Monday, March 31, 2014

Ok, as Long as We're Talking about Scott Sumner, How About the Money Multiplier?

    He had another one of his sophistic defenses of the money multiplier-yes, it's useless, but it's not wrong just an identity, and it does no harm so let's keep using it.

    "David Glasner argues the money multiplier is a useless concept.  I’m sympathetic to that claim, and yet I think he goes to far in his criticism of Friedman and other monetarists.  Although the concept is useless, it’s not wrong, and it’s hard to see how it does much damage.  Here’s David:
So in Nick’s world, the money multiplier is just the reciprocal of the market share. In other words, the money multiplier simply reflects the relative quantities demanded of different monies. That’s not the money multiplier that I was taught in econ 2, and that’s not the money multiplier propounded by Monetarists for the past century. The point of the money multiplier is to take the equation of exchange, MV=PQ, underlying the quantity theory of money in which M stands for some measure of the aggregate quantity of money that supposedly determines what P is. The Monetarists then say that the monetary authority controls P because it controls M. True, since the rise of modern banking, most of the money actually used is not produced by the monetary authority, but by private banks, but the money multiplier allows all the privately produced money to be attributed to the monetary authority, the broad money supply being mechanically related to the monetary base so that M = kB, where M is the M in the equation of exchange and B is the monetary base. Since the monetary authority unquestionably controls B, it therefore controls M and therefore controls P.
    "If I understand David correctly he’s a bit confused about the money multiplier.  It is simply a ratio, regardless of what David was taught in school. In his example the multiplier equals k, which is the ratio M/B.  But unless I misread him, he seems to believe multiplier proponents viewed it as a constant, which is clearly not true. Rather they argued the multiplier depends on the behavior of banks and the public, and varies with changes in nominal interest rates, banking instability, etc.  This is how it’s taught in the number one money textbook, and this is the version Friedman and Schwartz used in the Monetary History, which focuses heavily on explaining changes in the multiplier."

     Glasner came back:

     "Scott, Noah was right (about this post, I mean). Also Andy’s point about the difference between the average and marginal money multiplier was spot on. I was going to mention it myself, but I was getting tired. And I think that it is clear that the old Monetarists thought that the multiplier was a critical variable for the conduct of monetary policy. Otherwise how could Friedman have imagined that it would be possible, as he claimed, to replace the Fed with a computer programmed to implement his k-percent rule?"

   Sumner replies to Glasner's reply:

   "David, I basically agree with Andy’s point. My only point here was that the monetarists and the textbooks are both aware that the multiplier changes under certain circumstances. Also that the textbooks define the multiplier in an AVERAGE sense. But as far as the utility of the concept, I’m completely with you."

    Frances Coppola made this comment:

    "Scott, there are an awful lot of people out there who ARE perplexed by the money multiplier. Or rather, they are perplexed when they discover that it doesn’t work in the way that they were taught. It would be immensely helpful if it was taught properly in the first place."

     Sumner answered her:

     "Frances, Good point. My only point is that some people suggest that the economists who use the multiplier concept are deluded. That’s very different from saying some undergrads get the wrong message. Many undergrads also think the fiscal multiplier is a constant."

      See, this is the kind of Sumnerian argument where you have to ask what's his real aim here. It's the fault of undergrads because their teachers can't explain the money multiplier in such a way that doesn't lead to confusion? His overall argument is rather elusive. He says mm is useless but it's not wrong and does no harm. If it does no good though as he himself says why have it?

     Why sow confusion if there is no net gain from the mm concept? Tom Brown I'm talking to you now-only because if memory serves me, you know a lot about the mm thing.


Unemployment Benefits and My Scott Sumner Problem

     Call this the unemployment benefits edition. In my last post we looked at my Sumner problem in the capital gains taxes are terrible and should be zero edition.

      Krugman, the capital gains tax, and the lies of Scott Sumner


     There was a story in Newsday today about how many people on Long Island are suffering after losing their unemployment benefits.

      "Growing numbers of jobless Long Islanders are struggling to survive with little to no income since extended federal unemployment benefits ended in December."

      "Despite improving local unemployment rates and job growth, thousands of long-term unemployed are still unable to find work, and now many say they are running out of money to meet even basic expenses."

      "A bipartisan compromise was reached recently in the U.S. Senate to provide extended benefits through May, retroactive to December, but it faces an uncertain fate in the House."

     Yes, the fate of these folks lies at the tender mercies of the House GOP. Kind of like being at the mercy of hungry polar bear. However, this is where I have a real problem with Sumner. All he ever does it tell us 'don't worry the Fed can offset this by more QE, or forward guidance or if it does NGDPLT or starts an NGDP futures market.'

    What this does is make the sad fate of all these long-term unemployed folks invisible. He basically denies their pain-it's like the misogynist-ie, woman hater-who comes up with all kind of clever tricks to try to convince us that don't' worry, not too many women are getting beat by their husbands so let's just forget about it.

     I don't buy that the Fed can by itself give us the optimum recovery from a Great Recession like we've had. However, even if it could this wouldn't mean we shouldn't do things like UI anyway. I mean the government would still have good reasons to want to help these suffering people-for one thing there are all kinds of social blowback that can incur, like more crime, vagrancy, a society with much more problems. Even if the Fed could totally deal with our AD problems there would still be the vexing question of distribution.

     Some like Mark Sadowski and Tom Brown tell me that Sumner just wants us to do his NGDPLT scheme and he leaves our fiscal policy to us-or at least our politicians. However, by criticizing anyone who criticizes something like allowing UI benefits to lapse-he never stops about how long 99 weeks or 73 weeks supposedly are-he's giving aid and comfort to these House Republicans whether he wants to or not-and I'm far from convinced he doesn't want to.

    "When Congress allowed extended benefits to lapse in December, 1.3 million Americans, including 13,699 unemployed Long Islanders, were left without the income. In the months since, more than 4,135 Long Islanders have come to the end of their 26 weeks of state benefits without the prospect of any federal help. Under the recent emergency compensation program, benefits -- including both regular and extended benefits -- had at one time lasted as long as 99 weeks in states where unemployment was worst but had been limited to 73 weeks by the time extended benefits ended in December."

     "Federal benefits have supplemented state benefits in times of high unemployment since 1970, with full federal payment for extended benefits enacted in February 2009. Extended benefits with costs shared by federal and state governments can be triggered when unemployment rates spike, but none are in effect. About 28,500 Long Islanders currently receive regular state benefits, and each week more will see those benefits expire, leaving most with little or no income."

     "The state Labor Department recently reported that Long Island's unemployment rate had dropped to 5.9 percent in January, compared to 7.7 percent a year earlier."

     "But the good news hasn't yet helped a 40-year-old Suffolk County woman, who asked to be identified only by her middle name, Jimena. She said she never expected she would still be unemployed more than a year after losing her job as a sales rep making $70,000 a year plus commissions."

     "I haven't gotten unemployment insurance since December, and now I don't have a dollar to my name," she said, noting her savings are depleted and her credit cards are nearly maxed out.
"For the last month and a half I haven't been able to sleep; I don't eat anymore. It's just like everything is worrying."

     She added, tearfully, "I feel like I'm in a hole and I don't know how to get out."

     Sumner's answer would be, don't worry you can eat QE.

     "For Jimena, the Suffolk woman, the $375 a week in unemployment benefits at least paid the rent on the apartment she shares with her daughter, 19. Now, without the benefit and her own resources, Jimena said she puts as much as she can on credit cards, gets occasional help from friends and the local church, and $189 a month in food stamps that don't go very far."

     "I never realized how hard it was to find a job until I was in that situation," she said, scoffing at those who suggest unemployment benefits make it easy for people to avoid having to get a job. "They don't know what they're talking about." She is hoping for a second interview for a sales job.
Puzzele, who said she loved the restaurant job she held for more than a decade, agrees. "When I hear on the news, it makes me upset to the extent that people in Congress say that people are lazy," she said. "But when I go to unemployment [office] most of the people there are older."
Feelings of anger and abandonment can haunt those who find themselves in distress after a lifetime of steady work and independence, people like Ann, 51, a Suffolk woman who asked that her full name be withheld to protect her privacy and job prospects after eight months of unemployment.
As a voter who had leaned Republican, she said she was "shocked" by the lack of support for extended benefits among the GOP in Congress."

     "People who had relied on unemployment insurance, she said, "are the people who are workers, the backbone of our society, and you are turning your back."

      Ann was clearly completely out of touch with reality coming in to this if she's surprised much less shocked that the Republicans would do this. It's what they live to do, they believe they're selected by God to do it and Sumner continues to throw whatever aid and comfort he can there way. 

Capital Gains Taxes, Paul Krugman, and the Lies of Scott Sumner

    If you think this is unfair to call him a liar, keep in mind that in his recent post has called Krugman either a liar or ignoramus. I know, Tom Brown will say it was nice of him to give us a choice LOL. You know I love you Tom. Here is Sumner:

    "this comment by Greg Mankiw intrigued me:
In this case, the issue is the reduction in capital taxes during the George W. Bush administration.  Paul [Krugman] says that the goal here was “defending the oligarchy’s interests.”
Really? As Paul well knows, there is a large literature in economics suggesting that an optimal tax system imposes much lower taxes on capital income than on wage income (or consumption).
     "Why should we assume that Paul Krugman is aware of that literature?  You would think he would be aware of the literature—other progressive bloggers like Matt Yglesias and Brad DeLong obviously are.  But I don’t recall reading a single Krugman column that showed any awareness of the need for replacing our current tax system with a progressive consumption tax.  I don’t recall a single post pointing out that taxes on capital should be much lower than taxes on labor income, if not zero."

     "I don’t recall a single post pointing out that nominal tax rates on capital income are meaningless, and that real tax rates on (for instance) Treasury bonds are now well over 100%.  Or that corporate income is triple taxed, making nominal corporate tax rates utterly meaningless as indicators of progressivity.  Or that Warren Buffet was spouting utter nonsense when he claimed his tax rate was lower than that of his secretary.  If such Krugman posts exist then please show them to me, I’d love to read them."

     "Either he is unaware of the literature, or he is aware of it and is knowingly spouting misinformation. I’d prefer to be charitable and assume that he’s not aware of the literature."

     This is a very strong statement by Sumner-way too strong. You're either have no idea what you're talking about or you're saying something you know is false. I came back at Sumner:
     "On Krugman are you suggesting that the idea that we should tax capital much lower than wage income is universally accepted among professional economists?"

      "There may be a literature with this argument but there is also a large literature arguing the opposite like Joseph Pechman for instance. He also argues against the consumption tax."

     "So there may be a large literature but its far from unanimous. My guess is Krugman is aware of this large literature but disagrees with it."

       It turns out my guess was right. I'm just waiting for Sumner to give me a snarky reply because I'm ready. Here is what Krugman wrote

     "Greg Mankiw is upset at my suggestion that the Bush administration was motivated by class interests in its determination to slash taxes on capital income and eliminate estate taxes. He wants us to know that it was all about optimal taxation, as dictated by economic theory."

     "Well, we could have a political discussion: How many people really, truly believe that George W. Bush chose to slash taxes on dividends and phase out the inheritance tax because Greg Mankiw and Glenn Hubbard told him that this was the conclusion from economic theory? Can we have a show of hands?"

     "But let me instead point out that the case for zero or low taxation of capital income rests on very strong, very unrealistic assumptions — basically perfectly rational intertemporally optimizing agents, with dynasties behaving as if they were infinitely lived individuals. Question those assumptions, and the whole case falls apart. Don’t take my word for it — read Peter Diamond and Emmanuel Saez (pdf), who also point out that the intertemporal optimizing model of saving is in fact rejected by lots of evidence."

    "And when it comes to bequests, read Irving Fisher (pdf):
The ordinary millionaire capitalist about to leave this world forever cares less about what becomes of the fortune he leaves behind than we have been accustomed to assume. Contrary to a common opinion, he did not lay it up, at least not beyond a certain point, because of any wish to leave it to others. His accumulating motives were rather those of power, of self-expression, of hunting big game.
     "The point here is that the economic case for not taxing capital rests on a stylized model that we know does a bad job of capturing real behavior; the case for taxing capital rests on considerations of equity and concerns about excessive concentration of wealth that are very much grounded in real-world observation. You don’t have to be a know-nothing to argue that the second case trumps the first."
    Ooooh! A few things become clear reading this. For one thing I was right-Krugman obviously is very well acquainted with this literature-he just doesn't buy it. This is a big distinction. It's also clear that someone is knowingly spouting misinformation and that person is, of course, Scott Sumner. He chose to pretend Krugman's reply to Mankiw here doesn't exist. So he's being dishonest-unless he published this on March 28 without having read Krugman's reply on March 27 so maybe he's ignorant.
    It's clear what bee was up Sumner's bonnet here. Krugman has really been kicking his hornet's nest the week or so. Listen to Krugman here:
    "Consider first one of the classic models in international macro, Dornbusch’s overshooting model (pdf) of the exchange rate, which is used to show how exchange rates can be as volatile as they are — basically it’s the combination of fast-moving asset markets where prices react quickly to news and slow-moving goods markets where prices can take years to adjust. To make his model as clean as possible (which is to say, very clean — Rudi was my role model), Dornbusch assumed rational expectations in asset markets, so that the exchange rate immediately reflects news about the money supply and other things. Was this assumption realistic? No — there is in fact a lot of evidence that the specific result that interest differentials are equal to expected future exchange rate changes isn’t right. But that really wasn’t crucial to Dornbusch’s point; he was using rational expectations as a simple way to get fast-moving asset prices, and his story wasn’t too sensitive to the precise correctness of the assumption."

    "Now compare this to people who say that because asset markets are efficient, there can’t be bubbles. They’re making the same assumption — but they’re putting much more weight on it, weight that it can’t actually bear." Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body
     That no doubt also tweaked Sumner-among other Righties-as this is exactly how he tries to claim there can't be bubbles-after all the market is efficient so how could there be a bubble?
      Anyway, good job Dr. Krugman. You have done God's Work here.

Sunday, March 30, 2014

On Jobs, Morgan Warstler and Robert Reich on the Same Page?

     On the diagnosis at least this seems to be the case. Listen to Reich in his 2013 Aftershock.

     "The Great Recession accelerated the structural change in the economy that begun in the late 1970s. More companies have found means of cutting their payrolls for good, discovering ways to use software, robots, and technologies to substitute for employees. Both container ships and the Internet have lowered the costs of outsourcing work to Asia and Latin America. Consequently, large numbers of Americans will not be rehired unless they are willing to settle for lower wages and fewer benefits. The official unemployment numbers hide the extent to which Americans will not be rehired unless they are willing to settle for lower wages and fewer benefits. The official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, more and more people have accepted lower pay and benefits as a condition for keeping them.

    "Or they have lost higher-paying jobs and are now in new ones that pay less. Or new hires are paid far less than the old(In January 2010, Ford announced that it add twelve hundred jobs at its Chicago assembly plant but didn't trumpet the fact that the new workers will be paid half of what current workers were paid when they begun). Or they become consultants or temporary workers whose pay is unsteady and benefits nonexistent. But if the trend continues, more people will be working for the pay they consider inadequate, and inequality will have widened."

    This has been Morgan's point as well-that many Americans-I wonder if it might be most?-can no longer support themselves on wages alone and this is the case for a wage subsidy. Sumner has bought into this idea now as well. 

    " "The title of this post was left in a recent comment by Morgan Warstler.  What he means is that NGDPLT takes nominal spending off the table, all that’s left is for the government to try to influence the split between P and Y.  And that means demand policies don’t work, all fiscal policy must be supply-side, aimed at more growth and hence less inflation."

    "If conservatives understood this then market monetarism would go from being a fringe movement eyed suspiciously by those on the right, to a position where we’d be headline speakers at CPAC. While we’re at it, Morgan’s wage subsidy scheme makes the minimum wage and welfare obsolete."

    So conservatives like Morgan and Sumner understand the problems of this labor market as well. In a way Morgan's implicity assumption is radical-standard economics can't really believe that in the long term at least labor can be displaced by technology, however, this is what he-and Reich, Stiglitz, and many others, liberals as well as shrewd conservatives now believe. 

    "Saxie,   You are close, so here's last point.  TODAY IS NOT YESTERDAY. What used to happen, cannot happen again. This is what Summers and DeKrugman and Secular Stagnation are stumbling around, describing. This is WHY so may are screaming about Guaranteed Income."

     "This is Tyler Cowen noting that there are MORE Zero Marginal Product workers every year. It's because we have a digital global economy. We only need 57 employees to build WhatsApp.So now you have ALL the pieces, you have no excuses."

     "You know today is not yesterday, so what used to be - is no longer going to be. You can imagine having 50%+ of our population in the future not being able to earn their own way. So now we can say IF Saxie accepts these two ideas might be true, THEN the WAY to provide social commitment is to FORGET ABOUT LIVING WAGE / MINIMUM WAGE."

      The real difference is what you believe the causes and solution is. Liberals like Reich argue the kind of cheap wage market we have now is not inevitable it's thanks to things like weakening labor unions, the Fed's inflation policy starting with Volcker, and cutting the MW-in real terms. Basically if there had been no Reagn Revolution we wouldn't have this problem is what liberals believe. Still, at least the real problem seems to be gaining understanding. 

      I mean I'm not poor anymore but I just got lucky in a way-my wages aren't actually enough for me to live on-at least not yet though they're improving. I just got some money the old fashioned way-I inherited it. This hardly means I can stop working. $500,000 grand can go fast if there isn't much coming in. 



Friday, March 28, 2014

Jim Cramer: Buy Bank of America if We Get Strong Job Numbers Next Week

     Jim is thinking kind of what I'm thinking too. This was a very good week for Bank of America as it aced it's stress test with the Fed and got the ok to raise its dividend-unlike Citigroup who's request was denied.

      So if I were going to play it-and with a little cash now, I'm tempted to play-a little bit-this might be a good move: shorting Citi while going long BACr JPM, WFC, or GS as well of course. What I like about BAChough is it's so cheap. It seems to me that whether it's headed up or not, there's little down side-I mean no way does it go anywhere near the levels we saw in 2008. 

     That was my thinking and I'm gratified to see tonight that Cramer is thinking the same thing. He argues that you play BAC if we get a strong jobs number and Sumner's favorite indicator-interst rates-go up. 

      "Jim Cramer discusses the mixed signals that exist in the market regarding what sort of nonfarm payrolls report we will receive next week. He says if we get a strong jobs number, interest rates will rise and investors should buy the banks, a group that's been under pressure with low interest rates. However, if we get a weak number, Cramer recommends looking to stocks like CBS Outdoor, which just became public, REITs like Ventas and utilities like Southern Company and American Electric Power."

     I'm tempted to go conservative and buy maybe 100 shares of BAC. Cramer argues to wait till Frday's  report but of course I'm tempted to jump in on Monday. I like the idea of buying BAC and then buying a lot of puts in Citi. I'm thinking they may drop about 20 percent in the next few months-if you're an investor who wants dividends C is what has nothing to offer you. Also this suggests C's relative weakness vs. these other names. 

     The other thing that interests me is these IPOs. It's been a great year for IPOs.

      The omnipresent Candy Crush IPO went badly the first day-the symbol is KING-but then Facebook started out rough and now it's at $71.

      Overall, I'm skeptical that there's a big downside move in the market in the near future. However, even if there is, something like BAC is more or less indemnified in downside risk for the foreseeable future. This is just a very different world than the one I used to trade in back in 2008. Then there was big money to make with short term trading. Back then the guys on Fast Money talked about the end of Buy and Hold  It seemed true then yet since the first big surge after the bottom was reached in the market in March, 2009 the market hasn't really had the volatility you need to really make fast money. At least for me-my strategy was to buy lots of puts in the banks in 2008 which worked very well for a time till I got to aggressive-the end came for me really the day the market hit bottom.

      I still wanted to think that there was more downside and got wiped out when the banks rallied. Now buying up stocks and holding them at least for the short term is the best strategy. It's not going to show the kind of returns my other strategy did-where I'd see returns of 300 or 400 percent but it at least has little downside. BAC is unlikely to go down much from here and likely at least in the next few years should clear $20 and perhaps $30. This is a stock that has moved very slowly since around May 2009. When it gets a new handle-like its recently hit the $17 dollar amount-it tends to stay there for 3 months or more before getting to say $18 though it's possible the new good news about the stress tests and the dividends will change that. 

Tuesday, March 25, 2014

Sumner, Morgan Warstler and Patrick Sullivan on the Benefits of Market Monetarism

     I see that Sumner has finally embraced Morgan and I say it's about time. I've always said that there is no daylight between the two and Sumner now confirms it-as opposed to dippy liberals and centrists who insisted as seeing Morgan as wild eyed and and extremist with Sumner as moderate and reasonable.

    "The title of this post was left in a recent comment by Morgan Warstler.  What he means is that NGDPLT takes nominal spending off the table, all that’s left is for the government to try to influence the split between P and Y.  And that means demand policies don’t work, all fiscal policy must be supply-side, aimed at more growth and hence less inflation."

    "If conservatives understood this then market monetarism would go from being a fringe movement eyed suspiciously by those on the right, to a position where we’d be headline speakers at CPAC. While we’re at it, Morgan’s wage subsidy scheme makes the minimum wage and welfare obsolete."

     This exactly what I've always said-NGDPLT is for Republicans to get the kind of cuts to government they can't get through the front door. Then Patrick Sullivan really underscores the point even more-turns out a government that controlled inflation with fiscal policy has existed before-guess which country did it?

     "Something like the fiscal side controlling inflation happened in Chile after the 1973 coup. As Pinochet privatized hundreds of businesses that Allende had nationalized (and others that had been informally seized by las turbas) the increase in productivity increased the supply side and moderated the 1,000% inflation rate the junta inherited."

     "Of course, it took Chicago Boys to really bring inflation down to reasonable levels over many years."

    Yes, we need a dictator to achieve this utopia as Benjamin Cole understands:

     "Kudos to Morgan. ..but someday look at federal agency spending (that is, not spending financed by FICA). Once you take DoD, VA, DHS, Intelligence and rural subsidies…hardly much else left.
And I would shoot for 5 percent NGDP growth…jn a democratic nation, structural reforms are impossible…think ethanol and zinc pennies…"

     This is a big part of why Sumner prefers monetary to fiscal policy here-it's not by directly elected officials but by a Fed with 'independence.' 

     Morgan insists there is something for the Dems in all this-which I have a hard time buying. His argument is that we have hit a kind of Great Stagnation-a la Tyler Cowen-and the only hope is lots of austerity. 

     "There’s no reason government can’t deliver 3-4% productivity gains YOY for a solid 10-20 years.
Eventually, this is the Dem’s best play."

      It's the best play for the Dems to become Republicans this is what conservatives always want us to believe. In any case, Sumner now admits to having the agenda I've always said he has-while others are incredulous at the thought. We'll see how they misconstrue him next. 

       I get Morgan's theory as I wrote about-that the Internet revolution means we have to cut government-so it was supportable before to have minimum wage. However, Greg offered a good counterexample-Australia has a very high MW as is doing pretty well. 

Sunday, March 23, 2014

Scott Sumner's Favorite Economic Magazine Not Sounding Very Market Monetarist

     Here the Economist sounds a lot more like Richard Koo:

     "THE year 2014 was already going to be a trial for the economic programme designed by Shinzo Abe, prime minister of Japan. But recent weeks have added a particularly worrisome handful of bad tidings to the cauldron. At the start of April the government will raise the consumption tax, Japan’s version of value-added tax, from the current low rate of 5% to 8%. The worry is that the tax rise could choke off an ongoing recovery in consumer sentiment and spending. After the most recent such hike, in April 1997, the Asian financial crisis rolled around and amplified the negative effect—as did a sharp fall in government spending on public works. The combined effect was to send the economy back into a slump."

    "GDP in the fourth quarter of 2013 now looks like 1.0% on a real, annualised basis; far below the 2.8% that economists had expected. After lacklustre growth of 1.1% in the third quarter, the fresh result put an end to the glad news from earlier in 2013, which had it that that Japan was expanding more rapidly than any other G7 economy. Real GDP had grown by an annualised 4.5% in the first quarter, and by a ruddy 3.6% in the second."

    "The chief explanation for the fourth-quarter setback was poor exports. While robust domestic demand and government spending together boosted growth by 3%, a steep fall in the trade surplus subtracted 1.8%. This in turn called into question one of the main planks of Mr Abe's economic plan, the devaluation of the yen."
     Incidentally, Koo had an interesting thought in his Holy Grail of how to jumpstart the Japanese economy: turns out they have very few paid vacation days typically in Japan-considerably less even than us here in the US of A, just about 5 days a year. Even we get about two weeks a year so there's not much time there to consume as they're all at work. 
    He actually thinks the place that this consumption should be driven is in luxury goods under the theory that necessities are going to be bought regardless as you can't do without them. In his textbook, Mankiw talks about a luxury tax in Congress hurt all the poor people who work in the industry and that it was promptly dropped.

The Rich Really Are Different Than the Rest of Us: My First Weekend as a Rich Guy

     Ok, I'm not rich exactly but I'm richer than I've ever been in my life. Today I did something that rich people do-Mayor Bloomberg does it. Remember how when people were complaining about the poor job the city did in picking up snow after a bad storm he wondered why they didn't all just chill out-after all there are many better things that they could do like go to a Broadway play. 

    Well, that is exactly what I did today-I went to a Broadway play and it certainly isn't cheap. The main privilege having a few dollars in my pocket got me today was the ability of them to gouge me. They had told me online that the two tickets I was buying-one for a female friend-not a girlfriend-and one for me would be like $190. However, I later saw on my receipt that they added a service fee of $92 dollars as well as another $75 dollars or so on a 'restoration of the building' fee. So it was $365 dollars not the $190 dollar online quote. 

     I had told my friend that her cost was like $95 dollars. So when I saw her I told her it was a bit more but that since I had told her it was only $95 dollars a piece I'd only hold her to that. She paid me $45-as she had told me she would when I had given her the quote-and would get me with the rest this Sunday. While that's what I asked and I don't think I would have been right to ask for more even though I didn't know it was more myself when I told her that and it means more money out of my pocket, I still kind of felt like she could have offered to pay me another $50 to be fair. I can't say that she was obligated to in principle-I had told her $95 even if I was mistaken. Still I think it would have been a little more impressed if she did that. I don't know if I'm right or wrong to feel this way-listen to me, I need Dear Abbie!

    Then again, she's poor-just where I was until the last few weeks. Still she could have offered something-not break even but a little more. I don't think she was wrong to do it this way but I think a truly classy person might have offered to pay an extra $50 as the website mislead me-rather than I misleading her. Again, I'm not sure I'm right but feel I would have appreciated her at least suggesting this. 

     Then when we got there it turns out that I had mistakenly ordered Saturday rather than Sunday tickets-though they gave us a break and still we got pretty good seats. My friend seemed to think that I should have argued for a discount if the seats weren't as good but our seats were still pretty darn good really-we were pretty close to the action. 

     However, they then gouged me for snacks which ran under the '$5 plan'-everything costs an even $5. None of that $4.95 stuff you usually get. So a tiny Pringles bottle-not the usual big ones-cost $5 dollars. I had a packet of M&Ms for another $5. Then after intermission I bought two ore Pringles and another M&M for $15 bringing my total for 3 tiny Pringle bottles-the three of them maybe equaled the usual big can you get for $.99 at the supermarket and two M&Ms for a grand total of $25. So that's what you get at a rich man's event-a change to get gouged royally. For the record I and my friend both loved the performance of Momma Mia. 

    Right now I'm reading Mankiw's Textbook-it's from a few years ago-1998 or so-but this part I'm on is probably pretty timeless in Mainstream Macro, the idea of the power of Supply and Demand equilibriating. I'm sure Mankiw would argue that this was a reasonable pricing of these items-after all, my 'desire' for the tiny pringle bottles and M&Ms was pretty 'inelastic.' It's efficient for people willing to pay $25 for such junk to be able to. Nor is he the only one who would argue this way. 

     After the performance my friend and I went to get a bite to eat at a dinner near Penn Station. The waitress came out-she was very attractive, kind of exotic-couldn't tell if she was Spanish or Indian or what but I found her kind of attractive but of course I would never say anything about this in front of my friend-even if you're just friends with a woman they never want to hear that you find another woman attractive. In any case our relationship is kind of unspecified which I like. 

     She had recommended this diner. I got the chicken parm. I had been torn between this meal and the ravioli but the waitress had said that in her opinion the chicken parm is much more filling. While I'm careful in front of Wendy-ok, I'm tired of referring to her as 'my friend'-I did kind of remark how I appreciated how the waitress helped me make up my mind-I don't like when people say things like 'well it's up to you, after all you know what you want'-I like it better when they help me divine it. 

     Wendy ordered light of course, just a grilled cheese sandwich. She asked the waitress a bunch of questions about how its prepared and what's in it before deciding. At the time I wanted to warn the waitress-'just so you know Wendy's cool, but she's a chef so she's rather particular about how she thinks things should be prepared.' but I didn't as I didn't want Wendy to think I was insulting her-it's not really an insult at all, it's just a fact-I wanted to forewarn our waitress. 

    Turns out she could have used the warning-at the end of the meal she came out and asked us how it was I, of course, said I loved it and that it was great-'thanks for everything!' but Wendy told her that the sandwich wasn't so great as there was only one piece of cheese and there should have been two or three. At this point I piped in and said 'You have to understand, Wendy's a chef so she kind of sees things other people don't. She doesn't grade with much of a curve.'

    Wendy then basically demanded a major discount on her bill-the sandwich was $5 dollars. So the waitress gave her a discount of $1.25 which she later complained wasn't sufficient-that it should have been at least a $2.50 discount. I'm not saying she's wrong by any means. I mean she may well be right-that doesn't sound like a lot of cheese. 

    Wendy had asked for separate check at the start of the meal-which was cool. My bill ended up at $26 as I got some chocolate mousse at the end of the meal. The bill seemed a little high but then I really didn't need the mousse. I gave her one of my $50 bills the check cashing place woman gave me on Friday when I cashed my check-and asked for $15 back. Wendy handed her $10 and then got quite animated in asking her "you're going to give me my change back right?' 

    I'm not criticizing Wendy here-I hope that's not what comes across. I'm really kind of just thinking about it. I think if you're not happy with what you get and have a righteous beef you should voice your complaint as she did. Still I was kind of gratified in the comparison-her demanding every cent of her $2.32 change back with me giving the waitress a $9 dollar tip. Talk about being the good cop!

    That's not exactly a rich man thing. I've always been a big tipper since my days as a pizza delivery driver back in Massachusetts during the Bush years before that opulent lifestyle came crashing down. Still since I got a little cash-still haven't gotten my large amount yet-I've been even more generous with the tips. When I got off on the train ride from Penn Station to Baldwin, I gave the cab driver who drove me home a $7 tip. All the cabbies that know me love me over at Dawson. Even when I was poor-just a few weeks ago-I would usually give a $5 tip, now I usually do $7 or $8. More than one cabbie has told me that they wish all the passengers could be like me-they have so many people have them drive them really far like to the airport complaining all the way they're going to miss their flight and then stiffing them on the tip after driving miles. So by no means do all rich people tip well or at all. Again, I'm not really rich, just no longer poor, and will be kind of well off but will still need to work. 

    What's really interesting though is despite it all-the $25  on couple of  Pringles and M&Ms the $26 dollar dinner and the $9 dollar tip, the $7 cabbie tip, I checked my wallet after it and I still have $232 of the $325 I had on my check after leaving the check cashing store on Friday, It's rather amazing-I never had much more than $100 by Sunday nights when I was poor. There's no question I've been improved in my saving since I 'got rich' which is what I always suspected. Actually looking at my spending habits, since my long banishment to my parents' basement in 2009 I see very clearly that when I have no money I spend much faster. In 2011 which was a pretty low ebb year-my last 9 months of the year were unemployed, and it took a long time-basically all Summer-for them to finally send me my UI checks-I spent much more, much faster than before. When I lost my job in June, 2013 from Slomins' after 10 months of solid work-they canned me for a few slow weeks, which even now sticks in my craw-right away I saw before my eyes that all wanted to do was drown my sorrows-not in booze like normal people but in 11 piece Popeye's Chicken buckets. 

    Even though at that point I did have a part time day job by then so I wasn't totally back at square one. I've been better at trying to save lately, but only now am I actually able to hold onto most of my check through Monday, even while buying $25 dollars worth of pringles and M&Ms. So financial strain hardly makes me tighten up but the opposite. 

   P.S. I hope my description of Wendy doesn't sound negative. I really do think she's cool and a good friend. I mean, it might be easier for me to think she could have offered the $50 now as I could now afford such a gesture. As for her being tough on waitresses and cooks, well she really is a cook, you see. I've been to places where the cook as come out and agreed with her. I mean I think that's how she is and it's cool. I just find it interesting in how differently I do things. Not to say that I never criticize or complain about service but usually I don't unless it's pretty serious. It's hard for me to identify on her sandwich as that would never satisfy me even if it were done right. I will on occaison criticize or ask for something to be heated more or redone but very really would I not tip. 
   The waitress doesn't make the food anyway. I did stiff I guy once a few months ago over at the Baldwin Diner-he just seemed to me to not every try. I sometimes feel like some of these male waiters feel that if you're a guy eating alone they're not even going to bother to kiss your ass or whatever and I have a real problem with that. It's not professional. I didn't tip him at all but wrote down on the slip 'You're very rude and useless.' You might wonder why I did this or think it was rough but my point was I wanted him to know that it was personal, I tip but he really went beyond the call of duty in doing nothing in terms of customer service other than placing the food down quickly and making himself scarce. 

   P.S.S. It's less that I'm part of the top 1% now, than I'm no longer in the bottom 1% which is something.

    Even though technically the lump sum I'm receiving may be in that range-if the 1% is just over $250,000-it's just one time payment. If someone gets $500,000 this year but $20,000 every other year, are they really in the top 1%?

Saturday, March 22, 2014

Sumner's Latest Passive Aggressive Shot at the MMTers

     He's on a topic he discusses a lot. Interest rates and how low interest rates actually causes deflation. This is an interesting and rather stark claim as it says more than that they are concurrent with deflation or correlate with it but that they cause it. He kind of brings to mind Stephen Williamson-or even Cullen Roche.

     Sumner is now saying the same thing-holding the monetary base constant. 

     "I was teaching the money multiplier the other day, and showing how lower interest rates tend to reduce the multiplier, and hence M1.  A student asked for clarification—they’d been told that lower interest rates were expansionary.  I knew how I was going to answer the question, but I sort of wondered how other (less heterodox) money and banking professors would respond to the question.  (Let me know in the comments.)"

       "A fall in interest rates will increase the demand for base money (here I assume no IOR, or at least a fixed IOR.)  As money demand increases the value (or purchasing power) of a dollar bill increases. Here I use the standard 1/price level as the value of money, although I actually prefer 1/NGDP."

       I say it's a passive aggressive knock as he doesn't give away till the end they're his target though it's obvious. 

       "In other words, interest rate targeting creates a money supply function that causes quantity of money changes that are exogenous on a “1/P” graph, and hence the normal monetarist assumptions about money still hold.  I think that’s a good way to think about the whole “endogenous money” issue (which has spawned more nonsense than almost another other topic in economics.)"

    "PS. I’m never too sure what the MMTers are trying to say, but in comments to my blog they seem to claim that if for some weird reason the Fed were to do an exogenous increase in M, interest rates would fall, we’d go to point b, and just stay there."

     Actually there are more than one argument I've heard from MMT types. Richard Koo-though he's not an MMTer-argues that interest rates don't help as the problem is not lack of money supply but lack of demand for credit-as everyone's paying down debt. As for the MMTers on interest rates, they say something quite different than Koo who actually argues that high rates actually encourage foreign direct investment-and low interest rates can discourage it. 

      They also don' think the Fed can set inflation targets or NGDP rates but they do think it can set interest rates. They also think ideally the rate should be left at zero-Walster Mosler here argues that the natural rate of interest is zero at least in the modern monetary regime-that is post Nixon closing the gold window. 

      I see that Frances Coppola and our very own Tom Brown get into a comment volley at the end of Sumner's post. Can I call him 'our Tom Brown' as he sounds more and more like his idol Mark Sadowski every day here in the comments.

         It really is a good little volley:

         "Scott, in that post Nick reduces the supply of money to a central bank function only – eliminating commercial banks – and removes the risk factor in lending by making it impossible for borrowers to default. This of course means the money supply is exogenous and the only constraint on lending is the need to control inflation. It’s lovely, but it isn’t what we have. You just can’t write commercial banks and commercial risk out of the equation like that. We don’t have an IMF Chicago Plan revisited banking system (yet)."

      "Regarding your own model here: I would venture to suggest that it is the fixed supply of base money that is deflationary, not low interest rates. It’s effectively a gold standard – or the Euro, if you prefer.
It is only possible to maintain low interest rates if the money supply can flex with demand. If it is fixed, increased demand for money would tend to push the interest rate up."

        "Frances, keep in mind this quote in the post which Nick put in bold face:

     “The supply (function) of money, and the demand for loans, together determine the quantity of money created, and that quantity created (eventually) determines the quantity of money demanded”

        "In other words: quantity of (broad sense) money supplied is a function of TWO things:

1. “The supply (function) of money” (determined by the CB in this case)
2. “demand for loans” = supply (function) of loans determined by borrowers.

    "I specifically asked Nick who determines the “demand for loans” and he said “borrowers.” So is “exogenous” really a good description here?"

      "Frances, Scott I think is saying something similar when he responds to my comment above about the (1+c)/(r+c) form of the money multiplier when he writes:
“Lenders choose r, but obviously the r they choose may be affected by things done in the non-bank sector.”

       " … here’s what it comes down to for me: the commercial banks, like the central bank, can “force” money (including broad sense money like bank deposits, which Scott calls “credit”) into existence, however commercial banks have to do this with an eye towards profits and solvency, whereas the central bank doesn’t. So the “force” word used on commercial banks in this context is a little misleading."

       I don't call Tom the 'Sumner Whisperer' for nothing. 

      Frances returns the volley:

      "Tom,I specifically read the constraints that Nick put upon his model. He eliminated commercial banks, and he eliminated the risk-return profile. Under these PARTICULAR circumstances money is exogenous and borrowers entirely determine the demand for loans. But that is not how the financial system works in reality. Borrowers may want loans, but banks don’t have to lend to them. The risk function DOES matter – it can’t be simply imagined out of existence."

     "Mind you, if all you have is a central bank, then you have a nationalized banking system with all lending implicitly backed by the state – in which case lending risk is actually sovereign risk and we are in a completely different world."

       It goes on for some length after-it's worth reading. 

Ok I Think I Get Morgan Warstler on the Labor Market

     He's been arguing that the minimum wage is a problem-that it leads to unemployment and enables Wallmart to pay low wages. I've disagreed with him-I argued that really what the wage subsidy really is amounts to a subsidy for Wallmart-you could call it the Wallmart Subsidy-it enables them to underpay workers. 

    However, regarding the minimum wage I pointed out that we had a much higher MW in the past and it did no harm-we had it at its highest level evern in 1969 and employment was much better then than today. Morgan countered with this which I find very interesting:

     :"Saxie,   You are close, so here's last point.  TODAY IS NOT YESTERDAY. What used to happen, cannot happen again. This is what Summers and DeKrugman and Secular Stagnation are stumbling around, describing. This is WHY so may are screaming about Guaranteed Income."

     "This is Tyler Cowen noting that there are MORE Zero Marginal Product workers every year. It's because we have a digital global economy. We only need 57 employees to build WhatsApp.So now you have ALL the pieces, you have no excuses."

     "You know today is not yesterday, so what used to be - is no longer going to be. You can imagine having 50%+ of our population in the future not being able to earn their own way. So now we can say IF Saxie accepts these two ideas might be true, THEN the WAY to provide social commitment is to FORGET ABOUT LIVING WAGE / MINIMUM WAGE."

    "Look, man STOP worrying about wages and FOCUS on consumption.If we do GI/CYB the poor get to consume more immediately."

     Notice that this is a very different argument he's making against the MW then the standard one at this point. When Bob Murphy for instance knocks the MW he uses standard Neoclassical Supply and Demand analysis-if you increase the price of a good you drive down supply-he sees the labor market as no different than any other one. 

     Which is how standard S&D analysis has seen it since at least Walras. Of course, one might think that the labor market is different. Certainly I think morally we have to say that the market for human beings looking for work is qualitatively different than say any other market like for apples, bananas or rock salt. However that's ethics, and traditionally economics ignored that-or at best it's 'normative rather than positive economics.' The idea that econ is or should be a pure science is to say only positive arguments matter. 

    Since the Depression, at least, we no longer believe that every market works on the classic S&D framework.  Most mainstream economists believe in S&D but they don't think it applies to every market--Sumner obviously makes one big exception with the money market where he thinks wage stickiness means that money is different from other markets. A Republican like Mankiw-I'm currently reading his textbook-makes that point very clear there that not every market has pure competition or even anything close-there is market power in many markets where employers are not pure price takers. 

        When FDR passed minimum wage legislation in the 30s few economists thought this was a good idea yet we did it anyway. Why? Because while Sumner says there is no such thing as public opinion in economics, economic policy is often set while disregarding the often rather strange sounding preferences of economists. We got the MW in the 30s not by consulting the economists and doing whatever they told us but because society as a whole decided that it was unacceptable for people to be paid such meager earnings. The classic S-D argument is that this increases unemployment by reducing demand for labor. However, the MW didn't become law through 'positive' arguments but through 'normative' ones. We decided that it simply isn't right for someone people to make below a minimal level. 

        It's the same thing in many other examples of social progress-many economists argued against ending job discrimination based on race, sex, etc. and argued against the end of segregation. Had we listened to them it would still be legal and acceptable to refuse black people, gay people or whoever else service. Morgan clearly has some sense of this. He argues that the liberal goals eliminating rampant poverty and helping those out of work and down on their luck are shared by everyone it's just a question of how to get there. 

      As a conservative, of course, he wants a market based solution. Again, I pointed out that a very high minimum wage is consistent with full employment. What's interesting is that he more or less concedes my point. This is why his argument against the MW is different than the traditional one-simply S-D where if you just leave the market along supply and demand will get back in line. 

       On the one hand, he seems to arguing for  very deep negative effects form the MW-suggesting that we have 30 million out of work because of it. This is more radical than even most conservative economists who argue against the MW-even Sumner only thinks it takes maybe half or at most maybe one percent off of unemployment. Yet he admits to me that this wasn't always the case-the labor market has changed radically due to the Internet and data revolution. The funny thing is that-whether or not you believe the central role of the MW as he does, I don't-I do think something radical happened to the labor market due to the data revolution. This is the kind of suggestion that mainstream economists find incredible-they don't think that the market can fail-that is demand and supply get out of whack-in the long run. 

        What I know is that things seemed to me to change overnight round about 2001. All of a sudden there were a lot less white collar jobs out there-as computers absorbed so many of their functions-what computers didn't absorb, outsourcing to Asia and South American did.  In the first half of 2001 I was just coming into the labor market for accounting. I was with a temp agency and until June that year there was always work. If one assignment ended the agency had another one for me the next day. In June a 3 month assignment I had with a waste disposal company-doing accounts receivable ended. I wasn't concerned figuring they'd find me something else. I never got a call. I called them back a few times and they always said they'd have something soon but they never did. 

         I remember at the time George W. Bush spoke about this problem. He helpfully said that people like me should go back to college and get another degree. Yeah, it must be nice to have the time and resources to say 'Gee after 4 years of college and $100,000 in student loans it turns out that my degree isn't going to get me a job. However, let me put up another $100,000 and another 4 years and I'm sure something will turn up.' I never really got back into the field. I got jobs here and there but nothing really stuck. If I had started out 10 years earlier, 5 years earlier I would have been on easy street. So I came into the labor market at just the wrong time. I got my second career alright-as a pizza delivery driver. 

        I was able to keep myself afloat for 6 years doing this. Then I couldn't even find a decent paying delivery job. In 2009 I got to come back to New York-I had been in Mass for years-and live in my parents basement. Yes now things have turned around-I've found yet another career, telemarketing which I've been at since 2012 so since September 2012 I have had work. Last September I finally found full time work-calling maintenance guys to talk them into buying sewer and drain cleaner. I made a splash right away doing this and in January my boss gave me a raise and promised that if I maintain performance I'll get another raise. Now as I revealed recently, I've inherited a little money. How little? Enough to move out of my parents' basement and buy a house and a car and have something to live on besides. 

        So I know something like this has happened through my own experience and not just mine but millions have gone through the same thing. I've spoken to people in this area-this is Nassau county for God's Sake-and talked to people at these job fairs who said they just want anything-they really don't care what the job is, and they were previous white collar workers.If anything I'd say we're much more of a Center Left country today than we were in 2001. I think the country was a lot more conservative-economically then. In the 90s even I thought there was something in the arguments against 'lazy people on welfare'-if only they weren't lazy they could get a job though I was a Democrat. It was very easy to get work back then. However, after 2001 all I saw was Republicans denying the elephant in the room-and of course they're the biggest elephant around LOL-and I said these guys sound like Marie Antoninette, just let them eat cake. In truth the cluelessness I and many others perceived was real. 

        Alan Greenspan in his 2007 book Age of Turbulence described the 2001 recession as 'mild and shallow.' It might have looked that way for those who only look at the official unemployment statistics as Greenspan did. So yes, in 2006, early 2007 you could still deceive yourself that the economy was working great-I mean GDP was 3.5%, unemployment was allegedly only 4.8%. Note that Sumner's hobby horse-NGDP was 'benign' as well, about 7% or so. This is the kind of thing that someone like a Sumner never can get. He thought everything was fine until all of a sudden in 2008. What happened though was not caught by the official unemployment rate. It wasn't that people didn't have jobs it was that they had crappy jobs. Jobs that paid $7 an hour rather than the $20 an hour their college diploma was supposed to make their birthright right out of college. 

     In the past Morgan has struck me as something of a technophile. I mean I love tech as well-I think the Internet is just crazy-I mean how can you even begin to assess how much it has changed our lives? I mean the last 5 years have been tough but at least I had the Internet. This gave me an outlet. In 2010, 2011 I was  out of work and spent the whole day everyday at the Baldwin Public Library here on Long Island However, I thought maybe he overestimates a little how much productivity it can give us. However, I see now that he understands this phenomenon as well as anyone I've read. Most mainstream economists have been totally unaware of this.  Interestingly liberals like Joseph Stiglitz have also made this argument and been dismissed by mainstream econ.

       This is the book that goes as furthest in analyzing this.  


          Essentially then Morgan's argument is thanks to this phenomenon we can no longer have a MW. So he's arguing that there's been a structural change in the labor market which is permanent. 

        So I certainly tend to follow him on the idea of a a radical change-I'm not sure though that it's permanent in the labor market-though I'm still not at all convinced that the MW is this big roadblock.. When I say it's not permanent is that can imagine the market changing in ways that will eventually get us past it. At best what he's saying is that the demand in the labor market is for a much smaller number of workers than in 2001 or so and so low wages would be the way that we can get all the unemployed and underemployed-which I argued was the real legacy of 2001-jobs.