economics - where to begin?

The Federal Reserve tripled their balance sheet and it hasn't stirred inflation.

http://upload.wikimedia.org/wikipedia/commons/0/08/US_Federal_Reserve_balance_sheet_total.png

Asian competition continues to be disinflationary on the goods and tradable services side, and newfound prudence from banks has prevented the funds from escaping into the real economy through loans. Quantitative Easing II (the last major money printing round) largely just enriched commodity traders.

My take is that we've had a hollowing out of the economy from the early 90s that was obscured by internet and housing bubbles. Take the bubbles away, and you get the economy of the early 1990s, only with a lot more workforce and a lot more debt. You can toss tons and tons of dollars in, but that doesn't change the fundamental bias towards deleveraging (paying off debt). Banks are beginning to offload their inventory of foreclosed property in earnest, so there's no tailwind from housing.

Also, as its not a normal inventory rebalancing based recession, but a financial/asset bubble collapse, different timescales apply. Normal recessions reduce inventory and resume growth in a couple of years. Credit bubbles take a lot longer to work themselves off. In Kondratieff's cycle, the "winter" generally lasts 17 to 20 years, until the generation that was scarred by the crisis is replaced.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/NWO%2014.jpg

the generation that was scarred by the crisis is replaced

ie the generation that was scarred by inflation in the 70s?

Also, most of my fellow bear forum travellers that have watched Ron Paul in every Humphrey-Hawkins congression testimony have known he's a nutter for ages. Some of the ideas are sound, in historical terms, but he's such a broken record there's no evidence of a mind behind the vitriol.

Um, the best recent book on Kondratieff may be the one by Michael Alexander, who ties it into Strauss and Howe generational analysis (the guys that gave us "Greatest Generation" and "Generation X").

My own grandfather, age 22 in 1929, abjured debt his entire life (I've inherited that). Its wasn't uncommon for those of his generation. It took about a generation, until 1948, until people started seeking credit for suburban homes and all the trimmings.

From 1992 to 2007, rare was the week in which I wasn't offered another credit card in the mail. A lot of peeps are paying for them, and student loans, and mortgages on credit bubble inflated property. Funds going to pay down debt are not spent, and don't contribute to GDP.

It isn't clear whether the Kondratieff peak should be 1999 (for financial assets) or 2006-7 (for household assets - mostly housing, and credit). The latter seems more compelling to me. Macroeconomics largely ignores mass psychology, and perhaps rightly so, as there aren't too many levers economists exert over it.

i have no debt

i also have no assets or money to speak of

if only i'd bought and sold before all this went down

My take is that we've had a hollowing out of the economy from the early 90s that was obscured by internet and housing bubbles. Take the bubbles away, and you get the economy of the early 1990s, only with a lot more workforce and a lot more debt.

This seems to me to be entirely correct.

The deflationary forces are very strong now, and attempts to pump money into the economy since 2009 have mostly fueled a variety of commodity bubbles, like gold. The Fed's asset acqusitions have been little more than shoveling free money into banks, without the slightest quid pro quo.

This kind of economy is when a more sensible government would be trying to finance a lot of public works and infrastructure modernization, just to get people working. Republican policies seem to be aimed at reestablishing a vast peasantry under the thumb of a tiny aristocracy. Their apres moi l'deluge sentiments are pretty frightening.

Don't know where to put this so:

Libertarians love neoclassical economics when it suits them. "People are rational utility-maximizers and we should trust them to make the right decisions." Then they turn around and blame poor people for their plight - lazy, stupid, uneducated, trapped in a "culture of poverty". They can't reconcile their assumption that people will make the right decisions for themselves with their assumption that the results of capitalism are not just Pareto-optimal but just.

I'm not just making an abstract point, you can find tons of example of microeconomic thinking (as much as I hate the Freakonomics guys, they have some good examples here) where the key to properly understanding a bizarre-looking situation is imagining "what if people are actually making the optimal decisions in this situation, based on the resources available to them?" But libertarians won't apply that thinking to the poor.

To play devil's advocate, some libertarians would probably argue that the poor are optimizing in response to a bad set of government policies (such as welfare) that reward laziness.

when you consider that libertarians tend to be privileged racists and replace "the poor" with "the non-white," their bullshit makes more 'sense'

Yeah both of you otm, although o. nate what triggered this for me was someone ridiculing an article about poor food options in rural areas with "what about the fact that these people are uneducated and have too many kids, eh? that's why they make poor food choices"

Yeah, I'm not saying that many libertarians aren't inconsistent in applying their assumptions. Personally I think the idea that welfare causes poverty is ludicrous.

anyone else reading/planning on reading thomas piketty's capital?

placed an order for my copy a little while ago

The reviews have been illuminating but it sounds like a bear of a book to actually read.

if i remember i'll report back

Sounds like it'd be worth a thread (I've been meaning to read it, but haven't got a copy yet).

i feel like it'd get very few posts

This Piketty book is kinda blowin up, huh --- got a scoff from Ross Douthat in the NYT last Sunday, plus a profile in the biz sec.

pik shit poppin, little shit scoffin

http://www.theguardian.com/commentisfree/2014/may/09/university-economics-teaching-lobotomy-non-mainstream

1% bristling at the suggestion it has an unfair economic advantage

The economic advantage of great wealth isn't unfair, because it exists. Its existence proves its right to exist. I have now used the word "right" and applied it to the advantages of great wealth, and what is right cannot simultaneously be unfair. QED. /think tank flack

Sobering history of the politics of inequality in the US by Eduardo Porter:

http://www.nytimes.com/2014/05/14/business/economy/the-politics-of-income-inequality.html?ref=business&_r=0

https://www.jacobinmag.com/2015/11/microcredit-muhammad-yunus-bono-clinton-foundation-global-poverty-entrepreneurial-charity/

hey can i get a quick read on this by an econ person

Not an economist and not qualified to talk about the bulk of his piece, but I did work at a nontraditional MFI for smallholder farmers. He completely ignores a billion subsistence farmers, who I (obviously) believe do benefit from properly structured microfinance programs. His arguments about Say's law don't apply here, because subsistence farmers have a pure supply problem (many are slowly starving.)

The rest of the piece might be right. Traditional microfinance hasn't been shown to increase incomes. Going directly to the poor rather than through corrupt governments is good, but just giving them money seems to be more effective. If microfinance detracts from fundamental reforms, that would be bad. Those reforms are never going to come from the outside, though.

Proof that I'm a neoliberal stooge: I used to sit in a cafe in Nairobi frequented by NGO workers and Chinese businessmen and wonder which group was having a more positive impact. (Kenya doesn't have natural resources to extract, so Chinese businesses there are just building roads, selling cheap high-quality farm equipment, etc.)

'detracts from fundamental reforms' seems so go-to for these guys that as an argument it ought to have a name

I feel like part of the problem with "microfinance" as a concept is that it's sort of like "charter school" -- it's a vague buzzword that doesn't actually tell you much about the actual structure of the specific thing in question, and which can be applied to a wide variety of different enterprises -- non-profit, for-profit, super-predatory for-profit, etc.

not really my field but my impression of the evidence is that since duflo and banerjee and their crew started looking at it people realized it's not as hot as first believed. like just poking through some nber wps

This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on "temptation goods" declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs ), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women's empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.

http://www.nber.org/papers/w18950

Theory and evidence have raised concerns that microcredit does more harm than good, particularly when offered at high interest rates. We use a clustered randomized trial, and household surveys of eligible borrowers and their businesses, to estimate impacts from an expansion of group lending at 110% APR by the largest microlender in Mexico. Average effects on a rich set of outcomes measured 18-34 months postexpansion suggest no transformative impacts.

(http://www.nber.org/papers/w19827)

We use an RCT to analyze the impacts of microcredit. The study population consists of loan applicants who were marginally rejected by an MFI in Bosnia. A random subset of these were offered a loan. We provide evidence of higher self-employment, increases in inventory, a reduction in the incidence of wage work and an increase in the labor supply of 16-19 year olds in the household's business. We also present some evidence of increases in profits and a reduction in consumption and savings. There is no evidence that the program increased overall household income.

http://www.nber.org/papers/w18538

i think the problem is micro-credit creates a lot of very small unproductive firms. in poor countries there are ten people selling coca cola and water bottles on every block. what they need is big productive firms. i don't know why there aren't more of those. dani rodrik emphasizes coordination failures, other people emphasize weak property rights or extractive institutions. despite all the criticisms i think weakening credit constraints for poor people is really important, maybe the interest rates on these loans are just too high?

j. i think i told you i would get you some links about universal basic income the other week too? that actually prompted me to find some cool stuff. i've got to go to bed now but i'll bump that thread when i have a chance

this was a fun thread to read

curious whether lex has given up now or feels he has some knowledge.

currently reading this https://www.theguardian.com/books/2014/may/29/economics-the-users-guide-ha-joon-chang-review and really enjoying it

what econ bloggers should i read? there are too many

Noah Smith (blog and Bloomberg column)
Marginal Revolution
Chris Dillow

more growth/economic history/development focus:
Pseudoerasmus
Dietrick Vollrath

prob a bit 'advanced' (strict academic focus and assumes knowledge of economic theory) but my personal fav is

A Fine Theorem

oh also Mark Thoma basically runs a huge econ blog aggregator, updated daily

http://economistsview.typepad.com/

curious whether lex has given up now or feels he has some knowledge.

neither but i've stopped feeling shit about it i guess?

Can anyone recommend me good stuff to read about understanding government debt, "unfunded liabilities" for public programs, etc.? I keep getting told by people on the left that it's a lot of right wing smoke and mirrors but I don't feel 100% comforted.

Here's a typical Krugman column:
http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html

My totally underinformed belief is that if you renamed the "national debt" to "national market capitalization" everyone would love it and be super excited for it to get bigger.

which is to say I read a brief introduction to Modern Money Theory a while ago and promptly decided I believed it.

xxxxp thx flopson!

my pleasure, hope u enjoy

as far as MMT goes, yeah I never really "got it", and people seem to get into crazy Talmudic debates about accounting identities whenever it comes up. a lot of its adherents are unpleasant quacks, but some of its more eloquent advocates seem reasonable. of all heterodox theories (of which there are surprisingly few, for all the screeching you hear since the crisis) MMT seems like the one most poised to puncture the mainstream of macroeconomics. (the other being neo-Fisherism).

it's not totally obvious what MMT is and the definition seems to shift based on which criticism is being made or who is defending it, but this was something I read (by a writer who I trust, very knowledgeable and open-minded on monetary theory & history) a while ago that nailed it down a bit for me; basically the sleight of hand is assuming central bank-treasury independence:

Modern monetary theory (MMT) in a nutshell, at least as far as I see it, goes something like this. Back in the 1990s a couple of clever guys came up with the idea of a government-provided jobs guarantee. They realized that this program would be seen by the public as an expensive boondoggle requiring sky-high taxes and huge debts. Could they outflank these criticisms by finding another way to fund the jobs guarantee?

To find the funds the early MMTers worked backwards through the labyrinthine relationship between the Federal Reserve and the Treasury. What they claimed to have discovered at the end of their trek was certainly shocking. The US Treasury, they said, funds itself not by the conventional route of taxes and bonds, but by creating and directly spending fiat (i.e. inconvertible) money. Furthermore, it is not only the government's prerogative, but its obligation to spend this money into existence, since people need a stock of fiat money to pay their taxes. Bonds, contrary to what most of us think, are not a sign of government indebtedness—rather, they drain spending.

This bit of monetary jiu-jitsu is powerful because it has the ability to disarm people's instinctual aversion to expensive social programs. If all it takes to fund a jobs guarantee is that the government spend money, and debt and taxes are not the great evils we have been trained to think, then why resist it?

Most governments don't create fiat money—their central banks do. For a government to have this power, it needs to be able to force its central bank to add new money to the government account. One way to do this is for the government to print up a bond and give it to the central bank. The central bank then credits the government's account for the full amount of the bond, and now the government can spend, say on a jobs guarantee. Alternatively, the transaction can be completed without the transferral of the bond—just have the central bank automatically credit the government's account prior to spending. When the government can require its central bank to create money on its behalf, we say that they are effectively consolidated into one entity.

The earliest MMT tome, Wray's Understanding Modern Money, is very insistent on the consolidated nature of the Fed-Treasury:
"The important thing to notice is that the Treasury spends before and without regard to either previous receipt of taxes or prior bond sales."

"...permanent consolidated government deficits are the theoretical and practical norm in a modern economy... Further, government spending is always financed through creation of fiat money - rather than through tax revenues or bond sales."

"While it appears that the Treasury 'needs' the tax revenue so that it can spend, that is clearly a superficial view... The government certainly does not need to have its own IOU returned before it can spend; rather, the public needs the government's IOU before it can pay taxes."

Now as their critics were quick to point out (see Lavoie, for instance), the relationship between Fed and Treasury is such that the two are not consolidated. The Treasury cannot ask the Fed to credit its account, nor can the Treasury print up a bond and give it to the Fed in exchange for spending power. The only way the Treasury can spend is by moving previously acquired funds that are held in the private banking system into its Federal Reserve account—and the only way it can acquire these funds is through taxes and bond issues. Using the Fed to print money and fund a jobs guarantee program is impossible.

The MMT wish, it would seem, was the father to the thought—Wray's 1998 tome was too hasty in consolidating the Fed and Treasury. MMTers are left with an intriguing theory of how modern money works, yet their theory corresponds to no underlying reality. That doesn't mean that MMT is without some merits. MMTers are hackers. In their efforts to reverse engineer the Fed-Treasury nexus in order to fund their pet project, they've come across plenty of interesting minutiae about monetary operations. MMT papers and blogs go into these details and are worth reading if you want to hone your understanding of the monetary system [just take anything they say about consolidation with a grain of salt].

Has the lack of overlap between Wray 1998's theory and reality stopped MMTers? Not at all. When your theory doesn't describe reality, don't bother changing your theory—change reality so that it conforms to your theory. Enter the platinum coin.

The idea of issuing a trillion dollar platinum coin rose to prominence with the onset of yet another US debt ceiling crisis. The MMT blogs hummed about the coin, a huge coin crescendo grew on Twitter, and the issue went all the way to the White House, which demurred. My hunch is that beating the debt ceiling is only a tertiary motive for MMTer excitement over the platinum coin. Far more important to them is that the platinum coin, if implemented, will effectively consolidate the Fed and Treasury, finally redeeming Wray 1998. This opens to door to their beloved jobs guarantee.

I'm not sure how MMT will evolve, but one thing we'll probably see more of is platinum coin-style activism. Though the rest of world has moved on from the coin, the MMT blogs are still buzzing about it. I'm sure more clever ways to hack the Fed-Treasury nexus will be found, thereby giving the Treasury other routes by which to force Bernanke or whomever follows him to print dollars on demand. These hack-arounds will be publicized. Perhaps a political movement will form. This wouldn't be unique. All sorts parties have formed around monetary ideas—Greenbackism, Free Silver, and Social Credit.

http://jpkoning.blogspot.ca/2013/01/meandering-from-mmt-and-platinum-coin.html

Can anyone suggest educational comics on economics? Something like a Larry Gonick "Cartoon Guide to..." book. I've read Michael Goodwin's Economix and Sean Michael Wilson's Parecomic about Michael Albert(which is more biography than explainer) but the two "Cartoon Introduction to" econ are way too yay-free-market! for me.

So I'm wondering if there's something else out there.

http://i.imgur.com/uYM2ZUl.jpg

Lol

I'm clicking unfollow but it isn't doing anything!

Killing yourself is an action where everyone intuitively understands the consequences for themselves and their dependents, so they can make a more or less informed decision about it. Borrowing money at high rates of interest has far reaching consequences that few people in the USA seem to understand until some time after the consequences have already arrived.

cowen is fucking capitalist swine

xp the "joke" is that suicide is like an infinitely high interest rate. an interest rate is the price of bringing money from the future into the present, so someone who pays a high interest rate values having money in the present more than the future. someone who kills themselves values the future at zero or lower, so it's like they're paying a high interest rate. har har

I've got a question.

I read Diane Coyle's GDP: A Brief but Affectionate History, which was very good. It goes clearly through both the history of it, but also how its structure and statistical composition has changed over time. She defends it as being the best way we have of measuring a country's economic capabilities, while painstakingly going through its shortcomings. Very far from being the least of these shortcomings is the particularly eye-watering case of the financial services measurements.

As the OECD GDP statistics manual puts it: "Measurement using the general formula [for constructing GDP] would result in their [the banks'] value being very small, if not negative; in other words, their intermediate consumption would be greater than their sales!"

Unable to imagine when this was writing that banking could be subtracting value from the economy, statisticians sought to find a way of measuring these earnings from financial intermediation...

..

One study of the United States concludes: "Making conservative assumptions, we show that the current official method overestimates the service output of the commercial banking industry by at least 21% (amounting to $116.8 billion in 2007:Q4 for example)"

That isn't my question, though it leads into it and the question whether financial services should be included in GDP at all, or whether they should sit behind the imaginary line dividing productive from unproductive, the 'production boundary'.

Diane Coyle starts the book with the example of how most European economies got a huge boost when statisticians decided to start including 'informal economy' outputs, including prostitution and drugs (and of course cash-only plumbers etc), in GDP (it immediately took Italy past the UK to become the fifth biggest economy in the world). At the end of the book she makes a strong case for also including household work in GDP.

It's a strong case - the central repeated paradox is a rather '20s-ish example of a widower marrying his housekeeper thus reducing productivity. But I don't really get it. Diane Coyle says:

It's what economists call "own-production" or "household production." This means all the work done within the family for its own use: the cooking, cleaning, child care, vegetable growing, sewing, carpentry, and so on. All of this can be bought, outsourced outside the household; but much is not. The main reason given for not counting unpaid housework as part of "the economy" while paid housework is counted, is the difficulty of measuring it

What i don't get is how something that doesn't, effectively, contribute to the market, or generate revenue can be considered GDP. I obv don't mean this work isn't real work, or that there is avoided cost and cost-opportunity issues associated with i, i just don't see why or how it would be desirable to count it as part of GDP. Anyone help?

the line that combines the two bits is the great:

Preliminary estimates suggest unpaid childcare is worth about three times as much as financial services, while household laundering is worth about four-fifths of financial services' contribution to the economy.

Additional evidence for wanting to include it:

Even in good times, however, the scale of this informal, unpaid work is significant: it accounts for more than half of all the time people spend working. if this is valued at money wages paid for similar work, it is equivalent to 1.85 times the size of the conventional national product figure for the United Kingdom in 2001. Although the figure, will vary among countries, the importance of this activity, conventionally but arbitrarily excluded from official GDP statistics, is universal.

xp

I have no formal economics training, but from my perspective the question could be recast in terms of whether GDP ought to be considered as an abstract measure of productive activity, in which case housework, vegetable gardening etc. are certainly productive activities and ought to be included, or alternately if GDP should be a measure of activity producing revenue or wages, and therefore more reflective of the 'money economy' only. In the second case, GDP might be more useful to planners, investors and statisticians whose main concern is the money economy, but less reflective of the whole productive activity within a society or a nation.

In short, it would depend on who is using GDP numbers and for what purpose.

Because GDP is just a measurement of whatever we want to include in it, there's no right answer apart from its fitness for the uses we put it to. Inevitably, GDP has entered the realm of politics, and so it is made to bolster arguments for which it is ill-suited. But if it is reformed to better fit some uses, it will perform other uses more poorly. As someone once said, "You pays your money and you makes your choice."