Saturday, 31 May 2014

The shocking truth is not enough to make sense

Here is a conversation between myself and some dude on the internet, a conversation in which I try to separate the facts from his ideological fiction. He is red, I am black...

Conservative and Liberal are fairly weak terms and mean different things depending on where you are and what time period you are in. I tend to be conservative, but I prefer to explain myself as being in favor of minimal government interference.
Most things the government does have unintended consequences. For example minimum wages hurt the very people they are designed to help by increasing unemployment. A minimum wage of $10.10 doesn't do you any good if you can't get hired!
There is a lot of truth to what Hellsworth is saying, but I just want to point out that economic growth occurs through the creation of economic value in a market. The government can influence that, but a deficit is not a necessity. A nation with no real government, just a court system and police force operated by fines, court fees, and volunteers could still have a growing economy. I would prefer a balanced budget to a deficit, because deficits inevitably require that either taxes are raised or services are cut over time.
Finally, full employment as a goal has it's weaknesses. If I was elected "Unconditional Ruler" of a country, I could eliminate unemployment in one day. Guaranteed. All I would have to do is require that instead of using cars, for transportation, anyone who wants to travel by road must hire a pedal car driver. Industry would scramble to manufacture pedal cars and people would rush to hire drivers. The economy would be destroyed, but at least we'd have full employment!
Then again, we could also require that any person who owns a home hire someone to stand in the front yard and wave to cars passing by.
Employment is a [/b][/i]measure of the economy, but it doesn't necessarily represent the underlying fundamentals.

Sorry, Razick, but you're understanding about economics is warped by ideological fiction. I haven't the desire nor the patience to change your ideology; I just want to expose some facts.

First, no society has ever managed to survive and grow based on voluntarism - that's why communism didn't work. You had peace and high equality in hunter-gatherer societies; but once the agricultural revolution happened (surplus society) all that changed dramatically.

Now, there are numerous historical, empirical, and present-world examples where public and private institutions both can yield negative or positive results from a social standpoint and economic standpoint. All institutions are run by human beings - and saying that government services will have "unforseen" effects is not an argument against government services at all. All human actions have or may have unforseen effects; the decision of the individual to drink, to smoke, to kill himself/herself - to abuse the weak. The decision to cut corners in order to turn a profit. The decision to accept bribes; the decision to bribe et all.

You clearly do not understand the purpose of government taxation, otherwise you wouldn't make fun of the idea of full employment. Permanent and involuntary unemployment is a crime against humanity - for the unemployment rate is a GOVERNMENT policy CHOICE! Whether the citizens or the politicians are aware of it or not. (the neoliberal establishment calls it the unemployed buffer stock) So either hire the unemployed or reduce the tax.

Yes, unemployment- source of the greatest economic loss as well as a social tragedy and a crime against humanity, is always the evidence deficit spending is too low. There is no exception as a simple point of logic. The currency is a simple public monopoly, and the excess capacity we call unemployment- people looking to sell their labor in exchange for units of that currency- is necessarily a consequence of the monopolist restricting the supply of net financial assets. There is always more to do than people to do it. Economically, unemployment is never appropriate policy.

Yes, increasing the minimum wage while leaving the economy to function at depressed levels of output won't do good overall. It's gonna have perverse effects - higher unemployment, while low income earners will benefit. An increase in the minimum wage needs to be correlated with a reduction in fiscal drag.

Your final statement on deficits shows that you are ignoring the other side of the balance sheet. Economic activity within a certain administrative-judicial territory is not measured in coconuts or banans. It is measured in the public unit of account, the legal tender set by law. In the US is the US dollar. As such, the net financial surplus of the nongovernment sector equals the net financial deficit of the government sector.
Solvency is NEVER an operational issue for a currency sovereign. The government can run all the deficits it likes - the size of the deficit, however, of course matters. Because if you spend past full output/past full employment - you're gonna have price instabilities occurring.

In a situation where you have a neutral trade balance, and a government neutral fiscal policy - then the balance of the domestic private sector is gonna be 0 as well. There will be no net growth. Sure, firms and households can leverage themselves - but the net in the system is gonna stay at 0. Because one man's loan is another's savings - one man's liability another's asset. One man's spending, another's income. The Money Supply will grow because of the new private debt contracted, and it will inevitably shrink back when those private debts are paid off or defaulted upon. The only sector capable of creating or destroying net financial assets within the economy is the currency monopolist. The government creates net financial assets by running fiscal deficits - and it destroys them by running fiscal surpluses. Fiat money is public property, and it should be used for public purpose!
Images speak louder than words: USA's sectoral balance graph - 1952-2010

After this, he still didn't understand the basic *and ground shacking* truth about the modern monetary system; that government taxation is financed by public spending!

I get what you are saying, I think, but money is just a unit of account. No growth in nominal wealth as measured by money does not mean that real growth, which is created by labor and capital and the market allocation of resources is not occurring.
We have had a massive increase in standard of living over the past two centuries largely due to technological advances. Maybe I am missing your point, but are you saying this wouldn't be possible without government deficits?
I am not arguing in favor of the system I outlined in my earlier post, merely trying to make the point that the private sector need not have a so called "fiscal surplus" in order to grow. In a perfect world, no public sector would exist to run deficits, yet the economy would still grow.
I'm also not advocating in favor of unemployment. My point is that full employment is not a goal above all else to be achieved at all costs. Full employment is easy to achieve, but it has to be done right.
As for arguing against government services, I'm not. I am, however, arguing against services and regulations for which cost is greater than benefit.
I'm not sure why this chart matters, if you divide an economy into various groups, of course balances between them must be equal, that's common sense. Anyone who has every used an accounting program knows that what comes out of one account goes into another. In the absence of a government you could divide the US into the East and the West and show how the deficit of one corresponds to a surplus in another. However, the West doesn't have to run a deficit in order for the East to grow.
Since the 1970s we've seen much larger deficits than in the years prior, yet contrary to what MMT would suggest, the GPI has been declining since then:In fact, it's quite impressive how well the increased deficit lines up with the decline in GPI. I don't claim that these are directly related, but rather that a growth in government drag on the economy around that time was the cause. Also, it seems that rather than creating a surplus in the private sector, US deficits have primarily funded foreign trade surpluses (capital accounts).
Let me ask you to clarify one thing: Are you saying that raising the minimum wage does hurt employment, but that government policy choices can counter-act this effect?

Measurements akin to GPI define well-being to mean things that the definers ideologically support. Also, you can't compare the military and sicence funding rush of the cold war with that of the post-war world. Second, you cannot imply that from a green-standpoint, antiquated technology polluted less - today's technology is more efficient; there are more people on earth - there is more consumption.
So it makes sense that the GPI is inverse to the GDP in trend.

GDP itself is a pretty simple measurement, one that does not measure wealth or well-being. GDP is related to national accounts, a subject of macroeconomics. (Private domesti sector)+(Gov sector)+(Foregin sector)=0 And you can always index it with inflation; and use other measurements to see what that growth or contraction meant. There's the GINI, the HDI, the real unemployment rate, the underemployment rate et all.

After the US started entering all those wars; they started to run trade deficits and they knew they couldn't maintain the Bretton Woods in place - which was an international surplus recycling system set up to be at the leisure of the USA. After WW2, they feared another Great Depression - they were the only ones able to produce on mass scale while Europe was crippled. Thus, they required these countries to be able to absorb american exports. Thus, they loaned the dollars and the dollars with which to pay interest on those loans to those governments. The US recycled the most in 2 key geostrategic countries: In Western Germany and in Japan. When the Bretton Woods fell, the americans thought to recycle the surpluses of others. Thus...
The US told the arabs, look, we'll pay your oil at whatever dollar price you want; but you better put back those dollars in our country or we're gonna come over here and kill you. They told the japanese, you're gonna give us engines and cars and in return you'll get dollars. And that was that. Because the US took over from where the british empire left off after WW2, and because it managed to become the world's hegemonic power - it was able to do this.
Why do you think the chinese have toiled as the world's slave producer? For geostrategic reasons. China required technology and strategic resources. It couldn't buy those things with yuans; it needed dollars. That's why they worked to create those huge commercial surpluses.

In the modern world, you cannot treat capital and labor as separate - existing in a void - without including money. That's why all the neoliberal models are bullshit; that's why both deficit hawks and doves (including Krugman) are wrong. Their models are missing private debt, they are missing money itself. That's why Keen pawned Krugman on their debate over the banks and the economy. And that's why fear merchants such as Peter Schiff are both comedic and tragic at the same time.

Bitcoin enthusiasts, just like believers in the Gold Standard, understand money as if it were some commodity which has spontaneously emerged as a unit of exchange – a little like cigarettes did in the POW camp ‘economy’ that R.A. Radford (1945) described so brilliantly. This is a gross misconception based on the unexamined (and dangerously false) faith that there is no substantial difference between Radford’s POW camp and a modern capitalist economy; that, like in that POW camp, output is independent of expectations and demand is always abundant enough to absorb the produced output. As for investment, it is assumed to be uni-directionally determined by savings which are, in turn, determined by the rate at which present consumption is deferred to the future. None of that holds in an economy involving not only exchange but also production and investment. It is these two activities, production and investment, that preclude the possibility of apolitical money. ~Yanis Varoufakis

Once again, you cannot measure wealth broadly in a myriad of different commodities or private IOUs. You cannot measure economic activity in banans, KFC discount cards, or your own personal IOU coupons. At the end of the day, you need a specific currency with which to pay your taxes, with which to do your shopping, with which to make your bankpayment.

The correct size of the fiscal deficit is that which coincides with full employment and price stability. Sometimes, the private sector (for various reasons) wants to save more or less. Look at the period of the Clinton surpluses - what did that trigger? A recession. The rest of the world was running a surplus against the US. The US gov was running a surplus as well. That left the domestic private sector to shoulder the corresponding deficit. Once you understand that you cannot extrapolate microeconomic principles to the macroeconomic domain, you'll understand why Fiscal deficits MATTER. You cannot solve a macroeconomic problem with a microeconomic solution, nor vice-versa.
The response of the fiscal deficit is largely organic, as it were, in the sense that it reacts according to the private economy. When there's a boom, the deifict shrinks because more money comes in via tax-revenue and less people claim unemployment benefits. The opposite happens in a downward cycle - it's the system trying to correct itself via the automatic stabilizers. Of course, when you have criminal dumb-ass politicians deciding to impose austerity measures during the downward cycle, things get worse tenfold. The private sector cannot deleverage if someone else isn't running the according deficit. That can either be the government, or the foreign sector by running big enough commercial deficits against the country in question.
Alas, the US elites are content to keep the country as a net exporter of aggregate demand; things might change in the future, of course. Alas, the US is a net importer of wealth - from a logical standpoint - this is awesome. Because true wealth is that which you produce domestically + what the rest of the world sends you - what you send to the rest of the world. The US is an empire, in my opinion, and that's why it can maintain such a status quo.
The world is not a fairy tale, it's not just, on the contrary, it's rather cruel/savage pretending to be civilized. The past was no different in this aspect. So all those people saying "back in the good old days..." What good old days? The Axial Age? The Feudal Age? The Colonialist Age? When there were no antibiotics? When there was slavery? When only the landed elites voted? When your deposits got evaporated in every bankrun because there was no FDIC? When there was no social safety net if you got laid off? When you didn't have television, the internet, the cell-phone, the computer? When women were treated as shit and masturbation was called and treated as a demented illness?
No, thank you. I quite like the present, with all the shit that's in it.

PS: Yes, a too big an increase in the minimum wage may increase the unemployment figures - it depends on context. If households want to save more than they consume, (they are in a deleveraging phase); then that increase in wage cost for the employer will not be off-set by an increase in sales. At the heart of it, what is a recession? Well, that happens when a lot of people want to spend less. Less consumption means less sales, less sales means less production, less production means fewer jobs. In such a time, the automatic stabilizers kick in. And over time, the system corrects itself, provided some dumb-ass politician, like Ron Paul, or his ilk - doesn't make congress pass austerity measures.
When you hear a politician or so-called analyst telling people "we must cut the government deficit", always remember that the guy in question is missing the other side of the balance sheet. In other words, what he's actually stating, "we need to cut the surplus of the private sector". Why would you (a firm or household) want this?