Sunday, October 15, 2017

Notes for David Graeber's Public Inquiry


At the New Statesman: We're racing towards another private debt crisis – so why did no one see it coming? by David Graeber.

Graeber's article is presented below on light blue background; my responses are on the parchment.


This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy.
Three sentences in, Graeber is already predicting disaster!
...to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous.
I won't be attending that impartial forum. But I have some thoughts you might bring up when you go. First: We need to know what the problem really is before we can really solve it. So the most important thing is to get the analysis right.
The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.
An inverse relation?

I agree with Graeber that private debt, not public debt, is the problem. I agree the crash happened "because of dangerously high levels of private debt" (though I would omit the word "dangerously" since the danger is obvious from the context). And I'm not sure he means to call public debt the "exact opposite" of private debt, but I agree these two types of debt affect the economy in different ways.

But an inverse relation? No. Recently I showed this graph:

Graph #1: Public (blue) and Private (red) Debt relative to GDP, 1834-2011
Source Data from Steve Keen's XLSX file from 2013
Public debt and private debt do sometimes move in opposite directions. There is sometimes inverse movement, we could say. But that is not a "relation". A relation is consistent.

And even if a thing is true, it may not be particularly significant. It's true that public and private debt sometimes move in opposite directions. That fact in itself is barely interesting, and not significant.

As I've said before, what's really significant about the movement of public and private debt (relative to GDP) is that when we have private debt rising while public debt is falling, we have an exceptionally good economy.

Bring that up at the Public Inquiry.
If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008.
Source: Wikipedia
That's not true. Graeber presents it like a General Principle but it's just not true. The public sector did not "reduce its debt" in the years leading up to 2008. In those years -- lets say since 2001, because before that the trend was different -- in those years, UK public debt increased from about 30 to about 38 percent of GDP.

Source: ukpublicspending.co.uk
Now ignore GDP. Look at the UK public debt in pounds, billions of pounds. There was a steady, gradual increase in public debt from 2001 to 2008.

Again, increase. The public sector did not reduce its debt in the years leading up to 2008. David Graeber is incorrect when he says it did.
As for the idea that private debt goes up when public debt goes down, well, private debt always goes up. Until you get a crisis like the Great Depression or the Great Recession, private debt always goes up. That's the problem. And it has nothing to do with public debt going up or going down.[1]  Private debt goes up because policymakers think the use of credit is good for growth, and they set policy accordingly.

Oh, and they say private debt isn't a problem. The use of credit creates debt, so the policies that encourage private use of credit also encourage growth of private debt. Policymakers don't see that as a problem. That's why private debt always goes up until you get a crisis.

Bring that up at the Public Inquiry.

Where this idea comes from that "overall private sector debt [only] goes up" when "the public sector reduces its debt," I don't know. But it is most assuredly wrong.
... That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.
David Graeber makes an incorrect generalization about the behavior of public and private debt, and treats it as a General Principle. His prediction of "another catastrophe" is based on the flawed generalization.

Don't bring that up at the Public Inquiry.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017.

This is what the OBR was projecting what would happen around now back in 2015:


This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:


Yeah, no. These graphs do not "show the relationship between public and private debt." They don't show debt at all; they show deficits. Deficits and surpluses. The graphs show quarterly changes, not the cumulative totals that comprise debt. That's why these graphs show the numbers getting smaller since around 2009.

I didn't know. I don't do sectoral balance stuff. I looked into it because if the numbers are getting smaller, it can't be debt.

Oh, and the graphs don't show the relationship between public and private debt. The graphs show four sectors, not two: public and household and corporate and foreign. And the graphs don't really show relationships. They show four separate sets of data. To see a relationship you would divide one of them by another, or like that.

Well, I take that back. I think these must be "stacked" graphs. For each quarter, the stuff that's greater than zero is piled up and compared to the stuff that's less than zero. And, for any quarter, the stuff that's greater than zero is equal to the stuff that's less than zero; that's the whole point of the graph. For each date, the bars below zero are the same height as the bars above zero. That's what creates the symmetry.

But symmetry is really all these graphs show.
First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”
"First," he says, "notice how both diagrams are symmetrical." Like that was the most important thing. It's not. The symmetry is of no great consequence. I mean, would you be shocked to discover that when you buy something, the amount you pay is equal to the amount the cashier receives from you?

All the money spent is equal to all the money received. All the money borrowed is equal to all the money lent. These things are not shocking. These are the simplest things. It's how transactions work. It would be shocking if the graphs didn't show it.[2]  Don't be duped by the symmetry visible on Graeber's graphs.


Next, Mr. Graeber provides examples to show that the amount of money involved in a transaction is the same amount for the one party as it is for the other. Two examples, which he puts on a pedestal called the ledger sheet:
As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram.

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).
Graeber expects you to be shocked and impressed by the symmetry in this. I expect you to know better.

Graeber is right when he says "in any ledger sheet, credits and debits have to match." Credits and debits have to match. That is the way accounting is done. And that is where the symmetry comes from.

Nifty. The symmetry is nifty. It may be shocking, if you didn't know. It may even be impressive. But it is not significant. Don't be misguided by nifty.

The amount you pay the cashier is equal to the amount the cashier receives from you. Actually, it's not even nifty. It's just ordinary.


Graeber next launches a generalization from the ledger-sheet pedestal, but it reaches an unsupportable conclusion:
So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.
Everyone else has to go into debt because government is in surplus? That's not true. You can have government and foreign in surplus, while household and corporate are in deficit. You can have government and household in surplus, while corporate and foreign are in deficit. You can have government and corporate in surplus, while foreign and household are in deficit. You can have government and household and corporate in surplus. Or government and corporate and foreign. Or you can have government and foreign and household in surplus -- and this you can actually see in the first two years shown on Graeber's graphs.

None of this stuff happens because of "accounting identities". It happens because of spending decisions people make. It shows up on the graphs because of the rules of accounting.

You cannot say "if the government goes into surplus, then everyone else has to go into debt." The statement is a caricature of thought. It is not true. Don't bring it up at the Public Inquiry.
We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)
There you go. That's a good paragraph, except for the silly stuff about the magic money tree. But yeah, I used to think of money as "already lying around". Back in 1976 I wrote "there is just as much money in circulation as ever there was." Like Graeber's poker chips. And I was dead wrong.

That is a good paragraph from David Graeber. Bring it up.
There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.
Oh, and things were going so well! Graeber is wrong when he says "the less the government is in debt, the more everyone else must be." That's "the real point" of the paragraph, he says. But it is wrong.

Graeber's in good company. Milton Friedman made a similar mistake. In Chapter 9 of Friedman's book Free to Choose we find a little story about building roads:

Financing government spending by increasing the quantity of money looks like magic, like getting something for nothing. To take a simple example, government builds a road, paying for the expenses incurred with newly printed Federal Reserve Notes. It looks as if everybody is better off. The workers who build the road get their pay and can buy food, clothing, and housing with it. Nobody has paid higher taxes. Yet there is now a road where there was none before. Who has paid for it?

The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity...

Milton Friedman is famous for his view that inflation is driven by "the quantity of money relative to output." But in order to make his road-building example work, Friedman assumes the size of the economy is a given. He ignores the normal expectation that output will grow. And he ignores the common sense that says the expansion of infrastructure encourages economic growth.

In order to make his road-building example work, Friedman has to assume zero growth of output. Why? Because according to his own famous phrase, if output grows then an increase in the quantity of money is justifiable and need not lead to inflation.

Friedman assumes zero growth of output. Graeber's mistake is similar. Graeber assumes zero change in total debt, so that government debt can only be reduced when some other sector increases its debt.

He overlooks the possibility that total debt could be reduced. To be sure, this is an understandable error because total debt never is reduced. But total debt is never reduced because policymakers think using credit is good for growth and private debt is never a problem. Debt could easily be reduced if policymakers were open to the idea of reducing it.

Bring that up.

Set aside those policymakers' principles, and reducing debt becomes possible. Reducing debt becomes a way that allows us to reduce government debt without an increase in household, corporate, or foreign debt. In other words, Graeber's "real point" is not necessarily true. There is a way around it.

Bring that up.

But because of the way the economy works, it would be better to give priority to reducing household and corporate and foreign debt. When those reductions bring true vigor back to the private economy, government debt will fall effortlessly.

Bring that up.
Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.
"In reality," he says, "debt is money."

In reality, debt and money are created at the same time (and in the same amount) when you take out a loan. The money gets put into your checking account or someplace where you can spend it, and it is soon gone. The debt sticks with you, and you pay it off gradually over time.

How can anybody in their right mind say debt is money? Debt is not money. Debt is the obligation you take on when you borrow money. Everybody knows that. So do me a favor and don't say debt is money. You're killing me with that stuff.
But of course debt has to be owed to someone. These charts show who owes what to whom.
"Of course" debt is owed to someone. And money isn't. That's the point. Debt and money are different. So, don't say debt is money. The thought is incomplete, and therefore incorrect.

Graeber says his charts show "who owes what to whom." They don't. The charts show who borrowed how much from whom in each period, net. The charts show surpluses and deficits. They do not show debt, so they don't show who owes what to whom.

Graeber is really not very good with graphs. Keep that in mind at the Inquiry.

Come to think of it, at the start of the article Graeber says "The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically)." And at the end of the article he says "And remember: it was a mortgage crisis that set off the 2008 crash". Graeber's focus is debt, dangerously high levels of debt.

He has the right focus. But his graphs show the symmetry of surplus and deficit. The symmetry and the declining levels of surplus and deficit. His graphs are unrelated to his focus. His graphs are irrelevant.

The symmetry may be striking, but the graphs are not relevant. Don't bring that up, but do keep it in mind.

Graeber's article includes two more sections and several more paragraphs. I have no remarks on that part of the article, except to quote this, which is very good:

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

Bring that up at the Public Inquiry, too.

//

Notes

1.
It is true that by increasing at a more rapid rate, public debt can solve some of the problems created by excessive private debt. But this does not mean insufficient growth of public debt is the cause of those problems. The cause is dangerously high levels of private debt, as Graeber correctly says.  Return


2.
Indeed, the second graph fails to show symmetry, suggesting an error. As Graeber describes it: "the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up."  Return

Thursday, October 12, 2017

"moved, steered, and in some cases manipulated"


At Mercatus, Nudge Theory in Action. It's a one-paragraph blurb for a new book on one aspect of behavioral econ, plus the Table of Contents, plus a link to the foreword by Tyler Cowen (PDF).

It's an advertisement. It's a nudge.

I went to the PDF.

"The issues surrounding 'Nudge' are some of the most important in all of economics" Cowen writes. "The simplest models of economics take preferences as given, but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Oh that's new.

When I took macro in 1977, I was taught that there are two major types of economies: command economies, and those guided by economic incentives. "Incentives" was the good one and (not coincidentally) the one we have. The commies had command economies.

More recently I've seen people complain about the ineffectiveness of our approach. Oh, sure, command economies can be much better at getting you to do what they want you to do. If you like that kind of effectiveness. But I prefer incentives: Give me a tax break for doing what you want me to do. I'll get there eventually.

Incentives are compatible with the market economy, if that matters to you; command is not.

When it comes to policy, I prefer incentives. But when it comes to what brand I smoke and what I eat and what I wear and where I live, I prefer to be left alone.

But that's just me.

"The simplest models of economics take preferences as given," Cowen writes, "but nudge ideas suggest that we can be moved, steered, and in some cases manipulated."

Cowen:
Should we be more suspicious of private sector nudge or public sector nudge?

I am myself never quite sure how to answer the above question. On one hand, I fear the greater competency of private sector nudge. I know that a talented team of marketers is working overtime to try to get me to buy the product, take out a loan, or participate in a charitable cause ...

"A lot of this nudging is good for me," he adds. Fuck that.

Private sector nudge is highly problematic, and I would say it is often worst in those areas we tend to feel best about: health care, education, and charity. In those cases, our guard is most likely to be let down, even if we are highly educated. Or should I say because we are educated?

What about public sector nudge? Well, the good news is that a lot of what government does is simply send money around through transfer programs. In this regard, its potential for manipulating us is fairly limited.

That last part I don't buy at all. The potential for manipulating people is limited because they use transfer programs? If I'm a poor starving waif surviving on government handouts, I have no incentive to kiss government ass? I have more incentive, more likely.

Furthermore, government is extremely bureaucratic and usually it does not have top tier marketing talent. Most of the time I just don’t find my government very persuasive. Is there really anything the DMV can talk me into that I wouldn’t otherwise want to do?

But can I then relax? Can I stop worrying about public sector nudge? I am not so sure...

War, he says. Government nudges us into war.

Government also has nudged us into believing that more government regulation is the answer to many of our problems.

Cowen is not doing a neutral evaluation here. He's got preferences, and his evaluation is based on them. But I think Cowen's preferences show that he has more to fear of manipulation from anti-government forces than from government.

"Finally," Cowen writes,
I worry about how private sector and public sector nudge interact... The problem, in broadest terms, is that the public sector often piggybacks upon the marketing efforts of the private sector. The private sector marketing, taken alone, probably would be far less harmful, but it can be combined with the coercive powers of the public sector.

With anti-government attitudes so common these days, I suggest that private sector nudges are far more effective than public sector nudges.

And what is this crap about "the coercive powers of the public sector"? I thought we were talking about nudging. Incentives, remember? Not the command economy. Did you lose focus, Cowen?

Or are you trying to nudge me.

Wednesday, October 11, 2017

Recommended reading on UBI


When an idea like Universal Basic Income (UBI) comes along, offered as a bold and innovative solution to a whole set of economic problems, it tends to find strong and growing support.

This guy raises an interesting point: Universal Basic Income and the Threat of Tyranny by Shai Shapira, at Quillette.

Recommended reading.

Tuesday, October 10, 2017

"Your thoughts and concerns are very important to me"


I'm old enough to know better. But more and more, I'm hearing talk of scrapping the mortgage interest deduction. I had to say something. So I wrote my senator.

I wrote
Don't give up the tax deduction for mortgage interest without getting something in return. Trade it for a new system of tax credits designed to encourage the repayment of debt. To ease the transition, design the new system to keep the tax benefit about the same as the old system. The amount of tax benefit can be changed gradually, later.

The macroeconomic problem with the mortgage deduction is that "the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness" -- NBER Working Paper No. 23600
http://www.nber.org/papers/w23600

The new system will encourage people to decrease indebtedness.

Three minutes later, I received a response from my senator:
Thank you for contacting my office. Your thoughts and concerns are very important to me and you will receive a more detailed response shortly. I sincerely appreciate your patience in waiting for this response, as our mail volume is often significant.

If this is a request for assistance with a federal agency or an immigration case, please contact ...

That was on 29 September. I'm still waiting for the more detailed response.

Friday, October 6, 2017

SNAFU


Milton Friedman said "Inflation is always and everywhere a monetary phenomenon". He did not say inflation is only a monetary phenomenon. He did not say the increase of money is the only force at work.

People assume that the increase of money is the only force at work. But Friedman didn't say that. People assume that if there is inflation you can clamp down on the money and inflation will go away, and everything is better and nothing is worse by it. But what if there was some other force at work?

What if there was a situation which, to be resolved, requires increase in the quantity of money? By clamping down on the money we could make the inflation go away. But that would likely make the other situation worse, the one that requires monetary increase.


Paul Volcker, saying "the inflation process is ultimately related to excessive growth in money and credit", ignored any possible situation that might require increase in the quantity of money.

Paul Krugman, saying "Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is, necessarily, monetary mumbo-jumbo", ignored any possible situation that might require increase in the quantity of money.

Bill Mitchell, writing of the government "taking a dollar" from people to "manage total spending" in order to avoid going "beyond the inflation barrier", ignores any possible situation that might require increase in the quantity of money.

Scott Sumner, who says "It's kind of scary when top Fed officials have forgotten that inflation is a monetary phenomenon", ignores any possible situation that might require increase in the quantity of money.


A large accumulation of debt requires a large debt service and drains a large quantity of money from circulation. To maintain a given volume of spending, an increase in the quantity of money is required. Inadequate increase leads to stagnation. As debt grows larger, this situation grows worse.

Thursday, October 5, 2017

Hurricanes on Ice


I want to take a few planeloads of dry ice and dump it into the Atlantic in the path of a hurricane that is just starting to form. Maybe lowering the temperature of the water in the region would kill off the storm before it gets going.

Wednesday, October 4, 2017

"The core of economics is that people respond to incentives ..."


Dietrich Vollrath considers why tax cuts don't boost growth, and reaches this conclusion:
... you could make the argument that if you want to raise GDP it would be ideal to raise taxes on financial transactions (a la the Tobin tax) to reduce the incentives to do those type 4 transactions, but lower taxes on type 1 transactions dealing with the provision of real inputs ...

Tuesday, October 3, 2017

Hicks, Friedman, and the "economic environment"


At Amazon: The Optimum Quantity of Money (Revised Edition) by Milton Friedman. Under Editorial Reviews for the book there are some quotes, including this one from J. R. Hicks:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost. It is the former question, not the latter, on which Friedman’s historical researches may well throw some light.

It's almost like an insult: Yes, Friedman is pretty good at the thing most economists are pretty good at, but he's not so good at the important stuff.

So I had a good laugh at that. But look at that first sentence again:

Economists are much better at defining what should be done to maintain an equilibrium than at devising means of recovering it when it is lost.

What I want to ask is: What causes the equilibrium to be lost?

You'll find the answer in the same sentence: It's the "defining what should be done" during the equilibrium that causes the equilibrium to be lost.

It's the things economists do when they're not in trouble yet, that get them into trouble.

I've said as much before.


September 23, 2015, Identifying the economic environment:

Back after the end of World War Two, the government had a lot of debt and the private sector didn't. What with reduced output during the Depression and rationing during the war, after the war people were ready to spend some, even to go into debt.

And then, because people didn't already have a lot of debt, it wasn't a problem when they did accumulate a little debt. The economy wasn't dragged down by the cost of debt so much as it was buoyed by the spending of borrowed money.

The economic environment, in other words, was conducive to economic growth. And growth was good.

In that environment, you could put idiots in charge and the economy would still be good.


August 19, 2017: Agreeing with Christopher Snyder, who said "a bad economy can feed back to make beneficial policies look damaging." My thought:

Yeah, exactly, and that's very important. There is another version of the same idea: A good economy can make any policy (good or bad) look good.


Times like the "Great Moderation" and the "Golden Age" that followed World War Two are taken by economists of the time as evidence of their own ability to make great policy. In reality, such times are evidence of the economic environment and of its predominance over policy. It takes decades for policy to destroy equilibrium.

Monday, October 2, 2017

"It isn't bringing the public debt down that makes the economy grow. It is the vigorous economy that brings the public debt down"


In yesterday's discussion, red was private debt; blue was public debt.

Yesterday's conclusion:
Red line rising, blue line falling, growth is good. That's why some people say we must get the blue line down, get the Federal debt and deficits under control and bring them down. That's backwards, though. It isn't bringing the blue line down that makes the economy grow. It is the vigorous economy that brings the blue line down even though the public debt is actually increasing. The vigorous economy grows faster than government debt, and that's what brings the blue line down.

I don't like to make naked announcements like that. Facts are facts, but you never know. So I always like to look at the data, make sure I got it right, and show my work.

It is the vigorous economy that brings the blue line down even though the public debt is actually increasing. The vigorous economy grows faster than government debt, and that's what brings the blue line down.

1. On yesterday's graph 3, the blue line was going down from 1948 to 1978, dates approximate. That is the period examined here.

2. The public debt was actually increasing during the 1948-1978 period:

Graph #1: Gross Federal Debt in Billions (1948-1978 in Red Box)
Yup. Increasing.

3. The economy grew faster than the government debt:

Graph #2: GDP Growth Rate minus Federal Debt Growth Rate (1948-1978 in Red Box)
Yup. The blue line is above zero when GDP growth is faster than Federal debt growth. The blue is below zero when GDP growth is slower. And the blue line is at zero when  the two are equal.

The blue line is above zero for almost the whole 1948-1978 period. So we know that GDP growth was almost always faster than Federal debt growth during that period.

Yup. The economy grew faster than the government debt.

4. Yes, it is the vigorous economy that brings the blue line down even though the public debt was actually increasing in the 1948-1978 period.

So as I said yesterday: The vigorous economy grows faster than government debt, and that's what brings the blue line down. The people who act as though the fate of the world depends on cutting Federal spending, those people are wrong.

Maybe now we can move on to the actual problem?