Spending creates resources, saving destroys them

I've been seeing a number of great blog posts on the paradoxes of thrift.  I took the title of my post from the reasoning in this wonderful post by Steve Roth, who starts from the fact that Savings is not equal to Investment, as it is in the toy economic models and intuitions of many people (please read the whole thing to get the point).  One key very easy to understand part is this:

... If you forgo as massage this week, or wait a few more years to get your house painted, is the labor for that massage or paint job "saved"?  How about this year's sunlight...  Understand: services comprise 80% of US GDP. ...

Steve Randy Waldman further examines these issues.

I've been struggling to make these points, and more, for years.  Spending is what it's all about, without spending there is no income, no economy, and no social benefits can be ultimately delivered without spending.  Saving across the entire economy is not even necessary in a modern economy.  Saving is only a convenience facilitated by an economy and useful for personal purposes...deferred consumption, retirement and so on.  For the overall economy, saving is a drag...a drag which specifically produces unemployment.  That's why periods of de-leveraging--which is relative saving--inevitably induce unemployment.

There is no social benefit in favoring saving over spending in taxation.  If anything, it should be the reverse.  But the conflation of spending with consumption aka wasteful dissipation permits moralistic sounding politicians to serve plutocrats by giving them key tax breaks on saving, often painting them as for everyone when overall most benefit is to top incomes.  And also inducing politicians and even academics to shove down further plutocracy serving "consumption" taxes (i.e. transaction taxes).

Life before and after Thatcher

Chris Bertram has a wonderful set of impressions wrt Britain since the 1970's.  Though most posters do not see Thatcherian neoliberalism as having been positive, a few Posters attempt a defense of Thatcher's legacy by appeal to the alleged rot of what had come before.

Tim Wilkenson has the winning post, I think so far, giving a sense of the history leading up to the (narrow) Thatcher victory.  There seems to have been a bit more or less than Democracy at work.

Social Security needs only 0.1% fix

None of the economists whose blogs I read (Krugman, DeLong, Baker, and others) believes that cutting Social Security benefits is a good idea.  More often than not, in fact, they state that the benefits ought to be increased, and that this is not unaffordable.

On the other hand, if you listen to the corporate media, you know (incorrectly) that social security has a huge demographic problem (wrong, that was figured into the Greenspan reforms of 1983 and already fixed with a payroll tax increase then), contributes to the deficit (wrong, since it's inception, social security has been self funding and off budget, although a "unified budget" was created in the 1960's and repealed in the 1980's, it never had any legal importance to the funding of social security), and that the Chained-CPI change is reasonable (wrong, even the current inflation index understates inflation for seniors slightly).

Now it is true, according to official sources, that Social Security would not be able to pay full benefits after 2033 or thereabouts.  It would not go bust, exactly, but it would then only be able to pay about 80% of currently scheduled benefits from then on (and essentially forever, according to conservative projections).

That gap could be "fixed" in a large number of ways, many of which have actually been scored by the Congressional Budget Office and/or the Social Security Trustees.  Probably the most well known fix and the one most often call for by progessives is raising the cap on FICA tax, which is currently set at $113,000.  Income above that level is not taxed.  Raising the cap to something like $250,000 would fix the funding problem.

But richer people don't like that solution.  While social security essentially returns what people paid in for more people, it has a progressive structure that pays proportionately more for poorer people (who may get slightly more than they paid in) and less for richer people (who get slightly less than they paid in).  Raising the cap would mean richer people would pay that much more than they get out (though it still works as insurance even for them).

So tax accountant Bruce Webb and his friends at Angry Bear (some of whom are moderately conservative) have worked out a plan that continues the pay-for-what-you get angle as much as possible for everyone, including richer people.  He has determined that the shortfall can be fixed with 0.1% increases in the FICA tax based triggered by projected shortfalls 13 years out.   Current economic projections suggest only a small number of these increases (3 maybe) would be necessary to fix the 2033 shortfall problem and keep the system solvent forever, according to current projections.  He calls this the "Northwest Plan."  But the plan could adapt to any circumstance by using predetermined triggers that invoke the 0.1% increases.  (To be clear, the FICA tax paid by employees is 6.2%, and employers also pay 6.2% of each employee's wages.  A 0.1% increase would increase both rates to 6.3%.)

I personally prefer the Raise the Cap solution.  But I think it's important to understand the Northwest Plan because it shows how small the Social Security funding gap actually is.  And the fact that the media doesn't really want you to understand how small the problem is so they can convince you that big cuts are needed to "save" Social Security.

Work? People should be paid NOT to work

I always hear, on right and left, but mostly on the self-righteous right, how laziness is a problem.

However, I look around, at the environmental destruction, at the weapons of mass destruction and the risks they pose around the world, and many other things.  All these terrible things are created by work.  We have done damage that will be impossible to reverse.  On balance, the future of our species, and our planet, would have been better off had the 18th century industrial revolution, and all that, had never happened.  And that involved a huge amount of work, and in the subsequent industrial revolutions, mostly to create destructive powers that played out immediately or mostly gradually.  We had a huge increase in population, which surely wasn't just child's play, with the construction of new facilities of all kinds, most rather unsuitable for our future which must be hardened from climate, and a huge network of energy systems all based on our greatest toxic waste.  If there is anything that has been truly beneficial, perhaps it has been art and science, but these things also have helped enable the others in no small part.

It seems to me that for the benefit of all, people should be paid not to work rather than the reverse, and paid the most to do the least.

All the better to be as far away as possible from this menace, work.

Dick Cheney vs Francis Fukuyama on Nation Building

The Iraq War turned into a disasterous experiment in Nation Building.  As such, it may be no surprise that famed intellectual Francis Fukuyama, author of The End of History, has said it didn't go according to his plan.  He may have a point, as explained in this incredible essay by Bill Barnes.

http://crookedtimber.org/2013/03/17/bush-did-not-simply-lie-in-the-run-up-to-the-iraq-war/#comment-458369

This is not to say that Fukuyama's plan was any good either.

Court reversing precedents to destroy government

Here's a description of the recent Appeals Court decision which invalidated Obama's recess appointments to the National Labor Relations Board.

Appointing government officials during intra-session recess is a practice going back to Andrew Johnson.  Every one of the previous 5 presidents has used this technique, with over 300 appointments having been made this way.

But now, a highly partisan Court of Appeals reverses over 100 years of established practice with the claim that the Constitution did not intend to allow recess appointments within a congressional session. 

Keynesianism and Ricardo

In an amazing essay on "fat tails", British banker Daniel Davies declares Keynesianism proven and the only proven economics:

 I think people are underestimating quite how well-tested Keynesian theory is, by now, in the Popperian sense. It not only works, as shown in dozens of recession cases, it’s also seemingly the only thing that works, also demonstrated by many of the same cases.

Down in the comments section, someone asks if Keynesianism wasn't disproven by the Stagflation of the 1970's.   One other posted seconded that.  Davies only answered that Keynesianism passed that test too.  But sadly no details are given.  So as much as I am inclined to believe this is correct, I can't forward the argument.

Oh wait, here's an introduction to the new Review of Keynesian Economics, a new free online journal.  This is worth following.  In this introduction Palley et al echo what Davies says about stagflation.  While stagflation was indeed used by the opponents of Keynesianism to discredit it, they were wrong.  A good accounting of stagflation is given by Keynesian theories of conflict inflation.

Now at the same time, Davies links to an interesting argument he had on twitter.

I need to read this argument some more.  But my current assessment in that Ricardo's Comparative Advantage argument taken at face value is worse than useless in designing trade policies.  Primarily because it takes so many things as given which are in fact should be variables affected by the model.  The bottom line for me is that comparative advantage is only a fleeting state.  If a country builds up its industrial capabilities through a protectionist regime, that may be best for it's long term advantage, as it may develop a comparative advantage it originally lacked.  Or, through misguided free trade policy, it may loose what comparative advantage it earlier had.  The first of these arguments is well developed by Ha-Joon Chang in his book Bad Samaritans.  The second to my mind immediately follows.  This effect is amplified by free capital flows, another variable not considered by Ricardo.

James K Galbraith also presents a series of problems with Comparative Advantage in his book Predator State.  He concludes with a simple summary: Ricardo was wrong.  I also go with his critiques and summary.  IIRC the core of his primary critique is that Comparative Advantage ignores the developmental effects I mentioned above, notably ignoring changes that can occur as a result of improved division of labor and producer network effects.  I believe there is also an argument that Ricardo's mathematics only works for two trade items.  When you add a third trade item, it fails.

But this is an area where Krugman's old neoclassical side won't entirely let go.  He of course cut his professional teeth on trade (albeit "domestic trade").  Krugman continues to insist that Ricardo was right.  That commentary by Krugman is now fairly old, and he now makes allowances for the liquidity trap now when writing about trade in his blog.  But the problem is not with the qualifications, the very notion of Comparative Advantage itself is fundamentally wrong in many ways.  Comparative advantage is not something you just have, it's something you try to build up and try to hold on to, and those things may require regulation of trade and investment.  Meanwhile, the utility which is maximized through Ricardian Comparative Advantage is not something that people make goals to attain, it's something they are willing to give up to hold onto comparative advantage.

In most other matters, BTW, Krugman is spot on and I read his blog and editorials first thing every day.  Krugman the blogger and editorialist is a great Keynesian.  Krugman the professional economist is (or at least used to be) an equilibrium modeler, and equilibrium modeling is simply apologia for plutocracy.