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Lawrence J. Kramer

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  • Is Inequality Causing Soft Economic Growth? [View article]
    When? Never. The genie is out of the bottle, demand will never catch up with capacity, and the apocalypse you see will never get here.

    How? No how. It cannot happen. Moore's Law says so. Our ability to produce will continue to outstrip our ability to entitle.

    "The output gap is the difference between savings and investments."

    No, it is not. Where do you get these bizarre definitions? The output gap is the difference between demand (manifested as actual GDP) and potential supply. Potential supply does not stand still. Every new invention, every new app, every new global trader adds to global supply. We cannot figure out how to enable demand for all that we can produce, and while we dawdle, potential supply (i.e., the ability to meet demand in short order, not necessarily the capacity on-line at the moment), grows apace.
    Aug 22 10:10 PM | Likes Like |Link to Comment
  • Is Inequality Causing Soft Economic Growth? [View article]
    "For the time being we have an output gap hindering inflation."

    And you see that gap closing when? How? And while it persists, how shall we behave?
    Aug 22 08:20 AM | Likes Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    "Seriously, does it really matter if my costs go up 20%, if I have 20% more income. "

    YES! What becomes of the money already in your checking account? How do you feel about your outstanding mortgage? Wouldn't you like to wake up tomorrow and find that your mortgage debt is 20% less than the day before in real terms? But wouldn't you hate to find that the $10k you are owed for a job you did last week is now worth 20% less? People order their affairs with regard to such things, and the effects are dramatic and important.

    Inflation is a nominal price phenomenon. What happens to real prices is also important, but it is a separate inquiry. You can use the word "inflation" any way you want, but if you are discussing economics, you will simply not be speaking the same language as everyone else if you use the term the way you understand it. Seriously.
    Aug 22 07:43 AM | 1 Like Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    "if wages increase at the same rate as prices, e.g. if my income increases 20% this year and prices for everything I own go up 20%, is there really any inflation? "

    Of course there is; that's what inflation means: NOMINAL price increases. Whether the wage earner keeps up is important, but it does not determine whether inflation has or has not occurred. In my example, inflation occurs - the worker gets a real wage boost initially, but so do other workers, and those who sell what those workers produce raise their prices. That's inflation.

    Don't get me wrong: I like inflation, up to a point. But if everyone is getting 20% increases, that is not a non-event. The level of inflation, even predictable inflation, is not a neutral thing, even if everyone who has something, including labor, to sell participates. Debtors and creditors are affected by the changing value of their obligations and collateral. Fixed incomes are affected, investment choices are altered, spending decision vs. saving decisions are affected, etc.

    "if the worker wages are higher, you are sure to find another worker to do the wages for you at a higher price and everyone will benefit equally."

    How so? Do workers grow on trees? SOMEONE will be priced out of the market. The guy I hire will be lost to whomever I outbid for his services. Understand that I am using the worker as an avatar for a SCARCE resource. If you posit that workers are not scarce, then there is no inflation when the government hires them to build roads. But if the worker is a scarce resource, someone will have to do without that resource if the government insists on using it. That someone may be me, or it may be someone I outbid. But someone will do without, because, by definition, too much money is chasing too few goods, and prices are rising accordingly.

    "The government doesn't have to really tax anyone in your situation, as the increased spending won't lead to absolute inflation."

    There is no such thing as "absolute" inflation. But there is inflation, and it can be too rapid, and it can be caused by too much government spending, and it can be suppressed by taxation.
    Aug 21 11:10 PM | Likes Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    "Rather a bit of a stretch given that democrats had a filibuster-proof majority in congress, and Obama signed the bill without question. "

    Three Republicans (Snowe, Collins, and Spector) voted with the Democrats in the Senate; the Dems did not have a filibuster-proof majority. There is no telling what those Republicans would have done were the bill's projected deficit larger. Obama did take credit for the bill, and he bragged about its effects, so I guess he cannot disown it. But I do believe it would have been bigger if the deficit hawks had not been so vociferous.

    It is certainly true that the GOP wanted more infrastructure action, and the Dems wanted more Social spending, and to that extent, I agree with you that the Act was misguided at Obama's direction. But what was really wrong with the bill was the budgetary constraints implicit in its size. Those constraints forced the parties to prioritize unnecessarily, and the Democrats' wrong priorities won.

    FWIW, I don't really believe in fiscal stimulus per se. But neither do I believe in a balanced budget as the default position against which all deviation must be measured. Rather, I believe that zero spending and zero taxation should be the default positions, that every dollar spent should be justified by its utility, and every dollar of taxes should be justified by the need to suppress private spending.

    The need to suppress private spending often arises from competition with public spending. At such times, a battle must be fought between public expenditures and private expenditures. Hopefully, the optimal mix will be reached. We call that process politics. My position has been that no such battle is necessary post-crisis, that everything worth doing can be paid for with newly printed dollars. But it's only a post-crisis, or post-globalization, or post-whatever position, i.e., it is based on supply and demand dynamics here and now, not on a preference for any particular mix of spending and taxes a priori.
    Aug 21 10:50 PM | Likes Like |Link to Comment
  • Is Inequality Causing Soft Economic Growth? [View article]
    "Pick the one I like? At what point did I do that?"

    In the immortal words of John McEnroe, you cannot be serious. You have picked austerity and some unstated Fed policy tighter than what the Fed has practiced. You do it with every Fed-bashing, monetarist bashing keystroke.

    You don't like fiscal or monetary stimulus, so you believe that those tools have produced worse results than their absence. You have not offered a cogent narrative of how other policies would have played out, either before or after the crisis. The same policies applied before and after might have had difference consequences before and after. Where you have tried to connect the dots, I, for one, find the narratives unpersuasive. Others may find your view persuasive. But if you really had an argument to make, you would not need to misstate mine, importing your conclusions regarding "excessive" demand and supply, as if refuting your version of what I said is the same thing as refuting what I actually said.

    "My counterfactual argument is the economies of the rest of the world who did not take Japan's 'medicine' did not suffer these ill effects."

    Which country do you have in mind? Greece? USA? Uganda? Egypt? Israel? All of them just like Japan in so many ways...
    Aug 21 10:22 PM | Likes Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    "Government spending does not crowd out private spending."

    Sometimes it does, sometimes it doesn't. If I want to build a house, and the guy building roads is willing to pay more for a rare construction worker, I have to pay more to get my house built. That's crowding out. Yes, the outcome may be that the higher wage entices someone to do the work for me, too, i.e., in the first instance, the government spending causes inflation rather than crowding out. But to prevent that inflation, the government taxes, thereby removing money from the private sector and making the demand match the old supply. So we can say that it is the tax increase that "crowds out" the private spending, but it's really the government's decision to tap scarce resources that "causes" the crowding to happen. Absent the spending, there would be no crowding. With the spending, there is crowding. Taxes are just the messenger.

    Of course, government spending only taps scarce resources if the resources it taps are in fact scarce. When resources are not scarce, government spending does not cause inflation, does not require offsetting taxes, and does not crowd out anything. Often, because our pols don't understand the importance of scarcity, government spending is accompanied by taxation that is not necessary. In those cases, as is the case now, it really is the taxation, and not the spending, that is causing the "crowding out."
    Aug 21 04:35 PM | 2 Likes Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    "If the banks had been prudent and non-fraudulent would the boom have been as big as it was?"

    Would it have been a boom at all? I agree completely that bad underwriting is a key domino in the chain that caused the crisis. The question remains, then, of what would have become of the dollars that went into RMBS and related derivatives if the underwriting had been more righteous.

    One possibility is a stock market bubble - the sort of thing we are seeing now, but on steroids, because there was so much more money then.

    A happy scenario would have Treasuries rising, the deficit falling (by virtue of lower interest payments) and a ton of infrastructure spending to exploit the low rates and available construction resources. That's what SHOULD have happened. If it had, if the construction boom had been focused on roads rather than houses, we would probably have come out pretty well.

    But it's not clear we could have got there, because some people oppose deficits no matter what, and deficit spending is the ONLY way to absorb a massive trade deficit absent private investment bubbles. Clinton's biggest mistake was running a surplus and bragging about it. Absent newly issued Treasury debt, the trade deficit money had nowhere to go, so it went where it shouldn't. The corruption was inevitable - no less culpable, but inevitable.
    Aug 21 03:03 PM | Likes Like |Link to Comment
  • Is Inequality Causing Soft Economic Growth? [View article]
    "How's are two decades of fiscal stimulus and low interest rates working out for Japan?"

    How would austerity and high rates would have restored the Japanese economy? As always, your only evidence of bad medicine is a bad result. You don't know whether no medicine or more medicine would have produced a better result. You just pick the one you like and assert its superiority. Confirmation bias at its finest.
    Aug 21 02:51 PM | 2 Likes Like |Link to Comment
  • Is Inequality Causing Soft Economic Growth? [View article]
    "Lot's of promises and good intentions, a horrible track record for execution."

    Absent the counterfactual evidence, we have no basis for saying the record is bad. It may be optimal AND bad, because that is the human condition, because free morons create tragedies of the commons all the while railing against efforts to get them to behave responsibly.

    As I said, I don't take responsibility for others' arguments. I'm not a monetarist - I don't have the learning for it. I believe that our political center of gravity has underestimated the extent to which supply would meet newly printed money. Here and now. It's not an absolute position, and it's not an "ism." It's what I see happening. The very same prescription might strike me as ridiculous at some other time - 1970, say. So if you have a problem with some sort of ism, take it up with those who cop to preaching it.

    The policies I advocate are fiscal and monetary policy that will create modest, predictable inflation. What those policies are depends on what is happening in the private economy. In 1880, it might have meant tight money and fiscal surplus; since 2008, it has meant loose money and fiscal deficit. Congress should have a fiscal policy that understands macroeconomics. Our current collection of bozos is not up to that task. The Fed is thus the only game in town, and it is doing what it can, which is probably not enough.

    I have no idea what I would have advocated before the internet and housing bubbles, as I was not paying attention then. The Financial crisis got my attention. As far as I can tell, monetary policy had little to do with either bubble - which is not to say that Volckeresque interest rates could not have prevented them (but at what cost?) - exuberance and foreign dollars happened, and any comment about monetary policy is simply post hoc ergo propter hoc speculation.

    The central bank has to have some target for inflation - even if it's zero - and it has to determine when THAT target is about to be breached just as it must when the target it 2%. So your notion that the Fed is not up to the task of keeping inflation from exceeding any given level gets you nowhere, as there is ALWAYS a level that it has to keep from being exceeded. Indeed, the Fed's positive inflation target is, if anything, an admission of humility: monetary deflation - as opposed to falling real prices - can be very bad outside of boom times, so the Fed is much more concerned with failing to reach 0% than it is of overshooting 2%. (You should be, too.)
    Aug 21 02:43 PM | 1 Like Like |Link to Comment
  • Naive Keynesianism To Keep You From Believing Macroeconomic Idiocy Of Various Kinds [View article]
    I pretty much agree with BdL's most important point - that we need fiscal stimulus - but I agree with alf2011 that the data here are sketchy. What is "potential GDP"? I get the concept - I'm all about the output gap - but I don't see the measurement. So I, too, wonder how the other things are calculated.

    I cannot make any sense of the claim that the financial crisis and not the housing bubble caused the recession. The collapse of the housing bubble triggered the financial crisis. (What caused the housing bubble is another matter.) What the chart shows, though, is that, absent the housing bubble, we would have been in recession WITHOUT a financial crisis.

    Whether our exports are competitive is a granular thing. To what extent is oil driving the export line? We all know that oil exploration is subsidized.

    Calling the Recovery Act "Obama's" is silly. The administration wanted more, the Republicans gave it less. This is very much the Tea Party's recovery bill, which explains completely why it failed. Yet the Tea Party is the first to claim that fiscal stimulus is no good, based entirely on miserly bill the Tea Part permitted. Chutzpah, anyone?

    But Blodget's take is no better. He show us that consumer spending has retained its percentage of GDP even as the share of government spending has fallen. That seems to say that SOME OTHER component grew to offset the losses in government spending. That component is business investment, yet the fact that it is not yet back to pre-crisis levels is said to be "to blame" for our weak economy. So, (i) consumer spending is not growing, (ii) government spending is falling, and (iii) business spending is growing faster than consumer spending, from which we are to conclude that business's short-term outlook is to blame for the anemic recovery. That he is a "renowned" anything proves to me only how low we have put that particular bar.
    Aug 21 09:22 AM | 3 Likes Like |Link to Comment
  • Obama Spins Subsidies Both Ways [View article]
    Colion -

    I agree. Medicare raises premiums for seniors with higher incomes. It would make more sense to raise the deductible and co-pays so that the means test has the added benefit of also being a medical necessity test.
    Aug 21 08:29 AM | Likes Like |Link to Comment
  • Obama Spins Subsidies Both Ways [View article]
    "If a man who smokes for 30 years and develops lung cancer, why is it the role of society to pay for his cancer treatment?"

    One of the things we can insure against is the risk of being the sort of person who is unable to care for himself. Yes, there is moral hazard there, but people don't decide to smoke or not on the basis of who will pay for their chemo. That's why life insurance covers suicide after a certain time: the risk of someone BECOMING suicidal is an insurable risk.

    If you think of health insurance as attaching at birth, the risk of growing up to be too dumb to stay healthy becomes part of the actuarial mix. Thus, it's not society's "role" to pay for the profligate ones. Rather, part of the insurance purchased by our parents' and, later, our own, taxes goes to cover the risk that we will BE the profligate ones.

    Risk is a wonderful thing to contemplate. It comes in so many forms and levels.
    Aug 20 10:30 PM | Likes Like |Link to Comment
  • Obama Spins Subsidies Both Ways [View article]
    "The ACA seeks to eliminate this scenario by compelling individuals to carry insurance."

    That's the problem with the ACA. We already have a law that requires people to carry insurance. It's called Medicare, and we all have it and we all pay into it while we work. The only wrinkle is that it has a 100% copay until age 65, which makes it necessary to make some other arrangement until then. In terms of compulsions, the ACA IS Medicare for all; only the tax structure is different, and a pile of money is siphoned off by the entrenched monopolies because that's how we roll.
    Aug 20 10:24 PM | Likes Like |Link to Comment
  • Is Inequality Causing Soft Economic Growth? [View article]
    "but inflation per se can't do anything"

    Predictable inflation is an environmental condition. People react to it predictably, which in macro terms, means that it "causes" things to happen that would not happen otherwise. Consequently, predictable inflation can be a tool of policy. Thus, although inflation is the result of credit expansion, the monetary authorities can influence credit expansion - see Paul Volcker - and so they can affect the rate of inflation, and so they can affect economic activity.

    The power of monetary policy to affect economic activity varies from time to time. Sometimes, monetary policy pushes on the proverbial rope. But at others, it tightens that rope, and at still others, it releases a restricting rope. Precision is not a test of whether something "causes" something else, nor is failure to cause something at Time A evidence of an inability to cause something at Time B.

    Unfortunately, these things are NOT simple, and any attempt to render them so is bound to ignore important distinctions.
    Aug 20 08:07 AM | 1 Like Like |Link to Comment