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Lawrence J. Kramer

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  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    "And we all agree that FICA deductions are insurance premiums -- its in the title of the law"

    WE don't all agree to any such thing. The statute books are full of things that are called one thing but are in effect something else. Obamacare was upheld because the penalty for not buying insurance is a tax. The law doesn't SAY it's a tax, but the Court found that it was a tax. (I support that conclusion.)

    But I don't care whether the FICA payments can rightly be called a "tax" for polemical purposes, i.e., for the purpose of claiming that poor people do or don't pay "taxes." The thing is what the thing is. To me, it quacks more like a tax than an insurance premium.

    Let's separate SS and Medicare. I don't see how Medicare benefits are any different from fire department benefits. You have a problem, and the government pays someone to solve it for you. In the case of Medicare, you pay an amount related to your wages (which has very little to do with your healthcare needs). In the case of fire department benefits, you could be assessed an actuarially sound fee based on the value of your property, but, as it happens, you already pay property taxes on that basis, so the government merely raises the tax rate to cover the fire department's expenses. One could, however, look at the town budget, allocate an actuarially sound amount for fire services, and say that the portion of your property tax attributable to that amount is a "contribution" and not a tax. As if that would make a difference...

    SS is a bit different because the benefits are related to contributions. But the program is NOT actuarially sound at the individual level, i.e., the present value of a high earner's contributions is less than the present value of his benefits. Rather, actuarial soundness arises from the social insurance feature, whereby people who need more get more, and people who need less get less. That's right up there with fire department benefits as a public service offset by a tax.

    I am more comfortable with the argument that the payroll tax is not really regressive. To the extent that payers get their money's worth in actuarial goodies - health insurance and annuity entitlements - the payment is economically equivalent to an insurance premium. And to the extent that the wealthy pay more than they get out, the payment is a tax, but a progressive one. Still, the burden to the payers is like a regressive tax.

    The bottom line for me is this: If the government is going to provide something to everyone, how that thing is paid for is a matter of fiscal policy, and all revenues are economically fungible both as revenue to the government and as burden to the payer. The macroeconomic implications of money coming out of the economy on account of any particular event (e.g., the payment/earning of wages) is the same no matter what the government is spending money on. Linking any revenue item to any expenditure is just optics.
    Oct 22 05:30 PM | 2 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    "I try to take a much more scientific approach than you."

    Try harder.

    You declare the Fed's actions "extraordinary" as if that were a binary category that creates some sort of burden of proof. They aren't - at least there is nothing "scientific" about claiming that they are. Then you set the bar by having your own idea of "working" and testing to see if the Fed has cleared your bar. Where is your control? What would the null hypothesis even look like? What do you do with Japan's unique culture and demography? What about that pesky consumption tax? "Scientific"? Yikes.

    "The result has been continual low-growth and disinflation."

    Or the result has been avoidance of a catastrophic melt-down. You have no freakin' idea what the "result" has been. You only know what happened next, not what would have happened otherwise. As I understand it, Japan's stimulus was mostly fiscal until recently, and is just now monetary, too. And then there's that stupid consumption tax that would destroy any "scientific" analysis, if you were really trying to conduct one. You are dealing in the most simplistic post hoc illogic. It may LOOK scientific, but it isn't. It's just your confirmation bias on stilts.

    "constantly lowering interest rates merely resulted in weaker investment returns."

    If capital is so easy to come by, the problem MUST be that entrepreneurs, despite cheap capital, and despite cheap customer financing, cannot see a profit to be made. Returns have nothing to do with it. Low returns demonstrate an eagerness to invest and a reluctance to use OPM. The low returns are an effect, not a cause.

    The Fed controls the risk-free rate, nothing else. Private actors are free to charge and pay whatever they wish for private capital. Higher Treasury rates would only compete for the existing capital, not increase the attractiveness of private investments, which the low returns prove do not need to be any more attractive than they are to attract bidders.

    "Central banks can not 'grow' the economy. "

    A truly meaningless claim, responding to no claim by anyone. A high risk-free rate is an obstacle to private investment. The central bank can help by removing that obstacle. There may also be a wealth effect, although I think that tends to be overstated. To the extent such an effect occurs, however, especially if it takes the form of a recovery in lost paper wealth, spending may rise, which will create an incentive for investment and, yes, growth.

    Monetary policy can help and it can hurt. Right now, it's helping. If the results aren't robust, that's because the Fed primarily operates the brake pedal and not the accelerator. QE is just the Fed taking its foot off the brake of a car that is struggling up a hill. Why anyone would have it do otherwise remains a mystery.
    Oct 22 02:32 PM | 3 Likes Like |Link to Comment
  • America's Disinflationary Future? [View article]
    " Let's examine a hypothetical state pension fund that is 80% funded with an 8% actuarial return assumption. "

    Ah, hell, let's throw in a salary scale, too. After all, our fund's liability is a function of final average pay, right? Now what happens? If the return falls BECAUSE there is less inflation, then salaries do not keep up with the projection, and the fund's liabilities for active workers falls dramatically, even if the discount rate is understated.

    More to the point, if lower interest rates make defined benefit plans unworkable, then the plans are too generous. The article is simply pleading for a subsidy, nothing more. I think public pension plans should be replaced with Social Security, but even if state and local governments are going to run their own plans, they can afford what they can afford, and it's not Uncle Sam's job to send them money by sustaining interest rates.

    The real flaw in this article is that it assumes an optimal allocation of capital when QE begins. Unless the allocation is optimal at time zero, then any shift in allocation arising from QE may be TOWARD optimal. We managed to have an internet bubble without QE. Would an orientation toward debt finance in 1997 or so have prevented the bubble? If so, wouldn't QE have been a GOOD thing then?

    There is nothing magical about QE - it's just the Fed doing its job, putting the Treasury's interest bill at the lowest non-inflationary rates. Anything else is sub-optimal in fiscal terms, depriving the government of funds or the people of tax money they could spend. Without a demonstration that capital was ideally allocated in 2009, I don't see how any speculation about QE and net malinvestment has a place to stand.
    Oct 22 01:05 PM | 1 Like Like |Link to Comment
  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    Robert -

    As the Fed does not buy equities, is your comment about QE addressed to the Fed? One would have thought that it was.

    You are right about the Treasury paying interest on its debt to protect the value of its currency. But if inflation is only 2% WITHOUT the Treasury paying interest, there is no reason FOR the Treasury to pay interest.

    Yes, the Treasury could pay higher interest as a FISCAL stimulus - putting money in the hands of savers so that they can save less and spend more, but there are way better ways for the government to stimulate spending than to just give money away to those who already have it. The whining we hear about how savers are being punished by QE is just a demand for a subsidy dressed up as advocacy of stimulus. We can do better.
    Oct 22 11:22 AM | 1 Like Like |Link to Comment
  • The Ultimate Carry Trade: U.S. Banks Buying Treasuries [View article]
    "These deposits are not excess reserves that the Fed created, but household, corporate savings"

    If households and corporations were spending every dollar they took in, that would show up as velocity, not as a reduction in deposits. The amount of deposits would be at least as great. (If households were spending, they'd probably also be borrowing, creating deposits for their vendors).

    Spending and investing only move deposits around.The only way for deposits to go away is for someone to pay off a debt to a bank. Corporate and household "saving" reduce deposits by paying down debt and making borrowing unnecessary.
    Oct 22 10:09 AM | Likes Like |Link to Comment
  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    "Are you saying that Americans over 65 DON't get subsidized healthcare?"

    Of course not. I'm saying they DO get it, which is precisely the opposite of "getting their money back." But they get it only if they live long enough to need it. It's a form of insurance, like a Fire Department. Just another government service.

    "And that was the whole point of FICA back in 1935."

    The point of FICA was (i) to make it look to the populace like SS would not cost anything because the beneficiaries would "fund" it, and (ii) to impose the tax in a way that would give the beneficiaries a moral claim to their benefits. That's good politics. It's really crappy macroeconomics, especially after the gold standard went away, but it was good politics.

    "If you don't work for wages at all, you get nothing at retirement."

    You get Medicare, but you have to pay a premium for Part A. It's still a bargain. And Part B is means tested - the more you make post-retirement, the higher the premium.

    SS benefits for high earners are subject to income taxes, and the benefit formula is not proportional to earnings. The less you make, the more you get as a percentage of average earnings. All this is fine with me - I'm fine with a means-tested post-retirement income from the government. In fact, I would like to see it increased and paid earlier. But the FICA "contribution" is a tax in economic terms, and it's time we understood that it is suppressing economic activity significantly.

    I am not claiming, by the way, that SS and Medicare contribute to income inequality. FICA imposes a regressive tax, but the benefits paid to lower earners are, in the aggregate, far greater than the taxes they pay. SS and Medicare greatly reduce either the amount a working stiff has to save or the amount his kids have to pay to support him in old age. I'm just saying that a tax is a tax, that it can be assessed in any way the voters agree, and that a regressive tax on labor is a terrible tax to be assessing at this point in our economic history.
    Oct 22 09:06 AM | 1 Like Like |Link to Comment
  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    Tom -

    Those who die do not get their FICA money back. Those who make the maximum earnings throughout their careers do not get their money back. SS is an INSURANCE program. But so is the fire department. Those who need the service, get it; those who don't, don't. Those who need to drive, get roads; those who don't, don't.

    All government expenditures are essentially a form of insurance against needing to do for oneself what the government can do more efficiently. SS and Medicare are no different. (Do you doubt that every government could turn police and fire protection into an actuarially sound program with "contributions" instead of taxes? It's only money.)

    The money contributed under FICA goes right back out as benefits, or it goes into the US Treasury. Bonds are issued, but, unlike the bonds that you or I own, these bonds do not entitle anyone to anything they did not already have; they merely provide some political cover for the Treasury's payments into the Fund when its cash flow requires it.

    There is no macro difference between the FICA tax and the income tax. Both remove money from the economy, and neither entitles anyone to anything. The purpose of the FICA tax is to cause voters to believe as you do so that they will not vote to undo the program. Apparently, it's working....
    Oct 22 01:45 AM | 3 Likes Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    TF -

    Excellent point. Now extend it to the lender's perspective. First, let's remember that modern mortgages do not have early withdrawal penalties. That's the law, and, I contend, it can only be the law BECAUSE inflation is part of the environment. Let's pretend, though, that the same law would apply in a zero inflation or deflationary environment.

    Without a prepayment penalty, a mortgage loan can be conceptually viewed as a loan with an infinitely short term, subject to the borrower's option to renew for a decreasing amount (the original amount net of amortization) as time goes by, until that amount becomes zero by amortization of principal. To avoid the exotic notion of infinitely short term, let's just replace the mortgage with a set of annual loans, each renewable at the borrower's option at the same interest rate and with the same collateral.

    Thus, under a standard 30 year loan, the bank is promising to lend someone $X thirty years from now at a rate decided today, on the collateral of a house thirty years older than it is today. And then only if the deal works for the borrower, who is free at any time to find a better one. That's a pretty scary prospect for the lender. Fortunately, $X is not a very large amount, and real estate and incomes tend to rise in an inflationary environment. Indeed, the more inflation that is expected, the less risky the bank's out-year promise becomes. As a result, the more PREDICTABLE inflation there is, the less the bank has to charge IN REAL TERMS for taking on the risk associated with the borrower's option.

    Yes, the bank has to charge more in nominal terms to cover the erosion of principal, but that additional interest actually amortizes part of the loan in real terms, even further reducing the risk of making the loan in the out years. Thus, the REAL price of mortgage credit falls as the predictable level of inflation rises, at least to the point where the rate of inflation threatens the economy generally, a rate much higher than anyone here is advocating. To the extent that we regard home ownership as a social and economic desideratum, the impact of predictable inflation on home finance is clearly quite salutary.

    In contrast, in a deflationary world, the banker's risk grows over time as the outstanding debt gains value and the collateral loses value and the borrower's nominal income shrinks. This risk can be priced for, but it is a REAL risk of default, not a nominal one, so the adjustment must be an increase in the REAL cost of credit, an unhappy outcome for borrower and lender and society at large.

    This dynamic is repeatable in any financing context: underwriting information ages and becomes less reliable with respect to out-year promises, so the predictable trend of income level and collateral value becomes essential to rendering the risk viable. Inflation lowers the real cost of credit, and deflation raises it. That phenomenon alone shows how deflation suppresses activity and contributes in a major way to an economic death spiral.
    Oct 21 04:18 PM | 1 Like Like |Link to Comment
  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    "Time to kick him out "

    Nothing is impossible for the man who doesn't have to do it himself.
    Oct 21 08:53 AM | 4 Likes Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    "what's wrong with putting the fiscal house in order ..."

    Nothing. But it's a meaningless notion until you flesh it out. Then it becomes a bit dicey, as individuals and nations are, well, different. Individuals have a finite earning capacity, so they have to pay down their debts as they age. Nations are perpetual, growing entities. They need never pay down their "debt," and they can even expect it to grow as their economies grow.

    Any analogy to national finance from personal finance is moralistic hocum. There is no such thing as macroeconomics at the individual level. And nations print their own money and have the power to tax. They are completely different economic actors from individuals and households. When a nation diverts assets from private use to infrastructure, education, etc., that IS "saving" and "investing" at the national level. The human resources that would have gone to private production are "saved" and "invested" instead in national capital.

    "Even without deflation, the discretionary spending by those handful with the means won't grow the economy."

    Which would make deflation a good thing? Talk about grabbing at straws! (And that's without debating the absurd suggestion that there isn't enough discretionary income in the economy to worry about.)

    "In stagflation, even though inflation is rampant, wages sta[y] stagnant."

    So? Stagflation occurs when real price relationships adjust, with downward sticky prices - notably wages - staying fixed, and everything else rising. As always, it is the realignment of bargaining power that drives the train. Inflation is just the transmission mechanism.

    "Also, in the 1930's depression, falling price of necessities is a boon to the unemployed."

    I'm sure they would have traded for their jobs back. The falling prices were the result of the unemployment, not a "boon" to the unemployed. Especially if those falling prices contributed to the lack of spending necessary then to put people back to work.

    "You think the Fed can print money and decides where the money should go and everything will increase nominally in prices?"

    No. What other baloney would you like me to have said?

    "You think house price increase is nominal? Compare the house price increase with wage increase, and you know it is real."

    Of course it's real. And real price changes are not inflation. Rare real estate is becoming more valuable than plentiful labor. The invisible hand does its thing yet again. But low rates are not making real estate scarce. On the contrary, low rates are making mortgages more affordable. Whether the potential buyers can qualify for those mortgages is another story, one not made more pleasant by deflation.
    Oct 21 12:04 AM | 2 Likes Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    "It is not the lack of expected inflation that accounts for the sharp rise in price of debt and equity. It is the chase for yield. "

    The hip bone is connected to the thigh bone. The chase for yield arises because long term interest rates are low. Long-term interest rates are low because there is no expected inflation. If there were, the long end of the curve in private bonds would go parabolic and the Fed would have to allow the short end to rise. So, yes, the lack of inflation accounts for the rise in the price of financial assets.

    "Tell this to the average Joe with stagnating wages saving up to buy a house. "

    Once again you mistake a loss of bargaining power for damage due to inflation. The real value of average Joe's labor is falling, so he is finding it harder to afford a house. Inflation has nothing to do with that. If he cannot keep up with inflation, then his problem is not the inflation; it's his loss of bargaining power relative to those who sell the things that have risen in price. The real price of things is rising relative to the real price of labor. That's the invisible hand in action. Inflation is entirely beside the point. The real question is why he cannot get a raise if his butcher can?

    "Can't you see that there hasn't be[en] any wage inflation? There has only been asset inflation."

    No, I cannot see it, because there is no such thing as wage inflation and asset inflation. There is only general inflation and changes in relative bargaining power as that inflation is occurring. What you are describing is general inflation and a loss of labor's bargaining power. The inflation is not hurting anyone.

    "If you buy a few houses and sell them in 3 years and you make a profit from the expected inflation,"

    Did you pay cash for the houses? If so, the houses have increased in value (as a result of inflation) by exactly the same amount as the dollars have fallen in value. If wages have kept up with inflation, you can hire exactly the same amount of people as before. You have no real profit. If you DO have real profit, it arises from a rise in the real price of real estate relative to the real price of labor. That's not profit from inflation.

    "Some builder may think that the deflation will end soon. Others may think otherwise."

    If the government endorses a policy of deflation, the expectation among builders generally will govern prices, and they will behave accordingly. Those same expectations will affect lenders, who, on average and in the aggregate, will have no confidence in collateral keeping up with the real amount owed. If inflation or deflation is expected in the macro sense, then the consequences will be those attributable to a statistically predictable number of rational actors responding to that expectation. What outliers do is irrelevant.
    Oct 20 09:35 PM | 2 Likes Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    "Inflation benefits asset owners. Who's celebrating the hot rising property prices?"

    You are one very confused fellow. Inflation - monetary inflation - causes capitalization rates to fall and financial asset values to fall. It is the LACK of EXPECTED inflation that accounts for the high price of financial assets, both debt and equity. Calling the reduction in the real price of capital "inflation" because reciprocal asset prices rise makes no sense.

    As for real estate, PREDICTABLE inflation can be priced for by anyone dealing with it as buyer, seller, owner, or renter. The inflation per se benefits NO ONE if everyone sees it coming. Only unexpected inflation benefits real asset holders.

    You need to sort out (i) nominal vs. real price changes, and (ii) expected, i.e., policy-driven, vs. unexpected changes in currency value. Any policy argument about the price of things or the the rate of inflation that does not include the modifier "real," "nominal," "expected," or "unexpected" (or a synonym thereof) is almost certainly wrong. (You cannot disagree with someone about something if you cannot even identify what that thing is.)
    Oct 20 06:13 PM | 1 Like Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    "Who's discouraging discretionary spending by those with the means?"

    Anyone advocating deflation as a policy. That'd be you. Deflation encourages people to save their money because it grows in value risk-free. So they put off discretionary purchases. The driving force is not the declining price of the goods; it is the increasing value of the unspent money. Inflating money chases goods; deflating money chases mattresses. It's as simple as that. (The author has not "explained" anything; he has merely made claims about how he thinks people behave, without mentioning iPhones or trips to Hawaii. Most economists believe that aggregate spending falls when idle money appreciates. You are free to believe otherwise. But believing isn't explaining.)

    "When the economy is sluggish and wages are stagnating or even dropping (people losing jobs and finding lower paying jobs), people struggling to make ends meet would certainly welcome some deflation. "

    You cannot step outside inflation/deflation to assume wages do X and then claim that the change in the price of every else is inflation or deflation. If wages are dropping, wage earners would be delighted to know that the reason is deflation and not a loss of bargaining power. But they are not exogenously losing their wages and then praying for deflation to bail them out. They are losing their wages BECAUSE deflation is occurring. If a man puts on an overcoat because he likes how the coat looks, you might say that he would welcome some cold weather. But if he puts the coat on because he knows it's cold outside, the idea that he would "welcome" some cold weather simply does not compute.

    "If you believe in the free market of supply and demand, you should accept prices can drop as well as rise. "

    The invisible hand cares only about real prices. Nominal prices are not market things. The value of the currency - a governmental artifact - provides a way for all of us, through the political process, to take advantage of the plus-sum opportunity that arises from the maximal use of productive capacity.

    Randians don't understand plus-sum games, and they have a pathological blind spot for coordination problems, in which players VOLUNTARILY surrender some autonomy in exchange for the plus-sum gain of a coordinated (i.e., coerced) strategy.

    So yes, I think that NOMINAL prices should only keep going up. Real prices, however, can do what the market tells them to do, which, one hopes, is fall relative to incomes.
    Oct 20 05:48 PM | 2 Likes Like |Link to Comment
  • Janet Yellen Is Wrong About The Cause Of Wealth Inequality [View article]
    "QE, for example, removes productive and yield bearing assets from the private sector and nationalizes them and their future income."

    Robert- Can you explain that claim. Which assets are you talking about that have been removed from the private sector? Treasuries? Agency RMBS? I get how those assets are yield-bearing, but why should they be? They are credit-risk free. Why should anyone be able to earn anything on them?
    Oct 20 02:35 PM | Likes Like |Link to Comment
  • Who's Afraid Of The Big Bad Deflation? [View article]
    " Post-recession the expectations appear to have stabilized around ~2% inflation,"

    I think we're probably below the ideal level, but not much below. I don't really know the right level; I'm more interested in the general idea that the unit of currency lose purchasing power over time in a modest and predictable way.
    Oct 20 02:26 PM | Likes Like |Link to Comment