One of the big differences between vaudeville and radio, television, or film is that a vaudeville act could earn a reputation and get bookings on the basis of a single act. One great example of that is Smith & Dale. Smith & Dale got their start at the turn of the last century but rose to prominence in the 1920s. Their act was “Dr. Kronkheit and his Only Living Patient” and they made a good living from that act over a period of a half century. If you’re not in on the joke Smith & Dale’s real names were Joe Seltzer and Charlie Marks and their first language was Yiddish. “Kronkheit” is Yiddish (and German) for “disease”. Get it?
The act had a long laundry list of corny wisecracks that have become staples, e.g.
SMITH: Look at this, doctor.
DALE: Look at — oh, that there? Did you ever have that before?
SMITH: Yes, I did.
DALE: Well, you got it again!
but probably the most famous was this exchange:
SMITH: Doctor, it hurts when I do this.
DALE: Don’t do that.
With that introduction, I’ve got to admit that I don’t get the point of Robert Samuelson’s latest Washington Post column. It’s ostensibly about income inequality:
Americans have long tolerated some inequality, because almost everyone would like to strike it rich. If you harbor these ambitions, you’ve got to accept the consequences. But today’s gaps between rich and poor, or between the super-rich and upper middle class, long ago exceeded these permissive limits. The present inequality must make all but the most avid enthusiasts of laissez-faire (“let it beâ€) squirm.
Anyone who doubts this should consult a recent study by the Federal Reserve. Until now, most studies of inequality have focused on income — what people earn or receive in a year. By contrast, the Fed study concentrates on the less common subject of wealth — what people own, from cars to homes to stocks.
The study’s most striking feature is how gigantic the numbers are. In 2018, the Fed estimates that Americans owned $114 trillion of assets, including $26 trillion of housing and real estate, $26 trillion of pensions (such as 401(k) accounts), $22 trillion of corporate stocks and mutual funds, and $6 trillion of durable goods (vehicles, appliances, furniture). Liabilities — mostly mortgages and consumer credit — totaled about $15 trillion, leaving net worth at nearly $100 trillion.
Income inequality is at the highest level in the United States since the 1920s, coincidentally also the period at which we last had the level of immigrant population we do now. Mr. Samuelson offers no explanations for the causes of the present situation or what we might do about it.
It’s not that great a mystery. Consider, for example, this recent study on income inequality from the Netherlands Central Bank:
…loose monetary conditions strongly increase the top one percent’s income and vice versa. In fact, following an expansionary monetary policy shock, the share of national income held by the richest 1 percent increases by approximately 1 to 6 percentage points, according to estimates from the Panel VAR and Local Projections (LP). This effect is statistically significant in the medium run and economically considerable. We also demonstrate that the increase in top 1 percent’s share is arguably the result of higher asset prices. The baseline results hold under a battery of robustness checks, which (i) consider an alternative inequality measure, (ii) exclude the U.S. economy from the sample, (iii) specifically focus on the post-WWII period, (iv) remove control variables and (v) test different lag numbers. Furthermore, the regime-switching version of our model indicates that our conclusions are robust, regardless of the state of the economy.
That is hardly a state secret. It was the explicit, openly-stated reason that the Federal Reserve adopted its policy of quantitative easing during the Great Recession in the hope that it would produce “animal spirits”. It flopped except in that it substantially exacerbated income inequality. After 30 years of Fed policy aimed at boosting asset prices it’s hardly surprising that the incomes of the ultra-rich and the rest of us have diverged.
My prescription is stop doing that.
I saw another post about the paper, but I only read the synopsis. It looks like what I have been saying.
I was going to comment on yesterday’s thread where @Piercello asks @steve about “… a behavioral/economic model … in a predictive/descriptive sense …”. Interestingly, @steve’s reply excludes MMT.
MMT is more properly named MCBMT (Monetary Credit-Backed Monetary Theory). The Stock Market Crashes of 1929 and the Financial Collapse of 2008 have the same origin – credit-backed money, and credit-backed money can only exist in a Modern Credit-Backed Monetary System.
The Banking Act of 1933 is what prevented another disaster until it was repealed, but it caused the Great Depression of the 1930’s. After 2008, another Great Depression was averted by doing the same thing that caused the Financial Collapse of 2008, but the price is wealth inequality.
From what I understand about MMT, it, like all other economic theories, is a hard money based. Keynesian Theory, and offshoots, work with a G-S constrained credit-backed monetary system. MMT could work, also. In a G-S constrained credit-backed monetary system, credit-backed money functions like hard money.
William Jennings Bryan was correct about a “Cross of Gold”, but silver would eventually become a “Cross of Silver”. A G-S constrained credit-backed monetary system would avoid becoming ‘hide-bound’, but there would always be the temptation to loosen and, eventually, remove the constraints.
MMT goes ‘off the rails’ because it confuses credit-backed money with hard money. In a constrained or unconstrained credit-backed monetary system, virtual currency temporarily acts like hard money, but it quickly returns to an accounting ledger.
Money flows are a hard money concept. They exist in a credit-backed monetary system, but they do not encompass the majority of economic activity. In a credit-backed monetary system, credit creation is where the dominant economic activity occurs.
Credit-backed money is created through lending, and it is destroyed through payback write-down, or write-off. The “$26 trillion of housing and real estate” can be used to secure loans, and the financial assets can be used to create the credit needed to extend the loans. (Stocks, futures, interest rate swaps, etc. act like financial assets.)
Credit creation facilitates loan extensions, and loans create physical assets. The new physical assets secure new loans that were created with credit being created, but in credit-backed monetary system, credit and loans are entries on an accounting balance sheet. (Commercial paper is similar to using silver to eliminate the Cross of Gold or cash-flow constraints.)
Economic activity occurs on these balance sheets, but because a balance sheet is balanced, economic activity occurs through credit creation and loan extensions not money flows.
Theoretically, consumer prices would not rise substantially because the supply of consumer goods would be created to match the increased demand of consumer goods. Inflation would occur in asset prices, and this inflation would need to be controlled.
The problem is that the government’s credit creation is miniscule compared to the financial industry’s credit creation, and because economics is behavioral based, neither the government nor the financial industry will correctly control credit creation and loan extensions.
Credit is only as good as people believe it is. A credit-backed monetary system is faith based, and when people or institutions lose faith in the system, it collapses.
In a fractional reserve lending financial system, creating virtual assets is faster than creating physical assets, and the economy grows faster. A stable financial industry requires stable credit creation, and this stability slows wealth creation. In turn, this slows economic activity.
(There were small crisis during the Glass-Steagall era, but they could be contained and rectified, easily.)
That is a topic I have debated on more than one occasion with advocates of MMT. It’s something they really don’t want to hear.
Slightly OT, but I think this partially addresses the issue. The jobs we have been losing are not being replaced with equivalent level jobs. We are getting growth, but it is too focused into the top 1%. We keep supporting policies that enhance the problem.
http://conversableeconomist.blogspot.com/2019/05/is-something-different-this-time-about.html
Steve
I’ve been saying that for years.
Yup, but the standard response from those who think the market solves everything is that with disruption we always create new and better jobs. In our current case that may not be true. Wouldn’t bet everything on one study, but nice to see people are looking at evidence.
Steve
“…the standard response from those who think the market solves everything…”
Who are these people of which you speak? Can you name any?
Guarneri
“…the standard response from those who think the market solves everything…â€
Who are these people of which you speak? Can you name any?
Me! Pick me! It doesn’t solve everything but it solves far more problems than any other mechanism.
Yes, but Roy, you just made my point. It’s better than all other, by a wide margin. But the dim bulbs demand perfection……………..and then pick horrible and ineffective, dare I say grossly worse, alternative systems.
I’m unaware of perfect societies. Maybe steve can point us there.
It is not difficult. That’s what just about everyone writing at Reason.com thinks. The objectivists. Alan Greenspan. Paul Ryan.
“Who are these people of which you speak? Can you name any?”
I guess that would be you and Roy. (I never said perfection BTW.) You adhere to the idea that the market is always the best way to solve things when we have so many examples of areas where it was not best, or just wasn’t interested. Public health. We are all dead right now from Ebola if we left this up to the markets. Computers/internet. We probably dont have the internet, or at least not at this stage and could still be in the era of mainframes w/o govt involvement. Agriculture- Without a government funded Borlaug where are we? Basic research- It doesn’t pay, so we dont get much of it absent govt funding.
So far, the markets have not solved this problem, and I dont see why it would. Markets are just a pricing mechanism. Capitalism is just a system that rewards self interest. As long as there is growth, and there is adequate supply of basics, why would markets or capitalists really care if new jobs are as good as the old ones? SO maybe this cant be fixed, but you are opting for the status quo behind the assertion that only markets can be trusted to fix things, ignoring the evidence that sometimes we do find answers elsewhere. Rather than invoking the “magic of markets” I think you guys should actually tell us why markets will solve this particular problem, starting with why it has not done so for the last 15-20 years.
Steve
We used to have such a system. Under it people routinely sold rotting meat and pharmaceuticals that were more likely to kill you than to cure you. Mine owners hired thugs to kill striking miners.
Inspecting food is not a bad thing. Reviewing pharmaceuticals is not a bad thing. Granting patents is not a bad thing. Regulating banks is not a bad thing. Licensing physicians is not a bad thing. They’re all better than the alternatives.
But they do interfere with the market and require compensating actions.
It’s more than that, steve. Without government interference there would be no smartphones, no Internet, no computers at all. Computers were developed under government contracts back in the 1940s. The miniaturization that ultimately led to smartphones was a byproduct of the space program. Without the government there would have been no space program. The Internet was developed with government funding. Its antecedent was the DARPANet—Defense Advanced Research Projects Administration Net.
JIT, modern automation, and globalization are all byproducts of government intervention, requiring more government intervention to offset the secondary effects and more government intervention to offset the secondary effects of the secondary effects. Guarneri sees that process as bad. I see it as improvement by continuing approximation. The objective isn’t perfection but improvement.
“But they do interfere with the market and require compensating actions.”
Sure, but why is there always the assumption that the interference is negative? We interfered with pharmaceuticals, people realized they could actually trust them, and the market for them has been great ever since. My point being that sometimes it is good and sometimes it is bad. I think we should argue the merits of the individual case rather than just saying “markets” then handwaving a bit about they are always better.
Steve
Dave,
You are quite wrong in your perceptions of the development of computers and automation. Yes, DARPANet. It was indeed a government initiative, but only one of a number of competing protocols. Miniaturization was pioneered by Texas Instruments, Fairchild and Intel. Of course the government bought these products but they did not initiate their development.
Michael Crichton coined the term “Gell Mann Effect”. That is, you read a story about which you have some knowledge and say WTF? Then you read the next story from the same source but outside of your personal knowledge and accept it as true.
That is what I see here. I first tore the skins off a computer in 1961. I worked with punched cards and plug boards and vacuum tube machines. I was an engineer at Autonetics working with the very first production integrated circuit machine, the D37C Minuteman II guidance computer. I can attest that the public perceptions of computers and AI bear little relation to reality.
No. I was there. The proprietary approaches failed to gain traction because they were proprietary. The Internet is simply something that could not have been produced by the private sector. They tried.
Yes. Under government contract. The space program needed miniaturization. The printed circuit board in particular was specifically an outgrowth of the space program as was the use of semiconductors.
You’re right on AI, however. It’s being overhyped. There have been practically no new developments in AI since I was in grad school and that was 50 years ago. Hardware is cheaper and smaller. That’s it.
steve, this is a subject on which you’ll either have to take my word for it or become better-informed. There is always deadweight loss. Government intervention always results in less economic activity than would otherwise have been the case.
But sometimes the results of government intervention are preferable for non-economic reasons. I don’t reflexively oppose government intervention. But I do think it needs to be subject to cost-benefit analysis. For goodness sake the Canadians are doing that.
Too often, it seems to me that economic models focus overmuch on what the money does, and not enough on what the people do.
For example, it seems common to believe that (for any given model) things would work, if only the right (wrong!) people could be kept away from the gears. But what if, as seems more likely, the problems are systemic to human nature?
For any economic model, I’d like to see the human assumptions more clearly stated, PRIOR to getting into what the money should be doing.
I say it in a slightly different way. Economics is a science of human behavior. It’s not a “hard” science like physics. Its findings are very dependent on how people behave.
That’s my criticism of econometrics. They’ve focused too much on mathematical models and not enough on observing what people do.
Dave, what if I tried integrating our two statements, as follows? Would you sign off on it?
“That’s my criticism of econometrics. They’ve focused too much on mathematical models [of economics] and not enough on [first establishing a coherent mathematical model of human behavior, based on] observing what people do.”
Sure
Dave, if you’re willing, ping me with an email.
“Americans have long tolerated some inequality, because almost everyone would like to strike it rich. If you harbor these ambitions, you’ve got to accept the consequences.”
That is just plain stupid. People tolerate inequality because they understand that some amount is inevitable and they also understand it’s not about “striking it rich” like we got lucky Vegas.
What people care about is fairness. It’s one thing if someone gets rich through hard work, perseverance and luck – it’s quite another if it’s because the system is rigged and zero-sum. I don’t think people care as much about the fact of rising inequality as they do about its cause.
Markets always exist. They are simply a balancing mechanism for value-to-value transactions, and like a butcher’s scale, the problem is the butcher’s thumb, not the scale.
Over time, the value of things change, and the changes can occur quickly. The value of a life preserver changes dramatically once the ship hits an iceberg.
I think there is a difference though. In those examples, government is hiring the private sector to develop capabilities that it needs. That is a long way from nationalizing health insurance, as many Democrats want to do (or say they want to do).
And there’s a big difference in terms of goals – I think the divide about whether the market or government action (or some combination) is better can be determined, in a large part, by the goal one is trying to achieve.
That actually brings up an interesting subject. I am no longer able to tell whether extreme positions are being offered as bargaining positions or in sincerity. IMO offering a bargaining position is stupid but the idea that if you propose $1 trillion but are willing to accept $500 billion that’s a compromise has caught on.
“I think there is a difference though. In those examples, government is hiring the private sector to develop capabilities that it needs. That is a long way from nationalizing health insurance, as many Democrats want to do (or say they want to do).”
I still follow health care policy pretty closely and I have not been seeing people suggesting that we nationalize health care like the Brits do with the NHS. People are advocating for Medicare, where the government pays but the care is provided by private entities, much like the examples you use. I think that is mostly how we have done things, and been pretty successful at it, using other countries for comparison. It is not usually a govt employee inventing a new drug or doing basic research. It is the funding provided by the govt, that the market would never finance, that pays for that research.
“I don’t think people care as much about the fact of rising inequality as they do about its cause.”
Totally agree, until recently. At his point the inequality is so extreme that it is self-reinforcing like we have not seen before. I guess that could also be seen as related to cause, but it just seems to me that the real extremes of inequality become a concern unto themselves.
“That actually brings up an interesting subject. I am no longer able to tell whether extreme positions are being offered as bargaining positions or in sincerity.”
Art of the Deal. Stake out extreme positions for bargaining. It has been normalized.
Steve
Possibly because they believe, without a great deal of evidence other than by comparing our system with those of countries with which we have precious little in common, that centralizing administration will result in enough cost savings to expand coverage as they want.
“I still follow health care policy pretty closely and I have not been seeing people suggesting that we nationalize health care like the Brits do with the NHS. People are advocating for Medicare, where the government pays but the care is provided by private entities, much like the examples you use.”
The Sanders and Jaypal M4A plans, which have over 100 cosponsors combined last time I checked, are not simply giving Medicare benefits to everyone. They change Medicare completely – it would cover everything except cosmetic procedures, have no out of pocket expenses for anything, and make private health insurance illegal. In short, their plans nationalize the health insurance industry. That is not something even the Brits have done. I don’t know of any comparable countries that have done this.
“People are advocating for Medicare, where the government pays but the care is provided by private entities, much like the examples you use.”
And this is not like the examples mentioned. M4A isn’t contracting to private firms to develop some new capability the government needs but doesn’t have, it is displacing a private industry entirely.
“It is the funding provided by the govt, that the market would never finance, that pays for that research.”
And I have no problem with government funding research. That is not remotely the same thing as M4A though. The government should fund some research, it should not fund all research or even most research, and it certainly should not make private research funding illegal.
“The Sanders and Jaypal M4A plans”
Some version of these plans has been sitting as a bill but not voted upon since about 2003 or 2005. This is just for signaling. This will not be the bill that is passed. The Jaypal plan is just the rewritten prior plan which had about 15-20 sponsors. My point stands that there just arent a bunch of policy people on the left who are pushing for an NHS like system.
Query- Did you believe Trump when he said he would give us health care for everyone that would be cheaper than our current care and it would be easy?
Steve
“it is displacing a private industry entirely.”
The health insurance industry. Care would still be provided by private entities, but as I said this won’t happen.
Steve
Steve,
Trump shooting off at the mouth is a bit different than actual legislation (which has 108 cosponsors – I just checked).
Yes it won’t go anywhere and sure it’s virtue signaling but it gives us a pretty good idea of what they are shooting for.
“The health insurance industry. Care would still be provided by private entities, but as I said this won’t happen.”
I realize that. It still purports to nationalize an entire industry. That is fundamentally different than government funding research or large engineering projects.
“Yes it won’t go anywhere and sure it’s virtue signaling but it gives us a pretty good idea of what they are shooting for.”
Then we will probably just have to disagree. I dont think this is what they are shooting for. This is signaling. They put it in a bill that has been around for 15 years and never voted on, could never get past the Senate or past Trump. Not serious. I think we can take from it that there is support for some version of Medicare for all, but not much more than that.
Steve