Comments on Employment, Interest, and Money: Is He Serious?

During the 70's - a period of inflation - the ...

2010-05-17T03:52:28.505-07:00

During the 70's - a period of inflation - the public didn't buy as many houses
due to high mortgage rates. And once one buys a house, one has to spend money
to fill it. That probably didn't happen. Perhaps people saved money betting on
Arthur Burns' Fed to turn things around?

As rates came down, people sucked the equity out of thier home to spend.
This is how the sub-prime loans effected 2nd mortgages. Sub-prime also effected people who
purchased with prime mortgages, and are now underwater.

Fama perfectly expresses the logic behind either (...

2009-01-18T07:37:00.000-08:00

Fama perfectly expresses the logic behind either (a)the Hoover era "Treasury View" or (b)full employment crowding out. It is not clear to which he refers. The former completely ignores dishoarding and/or increased loan creation from utilizing formerly idle excess reserves. Either/both of these reduce interest rates that have increased due to deficit finance back toward ("fully back to" in the Liquidity Trap) their pre-deficit-financing levels. The conditions for full employment crowding out do not, alas, apply today. Ricardian Equivalence is a red herring here.

only one comment; the idea that the government thr...

2009-01-17T12:01:00.000-08:00

only one comment; the idea that the government thru the issuance of a t-bill is both receiving wealth, i.e. the savings and cash of the purchaser and is at the same creating wealth thru the issuance of the governments obligation to pay the note with interest at some future time is a total joke. Debt is not wealth. Credit is not wealth. In addition, the issuance of an I.O.U. on the part of the government to allow that government to transfer the real wealth of the lender to someone else, very likely to a very inefficient consumer of that largess, is wealth is absurd. This is why the whole chimera of credit and debt as wealth has destroyed this world.

>I'm saying that, even if savings had not r...

2009-01-17T11:11:00.000-08:00

>I'm saying that, even if savings had not risen in the first place, as long as there are idle resources, government deficits will create the necessary savings to finance themselves.

You could make an argument that government deficits might depress animal spirits (and thus decrease consumption and/or investment spending) sufficiently that the net effect of the deficit was contractionary. I have never been able to get a clear answer myself as to what is meant by "Austrian", but it is pretty clear that people who proclaim themselves to be Austrian react violently to all talke of government deficits. Which suggests they might indeed reduce their personal spending enough to offset the effect of increased deficits. So if the Austrian personality-type is dominant in our society, then this is an argument that government deficits might not be stimulating (at least until there is no further possibility of spending reductions by the private sector).

I apologize for not being more careful in the way ...

2009-01-17T10:23:00.000-08:00

I apologize for not being more careful in the way I expressed myself. I didn't mean it as a derisive scoff (but I can see how it would appear that way). I'm genuinely confused at how someone of Professor Fama's statute could make what seems to be such a fundamental error. When I attack the error itself (assuming it is an error), it is more with a "love the sinner but hate the sin" attitude. I was aggressive in explaining why I believe the argument, as stated, is fundamentally flawed, but I meant to leave open the possibility that I may be misinterpreting what was intended.

As to the Austrians, according to my understanding they are saying something quite different from what Professor Fama is trying to argue. AFAIK they don't deny that a stimulus will mobilize idle resources; they just deny that there will be any benefit in mobilizing those resources in that way.

I'm not sure I understand the Austrian view well enough to comment further on it, but there are certainly plenty of reasonable arguments against a stimulus. I happen to disagree with all of them, but I don't see them as making fundamental errors.

Fred, your argument seems to rely on savings having risen in the first place. That view is certainly relevant to the present situation, but my argument is more general. I'm saying that, even if savings had not risen in the first place, as long as there are idle resources, government deficits will create the necessary savings to finance themselves. I see Professor Fama's argument as being internally flawed in a way that does not depend on the empirical state of the world.

There's a simpler way to refute Fama. Household sa...

2009-01-17T09:43:00.000-08:00

There's a simpler way to refute Fama. Household savings must always equal Corporate borrowing (including bank loans and newly issued stocks and bonds) + Government deficit spending. In a crisis like the current one, household savings are going up (definitely ex ante and probably ex post as well). If government deficit spending remains the same (and the current account balance remains the same), then simple bookkeeping logic shows that corporate borrowing must go up to compensate for increasing household savings. But corporations are NOT in a mood to borrow right now. So the only way for the bookkeeping identity to hold is for corporations to be forced to borrow/dissave, which is equivalent to saying corporationsn suffer unwanted decreased profits and/or losses.

When corporations suffer unwanted decreased profits and/or losses, they tend to lay people off and their stock prices fall, both of which consequences cause households to increase savings even more, and the vicious deflationary cycle continues until enough of the economy has been destroyed that we are at the subsistence level and households are thus incapable of further savings.

There are only two way to counteract this spiral down into deflationary depression: either the government increases deficit spending to compensate for increased household savings, or the government takes steps to increase household and corporate "animal spirits" so that the former save less and the latter borrow more. But there is no quick way to increase animal spirits, which is why countercyclical spending is the answer. This is the essence of the Keynesian argument for countercyclical fiscal policy. Talking about infinite sums is pointless when poor anonymous and the other Austrians can't even do basic bookkeeping.

Andy, your incredulity is an unflattering debate t...

2009-01-17T08:06:00.000-08:00

Andy, your incredulity is an unflattering debate technique; the derisive scoff. There is a whole school of economic thought (at least one that I know of), which has been quite well developed over a century of time, that does seriously question the value of government stimulus. It's called the Austrian school, but I'm sure you knew that.

Government is an inefficient way for a society to allocate capital, and a rushed $850 billion stimulus plan will be even more inefficient than normal. Maybe three quarters of that money will be lost through waste, corruption, needless bureaucracy, misallocation, instead of the normal 60% that government wastes. You may disagree with those percentages, fine I pulled them out of thin air. But anyone who has observed the workings of both government and private industry knows that the two are incomparable. Private capital strives for return on investment, public capital strives for the re-election of those currently in power. One may think those goals would lead to the same end, but one would be wrong.

Government does not know where to deploy society's capital; it's not that smart. You are not that smart and neither am I. Our banks of computers are not that smart. The collective intelligence of millions of consumers and producers is the only way of allocating society's productive capital, any other method of central supervision will waste what we have and send us further down the road toward either government default or hyperinflation.

I know academic economists have little use for the Austrian school. It's much more alluring to think that we can tweak the levers of the economy from some high place and gently steer it along the path we want. But the Austrian school won't die, because the facts keep it alive. The Greenspan/Bernanke housing bubble is the latest example. The fed's distortion of interest rates created a false signal about the availability of capital in the real economy, with a resultant housing bubble. The current fiscal and monetary stimulus, will have the same impact, waste and misallocation of resources.

If the economy has idle resources at present, let them sit idle for a while. They will eventually find a productive outlet and create some good or service that we need or want. This is the way capitalism works. This is the only way capitalism works.

I don't have a PhD in economics, so you are welcome and entitled to disregard my advice, but here it is just the same. In the spirit of open-mindedness, spend a little more time trying to understand the Austrian perspective. Read Hayek and von Mises, if you haven't already. Read some of the Austrian blogs on the web. Listen to folks like Peter Schiff; sometimes they get it right (http://www.youtube.com/watch?v=B8r-nDBx5Jg). I don't expect you to become a convert, but just maybe you can occasionally acknowledge that we are indeed "serious".