the total purchase price of all the goods and services we produce in a year or in other words the total we paid to buy all that stuff step 3 then you take the money number from step one there and divide it by the gdp number from step two step 4 and then you take the answer from step three and times it by the consumer price index and you call this money relative to output when you graph the result from step four it looks a lot like the price trend because you factored the price trend into that result see also my exchange of comments with the secret economist beginning here a refresher on dividing by a fraction and my series on milton friedman s arithmetic posted by the arthurian at 4 00 am 1 comments monday december 27 2010 is the fed printing money gene you write seems to me the banks have a second required reserves account that the qe credits are going into and do not become a part of the fractional banking system i take it you mean an unofficial second rr account a second account in effect as it were i take it you observe what has happened with bank reserves and compare it to what would happen if a second layer of rr accounts had been set up for the qe funds if that s not what you mean i must have missed something here are excerpts and my initial reactions to the wsj post ...
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