Reply to Frances Coppola

Here is Frances Coppola:

Scott Sumner argues thatwhen the monetary base is fixed, low interest rates are deflationary. I’ve emphasised the fixed monetary base because it is an important condition. If the monetary base is NOT fixed then the relationship between low interest rates and deflation is much less clear.

Logically, this makes sense. If the supply of base money is fixed, then falling interest rates indicate* rising demand for base money, increasing its value and therefore causing prices to fall. Aficionados of a classical gold standard will recognise this as “benign” deflation. Falling interest rates when the monetary base is fixed are an indicator of healthy growth.

I would argue the opposite.  Low interest rates are usually indicative of weak growth, as both real and nominal interest rates are procyclical.  Barsky and Summers showed that under the gold standard, when the economy slowed interest rates tended to fall.  This increased the demand for gold (the medium of account) and was deflationary.

The “good deflation” was a secular phenomenon.  It was associated with a rise in the demand for money from positive trend real GDP growth, not lower interest rates.

It’s misleading to say falling interest rates are only deflationary under a constant monetary base. They have a deflationary impact regardless of the base, it’s just that when the base is changing the deflationary impact from falling interest rates is often offset by the inflationary impact of a rising monetary base.

The Fed was not holding the monetary base fixed and allowing the interest rate to fall, which is what Sumner implies. It was actively supporting the Fed Funds rate.

The Fed Funds rate is not simply a market interest rate. At the time, it was the primary monetary policy tool, though these days – because of the presence of excess reserves in the system – it has been superseded by the interest on reserves (IOR) rate.

Interest rates fell becasue of a weakening economy, not because the Fed cut interest rates.  When the Fed announcement in December 2007 was less expansionary then expected, 3 month T-bill yields (which are market interest rates) fell on the news. Markets understand market monetarism. A few weeks later the Fed had a panicky emergency meeting and cut it’s fed funds target in an attempt to keep up with changing economic conditions.  The reduced demand for loanable funds was pushing rates lower, and because the Fed did not respond by increasing the base this led to a further slowdown in NGDP.

Sumner seems to think that the Fed should not have supported the rate by draining reserves. On he contrary, he explicitly blames the Fed’s failure to expand the monetary base at this time for the subsequent collapse of NGDP:

Between August 2007 and May 2008 there was no change in the monetary base, and yet interest rates fell sharply.  Not surprisingly NGDP growth slowed and we tipped into recession.

But the problem was inflation:

Expansionary monetary policy when inflation was already so far above target would have seemed like madness. Even since the crisis, it takes a brave central bank to hold its nerve and its expansionary policy when inflation is a long way above target, as the Bank of England has discovered.

Yes, at the time the market monetarist message would have seemed like madness—focus on NGDP growth and ignore inflation.  But we now know it is inflation targeting that is madness.  Even Bernanke now admits that actual policy was too tight during the crisis.

Nor would NGDP targeting necessarily have made much difference to Fed policy. We now know, with the benefit of hindsight, that NGDP was going to fall off a cliff in 2008. But at the time, NGDP didn’t show much sign of such a dramatic collapse:

It would have made a huge difference, because with NGDPLT monetary policy works with “long and variable leads.”  The expectation that the Fed would return to the 5% trend line in the long run would have stabilized asset markets in the short run, and Lehman might not have even failed.

Those in favour of a strict rule-based approach to monetary policy based on something like an NGDP target will no doubt be disappointed: but as I said above, an NGDP target would not necessarily have resulted in a markedly different policy stance in the crucial early part of the financial crisis.

Maybe not all that different, but then the initial part of the recession was exceedingly mild.  Most importantly NGDPLT would have created expectations of a very different policy in the latter half of 2008, which would have made the recession far milder.

PS.  The Coppola post refers to a money supply graph that I wasn’t able to find. Was it included? Another graph has a garbled horizontal axis, and another refers to potential NGDP which is a nonexistent concept.  “Potential” only has meaning for real variables.

Update:  I mistakenly linked to the wrong version of the post.  The correct version does have a money supply graph.

HT:  Travis V.

 


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81 Responses to “Reply to Frances Coppola”

  1. Gravatar of W. Peden W. Peden
    25. March 2014 at 06:11

    “In short, if you look ONLY at monetary aggregates and inflation, it is hard to argue that the Fed’s policy during this period was too tight.”

    Yet another good argument to focus on expectations.

  2. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2014 at 07:04

    Nice blogging.

    And Bernanke is a little bit doing some revisionist history. The FOMC was compulsively obsessed with inflation all through 2008, as we know from the just-released transcripts.

    I disagree with Scott Sumner in his wording in this paragraph: “Yes, at the time (2008) the market monetarist message would have seemed like madness—focus on NGDP growth and ignore inflation. But we now know it is inflation targeting that is madness. Even Bernanke now admits that actual policy was too tight during the crisis.”

    I do not think it is “madness” to focus on NGDP growth, when a recession is on. I did not think it then, in 2008 (although then I was only thinking about economic growth, not NGDP)…I never thought inflation under 5 percent was much to worry about. The historical record shows I am right on this.

    It is madness to peevishly fixate on inflation, or to consider lower rates of inflation, in and of themselves, to be a positive.

    BTW in the 1970s, Japan posted good real growth with inflation rates in the double digits and one time above 20 percent for a year. In the USA, the years 1982 to 2007 were fine and dandy, with inflation varying from 2 to 5 percent for most of that time.

    It is madness to not accept higher rates of inflation to avoid economic contractions.

  3. Gravatar of dannyb2b dannyb2b
    25. March 2014 at 07:15

    “The expectation that the Fed would return to the 5% trend line in the long run would have stabilized asset markets in the short run, and Lehman might not have even failed.”

    Why will expectations be any different if the fed increases base the same amount under ngdplt as it would have under inflation targeting?

  4. Gravatar of Tommy Dorsett Tommy Dorsett
    25. March 2014 at 07:20

    Here’s a chart that would bring a tear to Milton Friedman’s eye:

    http://research.stlouisfed.org/fred2/graph/?g=uqr

    Yes, the demand for money (1/v) is an inverse function of the market interest rate. About that there is simply no debate.

    So why does the Wall Street intelligentsia fret about rising long rates when they *should* be asking WHY long rate have (or have not) risen. It’s the V, stupid.

  5. Gravatar of Tommy Dorsett Tommy Dorsett
    25. March 2014 at 07:25

    Sorry that chart didn’t post properly – the overhaul of FRED has some massive bugs in it…

  6. Gravatar of TravisV TravisV
    25. March 2014 at 07:51

    Some discussion yesterday of DeLong’s disagreement with Krugman:

    https://twitter.com/CardiffGarcia/status/448242668611854336

  7. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 09:00

    Scott,

    All the charts are from FRED. I agree with Tommy Dorsett. New FRED has bugs. If a horizontal axis is garbled, it is because FRED garbled it – and I don’t have any control over that, sadly.

    Also, all the charts I refer to are in the post. The “missing” money supply graph is Graph 1 (M0/M1/M2).

    Re the NGDP potential: as the Fed does not have an NGDP target I used potential NGDP as a proxy, purely to show the gap beginning to open in early 2008. Cheating, I admit. I could have stolen Marcus Nunes’ charts instead, I suppose.

    Now to look at your response to my post. You’ve misunderstood quite a bit of what I wrote, unfortunately. Here are my clarifications.

    1. First you disagree with me that falling interest rates can indicate healthy growth, and then you admit that when there is a positive RGDP (secular) trend interest rates can fall. I didn’t say anything about the trend of RGDP growth. Nor did I say anything about cyclicality.

    You seem to confuse “indicate” with “cause”. I did not say that falling interest rates “caused” anything – indeed in the footnote I explained why I did not. I said they could INDICATE healthy growth,which is consistent with what you said about a secular trend.

    Actually I don’t think falling interest rates usually “indicate healthy growth” either. I’m no fan of deflation, as you would know if you had read any of my recent work. However, I’ve had enough arguments with goldbugs to know how they think. They like deflation, because they only recognize the secular sort. It’s that variety I was referring to. I’d also suggest reading David Beckworth’s comments on the post. He understood what I was talking about.

    2. I also said that the relationship of interest rates and deflation is less clear when the monetary base is not fixed. You dispute this, and then give a reason why the relationship is less clear. I don’t disagree with your reason, but it doesn’t invalidate what I said.

    3. I did NOT say interest rates fell because the Fed cut rates. Quite the contrary, actually. I said the Fed was trying to STOP them falling – hence the reserve drains that I mentioned. You have completely misconstrued what I said, which is a pity because we are saying similar things, just in different language. You say:

    “The reduced demand for loanable funds was pushing rates lower, and because the Fed did not respond by increasing the base this led to a further slowdown in NGDP.”

    I say:

    “The Fed was not holding the monetary base fixed and allowing the interest rate to fall, which is what Sumner implies. It was actively supporting the Fed Funds rate.”

    What I am saying is that Fed policy was actually even tighter than you think. At times during this period it was supporting the Fed Funds rate not by “not responding” to reduced demand for reserves (loanable funds, in your language), but by actively reducing the amount of reserves in the system. That’s why the fact that M0 was roughly tracking M1 is important: when M1 reduced, the Fed actually drained reserves to prevent the interest rate falling. I could look up the OMO records, but really the behavior of the monetary aggregates is sufficient to show this. And if you look at the money multiplier for the same period (I did, though I didn’t put it in the post) you will see it was pretty much a constant ratio.

    4. I’m certainly not defending the tightness of Fed monetary policy at this time, merely trying to explain it. Inflation well above target WAS the reason for tightness. I agree that had NGDPLT been targeted instead, policy would probably have been looser. But I notice that you don’t attempt to answer the question I pose at the end of the post, about distinguishing between a gentle cyclical downturn in NGDP and the start of a disastrous deflationary collapse, except to say that had NGDPLT been targeted there might not have been such a collapse. Why do you think the Fed would have foreseen such a collapse and acted to prevent it?

    I do wish you had understood what I wrote. We are actually on much the same page – as I said in my discussion with David Beckworth in the comments.

  8. Gravatar of TravisV TravisV
    25. March 2014 at 09:04

    Ben Cole,

    You wrote: “Although, 10 years is a long time. It may be possible that Fed culture, or the zeitgeist of the economics profession will gravitate towards Market Monetarism somewhere in a 10-year time frame.

    I have optimistic days….But, as I say, 10 years is a long time…maybe something will happen……”

    Prof. Sumner wrote the following on September 14th, 2012:

    http://www.themoneyillusion.com/?p=16230

    “In my view the most important gain might be in future business cycles. The Fed has implicitly acknowledged that they should have paid more attention to market monetarists and Woodfordians back in 2008-09. Like most big institutions, the Fed evolves gradually over time. Perhaps the best analogy I could provide would be the Keynesian revolution. It had a small impact on 1930s policy-making, but not enough to promote a fast recovery. On the other hand it became conventional wisdom among policymakers after WWII (for better or worse–and I’d say “both.”) I expect the Fed to do some hard thinking about signaling/level targeting/etc between now and the next recession, and to be better prepared next time.”

    That said, Sumner wrote the following on March 13th, 2014:

    http://www.themoneyillusion.com/?p=26364

    “Unfortunately, we don’t have a coherent policy regime. We don’t know what the Fed is trying to do to NGDP. More importantly, we don’t know what they’ll do if they fail. That is an important part of a regime. Will they act as they did in 2008-09? Or will they have learned something, and act more appropriately (with some catch-up.) I hope it’s the latter, but the honest truth is that we simply don’t know.”

    My gut feeling is that Sumner had it right on September 14th, 2012…..

  9. Gravatar of Tommy Dorsett Tommy Dorsett
    25. March 2014 at 09:19

    Scott — Better graph of rates and velocity here:

    http://research.stlouisfed.org/fredgraph.png?g=uqF

  10. Gravatar of ssumner ssumner
    25. March 2014 at 10:20

    Ben, I agree NGDPLT would not have been madness, I meant it would have bene perceived as madness by the inflation nutters than ran our policy.

    Danny, Because the future expected path of policy is very different under the two regimes.

    Thanks Tommy.

    Frances, You said:

    “All the charts are from FRED. I agree with Tommy Dorsett. New FRED has bugs. If a horizontal axis is garbled, it is because FRED garbled it – and I don’t have any control over that, sadly.

    Also, all the charts I refer to are in the post. The “missing” money supply graph is Graph 1 (M0/M1/M2).

    Re the NGDP potential: as the Fed does not have an NGDP target I used potential NGDP as a proxy, purely to show the gap beginning to open in early 2008. Cheating, I admit. I could have stolen Marcus Nunes’ charts instead, I suppose.”

    We must be looking at different posts. The post I linked to has no money supply graph. It shows the fed funds rate in the first graph. Are you referring to a different post?

    I’m also puzzled by your statement “if a horizontal axis is garbled.” What does that mean? Is there any doubt about whether it is garbled? Are we talking about the same post?

    As for potential NGDP, there is no such thing. So I don’t understand your “cheating” comment. I have no problem with proxies, but you can’t use a non-existent concept to proxy for something else.

    There’s no point in me responding to the rest of your comments until we establish that we are talking about the same post. I fear I am analyzing a different one.

  11. Gravatar of TravisV TravisV
    25. March 2014 at 10:33

    Prof. Sumner,

    I think Frances Coppola did include the graph of M0/M1/M2 in her original post (see here):

    http://coppolacomment.blogspot.com/2014/03/interest-rates-and-deflation.html

    However, that graph was lost when Frances’s post was copied to creditwritedowns.com:

    http://www.creditwritedowns.com/2014/03/interest-rates-deflation.html

    That was the link I originally posted. Apologies for the confusion.

  12. Gravatar of flow5 flow5
    25. March 2014 at 11:15

    Contrary to Nobel Laureate Dr. Milton Friedman, the monetary base [sic] is not now, nor has ever been, a base for the expansion of new money & credit.

    The only tool at the disposal of the monetary authorities in a free capitalistic society thru which the volume of the money stock can be controlled is via legal (required) reserves. Keynes’ “liquidity preference curve (demand for money), has always been a false doctrine. Note also that the FFR hasn’t been the Fed’s primary tool for decades (it’s always been the repo stop-out rate). I.e., the Federal Funds rate market is relatively small in comparison to the government securities market.

    And the introduction of the payment of interest on excess reserve balances emasculated the Fed’s “open market power”. The effect of these “open market operations” on interest rates (now via the remuneration rate), is indirect, and varies widely over time, and in magnitude. What the net expansion of the money supply will be, as a consequence of a given injection of additional reserves, nobody knows until long after the fact. The consequence is a delayed, remote, & approximate control over the lending and money-creating capacity of the banking system.

    The money supply (& commercial bank credit), can never be managed by any attempt to control the cost of credit (i.e., thru pegging the interest rate on governments; or thru “floors”, “ceilings”, “corridors”, “brackets”, or the remuneration rate on excess reserve balances, etc.). See: “Scott Fullwiler | April 7, 2012 at 6:55 pm | Reply I completely agree with your (this) final sentence (!).”

    The FRB-NY’s “trading desk” has targeted the “one day cost of credit” at least since Paul Meek wrote about the FOMC’s modus operandi in “Open Market Operations” (dating back to his 1974 booklet). Therein, he described the same working model that Paul Volcker supposedly first tried in 1979 (targeting non-borrowed reserves).

    Note aside: “the advantage of the liquidity funding auction facilities (beginning in the 4th qtr of 2008), was the liberal rules regarding the types of assets accepted by the discount window as collateral — including certain CDOs. Such securities are not purchased by the Open Market Desk as it supplies non-borrowed reserves”.

    There’s a big difference between the type of securities that the Fed will accept at the Discount Window (credit easing), and at the Open Market Desk (i.e., quantitative easing). That said, one dollar of borrowed reserves provides the same legal-economic for the expansion of new money as one dollar of non-borrowed reserves (Volker’s idea of monetarism).

    Back in the good old U.S.A., money grew at less than a 2 percent rate in the decade ending in 1964. In the nine subsequent years the money supply grew at a rate in excess of 6.5 percent…

    The problems originated from using the wrong criteria (interest rates as the FOMC’s operating tool, rather than member bank legal reserves) in formulating & executing monetary policy. Net changes in Reserve Bank credit (since the Federal Reserve Accord of 1951) were determined by the policy actions of the Federal Reserve. But William McChesney Martin, Jr. changed from using a “net free” or “net borrowed” reserve position approach to the Federal Funds “Bracket Racket” c. 1965. Note: the Continental Illinois bank bailout provides a spectacular example of this practice.

    The effect of tying open market policy to a fed funds bracket (or any other interest rate), is to supply additional (& excessive) legal reserves to the banking system when loan demand increases. Since the member banks have no excess reserves of significance, the banks have to acquire additional reserves to support the expansion of deposits — resulting from their loan expansion. If they use the Fed Funds bracket (which was typical), the rate is bid up and the “trading desk” responds by putting through buy orders for gov’ts, free reserves are increased and soon a multiple volume of money is created on the basis of any given increase in costless legal reserves.

    Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of the Fed) as cited in the WSJ April 10, 1986 notable & quotable column: “…I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always, & still is, a preoccupation with stabilization of interest rates”. Note: Volcker widened the Federal Funds brackets (policy rate) – didn’t eliminate them.

    Interest rates are the price of loan-funds, not the price of money. The price of money is represented by the various price indices.
    ——–

    “We now know, with the benefit of hindsight, that NGDP was going to fall off a cliff in 2008”

    NO, I posted a forecast in DEC 2007 that money flows unquestionably projected a recession in the 4th qtr. of 2008 without extra monetary intervention. I.e., rates-of-change (roc’s), in aggregate monetary purchasing power (our means-of-payment money times its transactions rate-of-turnover), equal roc’s in all transactions in Irving Fisher’s “equation of exchange”. I.e., roc’s in MVt approximate roc’s in nominal-gDp (proxy for “PT” in Fisher’s mathematical truism)

    And contrary to Nobel Laureate Dr. Milton Friedman, the distributed lag effect for money flows has been a mathematical constant for the last 100 years (not as the pundits. nor as Swartz & Friedman said in the “Optimum Quantity of Money”: with unpredictably “long and variable lags”).

    “but at the time the main worry would have been inflation well above target”

    As I already pointed out:

    http://uneasymoney.com/2014/03/06/stephen-williamson-defends-the-fomc/

    “The trajectory for money flows in Dec was already contractual for the 4th qtr of 2008. As a consequence, a recession was inevitable without a reversal in this trend (countervailing intervention). This is simply inviolate & sacrosanct.”

    And inflation was out of lock step because of the dollar’s falling exchange rate. The peak in the roc in money flows (proxy for real-output) was already in place in Dec. 2007 (see 7/1/2008 = a peak in the roc of .32)”. The dollar’s exchange rate (which varies inversely with the price domestic price level), was the direct result of dropping the target FFR (a monetary policy blunder).

    See also: Dr. Daniel L. Thornton (senior economist @ FRB-STL): “The close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits”…”to equate movements in required reserves with effective money creation”…”It is important to note that the $308.7 billion increase in total checkable deposits since QE2 occurred with only a $27.5 billion increase in required reserves. This reflects the relatively low effective reserves requirement on checkable deposits, apparently about 9 percent ($27.5/$308.7)”

    See: bit.ly/yUdRIZ

    research.stlouisfed.org/publications/es/12/ES_2012-02-03.pdf
    Quantitative Easing and Money Growth:
    Potential for Higher Inflation?
    Daniel L. Thornton

    What’s important though, it’s not the money stock per se that reflects monetary policy, but the rate-of-change in legal (required reserves).

  13. Gravatar of flow5 flow5
    25. March 2014 at 11:25

    “I don’t have any control over that, sadly”

    Wrong again.

  14. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 12:26

    Travis,

    Thanks for posting a link to my original post. I hadn’t looked at the Credit Writedowns version of my post: Edward usually posts an exact copy, so I didn’t bother to check it. Evidently something went badly astray this time, because that particular chart being missing (and a garbled horizontal axis on another chart, too) makes the post incomprehensible. I have learned my lesson and will check cross-postings in future!

  15. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 12:27

    Scott,

    see my comment to Travis.

    The NGDP potential line doesn’t add anything useful anyway. It’s quite obvious that NGDP was slowing gently from the end of 2007 – and that’s what really matters.

    I didn’t realise it was the Credit Writedowns version of my post you looked at. Apart from the mess that Credit Writedowns seems to have made of my graphs, that version also doesn’t have David Beckworth’s comments on it, which I mentioned in my previous comment.

    Obviously I look forward to your comments when you’ve had a chance to look at the original post.

  16. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 13:04

    Low interest rates are usually indicative of weak growth, as both real and nominal interest rates are procyclical. Barsky and Summers showed that under the gold standard, when the economy slowed interest rates tended to fall. This increased the demand for gold (the medium of account) and was deflationary.

    It appears that there is a lot of deep rooted disagreement concerning what “low” interest rates signify. A lot is banking on it too.

    There is yet another theory entirely consistent with the data tabulated by Barsky and Summers. And that is the theory that it isn’t so much a weak economy that causes rates to fall, but rather that a weak economy is typically responded to by the Fed who actively lowers rates to stave off recession (actively meaning it inflates reserves and through the liquidity effect lowers rates). This is why we see a correlation between low rates and a weak economy. It isn’t that the weak economy is pulling down rates, it’s that the Fed’s typical response to the weak economy that does it.

    Similarly, it isn’t so much a strengthening economy that raises rates, but more the Fed ‘s response of raising rates in a strengthening economy that does it.

    And why do I say rates with an “s”, and not rate without it? Because the Fed is in control of the fed funds rate, and it is the key rate that banks utilize when setting ask and bid rates for other loans including treasuries and corporate debt. It isn’t a weakening economy that lowers the fed funds rate. In fact, in conditions of a liquidity and/or credit crunch, and of recession, banks would raise the fed funds rate without Fed control, as they would become pressured to borrow more to cover their operations and would be less willing to lend for the same reason. With more demand for borrowing and less inclination of lending, the overnight rate would otherwise rise.

    Distressed banks don’t become willing to lend at lower rates. They become willing to lend only at higher rates. The Fed gifts the banks with plenty of reserves during such times, and it is this gifting of reserves that coaxes the banks to reduce the fed funds rate. If they didn’t, and let market forces take more control (still not total control because the Fed has a monopoly), then the banks would not only lend to each other at higher rates (fed funds rate), but they would also raise rates on their loans of other materurites. In addition, corporate rates would also go up.

    We don’t SEE this during recessions, because the Fed typically responds by flushing the banks with new reserves and keepng a lid on rates rising too much. This is why Barsky and Summers find a correlation between low rates and recessions.

    Now, of course, as in everything economics related, there are always counterforces. Against the above is the downward pressure on short term t-bill rates and other government debt that takes place during recessions as investors pile into such safer securities. If the Fed “did nothing” during a recession, then Sumner might have a point in his claim that rates lower BECAUSE of recession. But the Fed doesn’t just sit back. It acts. That action results in this term structure history:

    http://research.stlouisfed.org/fred2/graph/?g=uul

    Rates rise and fall from passive and active Fed activity, given that they are chasing their own tails and constantly trying to reverse the effects from its ownnpast actions.

  17. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 13:08

    flow5

    You obviously haven’t tried to use FRED recently.

  18. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 13:14

    Major_Freedom

    Indeed, that was my point. In the period that we were discussing, namely Aug 07 to May 08, the Fed was actively supporting the Fed Funds rate. That’s what I explained in the post.

  19. Gravatar of Morgan Warstler Morgan Warstler
    25. March 2014 at 14:47

    You say:

    “The reduced demand for loanable funds was pushing rates lower, and because the Fed did not respond by increasing the base this led to a further slowdown in NGDP.”

    I say:

    “The Fed was not holding the monetary base fixed and allowing the interest rate to fall, which is what Sumner implies. It was actively supporting the Fed Funds rate.”

    I think the real issue is this:

    “Nor would NGDPLT targeting necessarily have made much difference to Fed policy. ”

    Then in comments Frances says this:

    “as I said in the post, when the NGDP fall is gentle – as it was in early 2008 – how do you distinguish between a mild deflationary trend that is essentially benign, and the start of a disastrous deflationary collapse?”

    I’ve never quite understood how people who even talk about things like mint the coin, MMT, or guaranteed income without a rock solid work requirement can’t grok a very straight forward brutal machine response to the single instruction:

    STAY ON the 4% NGDPLT PATH

    If in Aug the machine, not the Fed (remember the Fed no longer matters with NGDPLT) doesn’t think in terms of “is it mild” or “is it disastrous” it just expect s a .2% drop or whatever the futures market etc predicts.

    And WHAM, WHAM, WHAM it comes in down .5%:

    The machine immediately sees shifted lower assumptions for Sept, Oct, Nov, prints and realizes it has to buys enough stuff to both handle the .3% make up, but also throw another added .6% on there to KEEP NGDP on LT.

    And it very well might look like watching a world class fat finger trade in HFT environment, the machine just keeps buying everything in sight, ceaselessly bidding more for whatever is put out there, jesus it has to increase NGDP, via inflation by 1% in the next 60 days.

    The machine makes Chuck Norris look like Paul Krugman.

    As such, the following month and every other month in future, the 100% rock solid guarantee is that the machine moves fast over short time windows it is capricious or benevolent.

    now I’d rather the machine operate first as a futures market for SMB owners, and have the transmission mechanism first and foremost be about giving them better than even odds on both winning and losing bets.

    But to me the idea of how to stay on 4% NGDPLT seems like a non-issue.

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. March 2014 at 14:49

    Evidently I should have commented on this post this morning. I read both versions of Frances’ post and noticed Beckworth’s comments.

    Some observations:

    1) Scott, I’ve pointed out to you more than once in the past that the CBO has two potential GDP series: NGDP and RGDP. For some reason you still refuse to believe it.

    2) I commented several days ago about the FRED mess. I’m glad other people feel the same way.

    I have 700 graphs in my account. Initially nearly all of them were ruined because of the new sliding scale feature. Now most have been fixed, but some of my best graphs, on historical data spanning century long periods, are still an unholy mess.

    FRED also switched from alphabetical ordering to the order in which graphs were created. When you combine that with the fact that my graphs are no longer in a list, but are organized in 47 different pages, this means it takes me forever to find a graph.

    I cannot fathom what is going on at FRED but evidently they gave no consideration at all to how FRED’s pre-existing users would be affected by the change. In a word it has been an absolute catastrophe.

    3) My general observation on this particular post is that Frances and Scott are not really very far apart on substance. I do however think if we had a market based measure of NGDP expectations, perhaps people would have noticed its steady significant decline in the two years preceding Lehman, and would have noticed its falling off a cliff starting in early July just as inflation expectations did.

  21. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 14:55

    Frances Coppola:

    I would say that the Fed is always “actively supporting” the fed funds rate, since they are engaging in OMOs on a daily basis in order to target the rate they want.

    I think we agree on the larger point.

    But this comment you made is inaccurate, if it is meant to refer something more univeral than an anecdote:

    “However, I’ve had enough arguments with goldbugs to know how they think. They like deflation, because they only recognize the secular sort.”

    On a side note, I myself am a “goldbug”, if by that we mean “I am someone who thinks people should be free to use gold as money if they want to, without being taxed or penalized for it in dollars”, or if it means “I think a 100% reserve gold standard, whatever its flaws, would work better than our existing system if a system is to be imposed politically.”

    To the point now. It is not the case that I “only recognize” price deflation caused by production increases, or what is called “secular” deflation.

    I am fully aware of the monetary contraction cause of price deflation.

    I of course can’t and won’t speak on behalf of every goldbug you’ve conversed with, but what might be happening is that you are interpreting their lack of hysteria, or perhaps more diplomatically, their lack of urging the central bank to reinflate during periods of monetary contraction, to be a sign that they do not understand P=D/S, where a smaller D (which we can think of as a price level for the purposes of this discussion) causes lower prices, ceteris paribus.

    Goldbugs are typically free market supporters, and anti-Fed, natch, and so their desire to opt out of the Fed’s hegemony takes precedence over whether the Fed should inflate more, or if it should inflate a lot more, as a “response” to otherwise market force influenced contractions in spending and thus “bad” price deflation. They view any calls for inflation as anti-market activity and something to defend against.

    A 100% reserve gold standard would be deflation proof, (deflation defined as money supply contraction), since unlike our existing system, money is not destroyed from existence due to bank debt default or to bank debt paybacks. It would also make booms and thus busts virtually impossible, since there would be no easy way for a central bank to lower rates below market. With no significant busts, there is no reason for the kind of significant and sudden increases in money holding that we saw 2006-2009.

    In this way, it is not unreasonable to assume that almost all price deflation would be of the “secular” sort. Notwithstanding wars, natural disasters, and other non-monetary causes for sudden increases in cash preferences.

  22. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 15:07

    Going to 1929 and the Great Depression, the problem wasn’t that the Fed allwed the fiat money supply to contract 30%, since it would be ideal for the supply of fiat dollars to decrease to zero. The problem was that the government used force and coercion to keep people in the fiat system as it was crashing.

    As an analogy: it wouldn’t be bad if the government of a fully socialist country stopped barking orders at potato farmers at gunpoint such that the government were no longer in control of potato production. It would be bad if they kept pointing their guns at anyone who tried to produce and trade potatos on their own as a replacement.

    The problem of social life is violence, not a lack of pieces of green paper with pictures of dead mafia leaders on them. Many people in monetarist circles have an incredibly difficult time understanding the difference.

  23. Gravatar of TravisV TravisV
    25. March 2014 at 15:14

    (Sigh)……

    FRED will no longer use S&P or Dow Jones data.

    http://www.businessinsider.com/fred-will-no-longer-use-sp-data-2014-3

  24. Gravatar of Michael Byrnes Michael Byrnes
    25. March 2014 at 15:38

    Major Freedom wrote:

    “I would say that the Fed is always “actively supporting” the fed funds rate, since they are engaging in OMOs on a daily basis in order to target the rate they want.”

    I’m guessing that Frances meant “support” in the sense of “holding it up when it would otherwise have fallen”, and that she would use a different term to describe a period when the Fed was buying bonds to prevent the Fed Funds rate from rising.

  25. Gravatar of dannyb2b dannyb2b
    25. March 2014 at 15:51

    “Danny, Because the future expected path of policy is very different under the two regimes.”

    Would expectations be different under NGDPLT regime if we assume that base permanently increases the same amount and timing under both policy paths (NGDPLT or inflation targeting)?

  26. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 16:03

    Michael,

    Yes, that was indeed what I meant. Similarly, at the moment the Fed supports the Fed Funds rate (i.e. prevents it from falling below zero) by paying interest on excess reserves.

  27. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 16:07

    Question for MM supporters:

    Given that you believe inflation since 2008 was not enough, how many of you would take at least some intellectual responsibility should the government treasury avoid insolvency (that was generated by too much debt being accumulated in the past due to low treasury rates brought about by the Fed) by “inflating its way out of debt” and going above 4.5% NGDP growth?

    What I mean is, what if all the past “not enough inflation” was positive enough in encouraging more borrowing and spending by the Treasury, that it results in a massive future cutback in other spending or outright insolvency if the Fed doesn’t go above 4.5% NGDP?

    Would you say “They went above 4.5% NGDP, so I’m immune”, or would you say “Darn, I didn’t know that all the years I called for more inflation, I was at the same time encouraging more borrowing and spending by the Treasury due to low interest rates which had the actual effect of requiring above 4.5% NGDP to keep the Treasury solvent.”?

  28. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 16:10

    Frances Coppola:

    “Similarly, at the moment the Fed supports the Fed Funds rate (i.e. prevents it from falling below zero) by paying interest on excess reserves.”

    Are you saying that in the absence of the Fed paying interest on reserves, the major banks would otherwise begin lending to each other at negative interest rates? That bank A would PAY bank B to borrow A’s money?

    That doesn’t sound right.

  29. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 16:18

    Major_Freedom

    Your definition of deflation is fundamentally different from mine. I take deflation to mean a general fall in the price level. You define it as a contraction in the money supply.

    If you have a fixed monetary base (say as in a classical gold standard) deflation can ONLY mean a price level fall, not money supply contraction. Therefore, as you say, deflation (my definition)is most likely to be secular and benign.

    If your fixed monetary base is leveraged, then deflation (my definition) may or may not involve a contraction in the monetary base.

    In 1929 the US was on a leveraged gold standard, not a fiat money system. It did not abandon the leveraged gold standard until 1933.

  30. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 16:42

    Frances Coppola:

    I am almost entirely on board with what you wrote there, but for two small points.

    1. I understand you have a different definition, but I don’t believe it affects the argument I am trying to make, but admittedly might not be clear. In a non-leveraged gold standard, that is, 100% reserve, I think you would agree that price deflation would be almost always “secular” in nature. Of course, in a leveraged system, contractions in money supply are possible.

    2. Regarding fiat versus leveraged gold, we definitely are referring to the same thing. Like you with the definition of deflation. I just use a different definition for fiat. I define fiat as any money brought about by government “decree”,, i.e. law. Thus, I define any quantity of “money” beyond the quantity of gold, instituted by government policy but not including free market banking that issues claims to gold that exceed gold, to be “fiat”, in that it is money created by law, not by free market money (i.e. gold) production plus excess claims to gold.

    I admit it’s perhaps not the most useful for policy purposes, but I think it’s most accurate analytically.

  31. Gravatar of Philippe Philippe
    25. March 2014 at 16:54

    no silver in your universe apparently. Or anything else of value. Just gold.

  32. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 17:09

    Major_Freedom.

    Yes, the Fed Funds rate can drop below zero, and it has done so a few times. It is currently 9 bps and IOR is 25 bps. Bear in mind that not all players have access to reserves (GSEs don’t, money market funds don’t), so reserves trade at a bit of a premium and banks make money on the spread. If the IOR rate were 10 bps, banks could pay 5 bps to borrow from money market funds and still make money.

    I’ve been a bit misleading here though. If excess reserves were unremunerated, the Fed Funds rate would be zero.

  33. Gravatar of Philippe Philippe
    25. March 2014 at 17:17

    wouldn’t banks stop lending to each other in the fed funds market if the FF rate was zero?

  34. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 17:28

    Frances Coppola:

    When exactly was there a time that banks PAID other banks to borrow their money in the overnight market?

    According to the history of fed funds:

    http://research.stlouisfed.org/fred2/graph/?g=ux4

    It’s gotten close to zero, but never zero, and certainly never below zero.

    What is the theory for why a bank would pay another bank to borrow its funds? Wouldn’t it be just like a bank giving another bank a gift of money for no reason?

  35. Gravatar of Philippe Philippe
    25. March 2014 at 17:34

    if the FFR was zero that would seem to indicate that all banks (and other participants in the FF market) had more than enough excess reserves. Everyone wants to lend, no one wants to borrow, so the rate goes to zero and lending stops…

  36. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 18:26

    Don’t look now Philippe, but you just made a case for the theory that a falling fed funds rate can be caused by “loose” money.

    Now just take that same idea and ask what height of rates banks will ask for when lending to non-bank borrowers, and in other maturities, when they are rife with reserves.

    Kind of puts NGDP as a less important factor, doesn’t it?

    Just imagine if your money balance instantly skyrocketed to say $100 million. Regardless of what is happening to prices and NGDP, would you be more or less willing to ask for a 1% lending rate on the first 10 million, as compared to if you only had $1000 in your bank account?

  37. Gravatar of Philippe Philippe
    25. March 2014 at 18:54

    “Just imagine if your money balance instantly skyrocketed to say $100 million.”

    a bank’s financial wealth doesn’t increase when the central bank buys bonds from it and thereby increases the amount of base money held by the bank. The bank just swaps less liquid assets for more liquid assets. It’s not like winning the lottery and suddenly having more money, i.e. more wealth. For your example to be relevant I would have to already own $100 million worth of assets, which I then sold to the central bank for base money.

  38. Gravatar of Major_Freedom Major_Freedom
    25. March 2014 at 19:06

    Philippe:

    Sure, but the money would be more valuable to you than the assets you gave up, or else you wouldn’t have “swapped” them.

    I know the point you’re making, and I agree with it. It’s not a 100% gift. It’s a partial gift. But this is kind of besides the point.

    If a bank has a bunch of treasuries, but little money, versus having a bunch of money, but little treasuries, I think you would agree that the incentive of setting particular rates are different.

  39. Gravatar of ssumner ssumner
    25. March 2014 at 19:12

    Thanks Travis, I added an update.

    Mark, You said:

    “1) Scott, I’ve pointed out to you more than once in the past that the CBO has two potential GDP series: NGDP and RGDP. For some reason you still refuse to believe it.”

    Oh I believe they have such a series, I just don’t believe there such a thing as potential NGDP. But governments do many strange things, and estimating potential NGDP is just one of them.

    Danny, You can’t have the entire path of the base be identical under two different policies, unless you have another tool.

    Frances, You said;

    “First you disagree with me that falling interest rates can indicate healthy growth, and then you admit that when there is a positive RGDP (secular) trend interest rates can fall. I didn’t say anything about the trend of RGDP growth. Nor did I say anything about cyclicality.”

    I’m not quite sure what this means, I was simply pointing out that your criticism of me was wrong. The secular decline in prices in the late 1800 had no bearing on my post. Yes, I “admit” interest rates can fall when there is secular deflation, but what does that imply?

    And I would never deny that low interest rates can be associated with healthy growth, my point was that they are usually associated with weak growth.

    2. I don’t understand your second point. There is a difference between the association of interest rates and prices, and the causal effect of interest rates on prices (which holds even when the base is not constant.)

    I’m glad to hear we are on the same page. Perhaps I misunderstood your post. It seemed to me that you were criticizing my claims, and that’s why I thought I disagreed with your view. I certainly stand by everything I said about my own post, but I may have misunderstood your criticism.

  40. Gravatar of Philippe Philippe
    25. March 2014 at 19:19

    I’m not sure what your question is. As far as I can tell the Fed sets a FF target rate, and tries to maintain that rate by buying or selling base money. It changes the target in response to what is going on in the economy. The FF rate changes on its own, but the Fed tries to keep it near to its target.

  41. Gravatar of dannyb2b dannyb2b
    25. March 2014 at 19:23

    “Danny, You can’t have the entire path of the base be identical under two different policies, unless you have another tool.”

    So if from early 2008 onwards the fed was using ngdplt instead of inflation targeting why would any extra reserves created not just become excess reserves like we have now?

    Are you saying that just because they would of reacted earlier in expanding the base under ngdplt we would of avoided the recession? Seems like we would of still ended up in the same place.

  42. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 19:41

    Major_Freedom,

    IIRC the Fed Funds rate has briefly dipped below zero, though it didn’t stay there long. My memory may be playing me tricks, though. I should really have said IOR prevents FF rate falling TO zero – though positive IOR does enable banks to make money from a negative lending rate stands.

    Zero FF funds rate would kill the interbank market, as Philippe said.

  43. Gravatar of Frances Coppola Frances Coppola
    25. March 2014 at 20:15

    Scott,

    On the first point, it wasn’t clear to me (despite your choice of example) that you were specifically talking about deflation associated with falling NGDP. I’m forever being told that deflation is a good thing, particularly by people who think that the ECB is doing a good job in the Eurozone (personally I think ECB policy is a disaster), so I’m a little sensitive about this. My apologies.

    On the second point: I don’t regard interest rates as “causing” price movements – or rather I don’t regard interest rate changes as the ultimate cause of price movements. But that’s because in my model of the economy I regard banks as the principal drivers of capital allocation, rather than passive intermediaries: lending decisions of banks therefore influence both interest rate and NGDP. In your model of the economy lending decisions by banks are not relevant, and so you will inevitably see interest rate changes as the cause of price changes. Hey-ho.

    Having said that, I don’t think whether interest rates “cause” price movements or are merely indicative of them really matters that much in this case, which is why I put my view in a footnote rather than in the post itself.

    I’m saddened that you saw my post as critical. That was not my intention. I agreed with much that you said. My post was more intended as extended discussion than criticism.

  44. Gravatar of Morgan Warstler Morgan Warstler
    25. March 2014 at 20:42

    Man,

    If only Frances was able to stare straight into the abyss and admit requiring people to do work for a buyers ROI increased consumption for the low skilled (via increased low skilled production) by 30%+

    We could speed up human history.

    Eventually, we do it my way Frances, so stop slowing down the future. Stop screwing the poor (you claim to care about), bc “choosing your boss” has the word “boss” in it.

    Think of the words CHOOSE YOUR BOSS:

    Normal people, successful people, and poor people focus on the joy of CHOOSING.

    Only angry weirdos with middling skills, who think they should be winning and aren’t, and don’t know why, get mad about having a BOSS.

  45. Gravatar of Lorenzo from Oz Lorenzo from Oz
    25. March 2014 at 23:20

    The “good deflation” was a secular phenomenon. It was associated with a rise in the demand for money from positive trend real GDP growth, not lower interest rates. I thought it was output in the gold zone countries rising faster than gold production. Just as the subsequent secular inflation was the reverse. In other words, the medium of account first rose in value (relative to output), so prices fell; then fell in value (relative to output), so prices rose.

  46. Gravatar of J.V. Dubois J.V. Dubois
    26. March 2014 at 02:01

    Mark, Frances (on potential NGDP): Here I agree with Scott that “potential NGDP” is nonsensical concept. There is no practical limit to NGDP given that CB is sufficiently expansionary – as opposed to Real GDP that cannot be boosted this way. It is bad concept and should not be used as a proxy for anything.

    However this also highlights a point Scott repeated a million times. Why don’t we have NGDP futures market? That way Frances could have used that chart to find out if there were or were not sufficient signals sent by markets about the larges aggregate demand fall since great depression.

    But the sad thing is that FED actually had more information about catastrophy around the corner in form of inflation expectations. And no, it is not “madness” to lose monetary policy even though actual CPI number were high. Marcus Nunes had a very good article about that here: http://thefaintofheart.wordpress.com/2014/02/21/the-2008-transcripts-confirm-the-feds-obsession-with-inflation-crashed-the-economy/

    It shows that in 2005 Greenspan had no troubles losening monetary policy on grounds that core inflation still low and inflation expectations do not show any signs of going up. This is in start contrast with 2008 where inflation expectations plummeted and core inflation was not showing anything to worry about – and despite that FOMC was is mortal fear of inflation right around the corner.

    PS (Frances): “But that’s because in my model of the economy I regard banks as the principal drivers of capital allocation, rather than passive intermediaries: lending decisions of banks therefore influence both interest rate and NGDP”

    I have a little trouble reading this. To what extent do you think commercial banks “influence” things like interest rates and NGDP? Because in one sense even if commercial banks are only intermediaries they influence RGDP in the same way any other sector in the economy does – for instance housing or energy production etc. This turn “may” influence NGDP – “may” as depending on CB reaction function. But MM do not think that commercial banks “control” nominal variables like NGDP, it is central bank that does that.

    Or to put it differently, do you also think that it is the lending decision of commercial banks that “influence” (control) another nominal variable that is inflation? Then why do we see that in developed countries where Central Banks adopted inflation target they were able to defend it for decades? Is it a coincidence that somehow commercial banks aligned their lending decisions to produce 2% or 3% or 0% inflation which was also by pure chance exactly what CB claimed it is doing? How do you explain that?

  47. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 04:23

    J.V. Dubois and Mark (maybe Scott too),

    “But that’s because in my model of the economy I regard banks as the principal drivers of capital allocation, rather than passive intermediaries: lending decisions of banks therefore influence both interest rate and NGDP”

    One of the things that’s obvious me, and hopefully soon to Frances from what she had written with Becksworth,

    “I’m not Luddite, and I don’t subscribe to the “lump of labour” fallacy, but equally I’m not convinced that a technological revolution that results in abundance of most goods and services would necessarily result in well-remunerated employment for all. It could just as easily result in very little well-remunerated work for anyone. I am of course anticipating that in due course new forms of “work” would emerge – as they eventually did in the industrial revolution, of course. But until then, there could be an awful lot of people for whom technological improvements mean scarcity of work and a serious fall in real income as they are either replaced by robots or their wages fall to below the running cost of robots. Under these circumstances, deflation caused by productivity increases would certainly not be benign.”

    Is the the real agent of change right now, the technological freak out that has Summers worrying about WhatsApp selling for $16B with 57 employees…

    Is that DEBT and BANKS are not actually doing any of the capital allocation that matters.

    Anyone with atomic business that is still profitable is being told by banks that those atoms they own and deal with aren’t going to be worth as much collateral.

    Anyone with an atomic business, apart from making robots, and commodities for 3D printing or FINDING ENERGY to turn into electricity, is trying to get out of the atomic business as much as they can.

    And the guys with DIGITAL BUSINESSES?

    They are all getting into Bitcoin. And they CERTAINLY aren’t asking the banks to be the principal drivers of capital allocation.

    YESTERDAY, Facebook bought Oculus Rift that in June was worth $30M, for $2B.

    What does OR do, you ask?

    https://twitter.com/morganwarstler/status/448622040929419264

    PLEASE go watch both the youtube links.

    Ya know, I KEEP TELLING PEOPLE HERE that sooner than later, the only thing that humans consume is calories and electricity. And from here to there is a conversion of DEBT BASED ECONOMIES to EQUITY BASED ONES.

    And we just JACK IN to our VR rig and have meetings, and ride roller coasters and talk to our dead, and whatever else.

    Walmart is fielding business proposals to set up 3D printing shops and just sell people a yearly $200 subscription for 200 lbs of plastic – to be whatever they want.

    So, I’ll end the rant here, but the message is:

    Banks really don’t matter, debt doesn’t matter, and while Frances doesn’t know it yet, she has the building blocks to get there.

    Get there Frances.

  48. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 04:39

    Morgan,

    If you were polite to me I might be more prepared to listen to you. But while you persist in being rude and patronising, I’m simply going to block you out.

    Interpersonal skills matter. You need to learn this.

  49. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 04:52

    JV,

    Banks are not “only intermediaries”. Their lending decisions determine the availability of credit in the economy, which influences both output and prices. I don’t buy the argument that if the central bank throws enough money at banks they will lend. That is not supported by the evidence.

    Of course central banks can defend an inflation target by controlling interest rates. Banks use central bank rates as benchmarks for interest rates charged to borrowers and paid to lenders. Obviously this affects both the supply of funds and the demand for loans. But lending decisions are not determined either by availability of funds or demand for loans. They are a function of risk versus return and driven primarily by the availability of capital, not deposits or reserves.

  50. Gravatar of J.V. Dubois J.V. Dubois
    26. March 2014 at 05:22

    Frances: Ok, so as far as I understand the causality goes like this: Central Banks adjust money supply via Open Market Operations to defend their short term interest rate target (until next meeting) which in turn changes incentives for banks to provide loans (bank money) to their customers which in turn influences their planned and realized nominal expenditures which (along with supply side) determines how nominal expenditures are split between real GDP and inflation.

    But even in this story the causality runs from CB to Inflation. If central banks wants 3% inflation or 5% inflation they simply change their reaction function. They print more money and they may signal this intend by using interest rate target. And by “money” I mean the same thing that Scott means – permanent monetary base, which is during normal times basically identical to currency.

    As for availability of funds and nominal targets and all that, here is my additional example. If you ask your average realtor what affects the price of houses he will say that it depends on supply and demand for houses. House purchasing decisions are not dependent on “availability of funds”. You may have someone who owns a lot of Apple shares looking for a new house for months before she makes her decision to sell the shares and buy a new house. She did not have to have the funds available all the time in the mattress.

    On the other hand the price of the house as well as the price of stock shares both depend also on the price level. If central bank wants to increase the price of houses all that is needed is to print enough money so that the prices rise no matter what happens on the “real side” – such as supply of houses. Because central bank controls medium of account and therefore it controls price level.

  51. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 06:23

    Frances,

    I have a long email thread with you where I was polite, but when you got debated into a corner one WHY PEOPLE HAVE TO WORK FOR GI, you didn’t want to knock down your king.

    You do not want to admit “money defines work” – that SOMEONE must being willing to pay you their money, for it to be work.

    You want your 10K hours of practice writing, when you weren’t getting paid to write, to be counted as work.

    And my plan, is a compromise for you.

    As soon as you could get someone to pay you $40 per week to write, you would be WORKING, and thus be due your Guaranteed Income.

    You have spent many hours debating the subject with me, and you have never been willing to publicly really press the issue, because you know I’ll win. On hegemony, or Haidt, on political reality, but also on MASSIVE UPSIDE consumption for the poor and on #distributism and finally, technology being the ONLY SOLUTION you have left.

    I don’t think poorly of you, you do a very good job of sensing the technological realities of the day, but you don’t have a grip on the tech itself, so you aren’t cozy trusting it.

    Ultimately the deepest truth is, you can’t craft a Guaranteed Income solution to the problem caused by digital technology, if you do not USE digital technology to solve the problem.

    Once you say:

    “Asking someone to pay $40 for your chosen labor each week, isn’t too much of a burden to ask of those who cannot cover their own expenses”

    You will be the leading GI advocate in Europe, you will OWN THE SPACE.

    Don’t tell me I’m rude Frances, tell me why I’m not right.

  52. Gravatar of TallDave TallDave
    26. March 2014 at 06:31

    As soon as you could get someone to pay you $40 per week to write, you would be WORKING, and thus be due your Guaranteed Income.

    Whatever other flaws it has, I found that aspect of your plan to be ingenious. It’s a beautiful way to bridge the gap between work value and minimum living standards.

  53. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 07:05

    Morgan,

    Do you know what “patronizing” means? You’re still being patronizing – and indeed you have been throughout our conversations, including the email conversation where you claim to have been polite (I beg to differ on that).

    I’ve read your proposal. It is clever, but you have not considered the effect that a state-paid reserve labor force would have on nominal wages. A while ago I wrote about a system much like yours in 18th and early 19th century England. It was known as the “roundsman system”, and it is known to have depressed nominal wages. Perhaps you would like to research why that happened. Those who don’t learn from history are doomed to repeat it, after all.

    I’m not going to listen to any more from you until you take what I have to say seriously and stop talking down to me. I’m not an idiot and I resent being spoken to as if I am.

  54. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 07:19

    JV,

    Actually, if you ask your average realtor he will tell you that demand for houses is governed by the availability and price of credit, since most houses are bought with mortgages. If banks tighten lending standards – whether because their balance sheets are compromised or regulators force them to is irrelevant – the price of mortgage credit rises and a growing proportion of would-be house buyers can’t get credit at any price. This is a tightening of credit conditions equivalent to the CB raising interest rates (or, if you prefer, reducing the supply of base money). But it is not driven by the CB.

    There are things the central bank could do to lean against this,of course, but they tend to be credit easing measures such as the UK’s funding for lending scheme, rather than increasing the monetary base.

  55. Gravatar of Major_Freedom Major_Freedom
    26. March 2014 at 08:19

    Frances Coppola:

    The mind can play tricks. Happens to us all from time to time.

    It is possible, although I am not certain, that you may have been thinking about the tresury bill rate dipping below zero once or twice or a few times. I remember that happening. The theory here is that during banking crises or credit crunches, a bank with very large (and uninsured) cash (or demand deposit) balances have an incentive to avoid losing it all through bank insolvency and bankruptcy, by converting those funds into guaranteed treasuries. It would make sense for a bank to take their money out of a bank to buy treasuries, and pay for the privilege.

    Then rates can go negative, as a bank will convert $10 billion or whatever into just slightly less value of treasuries and “lose” money, so as to avoid losing everything except $250k from FDIC.

    But I don’t know of any reasonable theory for why this would happen in the overnight market.

  56. Gravatar of J.V. Dubois J.V. Dubois
    26. March 2014 at 08:23

    Frances: I understand that you can stick every single purchase in an economy to a “credit” in some way. People may use use commercial loans to buy bread and everything. But then it would be strange for a bakery owner to say that the price of bread depends on interest rates charged by credit card issuers. This is normal result of having couple of banks supplying bank monies used by housholds and firms for purchases. Any price effects of changing credit conditions are there for “real” (supply side) reasons. Even if this real harm is caused by bad monetary policy.

    To explain this point I would say that that it is CB that is really in control. It is central bank that can theoretically make it so that the the loaf of bread will not be for $3 but it will be for $3 million. In the same way it is CB that can promise that the price of a loaf of bread will rise 2.00 % a year. Not – 10%, not 2.5% and not 58%. Central bank is really powerful and it can (nominally) offset any supply side impact. So even if there are forced bank holidays where people may no longer access their deposits – except of small cash withdrawals – CB is in charge. Credit conditions notwithstanding houses and loaves of bread would be purchased and nominal variables like inflation or NGDP would be determined by the entity that controls medium of account – Central Bank.

  57. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 08:28

    JV,

    The majority of loaves of bread are not bought with credit, they are bought with money. The majority of houses are bought with credit, not money. I would suggest therefore that the CB has much less control of house price movements than it does of changes in the price of bread.

  58. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 09:20

    “It is clever, but you have not considered the effect that a state-paid reserve labor force would have on nominal wages.”

    Why do you think I like NGDPLT?

    Precisely because it silences Big Government pretend “Keynesians” I use scare quotes because Roger Farmer gets Keynes right without Big Government.

    (GI/CYB plan is fully Keynesian)

    So, pls for now forget Spreemhamland (yes I long ago read all the literature – why would you assume I haven’t read it?), because there is no danger of a fall in nominal wages.

    I made a clear claim, you have no good reason to deny the poor the 30%+ more consumption that comes from making everyone do a job that someone else will pay $40 a week for.

    PLEASE give me a clear reasoning for why you as a writer would be put out by having to wait till someone paid a very small amount ($40 a week) for you to call it work – work that Society can say “yes, give them a GI”

    That buyer will WANT SOMETHING FOR YOU, they will WANT you to deliver the work worth $280, not the work worth $40.

    That’s where all the brand new extra consumption for the poor comes from. Please really noodle this. When Daycare gets priced at $50, because there are some people who can’t yet earn $40 as writers or whatever, or because there are some peeps who really prefer Daycare – either way the MOM buying the DayCare she want the WHOLE WEEK for $50, not just a day.

    The only way we get the PPP Purchasing Power Parity so that DayCare in Detroit is only $50 is IF EVERYONE has to do a job other people will PAY FOR.

    Frances, this is a fact of logic.

    The Buyer is the interested party who ensure that real consumption benefits accrue to the poor.

    If the Sellers don’t have to sell something people want, the Buyers will not get to buy as much stuff with their GI check, DayCare will cost $150 a week.

    The valve / lever for how much extra consumption does the GI buy is the minimum weekly job offer. At $40, the seller has MANY CHOICES, since it is easier for you to be a writer at $40 a week. At $120, there won’t be as many writers, the buyers have more control.

    —-

    Frances, this digital thing you type into is making more people unemployable at current wage rates, the solution is to ACCEPT that wages may find a new real price level, but to ensure nominally they stay on path.

    I’m always amazed at how people who on the surface are so gungho to help the bottom half are so blind to 1/3 more consumption in the ghetto.

    Is it that you don’t think they will get to consume more? Is it that more consumption for the poor is bad in your mind?

    What is it?

    How could fear of Spreenhamland keep you from giving the poor 30%+ more stuff every week?

  59. Gravatar of Doug M Doug M
    26. March 2014 at 09:49

    Frances,

    “The majority of loaves of bread are not bought with credit, they are bought with money. The majority of houses are bought with credit, not money. I would suggest therefore that the CB has much less control of house price movements than it does of changes in the price of bread”

    Houses are bought for money. You get a loan, the bank gives you money. You give the money to the seller. The seller sends the money to his bank to pay-off the remaining debts he has on the property… nonetheless, the transaction is settled with money.

    What is credit? Credit is future money. Or it is the promise to pay money in the future in order to use money today. The same Fed that manipulates the present money supply shapes the expectation for future money supply. The Fed’s lever over the supply of credit is as powerful as its levers over the supply of money, and the Fed has as much influence over house prices as it does over any other asset price.

    But the Fed, doesn’t have the power to manipulate specific prices, but only prices in aggregate. The Fed probably has more influence over housing prices than bread prices.

  60. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 09:49

    Morgan, I said nothing about Speenhamland. I said the “roundsman” system. It is not the same thing. You’ve just demonstrated that you don’t know what you’re talking about. Go and do some research.

    “Frances, this is a fact of logic”.

    Take your patronizing remarks and throw them at someone else. I’m done with you.

  61. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 09:52

    Doug M

    The evidence of history is that the central bank has nowhere near as much control of house prices as it does of CPI. Whether it COULD have as much control is a different question.

  62. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 10:00

    They are the same thing.

    http://en.wikipedia.org/wiki/Speenhamland_system

    Frances, you can’t nitpick your way out of the folder full of logic I’m dumping on you about a work requirement.

    Everyone notices you are being non-responsive. You never directly deal with my logic.

  63. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 10:28

    No, Morgan, they are not. The “roundsman” system was part of the Elizabethan Poor Law of 1601, which is nearly two centuries earlier than Speenhamland. It was however still in existence at the time of the Speenhamland experiment with basic income. Speenhamland was wrongly blamed by David Ricardo for depression of agricultural wages that was actually due to other factors including, but not limited to, the roundsman system.

    http://en.wikipedia.org/wiki/Roundsman_System

  64. Gravatar of Scott Sumner Scott Sumner
    26. March 2014 at 10:36

    Danny, That’s a complicated question, but the short answer is that expectations are very important in the short run, and NGDPLT would have helped to stabilize expectations.

    Frances, I may have misread your intent, if so I apologize. It happens often in areas which each person has a different mental framework for analysis. But rereading it now it seems clear to me that you are disagreeing with me on a number of points, including:

    1. My claim that the base was relatively flat in 2007-08, and that falling interest rates during that period caused falling prices.

    2. My claim that NGDPLT would have prevented a severe recession in late 2008.

    I still think those two claims are true, but you are probably right that on other issues we agree much more than I first realized.

    Lorenzo, Yes, that’s what I was trying to say.

  65. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 10:41

    Scott,

    Well, we aren’t going to agree on everything!

  66. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 11:56

    Frances “Nitpick never answer” Coppola

  67. Gravatar of Frances Coppola Frances Coppola
    26. March 2014 at 12:42

    Morgan,

    Ok, I will give you a detailed economic explanation of why I think the work requirement aspect of your proposal is a bad idea. This is microeconomics, not macro. No amount of NGDPLT targeting would make any difference to what I am going to describe.

    The depression of nominal wages that I mention (and you dispute) is a labor market effect caused by asymmetric bargaining power between employers and employees when there is a work requirement.

    You think you are describing an income subsidy. But with your work requirement, what you actually have is a wage subsidy. This distinction is important, because wage and income subsidies behave very differently.

    An income subsidy reduces labor supply and puts upwards pressure on wages, because people can refuse to work – Deirdre McCloskey is interesting on this in relation to Speenhamland, which was (briefly) a genuine basic income. Conversely, a wage subsidy increases labor supply and depresses wages, because employers can pay employees less and employees will accept lower wages in the knowledge that wages will be topped up. If there is no wage floor (minimum wage), a wage subsidy means wages can be bid down to virtually nothing. If there is a wage floor (minimum wage), then employers will bid down the price to that floor. There is empirical evidence for this recently produced by the UK’s Resolution Foundation in relation to the UK’s minimum wage legislation. The price floor becomes the “going rate” for unskilled workers.

    If the unemployed are forced to work for their benefits, then employers have an incentive to under-employ if there is slack in the labor market. Instead of competing for unskilled labor in the open market, employers would simply wait for unemployment to rise, then recruit from the reserve labor pool at basic income level. Such a system destroys the labor market and drives down wages. This is what happened under the roundsman system: farmers under-employed, forcing laborers into the reserve pool which was then auctioned back to those same farmers at lower rates. What safeguards would you have to ensure that employers didn’t use your technology as a means of obtaining cheap labor, bypassing the labor market and therefore forcing down unskilled wages to basic income level? I know you have excluded large employers from your pool, but large employers would not pay any more for their employees. And how would you prevent this ultimately becoming the State paying the “wages” of all unskilled workers in small and medium-size enterprises?

  68. Gravatar of Morgan Warstler Morgan Warstler
    26. March 2014 at 14:45

    YES! Now we are cooking with gas!

    But your concern was NOMINAL wages.

    I already say out loud that real wages may go down. But I doubt it. And either way the fact is we are not correctly measuring real wages today, bc of free digital consumption – which is only going to increase.

    (And your larger “under employ if there is slack” point does not logically follow bc there is never slack in my labor market, it ALWAYS clears – every worker ANYONE WANTS TO HIRE gets hired, those who DO NOT GET HIRED, still get their GI. Please really understand this point: the labor clearing rate $40 per week is SO LOW – a factor of 7x below MW (imagine raising MW to $50) – this isn’t marginal, this is diabolically low – so low 50% of America looking at these 30M and salivating about hiring them to do something. THE PRICE IS THAT LOW.)

    So no slack. Please throw out your models where slack has an effect.

    I have three different parts to your points up top, please divide you responses here:

    1. GI/CYB likely raises real wages, and not only thru consumption (bc prices go down), but bc of #distributism – in order to shrink the political power of the state, I KNOWINGLY disallow Fortune 1000 from hiring from this labor pool.

    Big Government is currently unmeasured negative externality (far worse than Global Warming), since Big Business always = Big Government.

    So while Big Business is “more productive” than SMBs, we then leak out all that productivity via Big Government.

    My plan instead relies on network theory (p2p and the like) and notes that the Internet allows distributed agents to act in concert without a central mainframe, getting us most of the productivity gains of Big Business, but without all the leaky anti-productive Big Government pollution.

    In real terms this means, since everyone ALWAYS has a job, and since they can all be like you decide to be writers for only $40 a week, FORTUNE 1000 guys like Walmart are going to be forced to increase wages – in order to get people to work there.

    2. Even if somehow wages at Walmart didn’t go up, it does’t matter, bc the CONSUMPTION of the Walmart workers goes up, bc they are putting the 30M to work for $40 per week.

    Finally and most devastating the political reality:

    30M not getting up everyday and doing what other people want to pay to have done VIOLATES Haidt’s notions of conservative morality.

    50%+ of America when they think “fairness” they think IS THAT GUY GETTING UP AND WORKING.

    Some worry about moral hazard, some think idle hands / Protestant work ethic, whatever you call it, whether you like it or not…

    It is REAL.

    And we do not have time to let the poor sit around getting even less employable, arguing about this, I’m giving you TOO MUCH upside, for you to throw the poor to the wolves for your pixie dust of “leisure society”

    Even if you don’t want to let it go, you have a moral obligation to use my plan as a stepping stone, until half the population fundamentally changes their attitude about fairness.

    Frances, people are going to be putting on a VR rig and only consuming calories and electricity, and there may in the distance become a time when “work” as we know it disappears.

    now is not that time. Our goal is Congressional Black Caucus, Occupy, and Tea Party agreement, and GI?CYB puts plenty on the table for them vs the status quo.

  69. Gravatar of Jim Glass Jim Glass
    26. March 2014 at 19:43

    The Roundsman System, described via Google Books.

    From: An Economic History of the English Poor Law, 1750-1850, by George R. Boyer

    An interesting description of various early attempts at poverty relief and their economic consequences. Everything old becomes new again.

    (The discussion starts well above where the link opens for me, up on page 9.)

  70. Gravatar of ssumner ssumner
    27. March 2014 at 04:36

    Frances, I’ll never be satisfied until the entire world agrees with me on everything. That’s why I’m throwing my life away to blogging.

  71. Gravatar of Frances Coppola Frances Coppola
    27. March 2014 at 05:18

    Morgan,

    Dear oh dear. No, it is NOMINAL wages that would go down in your model…..

    I didn’t discuss this in my previous comment, but you haven’t thought through the implications of excluding large companies. Every working-age adult in the US would of course sign up for this scheme – who wouldn’t? So excluding large companies amounts to a simply colossal fiscal subsidy to small and medium-size companies. Large companies would have to pay not only the marginal wage (which as I’ve already said might be nothing), but the whole GI as well. It would make them fundamentally uncompetitive. Perhaps that’s what you want, but you really need to think through the economic implications of such discrimination against large companies.

    You also don’t seem to have thought about the fiscal sustainability of your scheme. If no-one on GI is paying tax, and employers signed up for the scheme aren’t paying wages (because thGI becomes the wage ceiling when there is a work requirement), and large companies aren’t paying any more than GI (so presumably their employees wouldn’t be taxed either), who exactly is going to pay for this scheme? You might need something like an LVT – it’s something we’ve considered in UK discussions of basic income.

  72. Gravatar of Frances Coppola Frances Coppola
    27. March 2014 at 05:22

    Oh and Morgan, bear in mind that I am British. As professional marketers will tell you, hard sell techniques don’t work with Brits – they actually put us off. Present me with a well-reasoned economic argument and leave out the shouty stuff and “moral obligation” schmalz.

  73. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2014 at 07:15

    “Every working-age adult in the US would of course sign up for this scheme – who wouldn’t? ”

    Um, me and every other person I know. Anyone in the top 1/3 of America (the hegemony)

    Frances, I speak frankly, but the math of Pareto power law is is no less brutal. The top 20% of Americans are the workers who deliver 80% of the economy in any given year. About 1/3 will spend part of their earning lifetime in that 20% and as such identify as the hegemony (America is theirs as it were).

    The top 20% earn roughly $90K.

    NONE of them will take GI. Who in their right mind wants to live on $20K, even if they somehow find someone who will pay them $7 per hour (the high-end end) to do the thing they love?

    Now sure, there will be some retirees who choose to quit the rat race, when the house is paid off, the kids are gone – like my mentor Don, with his future secure after lifetime of writing junk mail and infomercials, finally played in Piano bar until he passed away.

    And you know what? I couldn’t care less about it.

    I WANT 74 years olds to feel encouraged to try their luck at a job they simply want to do, as much as I want 74 years who don’t like it, but still are able to be tele-service operators from home for $280 a week.

    Fiscal Sustainability

    Frances my modeling shows, this plan costs nothing.

    https://medium.com/p/1d068ac5a205

    In 2011, we had $468B in non-medical welfare cash transfers.

    My plan uses that money. With 30MILLION NEW WORKERS at an average job of $40 per week, we’re at $375B, at job $120 per week, we’re down to $312B.

    And again Frances, please really think about this, 22M Public employee labor in US this year?

    $1.7T

    I say very clearly in my plan, the SMB that hire the GI/CYB workers, say as landscapers for $200 a week, they are going in and replacing public employees who currently maintain parks, clean up the tube, and whatever.

    The end is that the there are fewer public employees, imagine 10M instead of 22M.

    That’s an extra $700BILLION we have to spend on the now 40M in the GI/CYB plan.

    YES, The plan pays for itself, by recognizing that that government jobs are not meant to be “good jobs” for the lucky ones with political connections. Government jobs are meant to pay what they are wroth WHEN 30M unemployed are employed.

    NOW AGAIN on the nominal thing. let’s go thru this in points:

    If the avg employee in US is earning $20 per hour thats our hypothetical base for starting the plan in 2015

    1. ‘m telling you first, i don’t expect much wage pressure on the $20, bc there will be a MACRO effect on the Fortune 1000 as their labor costs go up, and their market share goes down – they are now competing with SMBs who have labor advantage.

    BUT, overall the ages of Fortune 1000 have INCREASED. The shareholders, the capital class, they have taken a loss in their savings. I count this is a massive upside (I’m a populist), I’m far happier to see the new 1M ethnic minority SMB owners in poor areas who are suddenly earning 6 figures.

    The important thing here Frances is the shift of power from the capital class to the entrepreneurs.

    THE MONEY is still in the top 20%, but the distribution of that money is no longer so outrageously weighted tot he top .01.

    This means FAR MORE of the folks at 80-90%, are taking more vacations, they are eating out twice as much, they are getting twice as many manicures etc.

    Frances, here’s the secret: the way you fight income inequality is by structurally empowering the top 20% to gut the .01%.

    This gives the bottom 80% a far greater demand for personal services – which is what most of the bottom 80% are going to do service work.

    2. EVEN IF nominal wages were to fall, the real buying power increases to push past $20, bc the price of things fall asn consumption goes up.

    3. If you have any doubt left, ask Scott, NGDPLT VIRTUALLY ENSURES we can keep that $20 from ever falling. Scott and I would rpefer nominal wage targeting, but it is too hard….. unless:

    you do GI/CYB and then you can just raise the GI payment some amount every year.

    There is no nominal problem, and real wages / consumption MASSIVELY INCREASES.

    Frances, if we are going to claim to care about the poor, we have a moral obligation to solve this problem in a prudent and expeditious manner. Just because you come from the half for ht moral universe that views fairness thru a different lens, doesn’t delete the other half.

    The trick is to forge a compromise, and that is what I have done. $40 a week is nothing in terms of human value to expect our able bodied to deliver to someone else’s satisfaction.

  74. Gravatar of Brian Donohue Brian Donohue
    27. March 2014 at 08:43

    Keep on preachin’, Morgan. I think I grok your vision well enough to begin socializing your views within my own circle. Thank you.

  75. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2014 at 13:20

    Frances, this is when it finally gets good!

    I answered your question in lengthy detail.

    1,2,3 reasons a fall in nominal wages is HIGHLY improbable.

    And, I’d really like to understand why you think the productive class top 1/3 would even imagine taking the GI.

  76. Gravatar of Frances Coppola Frances Coppola
    27. March 2014 at 14:23

    Morgan,

    I did say give up on the shouty thing. And the moralizing. Please.

    Are you suggesting that someone who is already employed on a good wage can’t sign up for GI? Or that someone who takes a highly-paid job has to sign off it? If so, then this isn’t by any stretch of the imagination a universal GI. It’s merely a wage subsidy for the low-paid.

    You seem to be suggesting that there is some earnings limit above which GI is not available. What happens when someone who is on GI gets promoted? Do they have to sign off GI and lose all of it? We call this a “cliff edge” and it is seriously distortionary. People earning just over this cliff edge face marginal tax rates of up to 100%.

    Your cost analysis has some pretty heroic assumptions about revenue. And you’ve ignored everything I said about perverse incentives for employers when there is a work requirement. Please explain (without shouting, patronizing or moralizing) why these perverse incentives would not apply in your model- since they do apply in other wage subsidy with workfare models?

    You also assume massive job losses in the public sector – public sector employment cut by over 50%. Such an enormous influx of unemployed would depress nominal wages even without the perverse incentives of a wage subsidy without a floor.

    I do think you should call this what it is, not what it isn’t. As far as I can see it simply isn’t a guaranteed basic income. It’s EITC under another name with an online government peer-to-peer recruitment platform attached. The tech is clever, but the economics isn’t.

    Also, you are unclear about the limits of monetary policy. It is not a catch-all: monetary policy supports aggregate demand, but it cannot counteract the effects of deliberate manipulation of the labour market by the fiscal authorities. At the aggregate level, yes nominal wages may remain at $20 dollars or whatever. But at the sectoral level, you would see bifurcation, with high earners getting ever more and clustering of jobs at the GI level. Whatever the monetary policy stance, no employer is going to pay more than they absolutely have to for unskilled workers – and if the fiscal authorities are paying people enough to live on, why would employers pay anything at all? You need there to be competition for workers among employers, otherwise wages are bid down to the floor and no amount of monetary easing will increase them. And your proposal destroys competition in the labour market.

    Indeed in the UK, where we have had EITC and a minimum wage for quite a long time now – and a famously easy monetary policy stance (the BoE’s QE programme is larger than the Fed’s relative to the size of the UK economy – the distortion of the labour market is so extreme that there are proposals to introduce benchmarks for wages in different sector to prevent employers bidding down wages. I don’t think you appreciate what a gross distortion of the labour market your proposal constitutes.

  77. Gravatar of Frances Coppola Frances Coppola
    27. March 2014 at 14:42

    Morgan,

    On reflection, I think it would be more sensible for me to take your proposal apart point by point on my own blog site, rather than clogging up any more of Scott’s comment thread. I will do so in the next couple of days and post the link here.

  78. Gravatar of Morgan Warstler Morgan Warstler
    27. March 2014 at 17:07

    Yes, please read the plan.

    Here’s the best link:

    https://medium.com/p/1d068ac5a205

    It REPLACES unemployment. It replaces (as did Uncle Milty’s NIT) all non-medical welfare.

    Thinking on it, your model of labor and management doesn’t clearly map the ever growing gig economy.

    Think of it as a Junior Varsity league of the economy. Only for the 30M unemployed, and the entrepreneurs and families that live near the unemployed. Again, pls read the plan, buyers and seller pay no taxes, there are very few rules, the “kred” system serves to reward good effort and punish scumbags in the most benevolent way possible, and since everyone choose every week to go back, bc they can ALWAYS do something else next week, there aren’t eh same kind of normal harms you are used to.

    When I say JV – It’s only going to be used by the folks who are not able to keep up – and that number is growing – BUT IT WILL keep them gaining skills for the rest of their life.

    Let me give you my mental framework:

    Start with a basic concept, everyone one welfare or UI, is told they have to go work for the welfare recipient who lives nearest them on their right. and the nearest one to their left will come work for them 5 days a week.

    Each welfare recipient is simply directing anthers labor towards their own end, and doing the same with their labor for someone else, for their welfare check.

    Using no search matching, no real digital upside, but already the PRODUCTION / CONSUMPTION metric is greatly improved. – bc more stuff is being produced consumed BY THE WELFARE CROWD FOR THE WELFARE CROWD.

    My plan takes that simple model and using digital tech. strikes a balance between happiness with job choice, and optimal search matching productivity outcomes.

    I throw in the #distibutism (making it tax free and only for SMB owners and families who live with and around the poor) to align the interests of the minority groups and the left and right populist crowd (Occupy and Tea Party).

    The #Distributism is what makes the plan POLITICALLY PASSABLE, bc it directly pay$ off the base of both parties at the expense of Fortune 1000 and Big Government.

    —-

    One quick note here, this is simply incorrect:

    “monetary policy supports aggregate demand, but it cannot counteract the effects of deliberate manipulation of the labour market by the fiscal authorities.”

    Ask anyone here. None will disagree with me. That’s my #3 above. MP can lift any stone.

    But more to the point…

    Our CURRENT SYSTEM has FAR MORE deliberate manipulation of the labor market than my plan. my plan actually reduces the level of government manipulation.

    At it’s simplest welfare is a WAGE.

    It is paid BY THE top 1/3, to the bottom 1/3 – the only question is whether the job the welfare recipient does is productive for other people, or if it is couch sitting.

    And I haven’t skipped over anything you’ve said:

    “And you’ve ignored everything I said about perverse incentives for employers when there is a work requirement.”

    Please really read the plan, make a cup of coffee, and sit and give it the 15 minute read it is on Medium. I speak at length about the how I not only find, identify, and fix the criminally lazy, but also how bad bosses are suddenly in the weak spot of labor negotiations.

    Look, as professional debate goes:

    I get all the advantages that you claim from a workless GI + all the stuff that work delivers. My plan makes people 80% as free as yours. The creative class celebrates in the streets with my plan. Would they like not working at all more? Sure. But that makes it not passable. That makes it a “someday my prince will come” idea and I’m talking about something that can pass NOW, something that bridges the base of both parties.

    More so, I get the upper hand on production / consumption. Because the work requirement increases the amount of stuff and reduces the price of that stuff for the poor to consume.

    We can agree that things must first be produced to be consumed. So anyone not producing something for someone else reduces the amount of stuff to be consumed.

    And BECAUSE we use #distibutism that extra consumption tends to go to the poor, not to the top 1/3.

  79. Gravatar of Morgan Warstler Morgan Warstler
    28. March 2014 at 05:04

    Frances, sleeping on it, I think I can convince you best if I move you on this:

    “if the fiscal authorities are paying people enough to live on, why would employers pay anything at all? You need there to be competition for workers among employers, otherwise wages are bid down to the floor and no amount of monetary easing will increase them. And your proposal destroys competition in the labour market.”

    Yes people are required to work.

    But the competition is far greater than every before labor advantage is “choice.”

    And WHY does labor have so much choice? Why so many jobs to choose from?

    PRICE.

    By pricing the labor AFTER we make the commitment to a wage subsidy, we can forget about horrible concepts like a “living wage”

    Because “living” can mean stacked up with 9 people in a room, like a 3rd world country. It can also mean 1000 sqft, food, heat, hot water, a/c, 500 channels, broadband, a smartphone, edu, healthcare etc.

    And the LONGER that list gets the more horribly distorted and inefficient our labor laws and monetary policy will become.

    And we like seeing that list get longer, right?

    The longer that list gets the fewer people who can deliver it for themselves. Wages, priced at your worth, your ROI to employers, can always be “lived” on but now we’re back in the 3rd world.

    The trick is localizing the labor requirement, and keeping the capital markets from enjoying the benefits of subsidized wage labor.

    Grand Theory

    My argument is that if we have the goal of an expanding safety net and minimizing inequality: all human capital has to do something for others ROI and the 80-99% have to be incentivized to make war on the .1%.

    GI/CYB swells the ranks of the petite bourgeoisie, who are empowered to gut the oligarchs.

    It delivers couple million new almost a millionaires, who become a political force they deserve to be in a land with a Guaranteed Income.

    The top 1/3 become the ceiling, the gravity, the oligarchs cannot break-thru.

    We want Warren Buffet to lose, we want the Waltons to lose and that’s easy to do in a land where the best and brightest who live amongst the poor can compete against the Fortune 1000 oligarchs based on PRICE.

  80. Gravatar of Frances Coppola Frances Coppola
    28. March 2014 at 05:36

    You’ve forgotten what determines price, Morgan. If there is no competition, there are no price differentials. And I have already explained how your system encourages employers to bid down wages, as indeed every wage-subsidy-with-workfare system. You still haven’t explained why your system would not have this effect.

    You are also making the mistake of assuming that demand creates supply. It doesn’t. Just because there are lots of people looking for jobs doesn’t mean that there are lots of jobs for them to find. Creating a neat peer-to-peer online recruiting platform for SMEs and GI claimants doesn’t mean that there will be “lots of jobs for people to choose from”. There might be lots of jobs registered, but that doesn’t necessarily translate into full employment.

    It might be instructive for you to visit a UK job centre some time. It’s not online, but essentially a job centre is a recruitment agency. Employers register jobs, people register availability and choose from the registered jobs. But that doesn’t mean they GET those jobs. In the end, if there are more people registered as available for work than jobs registered, there will still be unemployed.

  81. Gravatar of Morgan Warstler Morgan Warstler
    28. March 2014 at 09:27

    Frances, this stuff is fundamental… if you were right there would be no Ebay.

    If ALL cars (as in ALL Workers) for sale on Ebay started at $1, and no matter what, the car would sell….

    YES, the overall price level of used cars would take a one time bump lower. BUT, on the postive side,all the cars would sell. Every one of them. Why? price started at a $1, and all cars are worth more than that.

    If JUST the clunker cars, (the 30M unemployed) are required to sell at $1, again the price will fall. BUT, the NORMAL NEW CARS, they will be less price elastic.

    GI/CYB goes a step further: The clunkers get to CHOOSE who buys heir week of labor!

    Now then, let’s talk about price of labor and the wage:

    The GI that is being paid to the worker COUNTS, it is being paid BY THE TOP 1/3.

    If we had no welfare the top one 1/3 would instead being paying those taxes as HIGHER WAGES.

    pls reread that.

    When the left says that Food Stamps and the like are keeping wages suppressed at Walmart – they are of course right, bc IF we don’t give them Food Stamps WALMART WILL HAVE TO PAY MORE!!!

    My point is welfare ALREADY counts as wages, the DIFFERENCE is only whether the people are WORKING.

    By ensuring they work:

    1. they earn more in short term, bc their labor clears, no human week, no car goes unsold.

    2. they earn more in long term, bc their skills stay up to date, they can continue doing something productive for other people startiung earlier and later into life without it EVER being a hardship.

    Remember GI/CYB is not a hardship. it is a vast improvement for the poor compared today.

    3. their prices go down bc of my awesome #distributism ruleset that keeps the poor working for each other, even though their GI check stays large.

    —–

    Frances,

    That you think this is even something within a country mile like a UK job centre is a big flashing sign, that you are not mentally framing this for what it is.

    the “tech”you think is no big deal, is the reason we can REQUIRE THEM TO WORK. It eradicated the old problem of search and matching – if Milton Friedman had been around for the Internet, he’d never had suggested NIT, he’d have done this.

    This is basically to welfare, what Bit Torrent or Bitcoin is to Hollywood or Money.

    It is software that is unstoppable, it just WILL happen. It’s not something that can be stopped.

    It’s fracking. A complete and totally new thing, that suddenly makes the 30M+ who are low skilled and not productive – PRODUCTIVE.

    You tend to cast a look askew at Bitcoin or maybe fracking, and think somehow it can be “stopped”

    It can’t. it’s like stopping movie piracy, or stopping the automobile, it succeed because it makes productivity gains.

    Anything that makes productivity gains eventually succeeds Frances.

    And you and I both know, GI/CYB make productivity gains. Big ones.

    Note: I think you confused looking for a job as “demand” – again demand is the labor, who wants to hire them? who wants to buy the car? Price it at $1 to start and we’ll always clear the market.

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