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Lawrence J. Kramer  

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  • That Ship Has Sailed [View article]

    I appreciate the kind words. I don't quite understand the notion of a philosophical framework or context. I'm sure we all have some such thing, and that they can differ, but I don't see how the concept relates to the specific issue of whether the economy will be made more robust by higher interest rates. If I have four apples, and I give you two, I will have two apples regardless of your philosophical orientation, and you will have two apples regardless of mine. (Or not ...

    As a pension guy, I'm down with demographics. We of the "me generation" should understand how many things were done for us because we were the demographic center of gravity for our entire lives. And we will continue to drive things until we lose our numbers in the years ahead. But I do believe the "dependency ratio" thing is overplayed. If it really were a problem, wages would be rising as shortages of workers developed. Yet, they are not.

    As a general matter, especially in the industrialized West, goods are imported from other places or made by machines, or both. The boomers have given us the boomerangs, kids who cannot get work because the old geezers won't get out of the way. But despite this obvious demographic log jam, the idiots running for President want to lower Social Security benefits, making the problem worse. If there is one clear sign that our pols do not understand macroeconomics, it is their failure to enable people to leave the workforce so that those who want in can find a spot. (And, of course, their thinking that we cannot afford to make infrastructure investments when, in fact, we cannot afford not to make them.)

    Instead of reducing SS benefits, we should be increasing them. We should be buying more things than just health care for seniors. Give us some airplane tickets and see what that does for the hotel business! Senior discounts are everywhere. They should be institutionalized. The government should distribute gift cards to retirees that can be used only for spending. In a Fordist economy, one business's employees are another's customers. If the population ages, and new sources of supply - globalization and automation - provide the outputs, an imbalance between workers and retirees shows up not as a shortage of workers but as a shortage of customers. But there is no reason why retirees cannot be customers if the capacity is there to meet their demand.

    Globalization and automation were going to make Fordism obsolete anyway as production became more capital intensive. The historic matching of people needing outputs and people producing outputs was a technologically contingent thing. It was not possible before Ford's time, and it will be too expensive a method of production in the future. So we MUST find another paradigm. Until we do - which I suspect will be a long time - we can expect stagnation, low interest rates, concentrated incomes, and general malaise.

    I don't know how we will come to realize that we can do more with less if only we could distribute the outputs. We are up against every fundamental comforting myth of virtually every culture. If we are to earn our bread by the sweat of our brows as punishment for original sin, how can we just print money? Manna was a temporary miracle, not a human achievement.

    So, speaking of ships having sailed, in one sense just the opposite is true. Our ship has come in. We are just refusing to unload it. While we wait, I am borrowing heavily to invest cautiously. There is enough of a spread between cheap money and "safe-enough" investments to produce a very nice return. The methods may be appropriate to this thread, but this comment is already too long...
    May 3, 2015. 11:58 PM | 1 Like Like |Link to Comment
  • That Ship Has Sailed [View article]
    "I agree it's becoming more clear there's little reason for the FOMC to begin to raise rates. "

    This statement begs (but implicitly answers correctly) the question of whether the Fed needs a reason to raise rates or a reason to keep them where they are. Just about every SA article and comment on the subject of Fed rate setting begs that question. Those who say rates should rise challenge opponents to show how lowering them has "worked," whereas those who say rates should remain low challenge their opponents to show how higher rates will make anything better for anyone that doesn't amount to a helicopter drop for savers (which could be achieved by, well, a helicopter drop for seniors).

    In law school, they teach one to "think like a lawyer." [Pause for snickering to subside.] For example, a lawyer always searches for the "consideration" behind a promise. If I promise to give you something, and I am not making a gift, I must be getting something I want. So, what's in it for the Federal government to pay interest on the money it borrows? What is the Treasury's "consideration" for paying the interest - i.e., what consequent event does the Treasury "consider" worth paying the interest for?

    Given that government has the power to confiscate money (by taxes) or to create money (by issuing bonds monetized by the central bank), merely getting money to spend cannot be the consideration for the government's paying people to lend it some. There must be something about taxing too much and/or printing too much that the government "considers" unacceptable, and in consideration of which the government is willing to pay people to relieve it of the need to tax or print.

    Taxing too much slows the economy. Printing too much debases the currency. Clearly, the government does not need to slow the economy right now, so raising taxes just to print less seems like a bad idea. But what about printing less? If that would help the economy, the government should print less money, and it might cover the shortfall in cash by borrowing (because more taxes would be recessionary). IN CONSIDERATION of the ability not to print more money, the government would then pay money to people who lend it money.

    Thus, the government should pay interest only to the extent that doing so enables it to escape raising taxes and/or printing money to cover its expenses. ANY return on government securities must be justified by the government's wish not to tax more or print more. (Note that the government's demand notes - greenbacks - pay no interest). Any increase in what the government pays for money should be justified by an INCREASED need to get money other than by taxing or printing. Where is that need today?

    Surely, the government needs to spend more money. The infrastructure gets a D+ from the engineering lobby, but given that the graders would benefit most from the infrastructure getting a poor grade, let's curve that to a C. We all know it's still not all it should be. The resources that were used to build lairs for liars could just as easily be put to work building roads for more productive users. Those resources - not the money, the actual stuff and people - are available, without their being diverted from productive private use. If there were a productive private use, considering how cheap capital has become, those resources would be deployed accordingly.

    The question then is whether the government should tax, print, or borrow. That is always the question, which means that the question really is what presumption to use, i.e., what hierarchy to establish among these three methods. Which, if any, should we do to the largest possible extent, which to the smallest? What metric determines the optimal combination? These methodological questions are the ones that always get begged in argument. I want to answer them explicitly.

    I submit that we should print as much as possible and tax as little as possible, borrowing the rest. That means we first determine how much new money the economy can handle without undue inflation, then how much borrowing the government can do without rates becoming recessionary, and then tax to get what's left.

    My reason for that hierarchy is that printing money is the least recessionary way for the government to get money. Unless and until the spending results in inflation, the new money is harmless, whereas the spending is stimulative. And if the money is well spent, we get something useful out of the deal. Thus, printing to spend is the best choice up until it is NOT the best choice, i.e., up until it becomes inflationary, which is at the time that it diverts resources from private use and private users try to outbid the government and each other for what's left.

    Are we there yet? I think not, and I am troubled by those who argue that we are ALWAYS there, i.e., that government spending is always bad BECAUSE it diverts resources from private use, without bothering to ascertain whether government spending is ACTUALLY diverting resources or would actually divert them if undertaken. Diversion of resources is not a pernicious development that eats away at the frame of the house without anyone noticing. Diversion of resources results in manifest inflation, as private enterprises compete for the diverted resources. Diversion of resources can be seen when it is happening, and it can be predicted when the labor market is tight.

    A tight labor market is, therefore, a reason for the government to print less money, either by cutting spending, raising taxes, or raising interest rates. When rates are historically low as they are now, raising interest rates is clearly the way to go. Likewise, a tight market in resources generally - inflation - would be a reason to raise rates toward historically typical levels. Are we there yet?

    Some say we are - the people who look at inflation measures other than the Fed's PCE. Maybe they are right. My job here is to find the right questions, not the right answers. If someone says that they agree with everything in this comment, but that, by their lights, the red inflation light is already flashing, that's fine with me. I may or may not disagree, but then we're talking data, not method.

    If we can agree on the questions, we have some chance of coming to a reasonable compromise based on our differing answers. But if we cannot agree on the questions, we just end up calling each other names.
    May 3, 2015. 01:58 PM | 5 Likes Like |Link to Comment
  • WSJ Editorial Page Watch: 'The Slow-Growth Fed'? [View article]
    "Actually the Congress did indeed engage a Fiscal Stimulus programme "

    But it was pretty thin gruel, nothing near the Hoover Dam level commitment we could have used. So many bridges, so little time...
    May 1, 2015. 03:21 PM | Likes Like |Link to Comment
  • QE Posted On The Wall? [View article]
    "The writer was saying that, when Central Bankers have nothing but a hammer in their hands, EVERYTHING begins to look like nails to them!"

    I read that article, too. Well, up to that point. Ben Bernanke, the USA's principal central banker until recently, repeatedly BEGGED for fiscal action to help the economy. Accordingly, I use the "central banker = man with a hammer" test to discriminate between authors who care about facts and authors who don't. It has saved me a lot of unnecessary reading.

    If there is anything in this article worth reading, I imagine it will emerge from the comments. The odds, however, strike me as slim. To a man with a stick, every central banker looks like a dog.
    May 1, 2015. 09:27 AM | 4 Likes Like |Link to Comment
  • WSJ Editorial Page Watch: 'The Slow-Growth Fed'? [View article]
    "Why do Keynesians always build bridges to 'nowhere?'"

    What other kind would a straw man build?
    May 1, 2015. 08:13 AM | 2 Likes Like |Link to Comment
  • No, Trade Deficits Don't Cause Unemployment [View article]
    Blanket statements about causality in economics are usually wrong because there are always multiple forces at play (for example, the income effect the substitution effect), and their relative importance varies with circumstance. Most policy theories "work" when it just so happens that the current implementation of that policy is wrong.

    So, no, trade deficits do not cause unemployment. But unemployment can result from trade, whether or not there is a deficit, and there is probably a correlation between trade deficits and unemployment, as the entire deficit cannot be attributed to a difference in the price of things that require the same amount of labor. The US trade deficit arises to some extent from our importing increasingly labor-intensive goods and exporting increasingly capital intensive goods. Thus, we may be able to reduce our unemployment by boycotting cheap foreign labor. But our standard of living would fall because we would lose the benefit of our comparative advantage in capital-intensive production.

    The real problem is not the trade deficit; international trade benefits both sides of the trade. The problem is the distribution of those benefits. In the classic example of comparative advantage, English cloth for Portuguese wine, both of the industries are assumed to be equally labor intensive, so the trade basically swaps weather conditions. But what if wine making were fully automated? The "jobs" would go to England, where more workers would make more cloth, and all of the benefits of wine making would go to the owner of the winery and its machines. Deficit or no, the trade would "cause" unemployment in Portugal. But the trade would still be beneficial if measured at the national level. The trick is to deal with the concentration of income that capital intensity creates.

    I submit that the best way to deal with the concentration of income is for the government to print money and spend it on the national capital. We have idle labor, and we have access to cheap foreign goods, so inflation is not a problem. We can "tax" the recipients of concentrated incomes, but we should at least START by taxing them through 2% inflation. Everyone says that inflation is a tax, but no one seems willing to compare it to other taxes in terms of efficiency and fairness. If we need taxes, why not that one? Inflation is a wonderful tax, up to a point, because it (i) taps excess capacity before it actually affects anyone, (ii) forces price discovery of downward-sticky prices, including labor, and (iii) discourages hoarding of cash. Where inflation hurts the poor, the safety net may need adjustment, but that is not a deal-killer; it's just part of the solution.

    The moral issue of sweatshops, etc., remains, but it is not an economic issue. If we are willing to forgo cheap stuff so that we are not enabling the bad conditions under which they are made, that's our choice. It is interesting to consider, I think, whether we would forgo the benefits of previous labor conditions in the US, all of which were part of the process whereby we have come to where we are. Could it have been some other way from the start? Can it be some other way now in other places? Maybe yes, maybe no. But whatever we decide, let us be clear that what we do for moral reasons we do despite the cost, and not because it is good for the economy.

    Apr 30, 2015. 11:28 AM | 2 Likes Like |Link to Comment
  • The Looming Liquidity Crisis [View article]
    "Who cares how pretty the well girl is.

    It's not about pretty; it's about branding. Branding is a form of information. If we ignore it, we are inefficient, which is why generics cost less than brand names. American investment banks and ratings agencies had good brands. If people could not drink their water without smelling it, they would be underpriced by Somali investment bankers and ratings agencies with good water.

    Brand value is not a simple thing. For example, an American entity may have a good brand value in part because America has a good brand value. The bail-out of our banks was really a bail-out of their customers to protect the national brand. We all benefit from New York's being a world financial center. For example, the price of imports reflect the safety of our currency invested here by our vendors. We may not all be aware of these benefits, but taking advantage of things we don't all know explains why we are a republic and not a democracy.

    It's all well and good to say that those who bought bad paper could have avoided the problem by looking at the underlying, but enabling them NOT to do that is where our competitive advantage lies, or lay. There is a special place in hell for everyone in the chain that put bad US, Grade AAA paper in the world's portfolios. They really did poison the well, and people will be sniffing the water, to our detriment, for years to come.
    Apr 26, 2015. 09:34 AM | Likes Like |Link to Comment
  • The Looming Liquidity Crisis [View article]
    This is a great article!

    I would, however, urge a more geologic approach - a discussion of the tectonic movements that affect our ability to do other than we are doing in at least several respects. For example, Mr. Lefeuvre writes:

    "In the context of widespread quantitative easing policies coupled with deflationary threats and compressions in term premia, the sharp decline in long term yield has triggered a 'search for yield' that has led many investors to ramp up their exposure to illiquid assets."

    I would say, rather:

    An imbalance in the supply and demand for capital (both in raw amount and risk tolerance) raised the threat of deflation, forcing central banks to lower risk-free rates and private investors to compress term premia. This sharp decline in long term yield has triggered a "search for yield" that has led many investors to ramp up their exposure to illiquid assets.

    I prefer that formulation because I think it leads our attention to identifying who, if anyone, can solve this problem. Mr. Lefeuvre accurately observes the transition from buy-to-hold to buy-to-distribute. Could that shift have been avoided by mere probity (which regulation can, perhaps, codify)? I think not. The distribution of investable assets has shifted from Main Street's clients to Wall Street's clients. That's what a massive trade deficit will do to money - put it in the hands of foreigners, all of whom suffer from exactly the kind of risk intolerance and information asymmetry that makes securitization so attractive. If a foreign investor can get paper from a respected investment house, with a AAA rating from a respected rating agency, why would it bother to investigate the underlying investments or their liquidity?

    Unfortunately the respect for these allegedly respectable entities arose from the fact that their partners once were financially responsible for the outcome of their work. Now, the partners are employees who get paid on the basis of deals done - investments distributed, without regard to their quality. Of course, there was a piper to be paid in 2008, but without meaningful claw-backs of bonuses, the day-to-day incentives driving the actual conduct of business favored quantity over quality to a disastrous extent.

    The point of this behavioral narrative is that I think Mr. Lefeuvre's description of the symptoms is spot-on, but that he has not identified the pressure point, the place where regulation could make a positive difference. That point is the compensation scheme at systemically important financial institutions. I like the idea of regulating SIFIs, but I am not an expert on the regulations. All I know is what I can't find on Wikipedia, specifically, the word "compensation" in the description of the applicable regulations.

    What I can find, I cannot say I like. I agree with Mr. Lefeuvre that hobbling SIFIs will just make things worse. The issue is quality control, not magnitude of risk. We need the bandwidth that we need. Decision makers at SIFIs need to have skin in the game, and the definition of a SIFI should be any institution that sells investment grade paper without a decision-maker having a stake in its performance. Just as BAD underwriting was essential to the last crisis, BAD regulation may lead to the next. But underwriting and regulation are both essential actions, and it would be a mistake to give the latter a bad name tout court.

    Separately, the impetus for the bad underwriting was the shortage of liquid paper, which Mr. Lefeuvre sees persisting because "there is no sign of reduction of the size of the balance sheets of many central banks and, meanwhile, fiscal imbalances are being corrected." In other words - mine, anyway - fiscal austerity, dating back at least to Bill Clinton's silly tax increase and budget surplus, and continuing today, is at the heart of the matter. The central banks cannot shrink their balance sheets in the absence of economic activity. The sovereigns need to spend - there is so much useful stuff to do - and they need to do it now, knowing that there is plenty of excess capacity to do the work and plenty of pent-up and systemically helpful demand for the resulting bonds.

    So - infrastructure spending and compensation rules that drive better underwriting. Kudos to Mr. Lefeuvre for laying out the consequences of their lack.
    Apr 24, 2015. 12:35 PM | 4 Likes Like |Link to Comment
  • Asset Managers Pose Systemic Risk - It's Time To Recognize It [View article]
    "It is time for regulators to move from their narrow focus on banks and insurers to recognize wider systemic risk."

    I don't see how regulation can fix this. These prices are real responses to the capitalization rates consistent with interest rates announced by the most concentrated earth-movers around, the central banks. There is nothing inappropriate about the current price levels (unlike the underwriting on liars' loans), and nothing that can be done about the fact that the price of a stock reflects the risk-free interest rate in the economy. Congress can repeal the CFMA 2000. It cannot repeal CAPM.
    Apr 24, 2015. 08:58 AM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    "That's the sole purpose of MMT - to construct a model view of the world that supports their policy ideas. "

    Maybe, maybe not. I wouldn't know. At best, MMT is consistent with those policy ideas, but the ideas have other weaknesses that MMT cannot address. All I see in MMT is a fiat-money version of Keynes's prescription to run deficits when the output gap is large and run surpluses when capacity is strained. In the days of hard money, one could talk about running surpluses to "save up" money (gold) for rainy days. But with fiat money, there is no reason to do that. Some OTHER basis for spending in recessions and not spending in boom times needed to be found, if that policy were to be maintained. I think MMT provides that theory. What others do with the tool is their business; a sound economic theory is a necessary condition for a policy, but it is not a sufficient one.
    Apr 23, 2015. 02:14 PM | 1 Like Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    I think CR unhelpfully resists some helpful abstractions. If taxes merely "redistribute" purchasing power because the government spends the money, one might infer that there can be no spending without such a transfer. But we know that the government can borrow, too. Borrowing must, therefore, be an alternative way for the government to redistribute purchasing power. Now our inference is that the government must either tax or borrow if it is to spend.

    But that's only true in a mechanical sense. When the Treasury sells a bond, and the Fed buys that bond by issuing paper that can be used to pay the holder's obligation to the Treasury (his tax bill), and the Fed, for no reason consistent with its being a private entity, remits the interest on the bond to the Treasury, the government has, for all practical purposes, "printed" new money to fund its spending.

    Accordingly, the government has THREE ways of obtaining money to spend: it can tax, it can borrow, or it can print. The feature that distinguishes a fiat money system from a system with redeemable currency (gold-backed money, say), is that inflation is the only constraint on the amount of money that the government can print. Logically, that is a very big deal, because in a deep sense, it changes the "purpose" of taxation and borrowing.

    If we allow that the government may fund its operations by taxing, borrowing, or printing, we must also allow, I think, that there is an optimal mix of these, not in absolute terms, but in terms of what best suits the economy as we find it at any given time. I submit that the optimal mix is the one in which the most possible money is printed. Printing money takes money from no one, but it does take result in an unstable currency, which is a bad thing irrespective of purchasing power dynamics. (At this point, we can assume that all prices are renegotiated to adjust for the inflation, i.e., that the disruption of excess inflation, not a shift in purchasing power, is its own evil.) This logical primacy of money printing - its superiority over taxation and borrowing as a source of funding to the extent that it does not generate inflation - relegates the latter two sources of funds to things done not to fund the government, but to prevent money-printing from causing inflation. We tax because, if we didn't, we'd have undue inflation, not because, if we didn't, we could not spend.

    You can see how angels-on-pinheads this issue becomes. Do we tax to prevent the inflation that spending would cause, or do we tax to enable spending that would be too inflationary if paid for by printing? These are semantic differences only. Obviously, we tax because an optimal division between taxing and printing always involves some taxing. Once we say what taxing "does," we head off down a semantic rabbit-hole, as the only thing we can really say about what taxation does is that it forms part of an optimal funding program, i.e., one that maximizes procurement and minimizes crowding out. It is, in that sense, like a stone in an arch: it does nothing but BE a part of the arch.

    Still, there is an advantage to TREATING taxation as doing something specific in formulating policy. Thus, given that a certain level of spending is going to occur, I can compare the "downside" of the methods available for funding that spending. (For the sake of simplicity, I will leave out unmonetized borrowing for now and look only at taxing and printing.)

    The downside of taxing is that it takes money out of people's pockets. The downside of printing is that it creates inflationary pressure. But, whereas we cannot tax without taking money out of people's pockets, we can print without causing inflation if there is excess capacity in the economy. As a matter of policy then, I submit that we should TRY to print before we are FORCED to tax.

    From within this frame of reference, we can describe the ideal amount of money printing as the amount that does not cause undue inflation, and the ideal amount of taxation as the smallest amount possible, because, as compared to money printing, which creates inflationary pressure because it does NOT destroy purchasing power as it funds, taxation avoids that effect because it DOES destroy purchasing power as it funds.

    Since the only reason any of this matters is to make optimal policy choices, a description of the options that captures their key differences seems to me the most useful type of description. Describing taxation as a transfer of purchasing power is ok if one understands that the difference between a transfer and money-printing is that the transfer entails someone losing something. I believe, however, that the preferability of printing over taxing, when capacity permits, is better captured by describing all spending as funded by printing, with some of that printing offset by taxation. The algebra is the same. Admittedly, the description does not mirror the mechanics, but that's not its purpose. The mechanism is the result of prudential allocations of power, whereas the description offered here addresses the logical structure of the underlying economics.

    At least, I think it does.
    Apr 23, 2015. 01:07 PM | 1 Like Like |Link to Comment
  • Economics Myths [View article]
    "Uncertainty raises the amount each rational person would want to save, and maximises the damage to the economy."

    You know what keeps the Fiddler on the Roof? TRADITION. Not calculation. Over time, the people find out what they need to find out. They observe that taxes do not wander all over the place but bear some relation to the price of milk at the grocery store. Rules of thumb emerge. Explicit information is over-rated.
    Apr 23, 2015. 02:25 AM | Likes Like |Link to Comment
  • Finding Religion On 'Crowding Out' [View article]
    CR -

    "If the govt taxes the deposit it CANNOT be destroyed by a non-issuer."

    But the government does not tax "the deposit." The government taxes the taxpayer, who must deliver a Fed liability to the Treasury in satisfaction of that obligation. Since a Fed liability is just an accounting "liability" on the books of the Fed (since it is dischargeable by the Fed only by issuance of other Fed "liabilities", and so is not a "liability" in the legal sense) but IS an actual legal OBLIGATION of the Treasury in the manner of a gift card, the delivery of a Fed liability TO the Treasury is the delivery of its own obligation, which then goes poof.

    I suspect we have reached an impasse. Thanks for your time.
    Apr 23, 2015. 02:20 AM | 3 Likes Like |Link to Comment
  • Economics Myths [View article]
    "The average man doesn't have access to the reams of data he would need to calculate the excessiveness of the money supply,"

    Then how does Ricardian equivalence arise? The hoarder doesn't have to understand that taxes reduce the money supply. He need only expect that his taxes are going to rise because that's what happens when the deficit is large and inflation looms. He know what he needs to know. You consistently believe that people need more information than they actually need in order to take actions that are consistent with the rest of the information that they do not have.
    Apr 23, 2015. 12:37 AM | Likes Like |Link to Comment
  • Economics Myths [View article]
    "BTW, you missed an obvious argument in your favor."

    And you are denying the readership the benefit of that argument because ...? And if it is in my favor, why hasn't it changed your mind? Or is it not really in my favor at all?
    Apr 23, 2015. 12:16 AM | Likes Like |Link to Comment