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Elias Isquith

Elias Isquith is a freelance journalist and blogger. He considers Bob Dylan and Walter Sobchak to be the two great Jewish thinkers of our time; he thinks Kafka was half-right when he said there was hope, "but not for us"; and he can be reached through the twitter via @eliasisquith or via email. The opinions he expresses on the blog and throughout the interwebs are exclusively his own.

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  1. “I spent about 20 minutes today going back-and-forth with the girlfriend as to what Geithner and the President could be talking about when they speak of restoring confidence to the markets.”

    Probably the same thing Joe Morgan means when he calls Derek Jeter the best player in baseball for his intangibles: http://www.slate.com/id/2298086/?wpisrc=newsletter_slatestReport

    • Avatar Koz in reply to Christopher Carr says:

      Like I mentioned below, this is a good bit more concrete than you’re supposing.

      We can have a regulatory or governance burden that’s greater than the money the government takes out of the private sector, but we can’t have less. This is simple arithmetic. Whatever money is committed to government expenditures is not available to build capital or pay dividends.

      Jobs are created by small business in the private sector (or new business, to be a little more precise). Not the government, though government jobs may be valuable for other reasons. Though, all government employees are a net drain on the public fisc. All private sector employees are net contributors.

      Furthermore, whoever has a working business model is probably making decent money with it.

      There is plenty of opportunity (and plenty of capital available) to create employment and growth, except that revenue streams in the future are being severely discounted because of poor governance.Report

      • Avatar RTod in reply to Koz says:

        “Whatever money is committed to government expenditures is not available to build capital or pay dividends…. Though, all government employees are a net drain on the public fisc. All private sector employees are net contributors.”

        Can someone who can translate Econ into music major explain why this is true? I hear this all the time, but it’s very counter-intuititve. Why is spending on sticks & bricks, equipment and payroll that is done by McDonald’s putting money *into* the economy, but spending on sticks & bricks, equipment and payroll by the city of Seattle *removing* money and capital from the economy? Why isn’t all the money still seen as circulating, creating jobs, purchasing goods & services, etc., regardless of what kind of entity is doing the spending? I get the possibility that the government might not spend as wisely or efficiently, but this notion that the wealth and capital disappears as it is spent by government is a nut I can’t crack.

        I hear this enough that I know there has to be an economic principle that makes it so (or at least a theory that says postulates that it is so), but I am simple enough to not be able to see what it is.

        Econ guys? A little help here?Report

        • Avatar Koz in reply to RTod says:

          “Can someone who can translate Econ into music major explain why this is true? I hear this all the time, but it’s very counter-intuititve. Why is spending on sticks & bricks, equipment and payroll that is done by McDonald’s putting money *into* the economy, but spending on sticks & bricks, equipment and payroll by the city of Seattle *removing* money and capital from the economy? “

          That’s a separate argument. My point was narrower, and easier (I hope) to understand.

          Public sector jobs drain the public fisc. Ie, the government pays you. Private sector jobs support the public fisc. Ie, you pay the government.

          That holds pretty much all the time, leaving aside overlapping jurisdictions and netting out crossflows, etc. Therefore, _in a situation where the stability of the public fisc is an issue_, it gives a pretty good idea of what reform should look like.Report

          • Avatar RTod in reply to Koz says:

            I’m not getting it – I don’t think, anyway. I mean I know this is true: “Public sector jobs drain the public fisc. Ie, the government pays you. Private sector jobs support the public fisc. Ie, you pay the government.” But I can replace the word ‘government’ with anyone I can buy or sell with, and it remains true.

            (e.g.: McDonalds wants a new building, it pays the construction worker. The construction worker wants a hamburger, it pays McDonalds.)

            So I get why what you’re saying is true… but I don’t get why that is inherently bad, or how that eliminates capital and cash from the economy as a whole.

            Again, I am neither challenging nor being purposefully obtuse. I really, really don’t understand why this is so.Report

            • Avatar Koz in reply to RTod says:

              “So I get why what you’re saying is true… but I don’t get why that is inherently bad, or how that eliminates capital and cash from the economy as a whole.”

              It’s not necessarily bad. You already got the first point, ie, contributing to the public treasury vs. taking from it.

              From here, the point being is that the stability of the public treasury is the problem. Compensation of government employees are not the only thing contributing to that but it’s one thing.Report

            • Avatar Jazgar in reply to RTod says:

              I’m with you on this. I frankly think there is a binary mentality that simply isn’t supported by fact as far as I can see. Aside from infra-structure, aren’t public jobs still just jobs? I don’t see why a job that is paid for by tax payers as something that we, as a society, think is desirable, in any way contributes less to society than a private sector one.

              A teacher, policeman, safety inspector contributes as much if not more to the value of society than, say, a used car salesman, accountant, or burger flipper.

              I find myself thinking that the whole “private=good, public=bad” mentality to be either seriously, fatally flawed, or just plain not supported by fact.Report

            • Avatar Simon K in reply to RTod says:

              Koz isn’t putting this very well, so let me try to put it as best I can, even though I don’t agree with it. Because even though most people who believe it don’t understand it, there is an argument.

              Ignore money for the moment. Actually ignore finance completely and focus on real resources. We work in order to consume, right? At its simplest, a farmer plants and harvests food to eat it. More generally, we work to get goods and services we need. We can improve the future returns on our work by doing work that has no immediate return. This is investment. For example, a farmer can build a plow. Or sell some crops to buy a horse to pull it.

              Its not very efficient if we all work for ourselves – we’re good at different things. So we invest in one another’s enterprises. I might be a blacksmith and you might be a farmer. If I make a plow for you, you’re more efficient and make more food for both of us. Okay, so now we need money to avoid the complexity of barter, and we need debt so we can record that I gave you the plow so you owe me food.

              Now think about government. Governments get money from taxes. But strip the money out of this, whats happening at the level of real resources? The government is confiscating resources that could otherwise have been elsewhere. Its just doing so by levying taxes instead of actually marching in soldiers and taking stuff, but its really no different. Now think about government debt. What’s really happening? The government is getting to use the resources now, but postponing the actual confiscation into the future, in the meantime they’re essentially merely lent to it. Accumulations of government debt therefore mean there will be more taxation (or alternatively inflation) in the future. Supposedly the expectation of future taxation retards present investment.Report

              • Avatar Elias Isquith in reply to Simon K says:

                The government is getting to use the resources now, but postponing the actual confiscation into the future, in the meantime they’re essentially merely lent to it. Accumulations of government debt therefore mean there will be more taxation (or alternatively inflation) in the future. Supposedly the expectation of future taxation retards present investment.

                Ahhh. Thanks for this. So the logic would be that a Grand Bargain — without significant tax increases — would assuage those worried of massive future taxation to cover the deficit that no such actions are impending; in turn, they will begin re-investing into the economy and, consequently, bringing the unemployment rate down. Do I have this right?

                And does the question next become: is there actually any proof that this is what’s going on?Report

              • Avatar Koz in reply to Elias Isquith says:

                When you looking at what’s happened and what’s happening in recent economic history across the world, I think the evidence is completely overwhelming. Forensically speaking, I think you’re better off trying to argue that smoking doesn’t cause cancer.

                The USA Today link is as good a place to start as any.Report

              • Avatar Elias Isquith in reply to Koz says:

                No, not evidence that this dynamic exists. Evidence that this dynamic is occurring today. Simon already requested that from you, but you either missed it or chose not to answer.Report

              • Avatar Koz in reply to Elias Isquith says:

                Elias, it’s a little bit complicated but not horrifically so. Here’s the key to your question: every piece of evidence tells the same story, but no piece of evidence tells the whole story.

                That’s why the USA Today piece is so important. The exact numbers are guesses of course, but overall magnitude is pretty well known (and fwiw, $60T is on the low end from what I’ve seen).

                From there, it’s pretty easy arithmetic to see that represents several years of GDP.

                From there, there’s a lotta lotta history of public debt that says that public debt representing several years of GDP is never repaid. Either it’s repudiated or inflated. Look it up.

                There’s other parts to this as well but that’s a good start.Report

              • Avatar Simon K in reply to Elias Isquith says:

                Koz – The evidence does not in fact support your position. Relative investment returns do not show crowding out of private investment. They show massive private savings seeking anything they can find, and settling on treasuries because that’s the only thing in sufficient supply.

                Its clever but spurious to say public debt of any size is never repaid. Of course it isn’t. Why would it be?Report

              • Avatar Koz in reply to Elias Isquith says:

                I’m not talking about “crowding out,” see below. (If crowding out does happen, that’s an additional problem on top of this.)

                I’m talking about the black hole of excessive public debt. Nobody knows how much the economy can handle, but there’s an event horizon somewhere, and five years of GDP is well, well past it. Therefore we have to stop the trajectory of government expenditures before these “obligations” become actual debts.Report

              • Avatar Simon K in reply to Elias Isquith says:

                Doesn’t matter what you call it Koz. There’s no evidence of it happening. Private sector bond prices are high. Equity prices are high. Small cap equity prices are high. Even commodity prices are high. Its inexplicable on the basis of the theory you’ve attached yourself to.Report

              • Avatar Koz in reply to Elias Isquith says:

                No Simon, small and midcap prices are not high. That’s why multiples are compressed, not expanded.

                But this is the wrong focus, for two reasons. 1. Whatever is trading on the exchanges launched its business model some time ago and is getting income flows now. Whoever is going to hire new employees is for the most part starting a new business model and intends to generate income flows later.

                2. The liquidity of the equity markets creates the possibility of a greater fool strategy. A much better example is housing. Part of the issue there is that we are fundamentally revaluing that asset downward, but even besides that there is the issue that buying real estate fundamentally commits capital that can’t be withdrawn without significant time lag and transaction costs. Exchange traded equities don’t have this problem.

                3. There’s another thing too. The dollar, for all its problems, is a relatively strong currency at least for the moment. And because capital has to be denominated in a currency somewhere, relative strength is what’s important. This is a key point to for understanding some timing issues. If the US can establish sound currency and regulatory environment, all the world’s investment will come here. If it happens somewhere else, that’s where it will go. The entire world’s capital base is very nervous and looking for a home because there are no good ones at the moment.

                That’s why the ability of the US governance to cut spending now is so critical. We won’t be in business cycle expansion be the beneficiary of capital inflows forever. Therefore we need to create a high growth low unemployment regime while this window of opportunity is still open.Report

              • Avatar Simon K in reply to Elias Isquith says:

                1. No. Here’s the Russell small cap index.

                http://moneycentral.msn.com/investor/charts/chartdl.aspx?symbol=%24rut.x&CP=0&PT=11

                All equities are traded on expected future incomes, in many cases very far out in the future.

                2. You’re seriously arguing that massively illiquid markets in a state of unwind provide better information than liquid ones? Again, you’re resorting to dismissing arguments in areas where we have good statistics which don’t support you, and choosing to tell stories about areas where no-one has the requisite information to know what the underlying real phenomena are.

                3. This is a different argument, and I only disagree with you about the timing. Now isn’t the time to reduce the supply of safe assets. If we do so, we’ll simply increase the real interest rate in the US domestic economy, which will retard growth. Once unemployment is falling properly, that’s the time to get the budget deficit under control. Ironically I’d have been with you that this year would have been a good time to do it, except for the various real shocks and the ongoing Euro crisis. If Greece would just get on with defaulting already, we could find agreement here.Report

              • Avatar Koz in reply to Elias Isquith says:

                “You’re seriously arguing that massively illiquid markets in a state of unwind provide better information than liquid ones?”

                Absolutely. In fact that’s most of the point. Independent of considerations of value, investors necessarily have a much higher level of commitment to illiquid investments than liquid investments. That’s pretty much the definition of liquidity.

                What we’re seeing now is very high demand for value and liquidity of American investments because no one wants to be left holding the bag of a dollar denominated asset they can’t get rid of.Report

              • Avatar Koz in reply to Elias Isquith says:

                “All equities are traded on expected future incomes, in many cases very far out in the future.”

                Well, of course. But,

                1. Current equities are harvesting the income streams of prior investments. Ie, the decision to commit capital is an event of the past and is not going to be undone. Stock prices are a secondary market and the information that it gives about capital commitments is indirect at best.

                2. Current equities are being valued by income streams far into the future, but that’s being balanced by their income streams now. Future equities have no current income streams, and for a while after startup they’ll be running in the red which pushes their (bond-style) duration even further into the future.Report

              • Avatar Koz in reply to Elias Isquith says:

                I should thank Simon for his explanation. If it helps, maybe North will read it. I have been trying to explain this to him for probably the better part of six months.

                There is one ancillary point worth making, and it gets back to what Jaybird wrote. The burden represented by government on the hopes of the private sector can never be less than the money the government spends, for the matter of simple accounting we’ve just gone over.

                But, it can be (and almost always is) more, because of the regulatory climate or culture. For example, the controversy between Boeing and the NLRB is a horrific omen. The Right has complained loudly about this but even so have still understated the case, in that for the sake of employment in America, it doesn’t even matter if the union and the NLRB is right.

                Whatever happens, Boeing and anybody who will be in the position Boeing is now, knows that they are going to drain money on accountants and lawyers and lobbyists and featherbedding union poohbahs in awful economic distortions which do nothing for the investors or the even the hourly workers. In spite of this, the government raise any revenue with this “policy” or even spend very much money enforcing it.

                Therefore, the economic burden represented by government is at least as much as the government spends, but in practice is much more.Report

              • Avatar North in reply to Koz says:

                I understand it Koz, I just don’t agree.Report

              • Avatar Simon K in reply to Elias Isquith says:

                That’s the idea, yes. Is there any evidence this is what is happening? In my view, no. Its there if you really want to see it, but you have to assume the financial markets are massively and systematically wrong.

                What would you expect in this scenario? You’d expect poor private sector investment and high unemployment. So, okay, we have that. But the rest of the picture is contrary. We’d expect private sector bond yields to be higher than normal relative to government. We don’t see that. We’d expect longer term bonds to pay much more than short term ones to compensate for future inflation. We don’t see that either. We’d expect the stock market to be depressed, especially small caps. We don’t see that.

                So, it doesn’t look great for the idea that government debt is crowing out private investment. All this says is that the markets don’t expect a massive surge in inflation or taxation. They’re usually wrong, it must be said. But they’re usually pretty good at summarising present information. Better than politicians, anyway.Report

              • Avatar Koz in reply to Simon K says:

                Yeah, that’s a great explanation of the big point.

                The difference between a public sector worker and a private sector worker isn’t exactly the same thing, but is related to it.Report

              • Avatar Jazgar in reply to Simon K says:

                You say government is “confiscating resources that could otherwise have been elsewhere.” I might be able to go along with that if government weren’t providing goods & services that generally & historically speaking weren’t unique to government and generally not provided by private sources (ex: police – I’m pretty sure I would not care for a privatized police force in my town, or private, for profit, food inspectors). Also, if government weren’t hiring contractors to carry out many of the desired functions – think defense, construction, etc.

                As for debt, simple, we’ve been cutting taxes for over a decade now without requiring that we first get broad agreement to actually cut a given program. This should be the flip side of Pay-Go, but sadly isn’t. When spending remans constant, but revenue drops what is the result? Yeah, debt.

                Yes, this will result in higher taxes in the future. We have, after all simply been doing exactly what politicians have been saying for decades we shouldn’t: shift the burden to our children and our children’s etc. etc.

                I sincerely doubt that after the shock people have been put through, and now that they’ve seen how they are affected directly by spending cuts, that many are going to be even more resistant to spending cuts in the future.

                Anyway, given how often government functions in areas where private enterprise often does not care to, or in many cases functions are bid out to contractors, I think the “government confiscates resources” argument is simplistic to the point of falling on its face.Report

              • Avatar Simon K in reply to Jazgar says:

                Yes, government provides real services. This is also a good point. Since the goods and services the government provides are not entirely wasted, they are to some extent either consumed or add to national savings, but don’t appear “on the books” of the private economy. When the government issues debt to pay for investment, then pays it back with taxes receipts enhanced by that investment, it is indeed acting very like a private actor. One of the muddying factors in all this is that its very hard to track the state side of the capital balance sheet.Report

              • Avatar Pat Cahalan in reply to Simon K says:

                > Now think about government. Governments
                > get money from taxes. But strip the money
                > out of this, whats happening at the level of
                > real resources? The government is
                > confiscating resources that could otherwise
                > have been elsewhere.

                This presupposes a whole lot of stuff that’s true in certain model theories and debatable at best in the Real World.

                First of all, you can’t separate out the money and talk about real resources. Because money is a construct, and a proxy for real resources, and it’s a bad proxy at that.

                Capital is a thing, itself, sure. But there is almost no direct link between the amount of capital we have and the amount of real resources we have… and there hasn’t really been, ever, not even when we were on the gold standard. That reduced the layer of abstraction between money and resources, but only by a real proxy instead of a constructed one.

                Secondly, it presupposes that the government, which is confiscating this proxy instead of actual real resources, is taking some of that proxy that would otherwise be used as *liquid* capital… when, right now, our biggest problem isn’t that we don’t have pools of capital, it’s that they aren’t doing anything.

                I’m not a Keynesian, mind you, I’m doubtful of the claim that the government is going to break a logjam. Keynes took what I think is a real observation (private sector decisions sometimes lead to inefficient macroeconomic outcomes) and jumped to the conclusion that because this is true, there must be a solution. Well, if you assume a solution exists, you’re going to be much more likely to find one than if you assume that complex systems just occasionally get wedged and they have to get through it on their own, really.

                The government is obviously an actor in this macroeconomic dance, but the government is hardly immune to exactly what the private sector is vulnerable to: macroeconomic inefficiency. It does inject different *types* of macroeconomic inefficiencies (and efficiencies, for that matter), but I’m not convinced that government spending policies can be traced to success in withstanding recessions with any rigor.

                It’s not dumb luck, but it’s probably close enough to call it that.Report

              • Avatar Simon K in reply to Pat Cahalan says:

                You’ll get no disagreement from me, Pat. I don’t agree with the theory I set out above at all and you’ve hit on the main reason why – financial markets, including the market for money, are only an imperfect mirror of the real economy and at times they actually encourage errors of coordination. Those errors build up and can create cataclysmic shocks. When those shocks occur, we actually need large supplies of safe assets (cash and government debt) to cushion the blow. There are interesting computational analogies here. Maybe I’ll write more tomorrow.Report

        • Avatar Barry in reply to RTod says:

          It’s BS, particularly in the current situation. He’s repeating the ‘crowding out’ theory.Report

  2. Avatar Jaybird says:

    most conventional criteria, the market appears to be rather confident that the United States is not at risk of imminent financial collapse

    I have dated people where it could be said that we were both confident that we were not at risk of imminent breaking up.

    This does not mean that she and I went to buy rings.

    I bought dinner, sure.

    Just because I was confident enough to purchase dinner does *NOT* mean that I was confident in the relationship. Not confident enough to *INVEST* in it, anyway.

    There is uncertainty. We don’t know what’s going to happen in 2012, we don’t know if the Republicans will keep the House, we don’t know if the Democrats will keep the Senate.

    We don’t know what Unemployment will be.

    We don’t know whether Obama will be President in February.

    The lay of the land depends on answers to these questions. “What will the regulatory framework look like?” is one of those questions that, when answered in November 2012, will reduce uncertainty to the point where folks will have the answers they need to start investing in the way that will best serve themselves (or their best interpretation of such, anyway).

    The fact that they are confident that the country is still going to be here is enough to get them to not empty their bank accounts and purchase guns, bullets, shells, and batteries.

    It ain’t enough to jump head first into the Stock Market again. (The stock market is likely to have a lot of downward pressure on it for the next few decades, I think… why get into it now?)Report

    • Avatar Koz in reply to Jaybird says:

      “This does not mean that she and I went to buy rings.

      I bought dinner, sure.

      Just because I was confident enough to purchase dinner does *NOT* mean that I was confident in the relationship. Not confident enough to *INVEST* in it, anyway.”

      That’s actually a pretty good answer.Report

  3. Avatar Simon K says:

    What does this have to do with the debt ceiling, though, Jay? If there’s one thing the market has expressed total confidence in, its the willingness of the US government to pay its debts. So much so it appears they’re only too happy to buy more of it. So why are we talking about borrowing less as if were some kind of Greek-style crisis? It makes no actual economic sense.Report

    • Avatar Koz in reply to Simon K says:

      It’s a matter of lowering the trajectory of government expenditures. The debt ceiling is the place where the GOP chose to fight. The GOP didn’t have to choose this particular hill to die on, you can go back and forth on that but. But it’s the fight we need to have somehow.Report

      • Avatar Simon K in reply to Koz says:

        Which is to say that this is a political maneuver on the GOPs fine. I see the strategy. I don’t think its wise, but there’s always the possibility than I’m wrong, and I can certainly see the political imperative for certain GOP constituencies. What I don’t understand is the willingness of the political center and left to talk about the national debt as if it were actually some kind of threat at a time when it manifestly is not.Report

        • Avatar Koz in reply to Simon K says:

          It absolutely is, in fact it’s the key threat in the economy now (outside of the somewhat artificial constraints of the debt ceiling).

          This is in large part _why_ we’re having this fight, especially why we’re having it now. The trajectory of government finance is the reason behind 10% unemployment and substandard growth.

          If there was a bipartisan consensus to reducing expenditures, we’d have a difficult but manageable problem. Where the libs and D’s want to pretend that the whole thing is small beer, that is an existential threat to the economy.

          Really, _there is no other reason_ for 10% unemployment except this.

          If we can reduce the trajectory of government expenditures, we have problems. But, we can handle problems. Without it, we just have despair.

          Right now, the key economic question is whether the Right and the Left can unify behind expenditure cuts at least to the point of being able to save civilization.Report

          • Avatar Simon K in reply to Koz says:

            This is in large part _why_ we’re having this fight, especially why we’re having it now. The trajectory of government finance is the reason behind 10% unemployment and substandard growth.

            Explain how.Report

            • Avatar Koz in reply to Simon K says:

              Because new business models (“small business”) are the driving force behind job creation. Government can “create” jobs in the sense of hiring people and writing paychecks but the tend to be small and short lived. What does create jobs in the sense of moving the unemployment rate is that a firm sees a profit opportunity that’s worth the downside risk of hiring somebody.

              Here’s the key point (or at least one of them): the income stream from the new business model, if it is successful, occurs in the future.

              Let’s repeat this for emphasis ‘cuz it’s so important. The income stream from the new business model, if it is successful, occurs in the future. And typically far into the future at that, like decades.

              Therefore, if income streams to be received far into the future are worthless because they are denominated in a worthless currency or because they are they are subject to oppressive taxation, the investor cannot afford to take the risk in the present.Report

              • Avatar Simon K in reply to Koz says:

                So you’re saying government debt crowds out private sector investment. Fine. If that were the case, we would see high private sector interest rates. Why do we not see this?Report

              • Avatar Koz in reply to Simon K says:

                No, “crowding out” is a different mechanism. There’s some evidence for that theory but not much, so the Team Blue economists are more or less right on that one.

                The “discounted income stream theory”, for lack of a better word, is more about equity finance rather than debt finance. Or to be precise, about what the fixed income community calls duration, ie the time in the future when the income flows come back.

                Actually, the most interesting things going are in the currency markets. Basically, it’s the nature of modern economies that large amounts of capital have to be denominated in a currency. They don’t have to be invested. Soon after the 2008 blowup, one wag wrote something like, “People quit carrying about return on capital and started caring about return of capital,” and for one sentence that’s as good an explanation of things as any.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > Soon after the 2008 blowup, one wag
                > wrote something like, “People quit
                > caring about return on capital and
                > started caring about return of capital,”
                > and for one sentence that’s as good
                > an explanation of things as any.

                Yeah, that fits.Report

              • Avatar Simon K in reply to Koz says:

                Doesn’t matter what you call it. There’s no evidence of it happening. Equity prices are high too, not just bonds. Its very hard to explain this if investors expect the government to snarf up all the resource they have a claim on before they can get them.Report

              • Avatar Koz in reply to Simon K says:

                Actually, equity multiples are compressed and have been for a while. And smaller the capitalization (ie, the more likely to contribute to job growth), the bigger the compression.

                To some extent, you’re looking at this from the wrong angle. Companies trading on the exchanges have already launched their business model. They’re committed to it, so they’re turning the crank as best as they can. It’s the business models that haven’t launched that are the immediate source of Demo unemployment.Report

              • Avatar Simon K in reply to Simon K says:

                “Multiples are compressed” means prices are high, which means more buyers/fewer sellers. Again, why would this be true if people were afraid of the government devaluing their claims? You’d expect the reverse.

                I note your decision to defend your claim on the basis of an area where there cannot possibly be any inconvenient facts, let alone actual statistics. I can only point out that because there cannot be any evidence about business models that haven’t launched, you don’t have any either, and are arguing purely based on your conviction that government spending by Democrats causes unemployment. What evidence we have says that this is not a significant effect at present.Report

              • Avatar Pat Cahalan in reply to Simon K says:

                @ Simon

                > Again, why would this be true if
                > people were afraid of the government
                > devaluing their claims? You’d expect
                > the reverse.

                That assumes that (a) people are rational and (b) they have something else obviously to do with their money.

                I’m pretty sure that neither is the case. Not that I agree with Koz’s conclusions, either, but I don’t know that this heavy lifting is done for this explanation, either.Report

              • Avatar Simon K in reply to Simon K says:

                @Pat – You’re quite right people have nothing else to do with their money. There are too few actual investment opportunities and too much money chasing them. That’s why we have low yields. Nonetheless, investors are not stupid. They’re avoiding Greek debt. Why are they not avoiding US debt?

                Which leads us to rationality. I won’t make any strong claims here – markets are frequently and dramatically wrong. However, people who want us to believe the market is wrong with regards to a specific price in a very liquid asset with a perfectly known premium and a very closely watched level of risk have an extremely high burden of proof. Markets tend to be wrong where there was an unappreciated relationship between prices (eg. between mortgage pricing and house prices in certain markets). Its hard to see how any such relationship can pertain to US debt.Report

              • Avatar Koz in reply to Simon K says:

                ““Multiples are compressed” means prices are high, which means more buyers/fewer sellers.”

                No, multiples are compressed doesn’t mean that at all. It means earnings are high and prices are about the same. The equity markets are in a state of schizophrenia between earnings and political risk. This is especially so in a regime of low interest rates. Assuming a constant equity premium this means that equity yields should be lower as well multiples should be higher. But they’re not.Report

              • Avatar Koz in reply to Simon K says:

                “They’re avoiding Greek debt. Why are they not avoiding US debt? “

                ‘Cuz the money has got to be denominated in some currency and we’re the tallest pygmy in the tribe. This has important time-frame consequences for ending the recession btw.Report

          • Avatar Pat Cahalan in reply to Koz says:

            > Really, _there is no other reason_ for 10%
            > unemployment except this.

            Er, how’s this?

            We’re already producing more than people are consuming. There’s tons of real numbers on this: American manufacturing output is well below capacity. Companies aren’t making more inventory, because people aren’t buying the stuff they already made.

            So there’s no inventory to be made, there’s no workers to be hired. There’s no workers to be hired, there’s nobody making any money to buy the stuff that could be made.

            I mean, at the heart, Koz, I agree with you that spending is batshit insane. You just seem to have this ironclad belief that if the spending is cut, the economy is going to recover. I see no reason to believe this is so. I don’t even see any reason to expect that a balanced budget is going to mean beans for the day-to-day working of the country. Too much long term debt is bad for a company, but long term debt itself isn’t bad… and a government is different from a company because they can cheat and print money.

            Practically speaking, there’s really only a couple of ways to get companies to spend capital. One is to lower taxes on certain expenditures, particularly capital expenditures, to encourage them to consume more themselves. The base tax rate aside, the effective tax rate on corporations is still pretty low, but okay, we could zero that sucker out and that’s still going to raise profits without really encouraging real spending, especially given that there’s no real need to upgrade a factory when it’s sitting idle as it is. Two is to cut the interest rate, so that long term investment is actually a net negative when you take into account inflation. I don’t think we can cut the interest rate at this point. Three is to plant a sign in the road in the near but not immediate future that says, “Taxes go *way* up right here” so that companies buy stuff before the tax credit goes away or the tax hike goes into effect, but (justice issues aside) that’s more of a problem than its worth, usually. Four is to encourage investors to buy the company and liquidize some of that held capital, but that’s also tricky and my God the unholy hell that could raise if it was encouraged by the government would be nuts. Five is to throw a war (or better yet get someone else to throw one).Report

            • Avatar Koz in reply to Pat Cahalan says:

              “You just seem to have this ironclad belief that if the spending is cut, the economy is going to recover. I see no reason to believe this is so.”

              Hmmm, let’s try this: if we can cut the trajectory of government expenditures, we have big problems in the economy. That’s a good thing. We might be able to solve problems and we can mitigate the rest. Without cutting spending, we’ve got no shot at nothing.

              The rubber meets the road here wrt unemployment. The evolution of skillsets and the changing demands to be competitive in the workforce create issues that there are no real solutions for. But, that’s miles away from 10% unemployment (or higher). From what we’ve seen in America since 1980, unemployment at this scale is like people falling off the edge of the earth.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > From what we’ve seen in America since 1980,
                > unemployment at this scale is like people
                > falling off the edge of the earth.

                Seems to me it’s more like a long overdue correction. We’ve been in an employment bubble.

                Our economic engine since 1980 has been increasingly dependent on consumption, and yet our production capabilities have been decreasingly dependent upon our own labor force.

                In a handwaving nutshell – more people are employed “adding value” to things produced elsewhere (either by processing it, selling it, shipping it, unpacking it, or whatever… or designing services that allow people to do more things with the stuff they bought) than they are in actually making stuff here.

                That’s fine as long as people are still buying enough stuff to warrant all that value-adding. But when the credit market (which has been crazy since before 1988) actually corrects itself to something resembling a sane risk model, and people’s buying power dries up, the economic shock goes back down the supply chain.

                And when people actually *do* start buying stuff again, the economic lift starts at the beginning of the supply chain and very slowly moves its way back up.

                Right now, people are barely buying enough stuff to warrant putting things on shelves. If you take out the crazy iPhone people, most consumers right now are not in the market for new *anything*. They’ve got their game console and their relatively new HDTV and their relatively new Blu-Ray player and what the hell do they need to buy? A bunch of them can’t afford their house any more and they’re downsizing their entire lives, selling off stuff on eBay and moving into smaller apartments. Not only do they not need to buy anything right now, they’re actually adjusting their lifestyles to get by with less crap (which, in and of itself, might be a good thing).

                If they don’t need to buy stuff, we can’t employ people unpacking the boxes, and baling up the cardboard, and shipping the cardboard back to the Port of Long Beach, and loading it back on a shipping container to go back to Taiwan.

                The “provide labor to the industry of selling things” employment market is shrunk, Koz. Where are those people going to get jobs, now? They can’t retrain to be industrial workers: we have a glut of those already. They can’t go back to school and get an advanced degree: school costs too much and advanced degree holders are already overrepresented in their own labor markets, too.

                Well, they can (and are) doing those things, but they’re not getting any job security out if it, either.Report

              • Avatar Koz in reply to Pat Cahalan says:

                “Seems to me it’s more like a long overdue correction. We’ve been in an employment bubble.”

                I disagree. Bubbles don’t last 25 years in the late 20th/21st century.Report

              • Avatar Pat Cahalan in reply to Koz says:

                We’ve never had a value-add-based economy until the last 25 years, either.

                It’s new. And newness is prone to bubbles, no?Report

              • Avatar Koz in reply to Pat Cahalan says:

                Overall, you touch on a lot of important points. The things you’re writing about are the sort of things that I mentioned when I said that once we show that we can restore fiscal balance to America, we’ll have problems.

                The problems are real, and we shouldn’t minimize them. But if we have hope we can overcome the problems or at least adapt to them. With respect to employment in general, there are at least two things going for us. Businesses, large and small, are making money. And we have an underemployed workforce who’s looking to get back to work.

                There’s definitely reason to think that, if we can get rid of the barriers in the way, that people will find each other and take advantage of some opportunities.Report

              • Avatar Koz in reply to Pat Cahalan says:

                “In a handwaving nutshell – more people are employed “adding value” to things produced elsewhere (either by processing it, selling it, shipping it, unpacking it, or whatever… or designing services that allow people to do more things with the stuff they bought) than they are in actually making stuff here.”

                I don’t necessarily know what you’re trying to conclude from this, but the key thing we’ve found in the last say, thirty years is that the value-added services are quite real, much more real in some ways that the underlying manufactured (or mined) good.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > the key thing we’ve found in the last
                > say, thirty years is that the value-added
                > services are quite real, much more
                > real in some ways that the underlying
                > manufactured (or mined) good.

                Sure, they’re real.

                But value-added services are just that, Koz. They’re value-added. If you are in a perceived state of economic distress (real or no), do you care about value-added, or do you care about the basic thing?

                If you can’t afford your mortgage, do you care about a new television that can stream all the porn you ever wanted from the Internet? No. Unless you decide that your house is no longer a basic thing. If you re-assess “house=basic necessity” to “place to live= basic necessity”, then all of a sudden you dump your house and walk away (or take an equity loss) and rent or move.

                If Starbucks is $5/cup and coffee you brew in your office is $20/50 gallons, you stop going to Starbucks. The value-add of the Starbucks experience, right down to the free wifi, is no longer a value-add… because you don’t value the basic good underneath the value-add.

                Yes, these things are real and great and all. But all our measurements of value-added economies come from *inside the economy that currently accepts value-added stuff as part of a good’s NPV*.

                That’s like saying, “Wow, 10 foot waves are zawzome for surfers! We have a month of regular 10 foot waves, everybody thinks this is the greatest thing since free love!” leads you to “we must preserve 10 foot waves!” when they stop coming.

                They stop coming, because the oceanic engine that generates them isn’t in the cycle to produce that. If you have a business that depended upon all the surfers showing up at your beach because there were regular 10 foot waves there, you’re out of business until the waves come back.

                Right now, we’re out of business until the waves come back. And since the economic pressure is always on being careful and risk-adverse during recessions, the waves are slow to come back.

                That’s the downside of the value-add economy. It is going to be goddamn slow to recover from economic shocks. If you ignore that cost when deciding that value-added economies are awesome, you’re in for a serious wake-up call when those shocks occur.

                And we’re all waking up right now, and looking around, and nobody can figure out what to invest in because our economy finally doesn’t look like what it’s been disguised as since the Soviet Union fell.Report

              • Avatar Koz in reply to Pat Cahalan says:

                “And we’re all waking up right now, and looking around, and nobody can figure out what to invest in because our economy finally doesn’t look like what it’s been disguised as since the Soviet Union fell.”

                This is too pessimistic for exactly the reasons Hayek wrote some years ago. If we have a transparent economy, we can adapt to periods of economic crisis or dislocation because the information we get from the market is good. If we live in a Communist or Demo policy regime this doesn’t work. There’s too much distortion over the economic signal.Report

              • > If we have a transparent economy,
                > we can adapt

                That “If” does a lot of lifting, there.

                Quiz: How much is a CDS worth? How much is my house worth? How much should a 15 year veteran sysadmin pull down in a year in today’s market?

                Do you have answers for any of those questions or the million others just like it? So much for a transparent economy…Report

              • Avatar Koz in reply to Pat Cahalan says:

                “Do you have answers for any of those questions or the million others just like it?”

                For most of them, no. The market supplies the answers. The issue is whether the market is allowed to propagate useful information.

                “So much for a transparent economy…”

                Really? Except for Demo (and GOP) policy mistakes the market is more transparent than you think. Among other things, the transition to a value-added service-based economy occurred because there was real value there. Unlike some of the more conspiratorial Team Blue players, it wasn’t because The Man wanted to keep wages down.Report

              • > For most of them, no. The market
                > supplies the answers.

                Koz, if the answers are there, and the market supplies them, how come we don’t know what they are?

                Okay, let me ask another question: were credit default swaps ever worth anything? Or were they always garbage investments?

                > The issue is whether the market
                > is allowed to propagate useful
                > information.

                I don’t know how to parse that answer. You’re saying that all other things being equal, the market will always signal the true value of something? Or are you saying that without any artificial barriers, the market will always signal the true value of something? Or something else entirely?

                > Really? Except for Demo (and
                > GOP) policy mistakes the market
                > is more transparent than you think.

                Then how come you don’t know the answers to the questions posed? All value ambiguity comes from government interference?

                > Among other things, the transition
                > to a value-added service-based
                > economy occurred because there
                > was real value there.

                Oh, yes, absolutely. Lest I be unclear: I’m not suggesting that we ought to go back to an agrarian economy or even an industrialized economy.

                I’m just saying that the complex system consequences of a value-add economy are as real as the value that is added in a value-added economy. We’re going through the consequences of that reality now. Indeed, for certain sectors of the economy we’re already going through the transition from a value-added (service) based economy to another layer of abstraction and moving on to a knowledge-based economy.

                But that’s yet another layer of abstraction where we’ve distanced our wages from real goods. When the economy gets in trouble, the wages that are most distanced from real goods are going to be the ones first depressed, and longest to recover.

                So if this is the game you want to play, in a globalized economy, when times are good they are going to be very very good. And when times are bad you’re going to see 10-16% unemployment that takes years to recover.Report

              • Avatar Koz in reply to Koz says:

                “But value-added services are just that, Koz. They’re value-added. If you are in a perceived state of economic distress (real or no), do you care about value-added, or do you care about the basic thing?”

                Very often the value-added. Americans are learning to adapt their perceptions of size, quantity, etc. (It’s funny responding to you on the one hand and Simon and Elias on the other ‘cuz I’m actually positioned between you even if it hasn’t been appreciated yet).

                If it costs a little more to have a baby-sitter with a 3.5 GPA in her first year at New Mexico State vs one that has a heroin habit, how does that compare to stainless steel appliances in the kitchen? Frankly, the value-added looks like a relative bargain to me.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > If it costs a little more to have a
                > baby-sitter with a 3.5 GPA in her
                > first year at New Mexico State
                > vs one that has a heroin habit,
                > how does that compare to
                > stainless steel appliances in
                > the kitchen?

                Er, you drop the babysitter that you’re paying above the table while filing all her support, and you turn around and pick up that Guatemalan nanny that your friends highly recommend who charges 3/4 as much and you don’t have to pay taxes on ’em.

                And you keep the stove you’ve got and decide you don’t really need a Viking after all.

                Anecdotally, this is what’s happening among people I know. And the CPI, last time I checked, bolstered that interpretation as being generalizable.Report

              • Avatar Simon K in reply to Koz says:

                (It’s funny responding to you on the one hand and Simon and Elias on the other ‘cuz I’m actually positioned between you even if it hasn’t been appreciated yet).

                In what way? To my eyes, Pat is describing a near-depression, which is in fact what we are living through. As I try to explain in my ridiculously long comment below, this is what happens after a financial crisis, especially if the Fed can’t or won’t respond aggressively, which is why I don’t think we need to conjecture any other explanation.

                Where I may not agree with Pat (its not clear) is in the assessment of the last 15-20 years. There is the idea going around that in some sense the Great Recession/Little Depression is in some sense a harsh reality we had coming to us, and that the Great Moderation was in some way a fraud. I don’t believe this can be supported. While there was undoubtedly some consumption funded by assets that turned out to be bad, the primary losses from this are trivially tiny compared with the knock on effects. The vast majority of the production and consumption during that period was sustainable (and in fact most of it is still going on – we shouldn’t get this out of proportion), the problem its caught up in chains of debt relations in which some of the assets are bad. We’re still untangling the consequences of that. Hayek (the later, non-deflationist Hayek) recognised this effect and called it ‘secondary deflation’ and echoed the later monetarists in calling for it to be combatted through the money supply.Report

              • Avatar Koz in reply to Koz says:

                “In what way? To my eyes, Pat is describing a near-depression, which is in fact what we are living through.”

                Because what Pat is talking about are fundamental economic issues or secular (in the economic sense). What you are talking about are the aftereffects of a single exogenous shock. What I am talking about are also fundamental issues, but whereas Pat is dwelling on the problems I am dwelling on the solution.

                Let’s pretend for a moment that there were no issues about a liquidity trap. Then, according to Pat (and me to some extent) we would still have to deal with a mismatched labor force. According to both of us, we would still have to deal with runaway government expenditures. My hope is in the answer of production and the quasi-spiritual properties underlying it. Ie, through mutual engagement and presence, we can create wealth, we can create value. From here, we can hope that the value we create is enough to pay off our problems. But, any economic policy that’s built on a foundation of extortion destroys this hope.

                Among other things, we should see that debt limit crisis has exposed the extent of bitterness and distrust between Team Red and Team Blue.

                In any case, we need to be able to make conservative (for lack of a better word) goals for economic policy. The status of the United States as a first world economic nation is in real jeopardy right now. Therefore let’s engineer our policy to take the danger of failure at level off the table. That’s where this debt limit deal comes in.

                In general my beef with cute macro tricks is that they’re way oversold. For example you write below that the solution is x, y or whatever. It’s important to understand the context of what we’re trying to solve. If the problem in our economy is a liquidity trap, then fine. But, we have other problems in the economy as well that Pat and I have been going back and forth on and the macro tricks don’t help those at all. In fact there’s a very decent chance they exacerbate those problems.Report

              • Avatar Simon K in reply to Koz says:

                This is the error, though. What Pat thinks are fundamental issues are after-effects of the financial crisis. They don’t look as if they are. They never do. It looks as if we’re all just less wealthy and made a whole bunch of bad decisions. But we’re the same people, we can have the same particular production relations as we did before, minus a little bit for asset misallocation driven by real estate. Where’s the fundamental problem?

                The real problem is nominal. The financial crisis was not exogenous. It wasn’t triggered by the financial doom fairy. It came about because of an accumulation of coordination errors worsened by the Fed when it raised rates in mid-2008 during a downturn. The damage is largely already done, so I don’t know if there are any “cute macro tricks” that can fix it. I’m not a hydraulic macro guy. Certainly doing precisely the wrong thing will not help, although it may also not hurt that much if Greece doesn’t default.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > Where’s the fundamental problem?

                Simon, when I see a three decade cycle of high-volume-holder-liquidity-driven booms followed by busts, what I see is people with lots of money (or controlling lots of money) manufacturing profit without attached wealth creation. Not maliciously, just because that’s their job.

                And doing it over, and over, and over again, just moving the pile of money from one set of investments that are separated from real resources by multiple layers of abstraction to another.

                This doesn’t actually have much to do with our regulatory structure, it’s “bubble whack-a-mole”. If G-S hadn’t been repealed, in the wake of the tech bust, that large balloon of wealth would *still* have to have gone *somewhere*. And you would have had a balloon there, too.

                I’m not an economist. I’m an ex-mathematician who understands a smattering of economics and game theory and has worked with complex systems for a while. I see this as a complex systems problem, not an economics problem.Report

              • Avatar Koz in reply to Koz says:

                “What Pat thinks are fundamental issues are after-effects of the financial crisis.”

                No. The mismatching of the labor force is a trend that’s been going for what, at least 30 years. The same with the demographic and fiscal trends that give the US $62 T or whatever in unfunded obligations (in addition to the $14 T in Treasury debt). These things are not attributable to the aftereffects of the financial crisis.Report

              • Avatar Koz in reply to Koz says:

                “Where I may not agree with Pat (its not clear) is in the assessment of the last 15-20 years. There is the idea going around that in some sense the Great Recession/Little Depression is in some sense a harsh reality we had coming to us, and that the Great Moderation was in some way a fraud. “

                This is where I am between you and Pat. Even if we allow for substantial social problems created by a mismatched labor force, the wealth created by the value-added economy is quite real and sustainable even allowing for labor mismatching and other social problems. But it’s an issue nonetheless and Keynesian economics doesn’t address it.Report

              • Avatar Simon K in reply to Koz says:

                @Koz – I agree with you that the debt and deficit are not primarily an effect of the financial crisis. There are secondary effects – reduced tax revenues and the bail-out funds – but there would certainly be a deficit without them. I don’t see Pat talking about that, though. He’s talking about the high (real) cost of living and the apparent detachment of finance from reality. The first at least is an effect of the crisis. The latter is a cause of it (not the only cause). For the record, pure Keynesianism is silly. Government spending has no effect on the macro-economy except under very specific circumstances that don’t apply right now. Nothing I’ve said here is specifically Keynesian – some of it is not conventional at all, but most of it is mainstream sort-of-monetarism.Report

              • Avatar Pat Cahalan in reply to Koz says:

                > I don’t see Pat talking about that,
                > though. He’s talking about the
                > high (real) cost of living and the
                > apparent detachment of finance
                > from reality. The first at least
                > is an effect of the crisis.

                The high (real) cost of living has been trending upwards, really fast, since 1980, Simon. Two major factors contributed to accelerating it out of control in the last decade (real estate and health care), with a third (education) going bat insane since 1995 (and still on truckin’). But the trends themselves have been increasing faster than the rate of inflation since I was in high school.

                How is this an effect of the financial crisis?

                (Me, I think it is an effect of the prevalence of easy credit since 1990, but people were getting credit lines with 16.5% APR well before the financial crisis and it’s kind of a stretch to include that.)

                Don’t get me wrong: the financial crisis made everything a helluva lot worse, granted. But the patient already had cancer when he came into the emergency room riddled with bullets.

                Look, I’m a middle class white dude with a middle class white upbringing and largely a bunch of middle class friends. My parents were lower middle class who worked their way into the middle class in the 70s and 80s. My parents’ peers did roughly the same.

                When I compare my peers with their aggregate parents, there are more who are in financial trouble, more who can’t afford to own a home (to begin with) or are having a hard time paying for their home (if they have one), more who can’t afford college for their kids, and almost none who are looking forward to retirement… while their parents have or had some, most, or all of teh above. Sure, some of these are due to bad luck, or simple poor financial planning, but not enough to explain the delta.

                Now, of course, this is anecdote. And while it is reinforced by a large volume of public perception reporting, I don’t personally have great data to back it up (and I’m not particularly invested in going out to look for it, because I already have too many things to do). But when I read blog posts that talk about how the poor are better off, or that the middle class has access to stuff they didn’t have access to 10 years ago, I can agree with all of the stuff that I read therein and it doesn’t exactly refute the point, because they’re talking about “financial well-off”itude from an entirely different perspective.

                Anyway, I can’t lay all that at the feet of the financial crisis. That seems to be deeply pervasive and fundamental, to me.Report

              • Avatar Pat Cahalan in reply to Koz says:

                @ Koz:

                > What I am talking about are
                > also fundamental issues, but
                > whereas Pat is dwelling on
                > the problems I am dwelling
                > on the solution.

                Just out of clarification: do you agree with some/all of my characterization of the problem?

                We can argue about the solution (or, to be more accurate, we can argue about whether or not there *is* a solution), but if we don’t agree what the problem is we’re probably not going to get anywhere on that score.Report

              • Avatar Koz in reply to Koz says:

                “Just out of clarification: do you agree with some/all of my characterization of the problem?”

                Yeah. Labor mismatching is a problem and excessive government expenditures is also a problem. To the extent that we disagree, it might not be about policy as much as the some of the assumptions underlying it.

                That’s to say, some problems aren’t directly addressed. As our economy develops, it’s becoming clear that ultimately economic production ultimately comes from strength of individuals and harmony between people. Because of that, we really don’t know how much economic production is available. So, for example, mismatching of the labor force has no solution. Excessive expenditures aren’t so much a problem as the prevention of the solution.Report

              • Avatar Koz in reply to Koz says:

                “Koz, if the answers are there, and the market supplies them, how come we don’t know what they are?”

                ‘Cuz the questions as you posed them had too many variables to answer. But the market does answer. That’s the point.Report

    • Avatar Jaybird in reply to Simon K says:

      There’s confident and there’s Confident.Report

      • Avatar Simon K in reply to Jaybird says:

        And the difference is?Report

      • Avatar Jaybird in reply to Jaybird says:

        Put another way, the business folks do not see default as an option at all. At all at all.

        They do see Obama’s re-election as a real option. They also see Congress’s Affordable Care Act going away as a real option.

        There are a lot of reasons to invest like *THIS* with a lot of upside and a lot of downside… there are a lot of reasons to invest like *THAT* with opposites. There’s fairly little downside to sitting and waiting a year to see what happens before you figure out how you need to invest.

        I mean, it’s not like the US is going to default now, is it?Report

        • Avatar Simon K in reply to Jaybird says:

          So you’re agreeing with Koz that this is a political maneuver for some GOP constituencies. I see that, although I think they’re wrong. What I don’t get, and I think I speak for Elias too here, is why the center and left would go along.Report

          • Avatar Jaybird in reply to Simon K says:

            A political maneuver?

            No. They want to invest and make money. They don’t know the best way to do that. If they invest like *THIS*, and certain things happen, they’ll make money. If other, equally(?) likely things happen, they’ll lose money. If they invest like *THAT* and certain things happen, they’ll lose money but if the other things happen, they’ll make it.

            They want to make money.

            The best way to do that, at this point and time, is to *WAIT AND SEE*.

            Why? Because they’re confident that the big issue will be who gets the House/Senate/White House and not whether the country defaults. It’s not a political maneuver at all.

            They just want to make money.Report

            • Avatar Koz in reply to Jaybird says:

              Yeah. Let’s just note that the investment climate in America is not about the debt ceiling (and won’t be unless things go really bad).Report

              • Avatar Pat Cahalan in reply to Koz says:

                I think the investment climate in America has been uncertain since about 1976. We’ve had brief periods of certainty, and it’s all been extremely short term, and in the long term it’s just been bad.

                We’ve grown the capital pool by making more money, both real currency and not. And the capital pool is so disconnected from the dollar value of work that investors are creating one giant pile of bullshit after another to believe in enough to give them somewhere to park their share of the capital pool.

                Junk Bonds, the dot-com boom, the outsourcing and downsizing craze, the real estate boom… they were all hugely faked investment opportunities. Some people walked away from them new millionaires or new billionaires but their actual creation of real wealth (money tied to some sort of actual real resources) has been nil.Report

              • Avatar Jaybird in reply to Pat Cahalan says:

                I think the investment climate in America has been uncertain since about 1976.

                This is a good point too. Back in the, oh, 1950’s and 1960’s, you knew that the difference between the Republicans and Democrats weren’t going to be *THAT* different when it came to business.

                In the 1970’s, that changed.Report

              • Avatar Pat Cahalan in reply to Jaybird says:

                In the 1970s, we learned that we don’t control our own energy supply. Since our economy was then still industrial and is now technological, this is kind of a giant freaking problem for exception resolution.

                Everything is hunky dory as long as everything is hunky dory. Something goes wrong outside your ability to influence, you’ve got problems.Report

            • Avatar Simon K in reply to Jaybird says:

              I’ll buy for the sake of argument that the investment climate is uncertain (although for the record, usually when people say that they’re trying to say something else without saying it). What does this have to do with the debt ceiling? And why would Obama accept that this has anything to do with the debt ceiling?Report

              • Avatar RTod in reply to Simon K says:

                I think the obvious answer is that the political message Obama is sending is not to “the markets.” It’s to the center of the country, and the independent voters.

                I don’t know a lot about econ (see my comments above as proof), but I know enough about techniques of persuasion to know that if I wanted people to choose me as the competent adult in the room this is the kind of message I would choose to be sending right now. Much of politics is story telling, and calmly meeting with “the markets” to work things out like professional adults fits the story Obama is wanting to tell (sell?) nicely.Report

              • Avatar Jaybird in reply to Simon K says:

                There are also dozens and dozens of ways to invest.

                One is by hiring people. Let’s say that I have a job that is worth $50,000 to me to have somebody do it.

                I look at my books and the want ads out there and resumes that come in and guess that I have to give someone $37,000 to do the job as well as $8K in bennies. Hey, that’s a good investment. Let’s say that there’s this law that, if passed, will turn that $8K into $14K.

                With that law’s passage, it suddenly becomes worth more to me to not hire someone.

                It’s a year from you finding out whether or not the law passes. Are you going to hire someone?

                Oh, let’s stipulate that if you hire someone, you’ll have to pay a penalty to fire him. Even if he shoots someone in the lobby and takes a dump on the sidewalk on national news when the cops show up, you’ll still have to pay a penalty.

                Are you going to hire someone?Report

              • Avatar Pat Cahalan in reply to Jaybird says:

                > It’s a year from you finding out whether
                > or not the law passes. Are you going to
                > hire someone?

                Me? No.

                Most somebody elses? They’re going with the decision they already made. People are good at that; if they’ve decided to hire someone and the conditions on the ground change they probably aren’t going to reverse course.Report

              • Avatar Simon K in reply to Jaybird says:

                I feel like I may be repeating myself, but what does this have to do with the debt ceiling?Report

              • Avatar North in reply to Simon K says:

                When discussing this issue with Koz you’ll often find this occurring. He takes a deficit question on which everyone pretty much agrees (that they should be smaller) and then drapes it table cloth like over a size of government issue on which people are considerably less agreeable and sortof tries to smuggle the one in under the other.Report

              • Avatar Jaybird in reply to Simon K says:

                It doesn’t.

                Everybody knows that the debt ceiling is going up. There is confidence that the US will not default on it’s debts.

                Hell, this is from the original post: “by most conventional criteria, the market appears to be rather confident that the United States is not at risk of imminent financial collapse”.

                The question then comes to be one of what these guys mean when they talk about “restoring confidence to the markets”.

                They have confidence that the US ain’t gonna default. That’s what this has to do with the ceiling.

                They still don’t have enough confidence to invest.

                I imagine that the debt ceiling will be raised, the budget will go through, and this will be painted as a major economic victory on the part of Obama.

                And then people won’t understand why confidence has not returned to the markets.

                Then I can write a comment like the one above.

                Then I can be asked about the debt ceiling.Report

              • Avatar Pat Cahalan in reply to Jaybird says:

                > I imagine that the debt ceiling will
                > be raised, the budget will go through,
                > and this will be painted as a
                > major economic victory on the
                > part of Obama.
                >
                > And then people won’t understand
                > why confidence has not returned
                > to the markets.

                This got a laugh, ’cause it’s all too probable.Report

              • Avatar Simon K in reply to Jaybird says:

                Quite. So what are Obama and Geithner talking about? They’re certainly not talking about regulatory uncertainty.Report

              • Avatar Jaybird in reply to Jaybird says:

                They’re probably conflating all kinds of uncertainty together.

                There is the uncertainty over the debt rating (blame S&P, not me, for pointing this out).

                There is regulatory uncertainty that is exacerbated by the upcoming election.

                There is uncertainty that is related to the economic plans that keep being attempted.

                It’s easy to wrap all of this together and say that the solution is to restore confidence to the markets.Report

              • Avatar Koz in reply to Jaybird says:

                “They’re probably conflating all kinds of uncertainty together.”

                This is a great point. It’s one thing to talk about the confidence unicorn or whatever. But confidence isn’t one thing, it’s the amalgamation of a bunch of things which are compounding.Report

  4. Avatar Koz says:

    I’m not sure who’s talking point “confidence” is. It should be ours, but mostly it’s a disparagement from Team Blue.

    Confidence can be a nebulous thing, but it’s not here. If you count the implied obligations of our current government policies, we are currently $62 trillion in the hole.

    Right now we are between a rock and a hard place. We “know” most of those obligations will end up being repudiated. But the essences of liberal politics for the last two years at least has been to insist that every penny of that gets paid.

    If it becomes plausible that we cannot reform our trajectory of expenditures, we have no chance of being able to pay our government debts.Report

  5. I don’t mean to be difficult or to come off as intransigent, but I feel that this thread thus far has gone somewhat off-course. Most of what Koz is saying seems, to me, to be profoundly detached from any realistic estimation of the present situation, its roots, or the realistic means for its being addressed. We are not in a fiscal bind — if we are in one at all — because of public sector employees; and they most certainly have nothing to do with 10 (really 16) percent unemployment. I don’t know where this stuff comes from, to be honest, (though I assume I wouldn’t have to search too far if I were so inclined).

    Jaybird’s explanation similarly confuses me; when do we ever know who will win the next election, more than 12 months in advance? Is the “regulatory structure” really to be so radically different under a President Romney than a President Obama? Sure, the zeal with which it’s enforced may be noticeably different — but the structure itself? If Washington does anything, it’s maintain the status quo. What’s more, how does the impending 2012 election relate to deficit reduction? Those seem like different issues entirely.

    So, yeah, basically I’m still searching for an answer to what Simon K asked above: why is there a seeming consensus that the deficit — and not massive unemployment — must be handled now? The more fire-breathing members of the left would say “because the system is rigged and run almost entirely by and in the interest of the wealthy”; can someone give me an answer that’s not so, well, simplistic?Report

    • Avatar RTod in reply to Elias Isquith says:

      I alluded to this above, but I’ll try again here: I don’t see this as an economic strategy, but simple messaging. And the messaging isn’t to “the markets,” it’s to center and indy voters.

      Why focus on the deficit now? Because when the other side is refusing to compromise, insinuating that shutting down the government would be fun, and looking to the lay person as a bit frothing at the mouth, this message communicates that you are a serious adult, that is willing to listen to the other side if only they would be reasonable.

      And as a non-econ indy guy who finds much of this confusing, I can tell you this is exactly the way he’s coming across. Like him or not, this is going to be a big political victory for him among the center-voters.Report

      • Avatar Elias Isquith in reply to RTod says:

        But this assumes he doesn’t believe what he says. Beyond our thinking that what he says is incoherent, there’s no real reason for us to make such an assumption. (FWIW, it’s one I made for a long time but have more and more as of late come to think is mistaken. I guess reading that WaPo story on Geithner’s influence has caused me to reevaluate.)Report

        • Avatar RTod in reply to Elias Isquith says:

          “But this assumes he doesn’t believe what he says.”

          I’m not sure that’s true, and I think you might be making this more complicated than it needs to be.

          He may well believe the deficit is an issue that needs dealing with. But even so, I still think my answer addresses your “But why now?” part of your question.

          I think the answer to the other other part of your question (essentially, “Doesn’t he understand the D is not that important?”) is that he simply disagrees with you. If so, whether he’s right or wrong, it’s a pretty common thing to believe – no real mystery to be unraveled. It’s not as if he’s saying the solution is to colonize Mars.Report

          • Avatar Elias Isquith in reply to RTod says:

            This is making sense to me, on the whole.

            But here comes my next question.

            I think the answer to the other other part of your question (essentially, “Doesn’t he understand the D is not that important?”) is that he simply disagrees with you.

            I actually do think it’s important, although not more important than unemployment. It’s a long-term problem vs. an immediate-term problem, in my eyes. But here’s where I’m confused, again: Why isn’t Obama asking for some stimulus as part of a Grand Bargain? His requests — ending tax loopholes — have absolutely nada to do with getting people to work right now. Geithner apparently thinks such concerns are not especially important right now. OK — I get that; he’s a lifelong banker and has shown himself to see the world through Wall Street’s eyes. Not my bag, but more power to him. But does the President really think he can win reelection with unemployment being what it is right now? And does he really not care that so many are out of work? I imagine the answer to both questions is No; but this is where I end up rather confused, again.Report

            • Avatar Jazgar in reply to Elias Isquith says:

              If Obama can make the case that the Republicans are intentionally sabotaging the economy, which is what he appears to be doing (see how the main stream press appears to be calling out the GOP), then maybe yes, he does think he can win reelection with current unemployment figures.

              His policies might make sense from a political brinksmanship perspective, but don’t appear designed to actually improve employment. Then again, unless revenue is increased that may be out of reach anyway.Report

    • Avatar Koz in reply to Elias Isquith says:

      “Most of what Koz is saying seems, to me, to be profoundly detached from any realistic estimation of the present situation, its roots, or the realistic means for its being addressed. We are not in a fiscal bind — if we are in one at all — because of public sector employees; and they most certainly have nothing to do with 10 (really 16) percent unemployment.”

      Not at all, this is the predicament of the current situation, that’s the point.

      Ie, it’s not necessarily to say that government employees are what’s causing unemployment, though that’s a factor. Instead, the lib-Left-Demo’s want to think that hiring government employees (or spending government money in general), will help unemployment. And this is a good thing because unemployment is the biggest economic problem so whatever collateral problems government spending might cause are worth it for the sake of lower unemployment.

      But this is very importantly and profoundly wrong. Unemployment is reduced by the private sector, which requires investors willing to put capital at risk. If there is no plausible scenario for putting capital at risk, there won’t be any investors which means there won’t be any new business models which means that there won’t be any new hiring.

      This isn’t any nebulous handwaving about “confidence”. This is the state of the economy today.Report

    • Avatar North in reply to Elias Isquith says:

      Elias, I’d like to offer a non-econ answer to your question:
      “Why is there a seeming consensus that the deficit — and not massive unemployment — must be handled now?”

      My answer: Because on the subject of what is important to the nation right now the GOP won the messaging war. Obama attempted to do exactly what you’re talking about; he was focusing on unemployment rather than debt which is why the budget he offered was pretty bad on deficits and ignored his own deficit reduction commission’s suggestions. The GOP, however, was able to convince the public (and they were able to do this in no small part due to Obama’s own contradictory stance) that the debt is important. So now Obama has been forced by political realities to start trying to address it because the GOP has moved opinion enough (in the voters in general and in their base especially) that they feel strong enough to have this show down about the debt limit.

      I continue to attribute this to Obama’s particular style of politics and communication. I feel like he has a tendency to try and aloofly ignore things that he doesn’t like; he did this with the GOP declarations of absolute opposition when he started the process on HCR; he did this with the utter circus that happened in the town halls during the HCR debate, he did this with his deficit reduction commission; etc. Perhaps this has worked for him in the past; I’m guessing it’s helped bolster his personal favorability ratings because people don’t see him slinging much in the way of mud and perhaps in some situations the things he’s ignored actually have gone away but it pretty much cedes control of the debate to his opposition. If they meet a certain threshold of persuasion then they win the debate and Obama can’t do anything about it.

      Now some believe that this is part of his cool hand Luke style of giving opponents enough rope to hang themselves. I’m skeptical but hell, if I can be agnostic about God then I can certainly handle being agnostic about Obama’s strategy or lack thereof.Report

    • Avatar Jaybird in reply to Elias Isquith says:

      If it turns out that the only explanations that make sense to you are the ones where your side is so good that they didn’t understand how evil the other side could be *OR* that evil is smarter than good *OR* some other explanation that soothes how you feel about things, you should re-examine the explanations that you dismissed.Report

      • Avatar North in reply to Jaybird says:

        Is that what he’s saying? I didn’t get that from it.Report

        • Avatar Elias Isquith in reply to North says:

          Yeah I don’t think that’s fair at all.Report

          • Avatar Jaybird in reply to Elias Isquith says:

            what Geithner and the President could be talking about when they speak of restoring confidence to the markets

            What do you see as “the markets”?

            Do you see it as including everybody (that is, down to you and me and North and our willingness to buy that product we don’t particularly need)?

            Do you see it as including only small business owners and up?

            Do you see it as including only power players in the economy… like the Corporations and the Members of the Board and Buffet and those guys?Report

            • Avatar Elias Isquith in reply to Jaybird says:

              Isn’t what Obama and Geithner see more important?

              I’m not sure on that one. I’ve tended to assume they mean the credit markets a/k/a banks & bond-holders. But I don’t know.Report

              • Avatar Jaybird in reply to Elias Isquith says:

                Do you agree that the credit markets a/k/a banks and bond-holders are somewhere between “not particularly confident” and “well, at least they’re confident enough that everything won’t go to shit like we’re Greece or something”?Report

              • Avatar Elias Isquith in reply to Jaybird says:

                Well here we are back to my initial complaint about your first response (not meant to be seen as an accusation or anything like that, btw): I’m trying to figure out how a deficit reduction plan will “raise confidence” and what that looks like in-practice. Your answer was about the 2012 elections, which seems to me to be a separate issue. If we turn towards the deficit itself being the cause of uncertainty, then we can continue the debate Simon K and Koz were having, in which I find Simon K’s arguments thus far much more convincing (and I’m pretty sure Simon K and I are not on the same “team” or whatever); but the idea that 2012 is to blame for our economic woes appears, so far, to me to be a separate issue of dubious validity.Report

              • Avatar Jaybird in reply to Elias Isquith says:

                I’m not even there yet, dude. At this point, I’m just trying to get you to say that, yes, there are degrees of certainty and we are at one of them somewhere in the middle.

                At this point, I’m just trying to address the issue of “what Geithner and the President could be talking about when they speak of restoring confidence to the markets”.Report

              • Avatar Elias Isquith in reply to Jaybird says:

                Yeah, but I jumped ahead, because you’re doing that Socratic/Cross Examination thing that I’m not necessarily the biggest fan of in the world :). But if Simon K is right then isn’t uncertainty irrelevant?Report

              • Avatar Jaybird in reply to Jaybird says:

                What question are you hoping to have answered in a way that makes sense to you?

                My answer dealt with the concept of confidence without getting into either the deficit or the possibility of default and it wasn’t seen as a useful answer.

                But if Simon K is right then isn’t uncertainty irrelevant?

                Given that the biggest problems include high unemployment numbers, I’d say that uncertainty has a direct effect upon employment. Given that we don’t know what tax policy will look like (will the government extend the Bush/Obama tax cuts a second time?), does that have a direct effect upon businesses employing others?

                Assume that the goal of any given business/corporation is to make money and margins are seen as razor thin right now.

                Are there two very different potential outcomes given the coming election? Are there multiple possibilities as to what one of those two outcomes is likely to be given who will be on the Republican ticket?

                It seems to me to be fairly obvious that there is a great deal of uncertainty out there not only for the various credit markets but for the folks who can best be expected to chisel away at the high unemployment.

                But if that wasn’t your real question, I’m sure that that answer didn’t address it.Report

              • Avatar Elias Isquith in reply to Jaybird says:

                My question was slightly more specific than that, meaning I was wondering how deficit reduction would assuage uncertainty, as Obama and Geithner and the GOP have maintained.

                I’m not opposed to agreeing with you that there is uncertainty, but the economists I read have argued that the real issue is a lack of demand, not supply, which I believe would mean uncertainty is a somewhat secondary issue. I’m not an economist, though, so it’s not like I’m wedded to the idea.Report

              • Avatar Jaybird in reply to Jaybird says:

                There are folks out there who suspect that, soon, the US will change from AAA to AAa.

                There are a lot of things bundled together with our AAA rating. If we become AAa, the house of cards will fall.

                One of the things that is the difference between a capital or lower-case third ‘a’ is the deficit. The administration doesn’t have that much influence on those whose job it is to choose which A we get. The numbers do that.Report

              • Avatar Koz in reply to Jaybird says:

                “My question was slightly more specific than that, meaning I was wondering how deficit reduction would assuage uncertainty, as Obama and Geithner and the GOP have maintained.”

                Elias, I agree with Jaybird for the most part. But one thing that you’re missing is the scale of the problem. If we get a Japan-style lost decade, that might not be that bad all things considered.

                The malfeasance and the incompetence of the libs has been substantial enough that there’s some really really nasty shit that’s very much in play. The IMF is for Argentina and Mexico. There is no IMF for America. Frankly the GOP’s message here has been pretty weak. But the level of denial among the libs is off the charts.Report

              • Avatar Simon K in reply to Jaybird says:

                @Jay – Given that the biggest problems include high unemployment numbers, I’d say that uncertainty has a direct effect upon employment.

                How large this effect relative to others is very important. I’m going to write a longer comment on the alternative explanation for high unemployment.

                There are folks out there who suspect that, soon, the US will change from AAA to AAa.

                Yes, and some people believe shiny yellow metal is the only safe investment. Other people believe space aliens are visiting Earth even as we speak. Still further believe the rapture actually did occur a couple of weeks ago and we didn’t notice. All of these people are deluded.

                @Koz – But one thing that you’re missing is the scale of the problem. If we get a Japan-style lost decade, that might not be that bad all things considered.

                This is an absolutely fundamental misconception, and its not unique to you, that deflation is somehow kind of okay or even good for “investors” or “the business climate” or “retirees”, or whatever. It isn’t. It seems initially attractive because, hey, your income is worth more. The problem comes because whoever was supposed to be paying your income can’t pay any more. Oops.Report

              • Avatar Jaybird in reply to Jaybird says:

                Yes, and some people believe shiny yellow metal is the only safe investment. Other people believe space aliens are visiting Earth even as we speak. Still further believe the rapture actually did occur a couple of weeks ago and we didn’t notice. All of these people are deluded.

                Are the people who read the S&P warning and think that it’s relevant to future outcomes somehow deluded?Report

              • Avatar Koz in reply to Jaybird says:

                “It seems initially attractive because, hey, your income is worth more. The problem comes because whoever was supposed to be paying your income can’t pay any more.”

                Yeah, I get that. That isn’t what we want, but it’s important to understand it’s not the worst alternative either. This way we at least get to preserve the appearances of a first world economy. The thing to emphasize is, worse alternatives are very much in play. I’m thinking of this in particular.

                The worst malfeasance of the Obama Administration has been its economic opportunity cost. I’m not religiously opposed to tactical moves. But the window for them is gone. Contra Republican Sen. John McCain, the fundamentals of the economy are not strong. We don’t need something done fast, we need something done right.Report

              • Avatar Koz in reply to Jaybird says:

                “Are the people who read the S&P warning and think that it’s relevant to future outcomes somehow deluded?”

                Yeah, I’m with you on this one Jay. Frankly, I can’t even see Simon’s train of thought on this one. Whatever it is, it probably is assuming that the political class has way more operational control than they in fact do.

                Among other things, we’ll probably get out of the debt ceiling business without too much damage. But, that’s not at all a sure thing and we should take it as a gimme.Report

              • Avatar Simon K in reply to Jaybird says:

                Credit agencies work for their customers. Their customer are bond traders. Traders create action by creating perceptions, and currently several people are trying to talk down US debt. It doesn’t surprise me that the credit agencies, who work for them, are helping. It wouldn’t be the first time, would it? I’m much more interested in where they put their money than in what they say, and their money isn’t telling me they’re worried. Even those who’ve made a big deal of being out or short on US debt are … how shall I put this politely … lying.Report

              • Avatar Jaybird in reply to Jaybird says:

                Let’s say that I internalize what you have just said.

                Would that give me *MORE* or *LESS* confidence? Would it stay the same?Report

              • Avatar Koz in reply to Jaybird says:

                Yeah. Once upon a time, we did have a Civil War here in America. Sometimes, issues of trust and bitterness outweigh what should be a mutual interest.Report

        • Avatar Jaybird in reply to North says:

          How many explanations have been dismissed so far? How many explanations have been accepted as accurate?

          I’m not saying “THIS IS WHAT YOU’RE DOING” as much as If it turns out that P, then you should Q.Report

    • Avatar DensityDuck in reply to Elias Isquith says:

      “Is the “regulatory structure” really to be so radically different under a President Romney than a President Obama? Sure, the zeal with which it’s enforced may be noticeably different — but the structure itself?”

      Why does the “chilling effect” only apply to speech? Why should I hire an employee when I might–or might not–be suddenly required to pay three times as much for the cost of their health insurance? Why should I do the research to develop a new product when the government might, despite my protests to the contrary, decide that it’s a children’s product and subject to lead-content restrictions? Why should I spend fifty million dollars building a new airplane factory?

      Even negative, punitive acts are better than uncertainty. If I know that I’m always going to have to add a 100% premium on my development costs to perform enough testing that the CPSC feels happy, then I can budget for that. How am I supposed to budget for a regulatory burden that might exist, particularly when I don’t know the size until it’s dropped on me?

      “Oh, just budget for the worst case!” Um…this is why children don’t walk to school, and students get expelled for having pocketknives in their car, and that sort of thing. “budget for the worst case” generally results in “don’t do it at all”.Report

  6. Avatar Jazgar says:

    Krugman’s response to Obama’s address – he brings up the “confidence fairy”:
    Barack Herbert Hoover Obama
    From today’s radio address:

    Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.

    Yep, the false government-family equivalence, the myth of expansionary austerity, and the confidence fairy, all in just two sentences.Report

  7. Avatar VinceP1974 says:

    What would cause uncertainty?

    Well, interest rates are at zero percent. The banks are insolvant and are alive through borrowing from the Fed (which is how TARP was purported paid back). No one knows what the Democrats Health Care scheme is going to do to the cost of hiring people. No one knows what Dodd-Frank is going to do. The EPA and other Agencies are hemorraging new rules. The President still presents budget projections which have perputual Trillion Dollar plus annual deficits. Social Security is paying out more than it takes. Medicare/Medicaid costs are exploding. We owe 14 TRILLION in money borrowed, and over 100 TRILLION in money promised. We have no domestic energy development policy. And we’re talkign to the muslim brotherhood who has vowed to destroy us.

    Gee.. why arent’ people making economic risks to grow their businesses?Report

  8. Avatar Jaybird says:

    To tie everything together: confidence is a social construct.Report

  9. Avatar Simon K says:

    I’ve been meaning to write a comment on the alternative explanation for unemployment that doesn’t rely on expectations about future taxation or regulatory uncertainty. I should warn you that while this is close to the mainstream view, it is my own personal very eccentric way of looking at it.

    Ignore the real economy for the moment and think about money. We use money to avoid the need for barter, because barter has huge transaction costs. From the view I outlined above, money is not very important. When there’s too much money its value falls (inflation), and when there’s too little it rises (deflation), but there’d no effect on the real economy. We may as well actually live in a barter economy.

    But this is an over-simplication. We have lots of contracts (wages, debt repayment, rent) that involve fixed payements that are hard to change. When there’s inflation, lenders/landlords/employees tend to get screwed, but provided the level of inflation is predictable, this can be priced into contracts. Thus, inflation tends to cause prices to rise relatively smoothly at low levels. When there’s deflation, however, borrowers/renters/employers tend to get stuck with their fixed payments. When that happens they buy less new stuff, default on their debts and fire people. Looks like a recession.

    But we’re not in deflation, I here you cry. No, we’re not. We’re at risk of it, but we’re not in it. However, inflation below the expected rate has many of the same effects as deflation. If I was assuming I could afford my adjustable rate mortgage when it adjusts in 5 years because I was expecting my income to have risen, I might be in for a nasty surprise.

    Okay, but why is this recession especially bad? Because it started with a financial crisis. The relationship between money and debt is complicated, but at least some assets are both. Checking accounts, for example, and money market funds. More generally, whenever there is a very safe form of debt, people will use it as money, This is, in essence, what bank clearing systems and settlement systems in the financial markets do. The actual need for cash is minimized because cash is actually quite expensive to hold onto in very large quantities.

    I’m going to wave a hand over the details – they’re fascinating, but this comment is already losing timeliness and becoming long, the guy to read is Gary Gorton – but pre-crisis the finance whizzes were using mortgage backed bonds as money, and had built up some supremely complicated debt relationships. When in turned out those bonds were not safe, no-one knew their exposure, and they all, simultaneously, tried to get back to government bonds, actual cash, and safe commodities. The massive increase in demand for money and close substitutes deprived everyone of transaction media. That’s why no-one could get credit and people were suddenly interested in how much FDIC insurance actually pays out. The Fed massively increased the quantity of reserves to try to compensate, but as we see did not in fact stave off a drop in the rate of inflation.

    When this happens, the lasting effects on the banks and their ability to create credit take an extremely long time to repair. This interacts with the change in the real economy – in this case that houses in Las Vegas are not worth as much as we thought they were – to produce a situation where everyone is trying to accumulate safe assets and no-one really wants to borrow. This explains the state of the financial indicators, as well as persistently high unemployment.

    If you look at the problem this way, the solution is diametrically opposite to what is likely to be about to happens. The government needs to create more safe assets. Which is to say it needs to borrow more. Alternatively (and more conventionally) the Fed can buy more bonds and create more cash. They were in fact doing so, until recently, so its possible that embarking on deficit reduction now is not actually suicidal. The risk is that if Greece were in fact to default, and we were to find US investment banks exposed (which they are – we just don’t know how much) while we were trying to reduce the deficit, we would in fact be hosed.Report

    • Avatar Koz in reply to Simon K says:

      “If you look at the problem this way, the solution is diametrically opposite to what is likely to be about to happens. The government needs to create more safe assets.”

      How do you suppose this might be done and what would it accomplish?Report

      • Avatar North in reply to Koz says:

        That’s just Keynes 101, the government borrows (aka sells more safe low yield bonds) and uses the dough to do it’s various government things: spend on goodies for taxpayers, pay for goodies for crooked contractors, steal it for themselves etc. Investors park their dough in treasuries and hyperventilate into a paper bag until their heart rates get back to normal. The economy gets prodded by the government spending and the toxic mortgages work their way out of the system. Eventually investors notice “hey we’re getting an utterly crap returns on these low yield safe treasuries” and start venturing back out to sniff after higher risk/yield investments which produces jobs etc…

        That’s the theory anyhow though I only have basic economic understanding so perhaps I got a part wrong. I personally don’t think that it’s actually that great a recipe for the current situation; I think some agreements on long term spending controls and some revenue increases would do some real good in reassuring the bond markets that the US actually is capable of laying out a plan for paying down their debts.Report

        • Avatar Koz in reply to North says:

          Yeah, but your answer is gliding over the difference between aggregate demand and liquidity. In general I’d venture most Keynesian stimulus is about aggregate demand but I think Simon is actually trying to address liquidity instead which is why I asked.Report

          • Avatar tom van dyke in reply to Koz says:

            Very interesting on the liquidity question. “Capitalism” often loses a necessary distinction between “free enterprise,” which creates wealth, and finance, which creates no wealth, but supplies liquidity.

            Mr. Koz hit on this earlier, that

            Independent of considerations of value, investors necessarily have a much higher level of commitment to illiquid investments than liquid investments. That’s pretty much the definition of liquidity.

            A “free enterprise,” a privately held company, is on the whole more committed to its own success in the real world. Completely committed sink or swim.

            [There is the phenomenon of taking high-risk, high reward technology innovations public. Sometimes it’s a Microsoft or Apple or Amazon, but there are far more bodies on the side of the road than still on it. In the end, it’s like investing in an oil well or a gold mine, a dice roll.]

            To return to Mr. Koz again, he writes:

            there is the issue that buying real estate fundamentally commits capital that can’t be withdrawn without significant time lag and transaction costs. Exchange traded equities don’t have this problem.

            I advance that in all the world’s history except for the last couple of centuries, it was always about real estate because they ain’t making no more of it. The rich, the landed, emperor or feudal baron, all wealth and power was all about who controlled the land. [The land feeds us!]

            It was the invention, the innovation, the phenomenon of liquidity that freed man from the Old Order. You could buy a piece of land, and determine your own fate.

            Property, and then the liquidity of it, is freedom. This is where the theories of liberty and rights become more than theory, more than appeals to the conscience of the strong re the weak, and mouthings of justice become reality. This is at the heart of the libertarian argument, methinks, and the innovation of John Locke in particular, and following, the American Founders.

            And this was Booker T. Washington’s argument, that the black man would sooner achieve equality by economic self-sufficiency and economic power than by rhetorical appeals to the white man’s conscience.

            To close, it is “free enterprise” that makes us prosperous, it is liquidity that keeps us free. And that’s the only reason why we put up with the parasitism of “high finance” that creates no wealth, and with all the chicanery, lying, cheating and stealing that goes with it. The pendulum swung ridiculously toward chicanery in triggering the current crisis [and assisted by the New Technology, ironically], but there was justice: many of the miscreants are now out of work.

            Finance is a necessary evil; free enterprise is a necessary good.

            [To Mr. Koz: I think you’re making your points strongly enough lately that you may consider dispensing with carrying water for the GOP and knee-jerk liberal bashing. The GOP is often not-good and liberals ain’t all bad.

            Leftists—progressives, statists and victocrats, well, they’re another story. It’s the defect in their worldview that’s the problem, and they hate everything and everybody who gets in the way of their vision of reinventing man. You would not want to be such a person.]Report

            • > “Capitalism” often loses a necessary
              > distinction between “free enterprise,”
              > which creates wealth, and finance,
              > which creates no wealth, but
              > supplies liquidity.

              Thank you Tom, I should have mentioned this somewhere about the first time I opened my trap on this thread.Report

              • Avatar Simon K in reply to Pat Cahalan says:

                @Pat – I like this too, you may be surprised to hear. I keep meaning to write something coherent in response to your comments above, because I think you make some interesting points that I partially agree with, and can’t quite express myself properly. Let me explain my mental model of the economy, because I think that might capture the underlying cause of any difference of opinion we might have. I call this the Algorithmic Post-Austro-Marxist model, to point out that it’s wildly heterodox in its construction.

                Consider the economy as a mechanism design problem. We’re trying to design a game, in the mathematical sense, with rules that cause all of the participants to do whatever they can for one another, or in the tedious jargon of economics “maximize production”. Lets call it the Cooperation Game. There’s a theorem in mechanism design, called the revelation principle, that says you can solve problems like this by having everyone tell The Computer their preferences and abilities and have The Computer then give everyone their “pay-off”, although in the Cooperation Game the pay-off would be a list of instructions as to what to make and where to get the stuff you need, which you would follow because you would always just gain more that you had to give.

                Of course, this is slightly reminiscent of the benign-looking central planning schemes beloved of Marxist economists and never implemented by actual Marxist governments. Of course this can’t ever work – our preferences and abilities are tacit and time dependent, many times revealed even to ourselves only in action. This isn’t just a private information game, its a game where relevant information doesn’t exist.

                So we play the Cooperation Game not by having a computerReport

              • Avatar Pat Cahalan in reply to Simon K says:

                > I keep meaning to write something
                > coherent in response to your
                > comments above, because I think
                > you make some interesting points
                > that I partially agree with, and
                > can’t quite express myself properly.

                Funny, I keep thinking my comments above aren’t as coherent as I’d like them to be. Also, to be honest, this is coming up out of my brain from half-formed stuff so part of me thinks I might be making a big-ass fool out of myself as I go 🙂

                > Consider the economy as a mechanism
                > design problem.

                This is not a bad idea, and something we need to yell at each other about as we drink too much beer.

                The problem with this approach (and it’s one that I relied heavily upon in my earlier years) is that mechanistic constructs *have* designs. Mechanistic constructs have well defined borders.

                This is why I like complex system theory as a model for an economy better than mechanistic design theory; because the borders are fuzzy and there’s a lot more organic ooze behind the curtain than there is a designer.

                But yeah, this sounds interesting. Write more.Report

              • Avatar Simon K in reply to Pat Cahalan says:

                Hit submit by accident. More coming soon …Report

              • Avatar Simon K in reply to Pat Cahalan says:

                Okay, this is losing all timeliness now. I’m going to finish it off quickly an rework it into a guest post or something later. I have a terrible habit of writing far too much, and a real job to do that isn’t this …

                So, we play the Cooperation Game not by having The Computer give us our incentive to cooperate via the fruits of other people’s labor, but through a series of interactions with other people that each have the same characteristic as the result The Computer would have given, in that each time we gain a little more than we give away. In essence, we solve the Cooperation Game through distributed processing. The algorithm is broken up into a set of social conventions, and distributed to the brains that actually have access to the preferences we need to understand.

                But as any Marxist will tell you, this distributed processing produces a sub-optimal result relative to what The Computer could have done. This is not a good argument for central planning, but it is true. Its true because we may not be able to set up the chains of pair-wise exchanges that get us to the result that The Computer would have reached. That in itself is an intractable problem even if we knew The Computer’s result, which we don’t.

                However, the error is not constant. In a barter economy, the error is huge. If I have eggs and need cheese, and you have cheese but don’t need eggs, you either have to accept the eggs on the basis you can trade them to someone else, and take the risk they’ll go off in the meantime, or we can’t trade. We can reduce the error by introducing money. Now I can sell my eggs and use the money to buy your cheese. But what if my goat dies and I need a new goat but don’t have enough money until I have a goat to milk and make cheese? Now we need debt. I can borrow money from someone with some and pay it back later. But what if I’m relying on the income from my cheesemaking to pay back the loan I got for the goat and the goat dies? The goat farmer down the street can sell me an option on a new goat if my goat dies.

                You see what’s happening here. As we add more financial instruments, we allow the specific pairwise transactions needed to get to The Computer’s solution to the Cooperation Game to be further divided up over time and space, moving closer to the optimal solution and away from barter. This is what finance is for. In a sense, finance is a computational aid to the distributed Cooperation Game algorithm that is the economy. Tom is right that it creates no value, but if its working properly is does allow value to be created that might not otherwise have been.

                This is where the rubber hits the road. Does it work properly? Before we delve into that, we should say that there’s also government, in case you forgot. Government has a clear role in all this in making sure people don’t cheat by stealing or defrauding one another, and also another, more disputed role in centralizing parts of the computation.

                Now, do we see cases where what actually happens in the economy, via our finance-aided distributed computation, isn’t what The Computer would have done? There are three of particular interest, I think: unemployment, working poverty, and accumulated wealth. Lets be clear about how these imply computational failures.

                Unemployment is clearest, which is why its been a general controversy for many years. If someone is unemployed, if The Computer is working properly, it means there is absolutely nothing they can do that’s useful to anyone. How likely is that? Can’t they at least clean up trash on the sidewalk? So unemployment is a clear computational failure. How you see this depends on how well you think our pseudo-computer works, or to put it back into boring-speak, how efficient the labor market is. If you think the financial computer is very good at its job, you’ll tend to think that unemployment derives from government’s attempts to centralize parts of the computation. If you think it tends to leave resources unused because it doesn’t have the computational power to figure out what to do with them, you’ll tend to think that is the cause of unemployment.

                That’s really fundamentally, the difference of opinion between Koz and I, if you strip the politics out of it. I think the financial computer doesn’t have the computational power to deal with properly allocating resources, and I think the recent liquidity shock has made its job much harder. Liquidity is sort of like the financial computer’s clock speed. If there’s enough liquidity, the financial computer can move it to the places where people need to buy stuff. When it does so, it increases what’s confusingly called “aggregate demand” in Keynesian models. Because of this, I’m advocate of having the government turn up the clock speed until the computer can do its job again. I don’t really like this solution, because, to stretch the analogy to breaking point, at some point we’ll need a tub of liquid nitrogen to keep the computer cool enough and we don’t know quite when that will be. I just don’t see any better options.

                I think the key point that you’re making is rather different, and relates to the other two problems – why do some people now have stratospheric incomes, where other people are struggling to afford things their parents and grandparents could cover easily. I’m going to leave aside the difficulty of inter-generational comparsions, that what constitutes “a house” or “health care” now is not what constituted those things 20 years ago, because I think there’s a point here that can withstand those arguments. That point is this: Are we really sure that there are people in our society whose contributions to our collective wellbeing are so tiny that we really don’t care that much if they die early? And are we really saying that there are other people whose contributions are so vast that the resources we might otherwise have used giving the first group decent food and okay health care should be used in paying for private schools, yachts and multiple gigantic houses for the second group? And that people who work on Goldman Sachs trading floor are in the second group? Really?

                I’m not trying to make an emotional point here, although its almost impossible to talk about this without being emotional. Its possible that this is true. Nothing rules it out at the level of pure economics. Note I’m not talking about ethics at all here, purely about hard-nosed “what can you do for me?” productivity. But if it is true, the consequences for our social organisation are wide-reaching and devastating. I think the people who assert the truth of this by and large have not confronted what it truly means.

                My personal view is that the financial computer is failing to properly compute the costs of its own computations, which is understandable because it seems like there should be a decidability problem in there somewhere. The consequence, however, is that people whose jobs involve shuffling money around are accumulating too much of the money they shuffle, because we’ve over-estimated the possible benefits of some financial manipulations, and under-estimated their difficulty. We have similar problems in other areas, for instance in health care, but the problem with the financial system is especially key because of its important role in keeping everyone working. This accumulation of resources amongst those who allocate resources explains, to some extent, the relative lack of resources amongst those who have no access at all to the resource allocation system and not much of their own to play with.

                Of course, there are other, deeper, more human concerns that would be a whole different post. In my bleaker moments, I worry that in spite of its elegance and liberating potential, we humans may not actually be well made for high capitalism. In my even bleaker moments, I worry that we’re on the way to remaking ourselves rather than remaking capitalism.Report

              • Avatar Koz in reply to Simon K says:

                This is a very very interesting comment and I’ll be looking forward to a guest post if in fact Simon writes one. For now, two points:

                1. This is sort of what I was getting at when I wrote that I was between Pat and Simon, logically speaking. I suspect I agree with Simon more than Simon might appreciate. In particular here. Whereas Pat emphasizes the problems in the economy, Simon is correct to emphasize the way out, which is contained the fundamentals of economic production.

                2. I haven’t digested Simon’s comment enough to figure out, but either we fundamentally disagree about the clock speed of production or maybe it’s just a difference of semantics.

                In any case, I’d say that the clock speed of the economic production computer is not a function of liquidity but of trust between people I think Steven Covey of all people wrote a book on this (and AFAIK he’s the only one who has). Whoever it was, he was right. Especially the age of mass communication, commerce moves at the speed of trust.

                In a low trust environment, we have to wait for the consequences of our actions to become manifest before we can take the next action. In a high trust environment we can trust the representations made to us by other people and move on to the next thing without having to see the confirmation.Report

              • Avatar patrick in reply to Koz says:

                And here’s another short answer (edit: turned into a long one):

                > Whereas Pat emphasizes the problems
                > in the economy, Simon is correct to
                > emphasize the way out, which is
                > contained the fundamentals of
                > economic production.

                Here’s where I think you guys are likely both wrong 🙂 Focusing on the solution leads you to believe that there is one. Once you believe that there is a solution, if you go looking for one, you’re going to find one that you think is plausible. Koz, you sound like an early 20th century Progressive, here.

                I think we should default-assume that there *is* no solution inside the current framework. Let’s describe the situation, instead. Because I believe that you’re going to have to look outside the framework to find an answer.

                The problems with our economy don’t have a very credible solution-space, because the problems with our economy are built-in to the model for the economy, which Simon alludes to here:

                > Are we really sure that there are
                > people in our society whose
                > contributions to our collective
                > wellbeing are so tiny that we
                > really don’t care that much if
                > they die early?

                If we focus entirely on the net-positive, we get into this conundrum. “What can you do for us?”

                The pessimist says, “What can I do for you so that you won’t be much of a burden on us?” And heaps of scorn fall on the pessimist for implying that they’re somehow “worthless”.

                The truth is, value is an integer, not a natural number.

                Here’s the flip side question: there’s this stateless country that everyone likes to throw into the face of the libertarian crowd, called “Somalia” (never mind that the current statelessness is directly traceable to historical, cultural, political, and international affairs that have nothing whatsoever to do with libertarianism).

                Somalia, since it was first put under the umbrella of colonial Europe, has never progressed past its rudimentary agrarian economy. And their land isn’t even particularly suited to that.

                Meanwhile, the world has gone post-industrial.

                There is no way for you to develop a reasonable economy in this country that can merge with the international, global economy without making some seriously prohibitive infrastructural investments; they don’t have the natural resources to go industrial, you’d have to move them from agrarian to the value-added economy Koz and I were talking about elsewhere. You cannot build this country up to be a playa in the global marketplace in even a decade, that’s a huge project.

                Right now, their economic value in the international marketplace is that of a parasite. They sponge off the global economy via piracy, which is by any measure possibly the least efficient way for them to interact with the global economy.

                Rather than trying to invite them to a game at which they have no chance to play, the least inefficient thing to do is pay them not to play the game they’re playing, ie -> don’t mess with shipping any more, here’s some resources in exchange. Give them outs; give these Somalis a place to go where they actually can be productive. Reduce their population to the size where internal resource competition gets to a sustainable level given their remaining populace. Then you can try to move them to a value-add economy.Report

              • Avatar dexter in reply to patrick says:

                Very interesting idea. There are around nine million Somalians. I don’t know how many that country could reasonably sustain, but I would like to know where you would send those extras and how would you choose who gets to go?Report

              • Avatar patrick in reply to patrick says:

                I think the U.S. and the former U.S.S.R. kind of owe those people a haven given that we played “fuck you” football with them from 1974 to 1988.

                We can hit up the Dutch and English to take a percentage too, for setting the stage in the first place.Report

              • Avatar Simon K in reply to patrick says:

                Don’t forget the Italians. And do the British get off if we recognize Somaliland?Report

              • Avatar patrick in reply to patrick says:

                s/Dutch/Italians.

                Grumbah. It’s a Friday.Report

              • Avatar Simon K in reply to Koz says:

                I didn’t like the clock speed analogy very much. I originally wrote “power” but that was even worse. This is the main bit that needs further expansion, and was where I got stuck and decided I should just finish the goddamn comment before I looked like the crazy person who posts lengthy rants to 6 month old comment threads.

                I agree with you about trust. I think that’s a fundamental point, actually, and one I spend a lot of time thinking about (would you believe I have a job unrelated to this subject?) I think trust and liquidity are actually very closely related concepts. Although I realize this sounds insane, I think that’s another example of tedious jargon getting in the way of understanding. Assets are liquid if we think we know their value very well. That depends on a number of factors, but for financial assets one of the crucial ones is that the chain of trust between the parties is intact. One of things that went wrong in the recent crisis was that the chains of trust in certain markets became so complex, no-one knew whether they were intact or not. Once they realized they didn’t know, the assets rapidly became illiquid.Report

              • Avatar patrick in reply to Simon K says:

                Oh, they knew, all right.

                Just like JFK knew that the Cubans knew that the CIA was training an invasion force, because it was on the front page of the freaking New York Times.

                But even though “We won’t invade unless we can keep the U.S. out of it, publicly” was a foundational pillar of the Bay of Pigs, once the planning got far enough along, “We’re going forward because it doesn’t make sense to back out now” overruled “Hey, one of our beginning rules was this had to stay secret or we’re pulling the plug.”

                Build enough inertia behind something, and letting it go just a little bit longer outweighs hey-wait-a-second-we’re-already-past-where-we-said-we-should-stop.Report

              • Avatar Simon K in reply to Simon K says:

                The true insiders knew from about mid-2006 when it was clear the housing market had turned down. Unfortunately, the machinery was not in place to get the information to the rest of the market until some bright spark had the idea of creating a synthetic index of sub-prime MBS. Once that index existed, it was only months until Lehman collapsed.Report

              • Avatar Simon K in reply to Simon K says:

                I should add that while the insiders knew the loans they were specifically involved with were going to default, they probably did not realize the systemic importance of this. If you’re interested in what really happened, you really should read Gary Gorton’s papers on the crisis. They don’t require any econ to speak of, just math and logic, which I know you can do.Report

              • Avatar patrick in reply to Simon K says:

                The true insiders were deluding themselves from day one.

                Look, everybody knows that there is no such thing as a risk-free investment, right? It’s an ironclad law of economics.

                So when someone brings you a model that says, “In this end we put all our risk, and in the other end we pull out AAA securities”, you *know* they’re feeding you a ball of magic.

                You know it. You went to school for this stuff. You’re not supposed to be a fucking rube buying snake oil on the Internet to make your dick bigger. Claiming otherwise is like having an automotive engineer sit in front of a safety engineer from the NTSB and saying, “No, that metal fatigue baseline is wrong, because the car is safe.”

                I have no respect for their claims of innocence. They all knew it was a sham, and they all went along, because everybody else was.

                That’s human enough. It doesn’t make you a bad person. But it doesn’t make you innocent of the outcome, either.Report

              • Avatar Will Truman in reply to Simon K says:

                Never underestimate the capacity for self-delusion. I worked in the mortgage industry from 2004-06 and we saw the contracts going through, each one worse than the last. Even to the very end, there were a lot of people that believed it would work out… somehow. Yeah, they can’t afford this house, but if they have to, they’ll…. sell it to someone who can!! Or they’ll renegotiate to basically a 60-year mortgage. Or… something.

                I personally fell into the category that you refer to. I saw bad things, though I had no idea how far-reaching it would all be. I thought the suck would be limited to people buying houses in California, Arizona, Nevada, and Washington (we didn’t do much business in Florida).

                Maybe that did change around the time I left (mid-2006), but I’m skeptical.Report

              • Avatar patrick in reply to Simon K says:

                > Never underestimate the capacity
                > for self-delusion.

                Oh, I don’t. Self-delusion is a mighty force.

                I have many relatives in the mortgage industry, and I knew from 2002 that things were already getting weird.

                I knew. They knew. Everybody knew.

                Except, apparently, the guys and gals higher up in the food chain who were being paid millions (or, at least, hundreds of thousands) of dollars to be the actual experts and be able to work despite self-delusion.

                That’s what they’re supposedly getting paid *for*. Now, sure, even then you can mess up every once in a while.

                Shoot, if I did that on an IT system that I ran and the company’s employment records were hacked and we had to send out breach notifications to every employee, I’d be *sacked*, even here in California where people don’t get fired, and I’d be near unemployable in this industry. I’d be working as an independent contractor or a barista.

                They’re all still there, most of ’em collecting bonuses.Report

              • Avatar patrick in reply to Simon K says:

                To clarify that last a bit:

                I don’t think these are bad people. I understand how group think works. I understand how self-delusion works. They’re just people.

                But they really shouldn’t be doing that job any more.Report

              • Avatar Simon K in reply to Simon K says:

                They were deluding themselves, but they also had an awesome argument. Other people believed it after all, so why shouldn’t they? Diversification is key investing principle, right? The more different assets you invest it, the less the risk, and the lower the average return. If you could somehow take a tiny, weighted slice of every asset in the entire world, you’d be totally loss-proof. You’d also only make money at the average rate of GWP growth, which isn’t much.

                So, we have all these people who can’t buy houses because they’re bad credit risks. But if we could somehow lend a little money to each of them, maybe that would be okay?

                So they did a bunch of math and came to the conclusion that yes, it was okay. In the beginning it probably was, but right up until the very end, they kept putting variances calculated using very respectable looking maths in the prospecti for these products.

                Of course, the gaussian cupola formula only really applies if know the correlation, but we have excellent data for mortgage defaults and we pretty much know the correlation is really low. There’s no single factor that could cause thousands of mortgages to all default at the same time, is there? …. is there? … Bueller?Report

              • Avatar Simon K in reply to Simon K says:

                I should point out that the surprising death of Long Term Capital Management had an extremely similar cause and should have been a clue.Report

              • Avatar Koz in reply to Simon K says:

                “I think trust and liquidity are actually very closely related concepts.”

                I was wondering about this when I was reading your prior comment.

                Now that I’ve thought about it, I don’t think this is right for the most part, though there is some overlap between trust and liquidity.

                The metaphor of clock speed is reasonable for trust and liquidity, but I don’t think they’re the same. I think trust operates at a lower, more fundamental level than liquidity. And for the moment at least, it’s quite a bit more important.

                I don’t think lack of liquidity is really a factor in the economy, except maybe for housing, and even there it’s not a monetary issue as opposed to an old-fashioned non-clearing market. If people know they can make money they can find ways to finance it.

                By contrast, lack of trust is everywhere. This was circulating around the internet not too long ago, but a hundred other examples would work just as well.

                There is some overlap in the sense that lack of trust has created a substantial liquidity premium in asset prices as a symptom.

                In any case, because trust operates at such a low level of economic intercourse, we should engineer our macro policy to our judgment of the best outcome given the feasible alternatives, which is a much different animal than holding the expectation that some macro policy will solve growth or unemployment or whatever.Report

              • Avatar Koz in reply to Simon K says:

                “But as any Marxist will tell you, this distributed processing produces a sub-optimal result relative to what The Computer could have done.”

                Unless I’m misunderstanding you, the Marxist is pretty plainly wrong, and in fact it’s not too much of a reduction to say the essence of the 20th century was to prove the Marxist wrong about that very point.

                And in fact this applies just as well in computers as it does in economics. Distributed/parallel architecture is always way faster and more power than serial processing. Remember, computers are engines to manipulate inputs to create outputs. I think you might have some hidden assumptions of omniscience somewhere.Report

              • Avatar Koz in reply to Simon K says:

                “If someone is unemployed, if The Computer is working properly, it means there is absolutely nothing they can do that’s useful to anyone. How likely is that?”

                This should be a pretty good clue that your liquidity interpretation is wrong. Lack of trust slows down the clock speed of commerce and creates unemployment.Report

              • Avatar Koz in reply to Simon K says:

                Finally, before this gets too stale, I want to express my gratitude to Simon and Pat for corresponding.

                In particular, Simon’s explanation of the time-shifting properties of government debt was very helpful. Some readers found his explanation more illuminating than mine so congratulations to Simon. If nothing else he clearly passes that Turing test.

                It was also illustrative something I was trying to get at later. Value is created in the context of interpersonal engagement. I am able to make my points more clearly in the presence of somebody else who understands them (even if he disagrees with some of them). If government policy directly or indirectly penalizes interpersonal engagement, the context is gone and value goes away.Report

              • Avatar Simon K in reply to Simon K says:

                Thank you to you, too, Koz, and Pat. This has been a fascinating discussion, and I’ve come out of it with a clearer understand of your positions, and of my own.

                Regarding a couple of your parting points: I think trust is the more fundamental concept, and liquidity is just a manifestation of it at the financial level. You’ll hate this – I don’t like it much myself – but I’ll say it anyway: The government acts as a trust back-stop when interpersonal trust fails. This is why increasing the supply of government debt and money increases liquidity – no-one expects the government to welch on its obligations. Of course, government also undermines interpersonal trust in all sorts of ways, including by changing regulations and taxes unpredictably. Another way of looking at our disagreement here is that its over which of these effects is larger at the present time.

                I agree the computer analogy contains an assumption that the computer is omniscient. The computer’s result is is the result the real macro-economy would produce in general equilibrium, with no uncertainty, no transaction costs, and perfect information. Its not intended to be realistic, but it is what we’re tending towards over time as both markets and technology improve in their effectiveness.

                Here’s a parting thought for you, though: If your argument above about government debt merely shifting taxation into the future is to be true, we must be quite close to a perfect general equilibrium?Report

              • Avatar Koz in reply to Simon K says:

                I’m not understanding the thought process behind your last question Simon.

                In any case I get your point about government and trust and I have a definite quibble with that. I agree with you that optimally trust in government is a backstop for failed trust trust between persons. But, the policies of government and in particular the Obama Administration have damaged Amercian governments’ ability to fulfill that very role.

                And there’s a lot of things the Administration has done wrong on that score, but by far the biggest mistake was PPACA and everything associated with it. PPACA is a much bigger deal than the stimulus package, which the libs seem to be spending their energy trying to defend at the moment.Report

              • Avatar patrick in reply to Simon K says:

                Shortest possible answer: this would work if the Computer was an infinite Turing machine.Report

              • Avatar Simon K in reply to patrick says:

                Sort of. The problem is mainly uncertainty – unknown and unknowable information. The Computer would actually need to include a complete model of everyone’s brain and excerpt control/prediction over the natural environment. At that point it really is starting to look totalitarian. “Paranoia” is a set in a dystopia after all.Report

              • Avatar patrick in reply to Simon K says:

                Serve The Computer.

                The Computer is Your Friend.Report

              • Avatar Simon K in reply to Simon K says:

                🙂 I was hoping you’d get it.Report

            • Avatar Koz in reply to tom van dyke says:

              “To Mr. Koz: I think you’re making your points strongly enough lately that you may consider dispensing with carrying water for the GOP and knee-jerk liberal bashing. The GOP is often not-good and liberals ain’t all bad.”

              Hmm, how to answer this. This is contingent on the lay of the land today, and most people are making knee-jerk assumptions that are not true or relevant, and in particular it’s frustrating to read criticism of the Republicans as idiots from people who are not as intelligent as the people they are criticizing.

              It wasn’t too long ago that Jaybird was hammering the Republicans for something Ed Meese wrote. Ed Meese, really? Can’t we apply some standard of relevance? Might as hurray for Coolidge then. Though to be fair to Jaybird, if we were half as good say from 1997-2007 as we are now the country would be in way better shape than it is.Report

          • Avatar Simon K in reply to Koz says:

            In the original Keynesian view, government spending in and of itself creates aggregate demand. Almost no-one now believes this – not even Paul Krugman when he’s actually being an economist. It depends how the spending is financed. In order for their to be additional AD, you have to give people an asset they don’t want to keep because its return is inadequate, so they spend it. Therefore increasing AD necessarily involves increasing liquidity. You can do this by swapping short term bonds for long term bonds (QE), swapping cash for short terms bonds (normal open market operations), or selling bonds and using the proceeds to buy illiquid assets so the net is more bonds, less illiquid assets (which can be anything – this is fiscal stimulus, although some Fed programs look a lot like this). All three require the cooperation of the Fed, because only it can print new cash, and even when that isn’t required, any stimulus depends on the Fed not reducing the money supply to compensate.Report

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