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Lawrence J. Kramer

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  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    "its just shifting the cost of subsidization to walmart and McDonalds instead of the government paying for it."

    It's also CHANGING the cost, not the amount, but the cost. If the government gives away one of McDonald's dollars, that costs McDonald's (and/or its customers) a dollar, but if the government prints a dollar, and the recipient uses it to buy a $1 burger, that costs the economy the marginal cost of the burger. Government can pay with excess capacity first; business must pay with first dollars first. The difference from a policy perspective is enormous.
    Apr 16 08:05 AM | 1 Like Like |Link to Comment
  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    "How about if you are a min wage worker with income under some standard, then you get subsidized EDUCATIONAL opportunities, counseling, etc, as needed to help one become a productive member of society."

    One advantage of a progressive income tax is that it sort of means tests benefits on a retrospective basis. We can GIVE away a college education to anyone who meets certain merit requirements, regardless of need, and then recoup the subsidy through the income tax in the case of those who either have family income or later earned income. It is an investment in human capital, and there is no reason why the society shouldn't "fund" it on a contingent basis, not as debt but as equity, repayable through the financial and other dividends that an educated workforce and populace produce.

    Metaphors are everything in politics. To the extent that we understand a free education as an investment by those of us who benefit from having educated neighbors, we don't have to think of it as a "transfer payment." Of course, the educated person will benefit more than those who do not receive the benefit, so there is a basis for taxing that person's success progressively, but still, if the principal analytic motif were public investment rather than private advantage, we would be better able to help ourselves.

    A similar thought applies to the guaranteed income that I call the national dividend. Rather than think of it as transferring one person's money to another, I think of it as distributing access to the excess capacity latent in the global economy, including our own. That's why I would print the money and let the global economy pay the cost by accepting slightly debased currency. As I said, that's a delicate business, as a more-than-slightly debased currency stops being a reserve currency. But the underlying principle is that, in a recession, and in our world of burgeoning supply, we can give away a dollar of retail buying power by adding much less than a dollar of production cost, and it is only the latter that we are really "paying" to provide the benefit.

    Suppose that, as a tax, each person who owned a dishwasher was required to wash one plate or utensil in every load for someone who did not own a dishwasher. How would the cost of washing all those dishes compare to the value of having all those dishes washed? The marginal cost of washing one more thing in a load is usually zero. Only in the rare case of a "full" load would the owner have to make one run just to pay the tax. That's the principle of any cash benefit paid with printed money: only to the extent that excess capacity has been exhausted does it actually cost anyone anything.

    Of course, there is a fallacy of composition lurking in that observation. It's never quite clear just how much money one government can print without stressing global supply when combined with similar printing by other governments, or how that stress will be accommodated, i.e., WHERE prices will rise. The country with the best market can export inflation to places where selling is not as easy. (That's why keeping our infrastructure sound is so important in a competitive global economy.) But I am not proposing any particular program here; I am just exploring the nature of "giveaway" programs generally, and specifically, how they first "give away" excess capacity, an importantly and remarkably inexpensive commodity relative to its value to those who receive it. To completely forgo that "arbitrage" for fear of the slippery slope of over-doing it seems to me a pity, if not an outright travesty.
    Apr 16 07:37 AM | 1 Like Like |Link to Comment
  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    "My guess is he probably shares your political view generally."

    Your prejudices are showing. All of my arguments have been about stimulating demand. When I argue for more equal income, it's to increase demand for my products and to protect my wealth from guys with torches and pitchforks.

    I'm not saying that I don't feel compassion for capitalism's casualties, but when it comes to government policy, I much prefer to deal only from enlightened self-interest. For everything else, there is charity, which begins in the home, not in the House.
    Apr 15 05:20 PM | Likes Like |Link to Comment
  • How Much Will The Fed Taper, And What Will It Do To Offset The Effect? [View article]
    "businesses are less likely to invest in the current environment because they fear that the demand for their products may be far lower once interest rates normalise. "

    That seems like a fair concern to me. I don't imagine that anything short of repairing consumers' balance sheet will give vendors any comfort.
    Apr 15 04:38 PM | Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    " I still don't see how providing large enterprise with cheap credit, cheap labor and a cheap currency, so they can export cheaply can cause inflation."

    I think you are missing the point of the exercise. The issue is not how cheap the money should be for others but how expensive it should be for the government and for regulated banks lending to each other to facilitate lending to customers. There is no reason for those rates to be any higher than they have to be to avoid overheating, and no one has suggested how raising those rates would help anyone but people who are lending their own money. To say, as I do, that lower rates are "inflationary" is not to say that whenever they appear, inflation follows. Other forces may push harder in the opposite direction. But the inflationary vector is still useful, and deflation would be worse without it.

    The important distinction here is metaphoric. You are saying that the Fed cannot push on a rope, and I am saying that it should not pull on the reins. ZIRP and QE are not gas pedals; they are ways in which the Fed takes its foot off the brake. The test of success is very different for the two metaphors. One requires progress, the other avoidance of catastrophe. Politics may require the Fed to talk as if it had a gas pedal - although Bernanke went to some lengths to get Congress to provide real stimulus - but the fact is that the Fed only has a brake pedal, and any serious evaluation of its actions has to judge how it is being applied.
    Apr 15 11:38 AM | 1 Like Like |Link to Comment
  • Great Graphic - Case Study: San Jose Hiked Minimum Wage [View article]
    The only thing one can say about the minimum wage with confidence is that there is nothing that can be said about the minimum wage with confidence.

    Sometimes, a minimum wage is really just a co-ordinated way for all employers to provide trickle-up money for their employees to buy the goods they make without the employers being undercut by competitors or violating the anti-trust laws. Sometimes, a minimum wage is a power play by unions. Sometimes, it's a populist vote-buyer.

    The economic consequences vary from level to level, and they often depend on the supply/demand dynamic of the locality. In a closed system where most employees shop at each other's employers' establishments, a minimum wage is a plus-sum device up to the point at which it strains supply. But in a global economy, or in an economy where workers primarily make goods for the rich, a minimum wage may just raise the cost of things and discourage employment.

    Logic suggests that any payment to someone with a high propensity to spend is going to have significant follow-on effects, so that the policy implications of a minimum wage will almost certainly go beyond the cost of the labor being compensated and even the ripple effect on others' wages. It's just another way of creating demand, and the demand created has to be weighed against any labor-market distortions that arise. Sometimes the scale falls one way, sometimes the other.

    Here and now, I favor a pure stipend to all citizens, a sort of national dividend earned by us as the single global polity that has achieved the level of prosperity and scale that we have achieved. People want to come here, and people want to sell here. We earned that together, and there is no reason that we should not be able to monetize that achievement. To some extent the "exorbitant privilege" of issuing the world's reserve currency, which lowers the cost of our deficit spending, accomplishes just that result. I'm thinking, though, that there is more juice to be squeezed through modest debasement of the currency.

    Of course, this is a well that we may be tempted to visit too often, and we may not have the self-control to embark on a minimum-income path without running amok. That is a political problem that we need to ponder, but the slippery slope argument is a political one, not an economic one, i.e., the guaranteed minimum income is a sound economic device, but we may not be able to pull it off (and, if we have serious doubts, we probably should not try.)

    Sticking with the economic analysis, I would argue that the guaranteed minimum income is better than its two closest competitors, the minimum wage and the earned income tax credit. The problem with the minimum wage is that it is a tax on employment. It may be a tax worth paying, but at the micro level, it discourages employment until the wages earned get spent and businesses reckon that they can afford higher wages now that they have more customers. For any given business, however, the minimum wage remains a tax on inputs, a tax on TRYING to make a living. That's a drag on business formation itself. If there's a better way, we should seek it.

    The EITC seems a better way at the micro level because the government, rather than the entrepreneur provides the job subsidy. Thus, the EITC encourages employment rather than discourages it. The problem with the EITC, though, is that its benefits are "negotiable" between employer and employee. The employer can lower wages and let the EITC make up the slack. Thus, the EITC may prove to be more a subsidy for employment - bad for importers and robots - and not really a boon to employees.

    The guaranteed minimum income may affect wages in various ways, from making some people less insistent on a higher wage (because they have the added income of the stipend) to giving others more backbone (because they have have the safety net of the stipend). It's not clear how it works out, but it seems to me that it would create demand, and so long as we have excess capacity, which may very well be forever after, we should be able to print some money to pay it and allow the excess capacity and the taxes on the multiplier to absorb it without undue inflation.

    Anyway, that's the context in which I would put minimum wage discussions, relegating the first-order effects to the minor role they typically play with respect to the sorts of increases typically discussed.
    Apr 15 08:50 AM | 2 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "It seems to me that a general inflation ... helps to reduce the debt/GDP ratio, while ZIRP just transfers the pain of government interest payments to the small savers of the general public - the very people who are most likely to generate new demand in the economy - and allows the debt/GDP ratio to grow ever larger."

    But the purpose of ZIRP is to cause inflation. How can you argue against the one and for the other, as if they were mutually exclusive choices?

    "It also puzzles me how reducing the yield of an economy by inflating all its asset prices and reducing return on investment in it is supposed to increase demand - not to mention sequestering a large portion of what return the economy offers into the Fed's balance sheet with QE."

    Reducing interest rates creates demand by lowering the carrying cost of things, from car loans to capital for expansion. Low rates do not dry up capital: if they did, capital would not be cheap, and asset prices would not be high. Rather, the Fed has removed safe paper from the menu, and investment money is going instead into (sometimes only marginally) riskier things, e.g., auto loans. That's what boosts demand.

    As I have written many times, if you want savers to get higher returns, vote to subsidize them directly. Forcing all of us - including savers who are also consumers and taxpayers - to pay higher interest rates may be the least efficient possible way to achieve the result you seek.

    "It also seems to me, that extended ZIRP tends to trap a central bank into ZIRP forever, as banks and other financial institutions load up on high priced assets that are then leveraged."

    That's bad underwriting. Bankers are supposed to go broke when they do that. Regulatory authorities are supposed to prevent that outcome. ZIRP is not responsible for the stupidity of those who cannot cope with it.

    Europe's problems stem from monetary unity without political union - inflation without representation. They are us under the Articles of Confederation.
    Apr 14 03:35 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "What incentive is there to increase employment/wages when it's just not needed?"

    None. Why should there be? The Fed is simply removing cost of capital as an unnecessary obstacle to more hiring. But I'm not saying that the Fed will achieve its stated goals, only that no other policy - specifically, higher rates - will produce a better outcome.

    "there is a paradigm shift that needs to occur,"

    Amen to that.
    Apr 13 06:32 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "It would seem to me that matching unemployed people with the means of production would be a better policy (as your reply to Flash implies), as a person who produces has income with which to demand. "

    But that's not mutually exclusive of deficit spending and ZIRP. There is no reason to select the "better one," as both are available.

    "That said, I feel that deficit spending is probably better paid for with outright inflation rather than with ZIRP"

    Another false dichotomy, I think. ZIRP is an inflationary policy - indeed it is the most inflationary policy, as it - with its longer-term partner QE - pays for deficit spending by printing money. The good thing about ZIRP and QE in a demand-driven recession is that they do not in fact cause inflation, but that does not mean that they aren't the most inflationary policy available. (I don't understand how "inflation" can pay for deficit spending other than by money-printing, i.e., quantitative easing.)

    "The low rate environment created by ZIRP has essentially targeted low risk/low yield lending into government guaranteed areas like housing, and pushed high risk/high yield lending off shore with the carry trade incentive."

    No, it has not done that. The off-shore portion of your claim arises completely from the dearth of good opportunities on shore - few good credits, few exciting businesses to finance. Anyone with a profitable idea here can get money here. The money is not going off shore in preference to US opportunities; it is going off shore for lack of them. Again, no good credit here is losing out to a worse credit somewhere else. And the whole point of QE is to keep the low-risk money from flowing into Treasuries, etc., as the Fed buys them instead, forcing the low-risk money to become higher-risk money, looking first at corporate credits.

    Yes, there IS more competition for credit in a globalized world, but the banks are awash in liquidity, and nothing is being rationed, and no one is being closed out by low rates. A good credit can always pay as much as a weak one. Can you write the script where a banker turns down an American borrower because he wants more risk? No one wants more risk, but some will tolerate it to get more return. The better risk need only raise his bid, if he actually represents a solid credit.

    I invest in BDCs, who are lending to the high-risk American market all the time. Good credits are being turned down by banks because the banks lack capital or because they have some regulatory hang-up, not because they'd rather lend to a worse credit at a higher rate.
    Apr 13 06:17 PM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    " it's the people's fault for not becoming larger debt slaves than they already are?"

    Who said anything about fault or blame? I said that if the people fail to produce, it won't be because the government dried up the financial resources. Debt is not the only way to finance production. Some people sell equity interests in new businesses. Perhaps you've heard of something called "angel investing" or "venture capital." Where's the debt in Kickstarter?

    This is all covered in Boardwalk Empire. (See the third quoted exchange.)
    Apr 13 01:36 PM | 1 Like Like |Link to Comment
  • How Much Will The Fed Taper, And What Will It Do To Offset The Effect? [View article]
    "Low or negative real interest rates act as a deterrent to investment, encouraging dividend payments and share buybacks.'

    I find the logic here hard to follow. I can certainly see how low or negative real rates would discourage a company from investing its own cash, but low or negative rates necessarily imply cheap OPM. The buy-backs and dividends represent a change in capital structure that reflects the cost of various types of capital. The cash line on the balance sheet doesn't have to change at all, just the liability and shareholder equity lines.

    Lack of customers, on the other hand, is a real disincentive to investment and an incentive to dividends and buy-backs. Low interest rates encourage spending by consumers, but can discourage spending by savers who are trying to fund their retirement and need larger contributions as compound interest does less of the heavy lifting. Of course, consumers and savers are the same people, and, as we age, the latter effect may come to dominate the former. The solution to the cross-currents is a subsidy for retirement that reduces the need to save for it - higher and earlier Social Security, say - but the chances of our Congressional bozos doping out such a counter-intuitive solution is vanishingly small.
    Apr 13 08:45 AM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    Robert -

    You said that you would agree that the low rates are market-driven if the market were free, but the market isn't free. But your arguments to that effect would apply if rates were high or low or moderate. The housing subsidy has been in place for years. Federal Deposit insurance lowers mortgage rates by lowering deposit interest. All sorts of subsidies and excises affect behaviors. But the price of money moves, and to call the price discovery not "true" price discover smacks of the 1960's leftists' claim that "true" communism hadn't been tried, as if there were such a thing. Your free market is a unicorn, not an unleashed tiger.

    "When government debt creation exceed GDP growth for an extended period of time, as in Japan, then ZIRP becomes the only rate policy the country's central bank can pursue to prevent default."

    I haven't seen any evidence of that. Deficit spending and ZIRP are the best policy in a demand recession. It lasts as long as it lasts. If it fails, it's because the people failed to produce DESPITE the monetary and fiscal authorities creating every opportunity for them to do so. If the people fail, they fail, and if the mechanism is hyperinflation, there is no reason to believe that fiscal austerity or tighter money would have prevented the failure, although it may have taken the form of a deflationary collapse. But dead is dead, and I think you are assuming away the real alternative outcome to the one you see coming.

    "Your habit of breaking out a sentence or phrase from an argument and questioning that in isolation tends to make answers into catalogs,"

    It's not a habit. It's a method suited to catalog-style complaints. I have been avoiding the logicianese, but what we're talking about is enthymeme, argument by minor premise only, as in "Fido has four legs because Fido is a dog." The major premise - all dogs have four legs - is unstated, but the audience is assumed both to know that it is being invoked and to agree with it. When the major premise is harder to dope out, or there is not general agreement as to its truth, enthymeme becomes a rhetorical dodge for begging questions.

    Thus, "The market isn't free because the government creates certain incentives and disincentives for borrowing" is enthymematic. To state the supporting major premise, you would have to define "free," and there being no general agreement on that subject, you are begging that question by not stating that premise. My "habit" is simply the logical response to all suspect enthymeme: the major premise is unstated, and, if stated, would either be surprising or controversial or both. If you argue in fuller syllogisms, my responses will take a different form.

    "My main objections to recent Fed and central bank action in the developed world is the credit rationing that comes with the low rates. It starves small enterprise and self employment, creating unemployment."

    That makes no sense to me. How do low rates result in credit rationing? Any banker can charge any borrower any amount the borrower can afford to pay. If there are no good borrowers at high rates, then the low rates don't prevent anyone from getting credit. No one is being closed out BECAUSE rates are low. Rather, rates are low because no one can afford to pay higher ones. I really, really don't see how higher Fed rates would solve that problem. And if you took the trouble to organize the argument into a full syllogism, I think you'd find that you don't see it either.
    Apr 12 07:14 PM | 2 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "However when we speak of 'ideologues', I'm sure we're each speaking about a different group of people."

    You're the one who said our disagreement was ideological. I think it's just logical. That makes you the ideologue and me the logician. I can live with that.
    Apr 12 12:04 AM | 1 Like Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "Why would I borrow to expand in an industry where the current dominant players are kept solvent, or at least competitive due to low rates."

    What would-be competitor is just waiting for his competition's cost of capital to rise? It's the new guys who benefit from low rates while the old guys are paying off non-callable bonds.

    "what reason is there for the Fed to distort bond markets by buying Treasuries?"

    They're not distorting it; they are recognizing it and helping the yield curve to equilibrate at rates consistent with demand. And, as always, you ask the wrong question and end up with a useless answer. The correct question is why the Treasury should pay anyone not to spend their money when the Fed can provide funding without causing inflation? You see, it AlWAYS comes down to rates being as low as they can be without causing inflation. There simply is not other question, and everything that looks like a relevant other question always turns out to be not worth asking.

    "Do market distortions not exist if you don't acknowledge them?"

    Do they exist if you insist on seeing them when the are not there? The market WANTS these rates. If it didn't, it would reject them by causing inflation or deflation. The Fed is engaged in a trial-and-error search for the right rates. The market demands, and the Fed responds. It just LOOKS like the other way round to people who want the government to be the villain. But that's not reality's lookout.
    Apr 12 12:03 AM | 4 Likes Like |Link to Comment
  • The Fed Is Backed Into A Corner With No Way Out [View article]
    "how about a government guarantee in all residential real estate lending or MBS purchases by the Fed?"

    What about it? That surely reduce mortgage rates, but we're talking about the Fed's actions here. If you are saying that the RETAIL rate is too low because its subsidized, you may or may not have a case. I'm fine with that subsidy (if the underwriting is properly regulated), but maybe there's an argument against it, and maybe you can make it.

    "how about when % of GDP borrowed by the government exceeds % of GDP growth and results in no increase in government revenue? "

    And that's a bad thing because...? It sounds to me like you're comparing apples and oranges. If you took the time to make an argument instead of just launching disassociated factoids, maybe you'd think so, too. And if a practice cannot be continued indefinitely, it may still be the right TEMPORARY practice, so the fact that it cannot be continued forever isn't really an argument against it.

    "when central bankers from EM are constantly gripping to the Fed or BOJ about it and Fed is lecturing them back in return. "

    Maybe so, but if we agree that the market can smack the Fed upside the head, I can't connect the dots between your claim that currency manipulation keeps the rate market from being "free." Currency manipulation may be an objective of a central bank, but the market reacts to its efforts in that regard and is not rendered less "free" by them.

    Catalogs are not arguments.
    Apr 11 12:49 PM | 2 Likes Like |Link to Comment