Great healthcare post

I liked this article by Bala Ambati on improving healthcare in the US. No excerpts, read the whole thing.

JKH at Mosler

Just wanted to set up this link where JKH appears in Mosler's threads. Raises many good points, and I hope to post a follow-up there soon.

Another leg down

Both Seatac and SFO have emptied right out again. Not as bad as 3 months ago, but visibly down from May.

Paid Out Equity

Nobel Prize winning Economist and NYTimes Op Ed writer Paul Krugman continues to struggle with basic accounting:

That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression.

Ya think? Given that Federal deficits fund private savings, and the only thing driving Federal deficits (since the Obama stimulus is too slow) is unemployment, and the automatic stabilizers it triggers, that maybe automatic stabilizers have, you know, been automatically stabilizing? Maybe? Might this also clue you into why people are against more slow, politically directed spending (aka the Second Stimulus?) Might you rethink the benefit of increasing deficit spending via a payroll tax holiday?

A long time ago, I had a conversation with JKH somewhere in Interfluidity about what a consolidated Federal Balance sheet might look like. I was resistant to the usefulness of the notion because, as the Federal Government must be cash flow negative, it must have negative equity on its balance sheet, and that was just too weird for me. Would this exercise "prove" that the Federal Government must be bankrupt?!

Anyway, I figured out how to think of that negative equity entry in the liability column: very simply, it's paid out equity, the perfect mirror image to private sector balance sheets that also captures how Government spending gives the private sector the money it needs to pay taxes, and net save.

The Sorry State of Mark Thoma

Mark Thoma is a responsible economist. But look at how muddled his thoughts are on basic issues of money:

Setting aside the particulars of the California case and whether or not the IOUs are actually functioning as money - that's debatable - very, very generally, the federal government has a budget constraint just like everyone else, well sort of like everyone else anyway -- most of us can't levy taxes or print money. Federal government finances must satisfy

G - T = ΔM + ΔB,

where Δ means "change in," G is government spending, T is taxes, M is the money supply, and B is bonds.

There is nothing debatable about whether California's IOUs are "money" -- if they can extinguish tax obligations they are money, if they can't, the aren't. No debate.

There is debate about Thoma's terrible model. He claims that the deficit (G-T) must be financed by printing money, or by selling bonds. But suppose the Government ran on overdraft? No financing needed. Or suppose the change in money (ΔM) was saved. No inflation impact then. The point is that the Government need issue no bonds (ΔB=0) and all the money can simply flow to net private sector savings, thus sterilizing any inflationary impact. In fact, G - T always equals the change in net private sector savings (for good or ill) if you don't see much difference between money sitting in an FDIC insured bank account, and money sitting in a US Govt backed Treasury account.

Why Economists oppose more stimulus

Paul Krugman wonders whyEconomists oppose more stimulus?. He, of course, puts it down to them being evil Conservatives

And here’s the thing: it’s NOT because they think a solid recovery is on the way...

So they’re not saying that everything’s OK, no stimulus needed. They’re saying that they don’t like stimulus. And why should you be surprised? These are business economists; they’re generally conservative.

I think they oppose the stimulus because it does not "stimulate". When the "stimulus" was first touted, it was rejected because it was too slow, and the money was targeted towards political interests, not households, and therefore would not help the economy. Here we are months later, and the stimulus has come too slowly, and has gone to political interests, not households, and how not helped the economy. Unemployment is nearing 10%, and continuing to rise. If the Obama tries to get another stimulus, it again will be too slow, and send money to political interests, not households. Critics were right the first time, and they are still right.

I would support the current "stimulus" being scrapped and replaced with a payroll tax holiday, to be kept in place until inflation begins to tick up. Arguments about stimulus being wasted because the money will be saved is nonsense -- part of saving is paying down debt, and isn't bad debt what's crippling the financial sector? Instead of simply giving money to households, who can then use it to pay down debt, the Government is giving money to banks, and asking them to write off debt. This benefits banks but hurts households and the private economy. "Who? Whom?" indeed.

The Arnie-dollar lives

It seems that California is on the verge of turning it's IOUs into real currency:

The Business and Professions Committee unanimously passed the bill by Assemblyman Joel Anderson during its first legislative hearing Tuesday. The bill requires the state to accept its own IOUs as payment for money owed to the government.

The Arnie-dollar (almost) lives!

Inflation 2.0

Long time reader MP asks:

I have been an avid Winterspeak reader for a few years now and given your track record on the housing bubble (we corresponded in the past about that) I figure it pays to follow your analysis closely. I’m pretty sold on the Mosler stuff you summarize but the one area where I haven’t seen a concise explanation is that of inflation. Is the argument that inflationary pressure just isn’t a factor, or that money through a payroll tax holiday has no more impact than the money being thrown into the system via the stimulus plans, or something else? I know this isn’t a very precise question…but basically how does the concept of inflation play into this theory? What is the endgame on that?

Excellent question.

"Inflation" is a slippery topic -- the standard definition is an increase in price levels across a broad basket of goods (Consumer Price Index: CPI). The CPI has all sorts of problems with how it is calculated, and how meaningful it is, so I'm not a big fan.

Most importantly, CPI conflates two different factors and gives us a net result which hides more than it reveals: "dilution" (through the creation of more money, which chases goods) and "technological change" whereby new technologies reduce prices. So, someone comes up with a more efficient way of making cars, and cars get cheaper. The Government prints a lot of money, creating inflation, and cars get more expensive again. The net result is that prices stay the same, but the benefits the non-Governmental sector would have received from cheaper cars was taken by the Government printing dollars. In a world of technological process, and constant money, you should see continual, mild, deflation. The more progress there is, the more the Government can take by printing money, without it showing up as higher prices -- you just get the absence of lower prices. This is the typical Austrian view, and it has a lot going for it.

However, adding Mosler's insight from the fiat money world changes how this works. The amount of money in the world is flexible, and most of the "printing" happens via extension of bank credit, not Government printing. Money, like all financial assets, exists as both an asset and a liability, whereas in the "gold standard"-centric Austrian interpretation, money is an asset to its holder and a liability to no one. Financial assets must, by accounting, net to zero. Money supply can increase as balance sheets expand, but they must always net to zero. So the culprit of dilution is credit, not the Fed or the Treasury.

More importantly, the "too many dollars chasing too few goods" is the best definition of inflation -- dollars have to chase goods for inflation to be an issue. If the Government prints money, and it just gets saved, then, although the money supply has been "diluted" (a la that Austrian school) from a practical perspective, it's like the money doesn't exist at all, since it just sits in checking accounts. Does the presence of all that checking account money mean that banks can lend more? No -- bank lending is constrained by capital requirements and demand for credit by creditworthy borrowers, not deposits, and not reserve requirements. If the Government prints money that just gets saved, it's like the proverbial tree falling in the woods: there is no inflationary impact.

Public debt (the deficit) must, by accounting, equal private savings. If the Government spends more then it taxes, that spending bids up the price of whatever the Government is buying. Taxation "sterilizes" the impact of that spending by taking that money out of the private sector. If the private sector naturally saves a lot (like Japan) then it "self sterilizes", enabling the Government to spend more (run higher deficits) without triggering an increase in the CPI. The mystery of Japan, with its sky high savings rate and 30 years of decline, is why the Government bothers to collect any tax at all.

If the private sector, as a whole, decides to save more, you'll see a fall in overall spending, reduction in incomes, debt default, inventory liquidation, and deflationary spiral current in effect in the US. The private sector, as a sector, cannot increase its savings. For one sector to increase its savings, another sector must decrease its savings. Assets must balance liabilities. The Federal deficit must fund the private demands for savings, or you will simply see debt default, lower aggregate demand, and unemployment as incomes keep falling as household try (in vain) to increase savings. Similarly, if the private sector wants to net dis-save, the Federal Government must run surpluses (tax more than it spends) to keep that private credit expansion from creating inflation.

You get inflation whenever you have too many dollars chasing too few goods, ie. too much Government or Private spending not sterilized by taxation or credit restriction. The desire for private sector savings is exogenous, it is Keynes' "animal spirits" and it ebbs and flows based on mass whimsy. When the desire to save is low, or negative, the Government must run surpluses to net destroy money, and/or throttle private (bank) credit extension, to control inflation. If the private desire to save is high, the Government must run deficits to fund that demand, it cannot rely on private (bank) credit extension because that is pro-cyclical. The current monetary response has not stopped deflation because lowering interest payments destroys private aggregate demand, and enriching banks "pushes on a string". The only thing holding up aggregate demand right now is unemployment, as unemployment drives higher deficits, and thus funds private sector savings. It also reduces the private sector demand for savings, as those without jobs run through their savings and/or spend what public transfers they receive.

Inflation control requires counter-cyclical fiscal management, nothing more, nothing less.

The Problem with the Obama Non-Stimulus

Straight from the horses mouth:

BIDEN: Well, look, we have increased the amount of money unemployed -- those on unemployment rolls have gotten, 12 million are getting more money because of the stimulus package.

We've increased the number of people eligible by 2 million people. We've given a tax cut to 95 percent of the people who get a pay stub. They have somewhere -- $60 bucks a month out there that's going into the economy.

There is a lot going on, George. And I think it's premature to make the judgment?

STEPHANOPOULOS: So no second stimulus?

BIDEN: No, I didn't say that. I think it's premature to make that judgment. This was set up to spend out over 18 months. There are going to be major programs that are going to take effect in September, $7.5 billion for broadband, new money for high-speed rail, the implementation of the grid -- the new electric grid.

$60 a week for *some* American families. As pathetic as 10% unemployment.

Fix the economy to fix the banks

A great post by Mosler that encapsulates exactly what is wrong with the Obama administration's approach to the crises, and by extension, academic economics. To paraphrase:

The problem with the banks is all the bad loans on their books. But why are those loans bad? What makes any loans bad? Just one thing makes good loans go bad, and that’s people who can’t make their loan payments. Bad loans are loans where people aren't making their payments. If you can make your payments, the loans are good loans, and banks have no problems.

It’s that simple.

So what’s the Obama administration doing about all this? They are keeping the banks alive with trillions of dollars of funding. Yes, throwing trillions at the banks keeps them alive, but it doesn't help anyone make their payments. So the loans are still bad, and the economy is still terrible

Now you know why this crises seems to complicated. When put simply, it makes a mockery of academic economics, and by extension White House policy. Mosler continues:

the States have their own crisis going on.

You’ve all heard about California about to go bankrupt, and lots of other States in big trouble as well. In fact, when the Federal Government let the economy fall apart last year, all the States saw their incomes collapse. And now they are all cutting their essential public services, including police, motor vehicle services, health care services, and even university classes. So what does the Obama administration do? They tell the States to submit lists of thousands of what’s called 'shovel ready projects' to Congress. And then Congress decides what to fund. The States need money to keep the hospitals and the highway patrol open, but Congress will only give them money for new public works projects.

As the private sector increases net savings, aggregate demand falls, and the deficit increases to fund that savings only through unemployment. But Obama funnels money to banks, as the US is now about three months away from double digit national unemployment.

The solution? A payroll tax holiday will fund private savings, and make loans good as workers will remain employed, and have extra take home income to pay their mortgage. A per capita grant to States will keep hospitals open, and let roadworks be postponed for another day. The private sector needs jobs, as the gap between potential output, and actual output, continues to grow. The States need money to continue providing services their constituents actually need. The Federal deficit must grow, by accounting, for the private sector to save. The worst way to grow that deficit is through unemployment.

California scrip

California is about to create printing presses and start producing it's own scrip... almost. Unfortunately, the California IOU does not seem to be capable of extinguishing a California tax obligation. I'm not sure why this is the case. If it was, a simple step, then the ArnieDollar would be a full fledged currency, and put paid to all those silly arguments about "what is money". Money has the ability to extinguish a tax obligation. A tax obligation is a creation of a sovereign entity. You charge a hut tax, and then invite the natives to work your fields in return for scrip which will, magically, if returned, keep their huts from burning down. The only requirement is that you can, honest to goodness, burn down huts at will. Does this sound like a "store of value" to you?