Friday, April 15, 2016

Interesting Comment


A commenter Brendan M left a very interesting comment over at Bill's:


...However it does seem common for you to discuss fiscal balances (deficits), structural balances, pro-cyclical spending and other quantities that my reading of MMT to suggest were dependent variables given the constraints applied to the economy.
Consider a piston moving in a gas filled cylinder. As the piston advances into the cylinder, the temperature of the gas will rise and as the piston retreats, the temperature of the gas will drop according to Boyle’s law. 
Although heat is a relevant quantity here, you will never come to an understanding of this system simply by looking at heat budgets. You can divide your heat flows according to any sophisticated criteria you care to devise. However, the temperature changes are caused by the pistol moving, thinking about heat flows just confuses the issue. 
In the case of the fiscal balance, the ‘piston’ is the savings propensity of the private sector. 
Sophisticated classifications of government fiscal flows are only confusing the situation. Your government can be as pro-cyclical or counter-cyclical as it wants. It can have a structural deficit or surplus. It can raise spending or drop it. It can raise tax rates, cut tax rates, target the rich or the poor. 
As long as the private sector has the option to net save, then the private propensity to save will be the determining factor in the sign of the fiscal balance. 
This is why Neo-liberal economists are continually surprised by fiscal balance results, they are looking at the wrong variables. 
Still, you also seem to lend some credence to the practice of looking at these government fiscal settings variables when considering the fiscal balance. 
Am I misunderstanding something?

Uh... no... I would say Brendan is not misunderstanding anything...

Saving is very important to accommodate; AND so is the return on said savings that the savers have been trained to expect.








25 comments:

Ignacio said...

For me the debate is much more interesting from an other point of view: the breakdown of society as it trends towards 'everyone from himself' due to institutional degradation and raise of feudalism.

The problem are not saving, or interest rates. The problem are social contracts breaking down due to the fall of the society and it's safety nets. Elders not being adequately provisioned, with a system that no longer works, is just one of the aspects of this trend.

Don't expect sympathy from the generations and cohorts which don't perceive the same reality as those whose social contract is being broken "we worked hard, we EARNED it", the other cohorts will answer: "deal with it, welcome to our reality". Most people under 40 don't expect such niceties as pensions or retirement to exist in the future neither know what the hell does 'saving' mean. Neo-liberalism answer to problems like this is: "it's your own fault" and "go die, and don't make too much noise while you are dying!".

As long as we are dominated by a zero-sum world-view nothing will change. And as expectations are unfulfilled, new experiences will settle-in and train the population to expect different things, in a more ruthless world.

Welcome to the race to the bottom. We are living in a depression in slow motion where 90% of the population is crapified while the remaining try to sustain their own privileged position as best as they can.

BTW you can go through the experience of how this looks like in Central/South America, Africa, Asia, etc. Western exceptionalism is coming to an end with globalization.

Ignacio said...

My point being that raising or decreasing interest rates won't change the underlying dynamics of what's going on and is just a shoot at fixing symptoms instead of causes. For anything to reality change the current dominant paradigm of zero-sum world-view must be replaced by an other.

P.S: BTW my support of ZIRP is because I truly beleive rates should be market determined, the world central planning thing simply does not work. So maybe that's what De Long means in that other article, it doesn't matter if rates raise or go down because it's just an expression of the appetite for credit and the ability of credit institutions to lend. As the bulk of "money" is credit in the end and enters the system through credit institutions and is not "vertical money".

CB's are always reactionary (which just adds fuel to the fire), and they are reacting to the market demands. If we are in a ZIRP environment is because there isn't really demand for credit. The function of IR is not setting income from govt liabilities, and is not what it should be about.

If you ask me the whole system is poorly implemented because you have ne mechanics to tackle different parts which shouldn't be linked at all. The problem of "provisioning elders and savings" is different than the problem of "providing housing and funding for business". But the whole savings mechanics are attached to the other because all the wrong social memes settled in the distant past (XIX century) because it favoured the interest of capital and financiers.

Is a mess, and that's part of the reason why it's breaking down and evolving into something else (for the good or for the bad, as still is an unresolved issue).

Andrew Anderson said...

so is the return on said savings that the savers have been trained to expect. Matt Franko

Wrongly trained in the case of risk-free saving which should return at most 0% else the Parable of the Talents (Matthew 25:14-30) is wrong.

But for non-believers, it's folly to reward risk-free saving since progress requires taking risks.

Auburn Parks said...

Why would anyone support higher Govt interest rates and spending (the only way to keep positive rates for savers) when for every dollar you want to provide for worthwhile savers you need to provide $5 to rich people, corporations, and foreigners.

Thats the dumbest fucking policy I can imagine.

One of the most regressive spending policy possible.

Auburn Parks said...

In MMT, talking about the deficit, as always, is simply a stand-in for saying that demand is too low, and we need to increase spending or cut taxes.

Why is that so controversial?

Pearce Tournier said...

Except of course that savers' behaviour is triggered/conditioned/facilitated by the level of government spending (which is what Mike says is more important than just deficits). And Bill often explains the movement of the sectoral balances over several periods, which is an easier way to understand what is going on, it seems to me, and provides more insight than just looking at private saving. One can have massive dissaving by the private sector because of a downturn, or because of, say, animal spirits during a financial bubble. These are not the same things, surely, but would the distinction show up so easily, for folk like me, if we only considered the level of private saving?

Auburn Parks said...

Pierce-

Just focusing on Govt spending ignores half the equation. Taxes are a flow also. Talking only about Govt spending is just as ideological as the Time cover talking about only what the Govt owes and not ignoring what the Economy owns wrt TSY Cds

MRW said...

Auburn, do you mean “and ignoring what the Economy owns?

Matt Franko said...

Yeah but Tom just posted this the other day from the evolutionary perspective:

"Apparently, evolution has equipped us with a subconscious long-term perspective that often disagrees with the neoclassical economic assumption that we maximize utility in the here and now."

So even from the evolutionary perspective, many among us have been "equipped" (FD anthropomorphism but I digress) with a propensity to save...

What are we going to say "F these people!" ?????

Like they are not wired for savings? Or we want to force some sort attempt at behavior modification on them which is counter to this evolutionary characteristic within humanity?

I dont see that working...

Tom Hickey said...

Saving is very important to accommodate

The sim;lest view of MMT is that it is about accommodating non-government saving desire (in order to optimize use of available real resources wrt to growth, employment and price stability).

Monetary policy attempts to do this using the interest rate as an instrument.

MMT says to use the fiscal balance instead, since only government can provision non-government with &NFA, which is sustainable financially.

Government interest plays some role but only a minor one, which MMT economists conclude can be largely dispensed with by paying only a short term rate on bills.

Matt Franko said...

"Government interest plays some role but only a minor one, "

I dont think that is true Tom....

Tom Hickey said...

So even from the evolutionary perspective, many among us have been "equipped" (FD anthropomorphism but I digress) with a propensity to save...

Not exactly the way it works. Animals have a propensity to provision for the future, both behaviorally (store nuts for winter) and biologically (store fat).

There would be no need to provision for the future if is were always harvest time.

In a modern economy with sufficient resources including knowledge, it could potentially be harvest time permanently. That is what a welfare state, which is based on consumption and investment, is about as opposed to a market state, which is based on saving and investment. The difference is that government plays a key role in a welfare state whereas almost no role in a market state.

The problem is with the tendency toward a market state. That is the result of ignorance on one hand and relative utility on the other. Some people enjoy being on top, which means that someone else has to be on the bottom. This, by the way, sums up feminism, too. :o

Tom Hickey said...

I dont think that is true Tom....

Right, and that is where we differed.

Even if government did run fiscal chiefly through interest, I would argue that it is a stupid way to do it since apparitions can be tightly targeted and interest is a shotgun approach that is ineffective and inefficient, not to mention regressive.

Auburn Parks said...

Matt-

You provision society's elderly with democratic, universal proposals like SS, not by regressive interest spending partly determined by a un-elected board of wealthy technocrats and bankers aka the Fed.

Private pensions, and state and local Govt pensions are bankrupting those entities too, and its definitely not just because of ZIRP, this was a widespread problem even before the crash. Non-sovereign simply cannot reasonably afford pension and health benefits in an aging society. The better our current system ends the better, and if it takes ZIRP to bring about its death, so much the better.

Bob said...

An expiry date on money might dissuade people from engaging in hoarding behavior.

Ignacio said...

Bob that was Silvio Gesell (recommend reading his book) suggestion a century ago, some form of hyper-keynesianism before Keynes. And that's what CB's are trying with NIRP in they misunderstanding of how the credit system functions.

But it can never be the whole 'solution' to the pletora of problems we have. It will only work if we solve the 'provision for the elderly' problem at the same time, and the 'savings problem'.

Short-sighted solutions which will end up benefiting those at the top are no longer sustainable and that's why the system is breaking down on small motion, that only puts us closer to feudalism (a return to the old order before the industrial revolution).

Matt Franko said...

Well maybe savers think non-savers are stupid for not saving....

Matt Franko said...

Where is this knowledge getting us if all we do is take a side?

Simsalablunder said...

"Well maybe savers think non-savers are stupid for not saving...."

Yeah we already know that some people think poor people are stupid.

Matt Franko said...

Two stupids dont make a smart...

Matt Franko said...

Mike maybe you should change the title of your new info. service from

"MMT Trader"

to

"Norman's Fiscal Rate Observer"

And start wearing bowties and ditch the contacts for horn-rimmed glasses...

Might get you invited to the next Levy Conference...

TofuNFiatRGood4U said...

There is no problem with ZIRP if private pension funds, or private indiviuals, receive a refundable tax credit based on a multiplier of actual interest earned. (Pension fund interest earnings might already be on form 5500 or similar.)

This is just Targeted Deficit Spending.

Ben Johannson said...

Can you write anything not dripping with resentment?

Matt Franko said...

Andrew,

"so is the return on said savings that the savers have been trained to expect. Matt Franko

Wrongly trained in the case of risk-free saving which should return at most 0% else the Parable of the Talents (Matthew 25:14-30) is wrong.

But for non-believers, it's folly to reward risk-free saving since progress requires taking risks."

Serious question... How do you square your comment here with this statement by the Lord to the Cainite woman:

"Now He, answering, said, "I was not commissioned except for the lost sheep of the house of Israel." Mat 15:24

iow I am not a lost sheep of the house of Israel... so why do you want to apply anything the Lord is depicted as saying to Israel (operating under the metals) about interest on savings or whatever to me, a Cainite (operating under state currency) under Paul's teachings.... Paul whom the Lord commissioned much later?

He is not talking to me there I can tell you that ... imo we can do whatever we want to do as we determine what is just/righteous we are not under the Mosaic Law here outside of Israel ... which can include paying guaranteed interest on savings of state currency if that is a policy that we deem just/righteous or a good idea thru the democratic process or otherwise...

We outside of Israel have been given authority to implement whatever economic policy we deem appropriate... granted most dont see it that way...

Simsalablunder said...

"Two stupids dont make a smart..."

If you yourself had that as your guiding rule…