Asymmetrical Information

OK, I'm really confused here. This study claims that the problem with deficits is that they "reduce national savings" unless they are offset by an increase in private saving. But every liability is an asset for someone else. In other words, an increase in government debt leads to - an increase in private saving! (Neglecting, for the moment, net foreign flows which don't change things all that much, as long as the debt is denominated in dollars) Likewise, a government surplus means that the government is taking in more in taxes than it spends - so that, in order to pay their tax bill, people must cash in some of that outstanding debt and pay it to the government (or someone, somewhere down the line must - otherwise there's not enough money) Thereby reducing private saving! They have an inverse relationship. In fact, the very idea of government "saving" is ludicrous. Saving what? The pieces of paper it stamps it's name on? It can issue those without limit, as long as someone is willing to take them. And soon as it accepts them, they cease to have value (i.e., are no longer money) The government "saving" money is like the NYC transit authority (in the old days) "saving" subway tokens. The tokens were just a way of keeping track of who paid - they had no intrinsic value to the NYTA, even if they did to riders. If the NYTA tried to run a "surplus" of tokens, people would run out and the system couldn't function.

During the late 90's everyone was bemoaning the low private saving rate (which actually went negative), without ever seeing that the private saving rate MUST be negative if the government run a surplus - the money to pay those taxes has to has to come from somewhere.

Y'know, I'd really be assured if someone proved me wrong on this - I'm starting to doubt my sanity. I mean, why does everyone in a policy position keep insisting that 2-2=4?

Did Al Gore and Bill Clinton ghost write this study under the names of Gale and Orszag? I like how they base their findings on "simple correlations." This report is so politically charged, they might as well subtitle it, "We think Bush is a moron."

Here's what the Cato Institute thinks about all this rubbish:

http://www.cato.org/pubs/tbb/tbb-0202.html

OK, I'm really confused here. This study claims that the problem with deficits is that they "reduce national savings" unless they are offset by an increase in private saving. But every liability is an asset for someone else. In other words, an increase in government debt leads to - an increase in private saving!

This is a theoretically loose answer, but I think it's illuminating: ignoring export effects, if the government cuts taxes and creates a deficit of size x, then private investment needs to go up by x for total investment to remain the same. Did *you* invest 100% of your tax cut? I know I didn't. Unless everyone does, total investment has to go down. Ta da.

That implies, among other things, that our failure to deal with Social Security and Medicare is costing us money, since they're the largest component of long-term projections (yes, mis amigos rosados, they dwarf even The Evil Bush Tax Cut For the Rich).

True, but this is an artifact of the ten-year phaseout on the tax cut. If made permanent, the size of the tax cut ends up being double the size of the SS shortfall, according to the authors.

Jason - I think your missing my point (that is, If I actually have one) We're not talking about investment, but savings. (Ulitimatly, they must equal each other, but that's another story...) And if the government creates a deficit of "x", it must therefore create an amount of bonds "x", which now become private assets. And actually, if you think about it, that's the only way to have "net" private saving - if I own a financial asset, it must be someone else's liability. All private saving must net to 0. The only way the private sector as a whole can save (again ignoring foreign flows) is for the money-creating authority to run a deficit. To claim, as these authors do, that surpluses are "national savings" that can be added to private saving is a basic misreading of national accounting.

>> ... every liability is an asset for someone else. In other words, an increase in government debt leads to - an increase in private saving!

No so. Say with a balanced budget the private sector saves X% of its income totalling $X. Then the government decides to incur a deficit of $Y which it spends on consumption. There is no reason at all why the private savings rate need go up. If it doesn't, total saving is just reduced from $X to $X-$Y.

What happens is that private savings that would have been invested in businesses (stocks, bonds, home construction through mortgages, etc.) are instead simply shifted into government bonds -- to be consumed on unemployment benefits and bombs for Iraq and the like.

>> Likewise, a government surplus means that the government is taking in more in taxes than it spends - so that, in order to pay their tax bill, people must cash in some of that outstanding debt ...

Not so. Say "income taxes." The overwhelming majority of federal tax collections come out of people's income, not from people cashing in their assets -- no matter how big the government's deficit/surplus position is.

>> ... and pay it to the government (or someone, somewhere down the line must - otherwise there's not enough money) Thereby reducing private saving!

Not so again. All private saving is from *income*, by definition. There's about $9 trillion of income in this economy. If the private sector's savings rate is 5% of income, and the government moves from a balanced budget to a deficit, the private sector savings rate of 5% can stay unchanged while some of those savings simply move to being invested in government bonds rather than, say, General Motors bonds. That's all.

Having "enough money" has nothing to do with it. Taxes are a flow, money is a stock -- and the stock of money isn't fixed anyhow, the Fed can send it anywhere it wants.

>> the very idea of government "saving" is ludicrous. Saving what?

Well, we see above how with private savings of $X a budget deficit of $Y reduces national savings from $X to $X-$Y. So it ought to be possible to figure out how a budget surplus of $Y would increase national savings to $X+$Y. It's merely the reverse.

>> Durring the late 90's everyone was bemoaning the low private saving rate (which actually went negative), without ever seeing that the private saving rate MUST be negative if the government run a surplus

A quick look at a various national accounts will show how false that is.

>> Y'know, I'd really be assured if someone proved me wrong on this ...

Hope you feel better now!

Tax cuts do not equal deficit spending as the current deficit shows. The Bush tax cut was enacted under rules that equated lost revenue to spending, and it passed as not causing a deficit. The tax cut then met the real world, the recession that began in 2000 and 9-11, and, guess what, tax revenue dropped while spending stayed flat or even increased. Deficits are caused by an imbalance between revenue and spending, not tax cuts.

Unless you cashed your refund check and burned the money, even spending it should have increased private investment. The business that took your money as income invested part of that money in it's operations, and passed part on to it's suppliers, who in turn invested in their operations and paid their suppliers, and so on. I seem remember that this was one of the arguments *in favor* of the accelerated tax refunds. Just because the tax refunds didn't get stuck in our collective piggy banks doesn't mean the money was not invested.

This sounds like a recycling of the argument from the 1980's that government deficits 'crowd out' private investment. Sounds good in theory but somehow we seemed to live (pretty well) through them.

I think "these guys" are being rather glib about some complex stuff.

My memory is that when I actually researched the research on this subject, to my own surprise I found the relation between gov't deficits and current long-term rates in the US due to the "crowding out effect" to be small to near-zero.

(As an example, just look at the last year during which the budget deteriorated by almost $300 billion and long rates declined, in spite of the guys' implied 1.5 to 3-point rate increase. Of course, other things weren't equal -- we had one of the mildest recessions on record in that period. But even that shows that the interest rate effect is so weak as to be swamped by other factors in the economy even in the face of *large* fiscal changes.)

OTOH, there are other ways that deficits can signal the markets to raise long interest rates. E.g., if the deficits result from apparently wasteful spending, or if they are large relative to the economy and policians have a history of monetizing them and creating inflation, or if a smallish economy runs on a fixed exhange rate and the government is going to have to somehow "earn" the money to repay the debt, etc., then rates certainly may rise.

But those results aren't from the "crowding out" effect as seems to be implied -- and if the political weaknesses they do result from aren't present, one wouldn't expect the rate hikes to materialize.

Some perspective may be helpful: Well over $1 trillion US dollars are traded *every day*, so increasing or reducing gov't borrowing by a mere $100 billion over a *year* would hardly be expected to have any great supply/demand effect on the market evident in the cost of borrowing, ISTM.

FWIW, Mankiw produced for the Fed an estimate of the total real cost of the accumulated federal debt as of the late 1990s when it totalled about 50% of GDP.

His estimate was that all the federal borrowing combined until then reduced current GDP by about 3%. That's not nothing, but it's not a whole lot either. And being that the debt had been accumulated over 60 years or so, the reduction attributable to any single year of borrowing was near trivial.

Personally I think deficits today are bad for a bunch of reasons, but the crowding out effect isn't high on the list.

"mis amigos rosados" = my pinko friends?

Heh.

>>No so. Say with a balanced budget the private sector saves X% of its income totalling $X. Then the government decides to incur a deficit of $Y which it spends on consumption. There is no reason at all why the private savings rate need go up. If it doesn't, total saving is just reduced from $X to $X-$Y.

What happens is that private savings that would have been invested in businesses (stocks, bonds, home construction through mortgages, etc.) are instead simply shifted into government bonds -- to be consumed on unemployment benefits and bombs for Iraq and the like.

Sorry, you still haven't cleared it up for me. It doesn't matter what the the governement spends the money on - it could pick people randomly off the street and hand them $100 bills - the money doesn't disappear off the face of the earth. That money is now sloshing around in the financial system, where it will eventually end up in the hands of someone who would rather hold interest bearing assets than cash, and so buy the new debt that the government has just issued. As long as people are willing to accept dollars in exchange for goods and services, virtually any amount of debt (within the economy's ability to generate goods and services) is thus "self funding".

And that "private savings" can't be "diverted" from investment. (Doesn't anyone actually read Keynes anymore?) You've got it the wrong way around. If you go down to the bank for a loan, the loan officer is not going to tell you, "Well, you qualify for a loan, but people just haven't been saving much this week, so we don't have any money to give you." The bank will make the loan if it thinks you are a good risk, and THEN, if it doesn't have enough reserves to balance it's books, will go out in the federal funds market to find the reserves. The Fed (through open market operations) will make sure there are always enough funds to cover all loans. The money which the bank has just loaned you will then flow through the economy, eventually reaching the pockets of people who want to save it, and it will end up in the banking system as deposits. Savings does not lead to investment, investment leads to savings.

Under a properly managed fiat money system, there can never be a shortage of investable funds - the central bank will make sure of that. The only thing there can be a shortage of is people willing to invest, or banks willing to lend to them.

First, how the savings rate is calculated...

>>> Sorry, you still haven't cleared it up for me. It doesn't matter what the governement spends the money on - it could pick people randomly off the street and hand them $100 bills - the money doesn't disappear off the face of the earth...

Who said it did? Now you move off into how there's always a lot of money sloshing about everywhere, and so on. Fine.

But your original statements were that "an increase in government debt leads to - an increase in private saving!" and "government surplus means that the government is taking in more in taxes than it spends - so that, in order to pay their tax bill, people must cash in some of that outstanding debt.. Thereby reducing private saving!" and "the private saving rate MUST be negative if the government runs a surplus".

All of which are plainly wrong, as one can see just by reading the national accounts and seeing so many examples to the contrary.

[Hmm, why do the names "Hummel" and "Mosler" pop to mind around now? ;-) ]

Accounting for savings is really very simple: Income is either consumed or saved in assets. One or the other. Gotta be, as unspent money itself is an asset. As Gale and Orszag explain in their paper: "Higher national saving increases the assets owned by Americans".

Yes, the same amount of money goes winding around the economy either way, consumed or saved -- but surely you see the difference between consuming and acquiring an asset.

The national savings rate is the amount of national income that is not consumed but kept in assets. That's it -- there's nothing more to it. And it equals the private savings rate plus the government savings rate.

E.g. if the private savings rate is 5% of national income, and...
[] The government runs a balanced budget, the national savings rate is 5%. Because 5% of national income is not consumed. Simple.
[] The government runs a deficit of 2% of national income, then the national savings rate is 3% because 2 points of private saving are routed to the government and consumed by it. Since only 3% of national income isn't consumed, that's the national savings rate. What could be simpler?
[] The government runs a surplus of 2% of national income, then the national savings rate is 7%. Because taxes equal to 2% of national income collected by the government are not consumed by it but are returned to investors through bond redemptions. And since those investors want to have that money invested, or they wouldn't have owned the bonds in the first place, they will now invest it in something else. That 2% of taxes plus 5% of private saving equals 7% of national income that is not consumed -- so the national savings rate is 7%. That's the amount of national income invested in assets.

What could be simpler? That's how it works, like it or not. Read the national accounts, or an economics textbook, and see.

Private and goverment savings clearly don't have to offset each other or finance each other. That would posit a static amount of savings in a growing economy. And where could those savings have ever come from, being that their amount is static?

Both kinds of savings can be positive or negative at the same time, or any combination.

"End of story", as another blogger said on a related post on a different site.

Next, whether savings matter...

>> As long as people are willing to accept dollars in exchange for goods and services, virtually any amount of debt (within the economy's ability to generate goods and services) is thus "self funding".

And "the economy's ability to generate goods and services" depends on the amount of assets it has, right?

>> And that "private savings" can't be "diverted" from investment.

Well, if those private savings aren't saved in assets but are diverted into being consumed by the government, then they in fact are diverted from investment, right?

>> You've got it the wrong way around. If you go down to the bank for a loan, the loan officer is not going to tell you, "Well, you qualify for a loan, but people just haven't been saving much this week, so we don't have any money to give you." The bank will make the loan if it thinks you are a good risk...

And that will depend in no small part on the amount of assets you have, right? To put up as security for the loan, to demonstrate that you already own a business with some assets that you've shown you can manage, and so on.

And really you don't want to pay interest on the full value of *everything* that comes into your possession, do you? You want to be earning some interest too, and earning even larger economic returns on some things, right? And you only do that on assets.

Assets count. That's why Gale and Orszag say: "Higher national saving increases the assets owned by Americans and leads to higher future national income." As they explain in a little detail.

Higher future income!

>> ... and THEN, if it doesn't have enough reserves to balance it's books, will go out in the federal funds market to find the reserves. The Fed (through open market operations) will make sure ...

So, this has exactly *what* to do with your claims about the savings rate? (I'm really beginning to suspect an overdose of undigested Hummel here.)

>> Under a properly managed fiat money system, there can never be a shortage of investable funds - the central bank will make sure of that. The only thing there can be a shortage of is people willing to invest, or banks willing to lend to them.

You mean, like if people have too much debt and not enough assets to be credit worthy? Because they didn't save enough?

Unless you cashed your refund check and burned the money, even spending it should have increased private investment.

Would it have increased private investment enough to make up for the deficit? If you say it should have, why don't we finance the government entirely through deficit spending? There's no difference.

>> I'm really beginning to suspect an overdose of undigested Hummel here.

I've never heard of Hummel, but I have read a lot of the (terribly unfashionable) post-keynesians, including Wynne Godley, who's done a lot of financial modeling along these lines. Check out this paper:

http://www.levy.org/docs/wrkpap/pdf/167.pdf

>> I've never heard of Hummel, but I have read a lot of the (terribly unfashionable) post-keynesians, including Wynne Godley

Ah, my friend Mr. Hummel's source. Almost word for word at points.... Well, never mind as far as that's concerned.

Well. Yes. I mean, I don't relish being associated with people the "mainstream" plainly dismisses as cranks. I would much rather conform to the consensus (and I don't mean that sarcastically - I really would like to learn some damn economics without all the political folderol) but, dammit, the post-keynesian story makes sense, and (even worse) they keep making predictions that come true. What's a poor naive economist wannabe to do?

Jimbo: You are on the right track and Godley is not a crank -- if anyone has told you otherwise, they are an idiot.

You've actually got quite a good /closed-economy/ model there. The important thing to remember, which I hope will clear up a bit of confusion for you, is that the USA can, and does, borrow from foreigners. So there isn't the one-for-one connection between the savings of US citizens and the investment decisions of US businesses.

Net foreign flows *do* change things a lot; although the debt is in dollars, it's real net investment; it allows current consumption in the US (therefore creates current income) in return for future promises to pay.

In related news, I don't see how, in context, the words "deal with Social Security and Medicare" can be taken to mean anything other than "cut benefits to old people".

Or admit that the system's a disaster, stump up the money to pay current benefits out of general revenue, and for people more than fifteen years off retirement, stop making promises we can't keep.

I see. So in fact that sentence could be rephrased "Our continued commitment to provide for the old and sick is costing us money". Which makes it a bit obvious, but there you go.

In all honesty, the problem appears to be the determination of the USA to pay well above top-dollar for the world's best healthcare. It's an expensive hobby, but there's no accounting for taste. You could quite possibly do what the French do and get a first-rate system for a reasonable price; nobody's suggesting the UK solution (a second-rate system for the price of a third-rate one). Call me old-fashioned, but I tend to think that mutual insurance is a better way to pool the risks of healthcare than civil lawsuits.

Um, as I thumbed through some of presentation by the authors in question, one point they made is that the interest rate question is sort of a red herring. So any reference to the interest rate question (which is how Hubbard got the thing started - they think he is doing bad economics) need to address the authors point. US private savings do not need to go up to perfectly offset the rise in the federal debt (thank you Jim) in part because foreigners can finance some of the larger deficit. That means some wealth that could have gone to US residents will flow overseas. That is one way in which the authors argue the US is left poorer by a larger deficit. Interest rates are just a mechanism by which investment may be lessened, but it needn't be lessened, if foreign investors are willing to completely make up the difference in US savings at an unchanged interest rate.

True enough that US entitlement programs represent a large drain on future wealth. It is unambiguous. However, the most recent policy change, one being justified as pretty much costless by its supporters, is a tax cut that is contributing to a larger deficit. Gale and Orzag are joining in that debate. Aswering them on their own terms (which requires giving them an honest read before critiquing them, folks) is not so easy.

Or admit that the system's a disaster, stump up the money to pay current benefits out of general revenue, and for people more than fifteen years off retirement, stop making promises we can't keep.

You know, SS can be easily fixed for the foreseeable future by declaring that (retirement age - life expectancy) should be a constant. At the moment, that retirement age is around 72 or so.

Sure it could. It could also be fixed by dragging out an shooting anyone over the age of 70, but that's not a political winner.

The problem with that, besides the political angle, is that you start to run up against the limits of the body's ability to work. Are you really going to send an eighty-year-old to work if life expectancy keeps going up? The old are getting healthier, but not that much healthier. And just as people's lives aren't designed around living 30 years in retirement, neither are people planning on a declining real standard of living as their vitality fails. A company that might have been willing to string a failing 63-year old along for a couple of years is not going to do the same for a couple of decades.

D^2, you're confusing private with public medical spending here. The medicare system, which is the costly item, is run on the same lines as National Health. What we don't have is the political will, to say, as Britons do, "we're not going to treat an 80-year-old with emphysema." Also, you may have noticed that the European countries are running up against the limits of the cheap health care workers developing countries can supply. What are y'all going to do when we nationalize and jump on board?

"Are you really going to send an eighty-year-old to work if life expectancy keeps going up?" My grandfather tried retiring at about eighty, for the second time. Like the first time, not working was too boring, so he opened yet another insurance agency. He only quit at about 85, when he went too blind to fill out the paperwork anymore. One of my great-grandfathers ran a furnace-installation business until he was 89. Both of them died within a couple of years of retirement. But if they had been on salary at a corporation or for the government, they would have been drawn pensions and social security for over twenty years each.

OTOH, over on the white-trash side of the family, Grandpa Freddie was obviously too worn out to work by his early sixties, and died before he was seventy. But it was kind of hard to tell when he retired, since I don't think he'd ever held one job for six months. Not sure what got him so worn looking...

So it depends. I don't think you'd want an octogenarian as a bicycle messenger boy, but a few men can actually keep up heavy physical labor into their 80's. Many smart and well educated 80 year okds could handle office work about as well as they ever did - although I'd expect them to start using some of that accumulated experience to avoid getting into situations requiring working late. Whether they want to when they've got the option to quit without financial hardship is another issue. If they are quitting because they stashed away enough money to support themselves practically forever is one thing, but taxing young poorly-paid workers to help support them is quite another.

The problem with that, besides the political angle, is that you start to run up against the limits of the body's ability to work.

Aaaah, so that's the fundamental difference. Is there any evidence for this, historically? I'd say 72 year olds today are a hell of a lot more able to work than 72 year olds of a 100, 50, or even 20 year ago.

Let's assume that it doesn't, though: will teh system result in disaster? Well, recycling an old post of mine, here's the relevant variables:

For the solvency of a generational transfer retirement program to remain constant, the annual increase in outlays must have a matching increase in income. So, for a steady-state system with a constant tax rate:

% change in work force taxes = % change in retirement outlays

% change in work force taxes = % change in income * % change in work force size

% change in retirement outlays = % change in individual retirement benefits over same time period * % change in retired population

% change in retired population = % change in life expectancy * % change in work force size (with a ~45 year lag)

A steady state system requires that:

% change in individual income = % change in life expectancy * % change in individual retirement benefits over a time period

To simplify: as long as productivity outruns life expectancy * retirement benefits, the system doesn't change.

In our current situation, where retirement benefits are constant (SS benefits are held constant in real dollars from year to year, surprisingly), such a system is just fine for the foreseeable future (productivity >> life expectancy). Heck, you can probably reduce taxes over the long run.

One adjustment is to put the "lagged population growth" back in on the left side, but I don't think it makes much of a difference, as it pops out the other end eventually anyway. Maybe treat it as a constant term.

Now, "bunching up" of population growth (the boomers) creates problems, but it only lasts one generation. Interestingly, if you assume each generation should have a roughly equal ratio of income to benefits, then generations bigger than the trendline should somehow transfer income to the next generation.

In other words, the we should be running a social security surplus.

The problem with that, besides the political angle, is that you start to run up against the limits of the body's ability to work.

Aaaah, so that's the fundamental difference. Is there any evidence for this, historically? I'd say 72 year olds today are a hell of a lot more able to work than 72 year olds of a 100, 50, or even 20 year ago.

Let's assume that it doesn't, though: will teh system result in disaster? Well, recycling an old post of mine, here's the relevant variables:

For the solvency of a generational transfer retirement program to remain constant, the annual increase in outlays must have a matching increase in income. So, for a steady-state system with a constant tax rate:

% change in work force taxes = % change in retirement outlays

% change in work force taxes = % change in income * % change in work force size

% change in retirement outlays = % change in individual retirement benefits over same time period * % change in retired population

% change in retired population = % change in life expectancy * % change in work force size (with a ~45 year lag)

A steady state system requires that:

% change in individual income = % change in life expectancy * % change in individual retirement benefits over a time period

To simplify: as long as productivity outruns life expectancy * retirement benefits, the system doesn't change.

In our current situation, where retirement benefits are constant (SS benefits are held constant in real dollars from year to year, surprisingly), such a system is just fine for the foreseeable future (productivity >> life expectancy). Heck, you can probably reduce taxes over the long run.

One adjustment is to put the "lagged population growth" back in on the left side, but I don't think it makes much of a difference, as it pops out the other end eventually anyway. Maybe treat it as a constant term.

Now, "bunching up" of population growth (the boomers) creates problems, but it only lasts one generation. Interestingly, if you assume each generation should have a roughly equal ratio of income to benefits, then generations bigger than the trendline should somehow transfer income to the next generation.

In other words, the non-SS government should be balanced, and SS should be running a surplus.

Oh, a natural consequence of the thing where big generations have to transfer income is that politicians will naturally be tempted to use the surplus; Democrats on spending and Republicans on tax cuts, of course.

Eliminating the off-budget nature of the program would make it politically harder to swipe a surplus, as it'd make what's going on a lot clearer.

Couldn't agree with you more about the surplus. Personally, I think the government accounting should get a major overhaul -- require them to account for liabilities and such, just like a real company. I also think the idea will never fly, because the politicians who would be required to pass it are the ones who benefit from it.

Having had a grandmother who worked until age 85, when her eyesight failed completely, and a great grandfather who remained self-employed into his 90s, when he suffered a stroke, it seems unremarkable to me to ask people to wait until they are unable to work before gaining access to others' wages. Of course, the gap between what I find unremarkable and what will get a politician elected is somewhat large. It seems indisputable though, that retirement ages need to be increased as soon as possible. Jason, under your scenario, what would you propose doing with excess tax revenues collected through FICA taxes?

Re Goldley, Post-Keynesians, et al.

>> Well. Yes. I mean, I don't relish being associated with people the "mainstream" plainly dismisses as cranks. I would much rather conform to the consensus (and I don't mean that sarcastically - I really would like to learn some damn economics without all the political folderol) but, dammit, the post-keynesian story makes sense...

You seem to have made the rather elemental mistake of falling for a critique of the "mainstream" without first bothering to learn what the mainstream is -- regarding even such elemental items as how the national accounts are tallied.

There are people all over -- and especially on the 'net -- claiming 'all the mainstream textbooks, economists, central bankers, and even accountants have *gotta* be wrong, so don't even bother to learn what they say, get the real truth from *me*'.

They are all cranks -- every one. A non-crank innovator says "*Learn the mainstream first*. After you do, you will find even mainstreamers admit they have this problem, for which I am proposing a new solution, which will require re-thinking other things about the mainstream".

Of those people, 90+% will be wrong, but they will be intellectually honest and disciplined and some will make a real contribution.

Even Einstein, who actually toppled a mainstream, didn't say the mainstream was "wrong", "silly", "an obstacle to clear thinking", "kept in place by the establishment's special interests ", etc., so that there was *no reason to learn it*, as various PKers have said to me.

Instead he mastered mainstream thinking, addressed the mainstreamers' problems in their own terms, gave them new answers that worked and so were rapidly accepted -- so that, as he ironically noted, he quickly became the mainstream establishment's authority figure himself.

You know, there are a *lot* of very smart and honest people working hard in the mainstream. If in physics, or engineering, or computer programming, you saw a case of *all* the textbooks versus a guy who says they are all wrong while he's figured things out for himself, who would you be inclined to bet on?

Now here you've got Godley in his first sentence saying all economics textbooks are "silly"...

>> What's a poor naive economist wannabe to do?

Be like Einstein. Learn about a subject before deciding if there is a need to critique it, and how. At least learn how the savings rate is counted before deciding you need a Post-Keynesian critique of the monetary system.

>> You've actually got quite a good /closed-economy/ model there.

The one saying private and government savings finance each other and so must offset, so the private sector must cash in its savings for the government to run a surplus?? And "the private saving rate MUST be negative if the government runs a surplus"?

I think one will have a hard time finding a textbook written by a mere neo-Keynesian -- like say Krugman or Samuelson -- who agrees with that.

>> So in fact that sentence could be rephrased "Our continued commitment to provide for the old and sick is costing us money". Which makes it a bit obvious, but there you go.

Saying "... to provide for the old and sick is costing us money in a hugely inefficient and inequitable manner" makes it even more obvious.

E.g., right now Social Security is paying benefits to Warren Buffet (and all other billionaires over age 65 who ever worked) -- a direct transfer from mostly low-income workers funded through a regressive payroll tax on (which itself destroys entry-level jobs).

As a matter of both economics and justice this is not just nonsensical but plain *wrong*. Now, means-testing could easily eliminate this double outrage, as well as push SS a long way back towards solvency -- but means testing would destroy the political base of SS as we know it. And those *political* consequences cannot be allowed, says our political class.

The economics of SS is easy, simple even -- it's the politics that's hard.

>> You know, SS can be easily fixed for the foreseeable future by declaring that (retirement age - life expectancy) should be a constant. At the moment, that retirement age is around 72 or so.

Sure -- then all you have to do is tell a generation (or two) of *voting* workers that they now have to work six or seven years longer than was promised to them and than they've planned for. And that by reducing their total SS benefits by about one-third, their return on their SS contributions will go *starkly negative*.

Easy! Any politician can see the merit in that plan. ;-)

Especially the Democrats who ran the pictures of Dubya pushing an old lady in a wheelchair over a cliff in response to the comparatively tiny reforms proposed by the Moynihan commission.

>> ... politicians will naturally be tempted to use the surplus; Democrats on spending and Republicans on tax cuts, of course.

You're right there. FDR's originally enacted SS program was funded on an actuarially sound basis with a 6% payroll tax to be "saved" for many years by paying down the national debt or paying for gov't expenditures in lieu of income taxes. FDR famously said SS was actuarially sound and would be "out of the Treasury" forever.

That lasted all the way until the next Congress. Then the liberals said it was unfair for payroll taxes to pay off the bonds of the rich and for gov't expenses. Income taxes were for that. They wanted to use the whole payroll tax to expand benefits right away. Conservatives said the liberals just wanted to consume the taxes on a new welfare state, saving nothing, so it was better to cut the tax.

They reached the classic political compromise -- cut the tax rate to 3% and hike benefits to spend it all. Congressional paradise: spending hikes and tax cuts too!

FDR had no votes to keep SS funded so he did a 180 degree turn on funding -- as a leader must in such cases to stay the leader -- endorsing the changes. And SS was off on the road to perpetual insolvency.

BTW, this shows the disingenuousness of many of those in the Democratic "save the SS surplus!" camp -- they are *60 years too late*, and never raised an objection to spending it until after the 2000 election, when it was far too late to make a meaningful difference.

>> Eliminating the off-budget nature of the program would make it politically harder to swipe a surplus

Well, it didn't keep them from swiping FDRs' entire surplus in the first election year to come along.

Jason, under your scenario, what would you propose doing with excess tax revenues collected through FICA taxes?

Well, assuming you could get politicians to leave it alone, paying down the national debt (with enough left over to keep monetary policy working) would increase net investment noticably. Beyond that, I don't know enough.

BTW, this shows the disingenuousness of many of those in the Democratic "save the SS surplus!" camp -- they are *60 years too late*, and never raised an objection to spending it until after the 2000 election, when it was far too late to make a meaningful difference.

Sure, but the surplus was tiny until the 1986 tax hike. Good point about the history of the program, though; do you have a link for background on this? I can't find anything.

>> Sure, but the surplus was tiny until the 1986 tax hike.

You miss the point in support of your own argument. The SS surplus would have been quite large from the 1940s on if Congress hadn't immediately spent it away. IIRC it was scheduled to have accumulated to about $600 billion (current dollars) by the late 1970s, when SS was in fact broke and had to be "saved" by the Greenspan commission.

> > do you have a link for background on this? I can't find anything.

On-line, there's a lot of interesting stuff at www.taxhistory.org. It's sponsored by Tax Analysts, www.tax.org, which is just about the only non-partisan tax policy analysis site on the web that actually *is* non-partisan.

Jim, before we progress this at all, do you know who Wynne Godley is? I've got a feeling you're about to make the most godawful fool of yourself and I don't want to put you through that. Let's put it this way; Godley, and others, believe that the Post-Keynesians are the only genuine Keynesians, and he has the distinct advantage over you of having years of personal aquaintance with Hicks, Harrod, Robinson, Kaldor and the rest of the gang.

Your little rant about "cranks" was wrong as hell when Martin Gardner put it in his book, and would certainly have been bad news for good old JM Keynes himself. I await with baited breath the hitherto unpublished chapters of "The Wealth of Nations" in which Adam Smith went through the case for the Physiocrats, or for that matter the chapters of "Origin of Species" in which Charles Darwin recounted the book of Genesis.

>> Jim, before we progress this at all, do you know who Wynne Godley is?

Sure.

>> I've got a feeling you're about to make the most godawful fool of yourself and I don't want to put you through that.

Oh, please, be cruel. I love it. ;-)

>> Your little rant about "cranks" was wrong as hell when Martin Gardner put it in his book

The rant about bothering to learn about what one is criticizing before criticizing it? Well, that sure would take a lot of fun out of the web, and darn near kill usenet. I'll give you that.

>> and would certainly have been bad news for good old JM Keynes himself. I await with baited breath the hitherto unpublished chapters of "The Wealth of Nations" in which Adam Smith went through the case for the Physiocrats,

Well, you could look at the published chapter IX of Book IV, in which WoN covers the Physiocrats' system in condiserable detail. Smith knew the Physiocrats intimately, having gone to France to learn their theories from them personally, and was so influenced by them that he considered dedicating WoN to Quesnay. Of them Smith wrote in WoN ...

"This system, however, with all its imperfections, is, perhaps, the nearest approximation to the truth that has yet been published upon the subject of political economy, and is upon that account well worth the consideration of every man who wishes to examine with attention the principles of that very important science."

So you can let your breath out now.

(Maybe this itself is a case where one should have learned mainstream knowledge before forming a belief and criticising another on the basis of it?)

And I take it you think the old pre-1936 J.M. Keynes was just as ignorant of the mainstream economic theory of his day as Smith was of the Physiocrats. Well, as the star student of Alfred Marshall, Marshall's successor as Cambridge econ professor, the author of the definitive text on monetary policy of his era, etc. & so on, you're right, he was!

So I don't think your examples very well support your assertion.

Remember what Newton and so many others back to Bernard of Chartres have observed: one sees further by standing on the shoulders of giants --not by deciding on one's own that everyone else is a pinhead.

>>And I take it you think the old pre-1936 J.M. Keynes was just as ignorant of the mainstream economic theory of his day as Smith was of the Physiocrats. Well, as the star student of Alfred Marshall, Marshall's successor as Cambridge econ professor, the author of the definitive text on monetary policy of his era, etc. & so on, you're right, he was!

Want to guess who Wynne Godley was the star student of?

There's no way around this, Jim. I thought I'd said enough to give the odd clue that I know _quite_a_lot_ about Keynes' biography and intellectual development. I don't see how anyone can claim, however, that on reading the General Theory, that JMK was of precisely the opinion that you deride; that his development of macroeconomic theory displaced previous views (such as Say's Law, albeit that JMK pretty badly misrepresented Say) and that there was no point in studying them any more. He says this pretty explicitly when he explains that his theory was "General", and that previous macro theory was a special case of his own.

Good spot on WoN, btw. I can only say in my defence that this chapter isn't in my abridged edition.

Let me stick in my own cracker-barrel-level insights: obviously the only solution to the SS and Medicare problems is to (A) cut benefits for the well-off, (B) increase taxes for these programs on the well-off, and (C) raise the retirement age for everybody. At some point this has to be done, whether political pressures delay it until the crisis is actually upon us (as is usually the case with democracies) or whether we start implementing it right now.

What is not in question is that Bush's solemn insistence that we can solve the problem painlessly simply by allowing current workers to withhold much of their current FICA payments for their own use -- and that this will not cut seriously into the benefits for current retirees -- is utter bullshit. If we want to start allowing investment of Social Security funds in private markets, we will have to (A) let the government invest the entire current SS fund in the investment market as a whole (WITHOUT allowing them to play favorites as to what funds they stick them in); (B) let the current retirees simply invest their own damn SS benefits in private markets (as they are already perfectly free to do); or (C) put up with a really huge and immediate drop in current SS payments (thereby starting the coming generational economic war earlier than it would otherwise begin).

Comments are Closed.