Isn't this just a point-for-point paraphrase of a Paul Krugman article, about the same co-op? He didn't even cite Krugman, or the journal article Krugman cited for the same story.
It is an awesome paper, but it doesn't appear to be your primary source --- which you haven't yet cited (it's "Babysitting the Economy", Krugman in Slate from '98, about the Asian crisis).
For example, unlike Krugman, the original paper doesn't state that the co-op is mostly lawmakers and lawyers (only that lawyers drafted the bylaws); unlike your post and Krugman's article, the paper also doesn't talk about legislation.
More importantly, the paper's thesis isn't Krugman's thesis, or yours. The paper seems to be making the point that the implicit economies that develop from social interactions are often destined to flail because people don't recognize them as economies, and insist on applying moral reasoning to technical problems.
But your thesis --- and Krugman's --- is different. Obviously, we recognize The Economy as an economy. So what Krugman is saying is that this story illustrates something about how to resolve a depression.
Which it very well might. It's not like I'm going to question Krugman on it.
(You did cite Krugman's anthology book, which I haven't read but might contain this article).
If you cut away all the economist talk and get down to the core of the problem it's very very simple: For the last 8 years America has been spending more than it has made. Production is not up to world standards, just look at the auto industry.
Bailing out companies and fiscal stimulus of one sort or another won't save you from the basic and indeniable problem: You're broke.
There's only one way out of that: Spend less and work more.
In the "scrip" economy, couldn't they just let the value of the scrip change organically? If scrips are getting too precious, you can tell your babysitter that he'll be getting one scrip per two hours instead of one hour. If scrips are indeed that rare, he'll accept it, and the scrip-time ratio will naturally reflect the scarcity of scrips.
Since this thing does happen with Dollars, I reckon his analogy is bad, and adding more Dollars won't solve the problem.
You've got it. I made the same point a few weeks ago: http://news.ycombinator.com/item?id=421617. It doesn't seem like rocket science, but maybe it is; the vast majority of economists, including Nobelists like Krugman, just don't seem to get it.
That's one facet another is how deflation and loans mix. In effect deflation increases interest rates just as inflation decreases them. If you owe 1$ @ 5% over a year with 50% deflation you now owe 2.1 times the value of what you bought. Once deflation starts people start trying to pay back their debt because their effective interest rate increased. Which decreases the money supply and causes even more deflation. This cycle can quickly get extremely nasty with most people defaulting.
The free market dampener is people refinancing at slightly lower rates, but this this hits a wall. Negative interest rates never happens, because why lend money when you can just keep it. And even mild deflation is hard to deal with because loans have risk so you can't lower loans below the rate of risk.
It would be nice if these people did something useful, but Keynes' point was that this is an optional feature which should not be allowed to detract from the main goal.
The main goal being getting money circulating again?
But why should that be a main goal? Why have money changing hands for the sake of changing hands? Isn't money just a medium of exchange -- a go-between, a currency -- used to convert one type of good into another? We don't just want money to circulate, we want money to circulate purposefully -- in transactions on the free market.
I still don't see how burying money and having miners dig it up helps anything. It doesn't create value. Those miners could do other, more productive things instead.
I think the general idea is that in this situation people are reluctant to spend so the price of things goes down. In the general case that decrease in price would make spending more attractive, however people fear further price reductions and so still don't spend and you get a spiral that feeds itself.
Isn't money just a medium of exchange...used to convert one type of good into another?
I'm tempted to answer "no". Money has properties -- the very ones that prompted its design -- that make an exchange of money quite different from an exchange of goods or services.
The important property for this discussion is: an exchange of services doesn't offer you a reliable medium of savings. If I offer to shingle your house in exchange for you shoveling my snow, but it's January and I can't shingle the house until May, we're stuck. You can shovel the snow first and have me owe you the shingling, but what if I flee the state, or injure myself? Or what if May comes around and you have decided that you'd rather have the lawn redone than the shingles replaced? I don't know lawns! I only do shingles!
But money solves this problem because you can put it in the bank (or a piggy bank, for that matter) and decide later what to trade it for and with whom.
Which leads directly to the problem we're worried about: deflation. Right now is a very bad time to hire someone to reshingle my house for $75 an hour, because in six months another 3-5 million people will be out of work and there will be a lot more unemployed people with building skills, some of whom might be willing to reshingle my house for $50 an hour. But, of course, at that point I might be out of work myself, and $50 might seem like a lot of money, but no problem, because if I wait another six months the price might be down to $25 an hour...
In a depression people hoard their money, because there isn't a lot coming in and because it's worth more the longer you wait. That's the phenomenon which Keynesian stimulus seeks to prevent. You have to offer folks $50 an hour (or whatever) to do anything -- twiddle their thumbs, if necessary -- to keep money flowing into and through the system and to fight the universal tendency toward deflationary deadlock: The situation where everyone sits on their cash and their labor, waiting.
(Since the 1930s, we've prevented our economy from falling into this terrible state by using monetary policy. But you can't use monetary policy to maintain equilibrium once the real interest rate is zero. Which it apparently now is.)
Unfortunately, a depression is one of those nonlinear, non-equilibrium, black-swan situations that relatively few living Americans have experienced, and we're seeing the very real danger that people will refuse to recognize the possibility this time until it's too late. You have to anticipate these things, because economies have a lot of momentum.
A medium of exchange, not an exchange itself. A medium: "a means or instrumentality for storing or communicating information." Money enables the storage and communication of information about exchanges, as posited by your example.
As for deflation: Isn't there a cost to not reshingling your house? You don't have a reshingled house, something you presumably want. You shouldn't just look at the price of labor, you also have to look at the value of what the labor does: the house, reshingled. Compare that to the cost of reshingling the house. (Opportunity cost, in so many words).
I still fail to see the point of offering folks money to do something pointless, nor how it helps stop deflationary deadlock. If there's a deadlock then they'll just sit on that money as before, no?
I'm not sure I understand the deflationary deadlock -- you posit a situation where everyone sits on their cash and their labor, waiting -- waiting for what? Eventually someone is going to stop waiting and start working, eventually the gap between desired state and existing state will loom larger than the value of sitting on that money. In the house-shingling example, eventually you will value someone shingling your house for $X/hr today more than you will value having a not-reshingled house until the price drops to $Y/hr in Z days. When that point comes, you'll stop sitting on your money and hire someone to reshingle your house. Wouldn't a series of such events unlock the deflationary deadlock as the market reaches the new price point?
Then, the idea was to let miners dig them back up. The burying and mining activities themselves are silly and useless, but then the multiplier effect kicks in. Keynes says the important thing is to get money circulating so that resources can (eventually) be put to practical use, whereas if everyone saves and does not reinvest then potentially productive resources are left fallow.
If people are jealousy guarding their cash for fear of losing wealth on other investments (seriously, what else would you invest in, in this environment?), then printing cash and throwing it around is SO irresponsible that no one can credibly believe their bills will maintain value. They'll spend their cash on goods and services rather than see it's value disappear.
This isn’t rocket science. Keynes suggested stuffing bills into bottles and burying them down mineshafts; Milton Friedman once proposed tossing cash out of helicopters. But as long as the government is spending money, we might as well spend it on something useful. And thus, fiscal stimulus.
I agree with printing money to halt the deflation. But this should not be done through government projects. If the money is spent via government projects, then you still get massive frictional unemployment as businesses shut down and and everyone has to find new jobs working for the government. Second, government spending has a ratchet effect. Government programs never die. Finally, I believe individuals know how to spend their money the best. Should money be spent on a high speed train from Boston to Washington, or should it be spent on healthcare? Just print money and give it to individuals and let each person decide.
As I recall, an article I read recently outlined a few key principles for such a monetary deployment (which Lawrence Summers apparently supported until he became part of the administration):
1) Must be able to start very soon
2) Must have a clear horizon (i.e. a project with a final deadline, so that it doesn't keep costing money forever)
3) Must be useful
One example it gave of the best way to spend that money would be actually to repair existing roads. That's usually very easy to do right away, provides immediate short term benefits, and reduces your long term costs (unlike building roads, which increases them, as you then have to maintain all these new roads).
The point of monetary deployment should be balance sheet repair. Only when people's balance sheet's are repaired can normal spending resume and the layoffs stop. The point of an intervention now should not be to get the unemployment rate back down to 4%, but to prevent it from going to 15%. Therefore, the thing to do is to repair balance sheets by printing money. If you only give money to people repairing roads then consumer spending still drops off a cliff, and millions of people still lose their jobs.
"The moralists insist it’s irresponsible for us to just print more money."
Actually economists, not moralists, are against this; because excessive pumping of money in they system in this way will cause hyper-inflation.
Classical (and rather extreme) example of why printing money should be kept under check: Zimbabwe.
Everyone agrees that excessive pumping of money into the system will cause inflation. The problem is figuring how how much is, in fact, excessive. And in a recession, you can't just say "let's err on the side of conservatism and not pump anything in" because there's the risk of deflation on the other side.
"We stand today at a crossroads: One path leads to despair and utter hopelessness. The other leads to total extinction. Let us hope we have the wisdom to make the right choice." —Woody Allen
Aha.. I've seen the "interest rates can't go below zero" claim again. Is this really so? I've read it a lot, but surely a negative interest rate is possible by being paid interest to borrow money?
A negative interest rate, therefore, would be a bit like a formalized "helicopter drop". If the interest rate of a loan were tied to the nominal interest rate in some way, you wouldn't have millions borrowing as much as possible because the rates could well shift back in the other direction before long.
Some economists have proposed imposing a tax on cash holdings, which would theoretically push nominal interest rates negative... this would really give people an incentive to hold assets instead of cash.
Some economists have proposed imposing a tax on cash holdings, which would theoretically push nominal interest rates negative... this would really give people an incentive to hold assets instead of cash.
Inflation is one way to solve a debt crisis. What ends up sacrificed is the reputation of the currency (dollar in this case). Our spending power as a nation will decline when the rest of the world demands more dollars for their goods.
I have wondered lately if this is why we are keeping our car companies alive: Massive inflation could make them cheaper than foreign cars.
He's proposing an expansion of the money supply, not inflation. It will only lead to inflation if the money is not withdrawn quickly enough as the economy recovers.
It's all relative. Expanding the money supply has an inflationary effect, even if the absolute effect is simply to slow deflation (which is still relative inflation).
Changes in the money supply do not appear to be correlated with short term inflation at all, so it's not certain that short term expansion will produce any effect.
But short term expansion will surely not be enough to quell the crisis.
Also, the point that other commentators have made on falling value of the currency stands valid. At the moment, America is facing twin problems of slowing economy and mounting debt; whose classical "cure" point to different directions.
Wait a second, isn't inflation = expansion of the money supply, i.e. monetary inflation? Price inflation comes later as a direct consequence of monetary inflation, as effects propagate through the economy.
Also, how could money "be withdrawn quickly enough"? Who would withdraw it and how?
Inflation is defined as a persistent rise in general prices. It used to mean an increase in the money supply, but that usage is archaic in most economic circles.
The money would be withdrawn in the way that central banks usually withdraw money in their day-to-day operations: by selling bonds or allowing them to mature.
The Keynesian prescription, AIUI, actually has two sides: the government should run a deficit (when necessary) during a recession and run a surplus during a recovery.
It's a damn shame that the Bush Administration didn't follow the second half of this advice for the past eight years, but that's no reason to ignore the first half now.
This is just a muddled explanation of monetarism, which is pretty well clearly nonsense at this point. No macroeconomic developments of the last 100 years confirm it.
> We’re not being punished for our exuberance
We're being "punished" for massive malinvestment. Wealth was poured into assets and ventures that could never achieve positive returns. A recession/depression is the process of liquidating malinvestments and redeploying wealth and labor to economically profitable ventures.
The malinvestment happens partly from mass psychology and mostly because of artificially manipulated interest rates. The natural market interest rate reflects the amount of wealth available for investment (capital). When people have saved a lot and there's a lot of wealth stored up, interest rates are low. When interest rates are artificially held low, investors and business people get the mistaken impression there's much more stored wealth in the society than there actually is. Then eventually many business plans come to tears at roughly the same time, as it becomes apparent there isn't the wealth to drive demand for the ventures. This is a recession.
A recession/depression is the process of liquidating malinvestments and redeploying wealth and labor to economically profitable ventures.
If what you say were true, then we wouldn't be suffering from unemployment. We'd suffer from massive writedowns in our wealth (as we realize our malinvestments) but labor would be redeployed to new ventures. Effectively, we'd be working our assess off harder than before, but receiving a lower quality of life in return.
In reality, however, the economy is not at full employment. If we malinvested before (effectively did useless work), that should be a sunk cost. We wouldn't receive the future benefits we expected from that work, but that wouldn't preclude us from continuing to work. Malinvestment is not a reason for unemployment.
No, we're in a liquidity trap. Option A is monetary policy. That has been tried and exhausted. Option B is fiscal policy. Bring out the helicopters!
That's only true if they're continuing to make poor investments. All we know is that lots of companies made poor investments in the past. Letting them fail doesn't change that past, nor does bailing them out necessarily reduce the quality of future investments.
If the person I originally replied to is implying that the current bailouts create too much of a moral hazard, then that's a possibility, but that one sentence that was given doesn't do the issue justice.
Have you seen the share prices lately for the companies that have needed the bailout? Citigroup's stock is down almost 95% since mid-2007. The equity holders have been wiped out. The poor investments don't need to be honestly documented for that to happen. If you know that poor investments have been made, so does the market.
What I mean by wiping out is that the company ceases to exist, its stock is deregistered, and a successor company is created by the bankruptcy receiver. Stockholders in most financial companies have not experienced this, because the government regulators have decided to prop the banks up as zombies.
Suppose a consortium of Arab investors decided to believe Citi's current published balance sheet, and bought $500M of newly-issued Citi common stock at US$2.00/share, a nice discount from its $3.40/share market price. They would most likely lose every penny of that investment when Citi fesses up to the true losses.
Of course the big money investors are no longer that foolish, having been burned several times by U.S. bank "recapitalization investments" in 2007/2008. Everybody is waiting on the sidelines for honesty to develop. This flight of capital has been billed as a liquidity crisis by the Wall Street hucksters, and used to justify mammoth bailouts, but in reality it is a solvency crisis and there is an ocean of hot money itching to be spent on honest companies.
we wouldn't be suffering from unemployment... labor would be redeployed to new ventures
Yes, but redeployment takes time -- especially when everyone looks around and sees all their assumptions about what profits different activities will return are wrong, and need to be recalibrated. That research -- which happens tentatively, experimentally at first -- means some capital/labor sits on the sidelines while the necessary information is collected or created.
Redeploying labor immediately at the first things you can think of might keep people busy but can worsen the wealth destruction, if those activities wind up being of net zero or negative benefit. (By tying up workers on make-work, they could also slow the rediscovery and restaffing of valuable projects.)
Those who have lost their jobs don't necessarily have the right skills for the more economically productive jobs that hopefully get created. Also, they don't necessarily live in the right places.
Not to mention that many who are in the right place and could profitably use new people are not sure of that fact, so they lack the confidence to bring in as many new people as they might otherwise.
Which is why fiscal stimulus is temporary. It's necessary while the economy is at less than full employment, but once the economy starts picking up fiscal stimulus should drop off.
That's the cover story. But how much of the $819 billion in the stimulus bill is set to automatically expire in 2 years, or when the economy reaches certain growth targets? Roughly: none. A lot of the spending won't even get flowing until 2010 or 2011, when the economy may be recovering just fine on its own.
Malinvestment also applies to labor. Workers need to retrain before they can start new productive jobs, and they need capital as well (not easy, since the US are borrowing instead of saving).
It's clear that the massive investments in housing over the last few years won't produce the returns we expected. Yes, we're going to suffer because those were bad investments.
But look at the bigger picture. We have productive economic resources (labor), why should they ever be sitting idle? It's not like we don't have problems to solve. We have to pay off our debt to the Chinese. We have to figure out what to do when the oil runs out. We have to make sure we don't destroy the planet sometime during the next century. We need to figure out how to take care of all the baby boomers once they retire. There's LOTS of work we need to be doing, but we're sitting around twiddling our thumbs. That makes no sense.
This presumes someone (the government? you?) can figure out what to do with that labor. Traditionally, in a capitalist economy, we let the market figure that out. Right now, the market's in a bit of a state.
Yes, in the industries where the bad investments where made (finance). But that alone cannot explain the withdrawing of investment from other industries.
No sectors exist in a vacuum. Take this very simplistic example:
The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects:
- There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc)
- Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above.
- As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there.
- As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle.
There's a much simpler explanation: the collapse of subprime mortgages forced people to confront the fact that there is way too much leverage in the economy. Too many people and companies owe money that they won't be able to pay back. The level of production of goods and services was based on the level of consumer and business spending, which everyone now realizes was being fueled by excessive debt. The level of production must now fall to a level that is consistent with businesses and consumers using much less debt going forward, and it will certainly overshoot on the downside because of panic and lack of information.
The question that I see being repeated in the media these days is "what are the banks doing with the bailout money, why aren't they lending it?" Perhaps the answer is that there is currently nobody out there who is a good enough credit risk to lend money to. Another possible answer is that the banks now realize that they've lost the ability to quantify credit risk correctly and they are going to need to relearn that skill.
No, you're ignoring the fact that every time a desk company tools up a new factory, they are investing, and when those investments track a faulty projection on the demand for desks from financial services companies, they too have malinvested.
You don't comprehend the macroeconomic scene if you think we're dealing with a "financial crisis." Dozens of sectors are at over capacity. Debt growth has hit its ceiling and households, governments, and businesses all over the country need to repair balance sheets. This is not about banks or financial firms.
Depressions are what happens when Recessions start feeding off of their own fall. Looking back at the great depression the amount of knowledge did not change, the workforce did not change, the amount of natural resources did not change much, but things kept getting worse. Over the long term Recessions are useful but Depressions can cause a lot more harm than good.
PS: We are not in a depression, but a major goal should be to avoid a depression while we let this recession fix many of the problems your talking about.
The change in the depression was massive government intervention. Hoover reacted quickly with unprecedented price support programs and stimulus to preserve the status quo. FDR upped the ante, and kept doing it for many years. There was a depression because the mistakes of the 20s were not swiftly liquidated.
The policy prescription for the current crisis is to beef up food stamps and heating assistance programs so people don't starve or freeze, and then let all nonviable businesses fail as quickly as possible so they can be reconstituted as profitable companies.
That sounds like a great idea but are economy is based off of consumer spending which can just free fall.
"From 1929 to 1934, U.S. personal income plunged 44%, real output nosedived 30% and the unemployment rate soared to 25% of the American labor force." and the great depression still had 5 years left.
"By Jan 1, 1934, as many as half of all residential mortgages were delinquent" let alone all the ones that had already failed.
And it can fall far further in the next one. It's a house of cards and the bottom is far further than you might expect.
I don't understand how this is a response to anything I've said. Yes, consumer spending needs to plummet. Many thousands of retail businesses need to shut down. They are not viable. The profits in recent years were from phantom earnings: totally unsustainable and artificially credit growth, mounting consumer credit card debt and MEWs. The quicker we get the liquidation and write-downs over with the better.
We had a positive personal savings rate last month. Once you have a positive saving rate there is no long term problem with spending. (http://www.bea.gov/briefrm/saving.htm)
The general view amongst economists is that Hoover's price supports were the one thing that caused the depression. FDR implemented limited socialism, which did nothing to alleviate the depression-- there was not much he could do about it at that point --but was rather meant to keep people in homes, and clothed.
I find it strange that there still exist named schools of thought in economics; perhaps it's a sign of the field's intellectual immaturity. After all, which schools of thought are there in chemistry or physics? A few centuries ago you could have answered that question, but today it doesn't even make sense. I wonder if economics will ever reach the same level of development.
For what it's worth, the only economists who consistently avoid setting off my bullshit meter are the Austrians. And yet, their views border on lunatic fringe according to mainstream economists. In a world where those same economists set policy, that is an alarming combination.
The core problem is that economics cannot use falsifiable experiments
I agree that falsifiable experiments are difficult in economics, which is why we must rely instead on logic and reason---a strategy seemingly abandoned by modern economists.
I remember the ridiculous (and since discredited) argument by Card & Krueger that increases in the minimum wage increased employment, at least according to their data. And yet, when you raise prices on normal goods, the quantity demanded falls; if you force companies to pay employees more, they will hire less. If the data say otherwise, the data are either wrong or too noisy to be trustworthy. (Unfortunately, their paper wasn't merely an academic curiosity---it gave Bill Clinton and Congress political cover to raise the minimum wage in 1996.)
And now we hear economists fret that Americans, who have been under-saving and over-spending for years, may yet ruin the economy---by saving too much and spending too little. Someone needs to tell them that wagging your finger and saying "liquidity trap" doesn't magically give the emperor clothes.
Yes, but they don't differ on how you deal with practical problems, at least not ones on the level of how to design a car or a computer. Maybe they would affect cutting edge semiconductor research or fusion reactor design, (I don't think the interpretations of quantum physics do, but other conjectures might).
I figured someone might mention this. (I almost addressed it in my original comment, but it was a bit peripheral to my main point.) The various quantum interpretations are not schools of physics thought; every physicist "believes" in quantum mechanics. They are schools of thought on the interpretation of quantum mechanics---which certainly is an indication of that (sub)field's intellectual immaturity. And, like economics, the interpretation of quantum mechanics has more than its share of bullshit. As Stephen Hawking supposedly once said, "When I hear of Schrödinger’s cat, I reach for my gun."
N.B. I predict the rise of quantum decoherence theory will change this picture in fairly short order.
I consider the silence of the Copenhagen interpretation over what happens during measurement to be an actual difference of physics, not of interpretation. If some other theory were able to predict, say, the time it takes for a wave function to collapse, or the number of particles another must interact with for it to decohere, or so on, it's a difference in predictive capacity, not merely of metaphysics.
That's a good point. There is definitely some physics content in the interpretation of quantum mechanics---Bell's Theorem certainly took many physicists by surprise when it came out, since it proved people were arguing over more than words---but in any case it's all a tiny higher order term in the series expansion for 'physics'. (The 0th order term is "Newton", FWIW. ;-)
Interpretation of quantum mechanics is outside of the scope of physics, it's more like philosophy or something. For physics to be like economy in that respect, there would have to exist, for example, university professors who still wouldn't believe special relativity or quantum mechanics and claim that only the classical newtonian mechanics makes any sense.
This concurrs with the grandfather's theory. This particular domain of physics, quantum theory, is certainly new and, we may say, as immature as the other domains were 3 centuries ago.
If hoarding leads to an irrationally priced money, rational people will quickly realize this and exchange their money for other alternatives that have become favorably priced.
Once this tipping point is reached, others will realize that they were overvaluing their money and the pendulum will swing back.
Some people are losing their jobs because they were in sectors that had too much malinvestment ( housing).
But many other are losing their jobs simply because of friction caused by the increase in demand for money. All contracts ( wage contracts and debt contracts) were written assuming an easier availability of money. When a deflation occurs, many businesses go bust not because they were "malinvestment" but simply because their contracts were denominated in 2007 dollars, not 2009 dollars. The correct response is to print money to prevent the deflation, thus removing the need for every business in the country to into bankruptcy court to get out of their debts.
Before the Great Depression, many people wanted cars and they could afford cars. After the great depression, the production of cars were even greater. Why did the factories need to stay idle during the great depression? Idle automobile factories were not a result of liquidating malinvestment, they were a result of collateral damage from deflation.
