Saturday, February 9, 2013


Our MMT Future: Randal Wray: GreatLeapForward
A Hearse, A Hearse, My Kingdom For A Hearse: Simon Schama: FT
Silk And Concrete: John Hewitt: ExtremeTech The TED lecture embedded in this speaks from a purely neo-liberal perspective. Behrokh Khoshnevis sees the human labor that makes the man made environment as a pure economic cost, proposing that by ridding construction of human labor we can somehow eliminate slums without considering the question of how former slum dwellers will afford the fabulous new machine made housing to which we will consign them.

He also fails to consider the soulless reduction of the man made world to essentially concrete double-wides with a rigorous performance spec, though he models the prospect explicitly in the animation he shows. It bespeaks a virtually identical utopianism to the one that brought the world all the worst housing projects of the Post WWII era. To eradicate slums one must focus not first on where people live, that is but a result of a prior and more important condition: one must focus on what people do. Historically, on those rare occasions where slums have actually disappeared they have disappeared as a consequence of the people who had inhabited them acquiring the means to move on to something better. This is the only proven path to improved living conditions: provide people with the opportunity through their own efforts to make a better world for themselves: provide remunerative employment that rewards motivation with meaningful gains.

I don't believe automation efforts necessarily mitigate against this opportunity for meaningful change. But cost cutting is by definition income cutting as all income originates as someone else's prior expense.  Where equal attention is not afforded to income support, ideally through competitive markets but where markets fail, as they commonly do, through political means and deliberate job creation, cost cutting leads to decline and retrenchment. One of the least understood and most important relationships in a
capitalist system is that between investment and profits. This relationship only holds where the definition of investment is constrained to include only real improvements in productivity achieved through the wise application of capital and organizational insight to creation of real benefits in the non-financial economy of production. And only where this constraint holds are "investments" that result in reduced costs real contributions to macro profitability because it is the prior expense to re-organize and improve that adds real living value to the overall system ahead of the reduced cost that results: that prior spending is the source of income growth that is the only force intrinsic to capitalism that makes the system sustainable.

Or as I wrote three years ago:

"Where Profit Comes From (it is not from cost savings)

Money is a system that facilitates the flow of economic things in one direction and information in the other. Every dollar spent in the system becomes both income flowing in the direction of economic things and demand signal flowing in the opposite direction back to the producer. By economic things I mean the labor, goods and services that are exchanged for money within the system. The total income in the system is identical to the total expenditure. This is not some theory, income comes from prior expenditure and if that expenditure reduces, income will reduce as a result. Money does not grow on trees.
The private economy can simulate the creation of money by creating debt. While the same dollar can be used numerous times through the acceleration of flow created by debt, the actual stock of dollars is unaffected by the velocity of the flow. As debt accumulates in the system the accelerated flow it creates in turn creates the illusion of a larger money supply. This illusion can have the effect of raising prices if the volume of supply of economic things does not keep pace with the accelerating velocity of money, but so long as markets are responsive, and remain fair, the increased profit opportunities of the increased money flow produce competition that invests to increases the supply of economic things and suppress rises in price.
Like the illusion created by the money acceleration that comes with debt, changes to the actual money supply can have the effect of raising prices. But just as with debt, so long as markets are responsive and remain fair the increased profit opportunities of the increased money supply produce competition that increases the supply of economic things and suppresses rises in price. So long as the relative supply is rising equal to the relative amount of money, prices will be held down by competition. So long as the portion of the money supply that actually backs demand in real markets does not outstrip the supply of economic things in the system, prices remain stable. Money in bank vaults or elsewhere that is not expressing demand for economic things will not cause prices to rise, no matter how much money may sit in such stocks. Bank reserves, foreign reserves and cash stockpiles of corporations have all been piling up for the last five years, but there is no significant inflation in the real economy except that driven by resource scarcity due to expansion in foreign markets.
By analogy, each year deBeers mines tens of thousands if not millions of new diamonds and yet the price of diamonds remains stable. Of course it does because deBeers is a cartel. A cartel, by deliberately constraining supply of economic things maintains their high price even as it accumulates potentially enormous stocks of those things. So long as money is allowed into concentrations of unlimited size, any money added to those concentrations has the effect of a cartel: it is a non-productive hoard of accumulated money that can only express demand if spent in the real economy. In the hoard it is just a pile of money looking for an investment and all sorts of financial tools have been devised to make the hoard look like an investment, but that it continues to slosh around the globe looking for something useful to do indicates that it has in fact not really been invested. Most of what we call investment today does not qualify in the stricter definition I'll develop below. This is important because the definition of investment I use, developed first by Jerome Levy in 1908 and again independently by Michal Kalecki in the 1930s, locates the source of almost all profit in the system in capital investments. Most of todays giant ball of global capital that roles from country to country and sector to sector chasing yield is by these definitions a non-productive hoard.
What makes it a non-productive hoard is the inability to find profitable use for it due to the very lack of demand that is caused by its concentration in a hoard in the first place: had some of that money gone to wage earners who generally spend most of their income rather than business owners who generally save most of theirs, it would express demand which would call real investments in real profit opportunities into being in the real economy when it was spent. When the holders of large stocks of money understand some component in the supply of economic things they can make an informed bet that by spending a certain sum, an investment, they can make a larger sum because the money they spend into the system will create more profit than the cost of producing it of which the investor will be able to capture enough to make a profit himself.
It is the investor’s knowledge of his business that allows him to create new wealth through investment by putting the inputs to the creation of economic things to better use. This new wealth is created by improved economic organization that produces more output per unit cost. These organizational insights in the real physical places where actual economic things are made is the source of most profit. It is the change the investment induces that creates profit. The essential systemic change that creates wealth through investment is that a business's purchase of capital goods, like property or machines, has no effect on the total wealth of the business that has simply transformed cash in its possession into productive capacity, but in doing so has paid cash to the seller of property or machines for whom the money becomes income. This is a net add to the system of both expenditure and income.
In addition, once the new productive capacity is put in use while the business purchases goods and labor to make its economic thing, whatever that is, that expense represents no decrease in the net worth of the business as the dollars are exchanged for its economic thing. At the same time those dollars become income for workers and other business that sell labor or other inputs to the investing business. Again this money flow is a net add to the system. These two net adds, the income from workers and suppliers of newly created production capacity and the income of the sellers of property and machines used to create the new capacity, are the main source of profit in a money system, they are the net adds to the system where the majority of new wealth is created.
A third source of profits is dividends from businesses. Because the recipients of dividends are owners of the business the payment to them of a portion of profits is not an expense to the business, it does not negatively affect the net worth of the business. But dividends are income for the multiple owners of the business and many of them will spend this money back into the overall system adding to demand and thus creating more opportunity for profit. So investment in new capacity, the use of that capacity and the dividends these yield are the primary sources of profits, they are the points where significant net adds to the worth of the total system occur.
Today's giant ball of global capital is a hoard because it is not being deployed in the real economy. Some real profits can be gleaned from the financial sector of the economy where some real increase in productivity is achieved, but most gains in finance are a zero sum game of speculative wins and losses, what Keynes called a casino. It is only when real value is created by the use of money in the real economy that use of money qualifies as an investment and it is very difficult to show that most financial activity creates any value at all. It is much easier, as I did above, to show how it destroys incomes and demand in the real economy leading to unemployment of both people and capital equipment. The greatest single loss from a recession or depression is the wealth that is simply never created by idle capital stocks and idle workers, beside this the expense of rising unemployment expenditures and the collapse of the tax base for the government making these payments pales.
In a fair, responsive market, when a real investment produces real profits competitiors will be attracted to drive profits down. At the same time, any workers displaced by a productivity gain will be available to competitiors who are pursuing the same productivity source and the profit it accrues. Except where oligopolies or monopolies are allowed to exist, profit growth always calls into existence new competition. So long as competition remains, employment is sustained by the investments that profitability calls into existence. This competition produces bargaining power for the employees of businesses who must staff their growing capacity with productive workers.
Where full employment exists within the system, employee wages will compete for some percentage of the added profits from the above three sources. Competition between businesses for workers splits the profits that accrue to investment between owners and workers according to the relative power of workers as driven by the employment level. As employees earn more they both spend more and save more.
While at the micro level individual business can increase their profits by reducing the wages paid to workers, at the macro level if all businesses do this it will draw down profits because of the demand destruction felt by workers. It is also clear that this effort will not produce any net add to the profitability of the total system as defined above: there has been no investment, merely a redirection of an existing money flow to owner from workers. Workers will still have the same desires and needs, but only desires and needs backed by money express demand in a market and across the board wage declines produce spending declines which in turn will produce across the board declines in demand. A decrease in wages will presumably cause workers to save less and spend more as a percentage of income, but none the less the absolute amount of spending will decrease unless workers run up debts to offset the diminished income.
This, incidentally, is exactly how demand has been maintained for the last forty years and is the mirror on the demand side of the misallocation of resources on the supply side that is expressed in the non-productive hoard of the rolling ball of global capital. Instead of making real investments in real capacity in the real economy the financial industry has extended credit to artificially sustain demand there since higher unemployment rates beginning in the 1970s deprived workers of the ability to command any percentage of profits in the system. Since the early 1980s when all of profits began accruing to owners, ending the history of sharing with workers that had sustained demand for the previous forty years, the only method to sustain demand across the system was with debt. The newly growing stocks of money that owners were receiving because they were not sharing with workers were then loaned back to workers to sustain demand. As interest was paid on this debt it appeared to be an investment but was in fact funding consumption and thus in the end, as is now clear, destroying wealth.
This diversion of an existing money flow in the system that eliminated the split of profits between workers and owners, redirecting all profits to owners is a result of the second main manipulation available to the controllers or the money system to rob the prudent and productive of the rewards of their efforts. By defining the acceptable rate of desirable employment down, that is by driving up the rate of unemployment, the controllers of the system deprive workers of the bargaining power to capture any of the added wealth that they are helping to create.
It is real investment, investment in capacity and productivity, in the real economy, the physical place where real people do and make real things, that is the final cause of most profits. This wealth creation is taking place in the real economy where actual people and property are combining to make real economic things. But for this to happen, enough money must circulate in the real economy to maintain demand. Above we looked at how the Minsky cycle sucks that money out of the system as a result of poor judgment by the controllers of the system. We have also seen how the decision by the controllers to slow growth in order to suppress employment deprives workers of the bargaining power to command any share of profits.
Manipulations in the money system allow the controllers of the money system to drain real wealth out of the real economy and pool it in the financial markets, what I've been calling the giant ball of rolling capital. I draw this distinction between the real economy and the financial economy where stocks, bonds and innumerable other financial instruments can add to total profits but do not necessarily, because the total contribution of financial activity to real profits in the long run is, once busts in the Minsky cycle are factored, vanishingly small.
Financial instruments, and their exponential growth over the last forty years are the mechanism by which the controllers of the money system have absorbed the massive increases in the money supply that forty years of annual Federal budget deficits represent without sharing it with the real economy where actual wealth is created. This has deprived non-financial workers, most Americans of income growth despite sustained GDP and efficiency growth in this time frame even as the national debt has been driven up.
Money is a system that supports commerce in a capitalist economy by facilitating the manufacture and exchange of economic things for profit. As Keynes observed, thrift, while important to accumulating money stocks for investment, is not the engine of capitalism: profit is. The above description of the sources of profit is the view from the systemic macro level that forty years of Monetarist ideology has concealed, but it is more true now than forty years ago when we were still on a loose gold standard and the actual stock of money was constrained so that government had less control of the economy at the end of a Minsky cycle.
Fiat money is as different from gold as the macro view of profits, seen as driven by investment, is from the micro view where profits appear to result from cost savings. Gold exists in finite supplies that are in specific physical places in the world, to have access to it governments must either expropriate it, purchase it or borrow it. This leaves governments subject to market forces for the supply of gold unless willing to countenance expropriation or war. Fiat money is created whenever an issuing government spends and extinguished when ever that government accepts taxes. On gold, when the government borrows it pays interest to the owners of the gold it is borrowing. With fiat money when the government "borrows" it is creating an interest bearing asset, a bond, that is equal to money at the same time it spends the actual money it has "borrowed".
The money the government spends it spends directly into the economy, the financial asset, the "debt" it sells, becomes part of the financial economy where loans can be made against it increasing the apparent money supply by increasing velocity as discussed above. So it has the affect of introducing real spending in the real economy at the same time the stock of assets in the financial system is expanded when the government sells bonds and spends. With fiat money the issuing government can pay back a "debt" any time it chooses. In addition, because the government issues the money it has the power to set the interest rate on its "debt" wherever it chooses. On gold there is a naturally positive interest rate that reflects the stock of gold relative to the flow of money in the economy, with fiat money the natural interest rate is zero and the issuing government must manage it upward to achieve whatever rate target it deems appropriate to market conditions. It is this independence of democratic fiat money issuing governments that individuals who control large amounts of money resent: no matter how much they have, the government still controls the interest rate and will likely pursue public purposes that may not suit the holders of large stocks of money. How the money system actually works is profoundly different from what is taught in standard economics text books that it is worth dwelling on this at some length.
Here in the United States our government issues Treasury Bonds to control the interest rate, not to "fund the deficit". The "deficit" is what the government spends beyond what it collects in taxes. It is thought of as a "deficit" because on gold the government would have to borrow against its stocks of gold or borrow gold stocks to spend more than it received. Thus the US government was long habituated to issuing bonds to fund deficits when the transfer to a full fiat currency happened in 1971. But, as mentioned, with fiat money when taxes are paid that money is extinguished and whenever the issuing government spends it creates new money. The government could simply purchase whatever it chose with new money and not issue any debt.
Those who don't like governments being able to set their own interest rates insist that doing this, government spending without the sale of bonds of equal value, would be inflationary and in very specific circumstances it would be, but we have not seen the circumstances required for quite some time. Milton Friedman claimed that inflation was always and everywhere a monetary phenomenon. He was half right. It is always expressed in money, but money is a system that is meaningless without exchange. This is where those who would prefer gold and Monetarist interests align: gold gives the appearance of actually being something without exchange, it is a shiny yellow metal, but as I mentioned, in a crisis it is no more edible than dollars, maybe less. Inflation is meaningless without exchange, so while it is always a monetary phenomenon, it is also always a market phenomenon. When demand backed with money in a market outstrips supply, inflation results.
With the enormous weight of idle capital and unemployed people in our system, the risk of money backed demand outstripping supply is for the moment remote. With the deficit hysteria in vogue as I write this near Christmas of 2010 the single biggest threat the United States faces of a supply constraint is that we will so debase demand and the American middle class that our capital stocks will be liquidated in a debt deflation spiral. An hysterical fear of inflation and incessant propaganda from those who would prefer that the government not set the interest rate is driving our politics towards a national economic suicide that might in fact leave only those so wealthy that they can fund their own states standing.
Keynes observation, "The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness is crazily improbable – the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years." is as appropriate today as when when he wrote it in 1929. But our politics is so distorted by incoherent propaganda that has mushroomed from the corpse of the "Fairness Doctrine" that half the nation, mostly in good faith, support policies that will liquidate our real capital stocks and impoverish the population. The deficit is going up as the tax base sinks and expenditure to support the unemployed rises. At the same time idle capacity and workers are not creating wealth. The deficit is going up and wealth is not being created: the government is spending money on everything except those things that might create demand and with it wealth. Tax cuts do nothing for people with no income and those who pay the most in taxes are the most inclined to save. Government purchases do nothing if they are purchases from monopoly or oligopoly suppliers who reduce wages to increase profits as most vendors to the government now are and do. What passed for stimulus two years ago was tax breaks to those with incomes and added profits for those already doing business with the government. The result is quite predictable: profits are up while the overall economy is still down. Reductions in the government's component of demand will only magnify our problems while a re-direction of that demand away from the profitable corporate sector toward those without incomes in the form of paid productive work would actually re-start the economy.
Watch closely what is happening in Ireland and England as they pursue the Monetarist program of popular austerity. Demand is collapsing, employment collapsing, tax revenues are collapsing, GDP is collapsing. And they are surprised to see the budget deficits expanding despite this: the deficit is an outcome, not an intention, it is the result of collapsing taxes meeting expanding unemployment and its cost to the public purse. To further cut government spending will increase unemployment and decrease tax income for the government, increasing the deficit outcome.
Only true believers in Monetarist orthodoxies could be surprised. Households are not Ricardian, do you know anyone who has saved money in order to pay the future taxes they imagine the national debt will require? If so, kindly let me know where they are storing that money: American's savings rate is near historic lows, England's and Ireland's aren't much different. Note also that business are not rushing in to invest now that budget cuts in Ireland and England are not crowding them out: only an idiot would invest in a market where there is no demand. And yet our ideologues can not see that these policies will in fact be a long term disaster for the very corporate and financial interests who sponsor the ideology. At a certain point, demand deficiency will destroy the market for corporate goods whatever they may be.
Monetarist ideologues want a government so small they can drown it in the bath tub. While our government is not that small it is proving to be that weak. If they succeed in drowning it we will indeed have reached the end of our road to serfdom: corporate and other wealthy interests will be the only power centers in a neo-feudal society. Our elected government is the mechanism by which the citizens direct the enforcement side of the agreements that create fair markets. Those who do not like government would prefer that market rules favor themselves rather than be fair.
The interest rate is the sole tool the government has used for the last forty years to control the money system. Those who stand atop the system but for the government want back the power to set that rate, it will allow them to own the government outright rather than merely renting it as they must now. While the psychology of the born rich is well captured by Fitzgerald, "Let me tell you about the very rich. They are different from you and me. They possess and enjoy early, and it does something to them, makes them soft, where we are hard, cynical where we are trustful, in a way that, unless you were born rich, it is very difficult to understand." None the less they are ultimately people like you and me, only with different experiences. It is the institutions that they fund that are more seriously different. While individually, like everyone else, the powerfully wealthy are subject to persuasion, they fund institutions with which it is impossible to reason. Institutions like Murdoch's "news" empire or the Koch brothers support for the "Tea Party", or the Peterson, Heritage and Cato Institutes that sustain propaganda engaging the innate moral heuristics of most Americans in distortions that lead them to actions counter to their own, the nations and even ultimately corporate interests.
The mechanics of the economy at large are not at all like the mechanics of household finances and the role of government is profoundly different from that of even the best business. Anyone who claims the government should be run like a household thinks money grows on trees: to suppose that a decrease in government spending will create investments and jobs completely ignores the reality that all income is some prior expenditure, reduced spending reduces income except where money grows on trees. Anyone who claims government should be run like a business thinks that if everyone's wages are cut we all somehow become richer. The absurdity is obvious and yet invisible in the fog of propaganda. This propaganda has so distorted our system that half the country is marching toward its demise in the name of "conservative" "freedom".
Above we saw how those with power in the money system can use it to create speculative profits through the Minsky cycle. This manipulation of the system allows those who control the system to concentrate all of the rewards at the top by draining the real economy of money. Then we saw how suppressed investment could be used to lower the rate of employment robbing workers of bargaining power to command some percentage of the profits in the system. Both of these manipulations have been supported by the policy of our government to the exclusive benefit of the private controllers of the money system.
We have seen how apparent profits at the micro level, achieved through cost cutting, primarily by driving down wages, are revealed at the macro level to not be profits at all, merely diversions of existing money flows from workers to owners. We have also seen how what appears prudent in a down turn at the micro level, to withdraw spending and pay off debts, is at the systemic, macro level an amplifier of the downturn: the withdrawal of spending depresses incomes in a downward spiral. And yet this too is the policy being advocated by Monetarists and their Neo-Classical fellow travelers. It is not clear what they hope to gain from this policy, as we are seeing in Ireland and England the policy will destroy capital stocks and living standards as it advances.
None the less, Monetarist ideologues have succeeded in convincing the government that spending policy is a poor way to guide the national economy despite, or perhaps because of the resounding success of the previous forty years when spending policy made the United States the most dynamic and wealthy country in the world. That era had seen government as a central agent in American civilization where the private controllers of the money system were highly constrained by it. That government constraint on the money system prevented exactly the coercions and destruction we are now experiencing from the misuse of that system. The obverse is now true, our government has become marginal to a financial mania now presided over by money obsessed plutocrats, but it is not at all clear that by achieving their victories over government the money controllers will shape a new system. It is just as likely that they will precipitate the collapse of the system from which they have extracted all of the rewards without leaving anything viable in its place.
The key problem now is the collapse of demand. This is both the immediate result of where we stand at the end in the Minsky cycle and the long term result of the elision between micro and macro economics effected by forty years of Monetarist ideology and propaganda. While the Minsky cycle has played out four times in the era of Monetarist, Neo-Classical ascendancy, with endings in 1981, 1991, 2001 and 2007, the latest collapse leaves Monetarism's micro-macro elision bare to behold: where governments like Ireland and England continue to act like households cutting purchases into the downturn, the collapse accelerates; where governments cut wages and payrolls, the collapse accelerates; where government budgets are cut private investment shows no sign of rushing in; where governments do not look after public interests in markets, private corporations and foreign governments exploit their populations.
While the debt load of Americans has reduced in the last two years, 90% of the reduction has been in the form of defaults. This means that Americans are not paying down their debts, they are declaring bankruptcy and being foreclosed on. 10% of mortgage holders have been foreclosed on in the last two years. On the other hand, the giant ball of global capital continues to roll from country to country and sector to sector in search of yield, but lacking a real spending component the best it can do is create successive bubbles and skim the froth from them before they pop. The policy proposals currently in play do nothing to address these central problems. As the Monetarist bubble started inflating forty years ago, for every dollar of income the concentration of wealth drained from the real economy credit was extended and citizens encouraged to accept it by easy terms to maintain and advance standards of living. Now forty years later these debts are revealed to be shackles used with government blessing by the irresponsible and power hungry creditors who sponsored them to tether those Americans at the lower end of the income spectrum to a kind of Monetarist indenture, a neo-feudalism. That Monetarism and Neo-Classical economics has failed to add anything meaningful for society at large to our economic knowledge is clear both from their failure to anticipate these disasters and the paucity and patent inadequacy of every solution proposed. Unless, of course, leading us down the road to serfdom was always the goal."

No comments: