Wednesday, March 14, 2012

Math is hard

But J. Brad Delong proves that the math behind deficit spending in a down economy works. That is, money in a depressed economy is seeking safe havens to hide in. What's safer than the full faith and credit of the United States of America? Nothing. What to do if bond buyers drive bond rates to effectively negative? Sell more bonds, duh -- I mean, if you're *making* money selling Treasuries, why the hell not?

So anyhow, that's just mathematical proof of what we already knew -- the proper role of government in a consumption-slump-caused recession is to be consumer of last resort, taking the money that would ordinarily be spent on consumption (but is now looking for a mattress to hide under) and putting it to use doing something useful rather than just sitting under a mattress effectively being pretty-colored toilet paper from the perspective of the economy.

Which brings to mind something that JzB and I have been hashing about in emails, about the nature of money and how do you measure the amount of effective money in an economy (i.e., the money actually in use to buy and sell stuff). Some thoughts: 1. Consumer consumption is money. 2. Government purchases is money. 3. Consumer and government wages are money. 4. Capital improvement purchases are money. All of these involve money changing hands in exchange for something of real value (money itself has no real value, it's just toilet paper with pictures of dead people for, it's the fact you can exchange money for things of real value that give it effective value despite no intrinsic value). If you add up all of these money flows in a month, you should have a good notion of the effective money supply in a given month. If you compare this number to the inflation rate, what do you see? I don't know. Maybe JzB will do one of his pretty charts and show us :).

-- Badtux the Random Economics Penguin


  1. I think that's a chart I'll get to eventually. There are some other steps along the way, and I do have my own fell purpose in exploring this.

    If you include wages, then don't you have to subtract savings - the portion of wages that finds its way under the mattress?

    I stumbled over whether to include capital improvement expenditures. Yes, they are circulating money, but they are not circulating in the same stream as consumption expenditures. They can influence the prices of control modules and fork lift trucks, but probably not the prices of bread and pork chops at least not in a very direct way.

    Maybe this is why CPI and the GDP deflator have diverged over time. But that is just a speculative after-thought.


  2. I meant to add that the math is easy - just 3rd grade addition and subtraction. What's hard is getting the assumptions right.

    Speaking of which - OK - just skimmed the Delong article, and I think he gets 2 assumptions wrong.

    1. ξ is the fiscal drag—the future output lost as a result of raising a dollar of tax revenue through distortionary taxes . . . the fiscal drag ξ for raising tax rates is always there and can be substantial

    Is there even a single shred of evidence that there is any future output loss at current rates? I have very serious doubts. Raising taxes increases the incentive to invest, for one thing.

    2. And amortizing this debt requires taxes in the future that act as a drag on enterprise.

    This is simply bull shit, besides also including error #1. Governments NEVER amortize their debts.

    So, the two big negatives in the presentation simply go away, and the case for fiscal policy becomes substantially stronger.

    Or have I screwed something up?


  3. I think where you screwed up is believing that these are Brad's assumptions, since Brad DeLong himself is a Keynesian. These are the assumptions of the "Classical" / Chicago school economists, which Brad then goes on to shoot down as inapplicable at least in a recession economy. I.e., he's trolling for converts to reality-based economics, and starts where they are to show that, at least in a down economy, their assumptions are *wrong*.

    Regarding payroll and velocity, some of the money put into passbook savings ends up back in the economy when the bank loans it out, so I think it isn't necessary to make any adjustment for that. What counts is that the money moved, and thus *was* for the amount of time that it took to move from the employer to employee. If the money then disappears under a mattress that's not our concern, that will be accounted for in the *next* set of transactions when there will be less money changing hands *somewhere* due to some of the money disappearing under mattresses.

    - Badtux the Economics Penguin

  4. Re: Brad - OK, my bad. I just skimmed. The math was too hard.

    Re: payroll - You have to assume something, and it might as well be that.

    My inkling at this point is the greater the money number becomes, the worse its correlation will become.



  5. . . . correlation to inflation that is.

    I need to get to bed. Almost midnight here.

    Severe thunder storms, large hail, thousands of lightning bolts per hour and tornadoes in S.E. MI earlier this evening. Widespread damage south and west of where I am.

    We could hear some thunder in the distance and see lots of dark clouds, but nothing came close to us. Horrible for the people in the path, though.



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