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Thursday, May 14, 2015

Irrelevant equilibriums

While I agree with Ari Andricopoulos's observation of the danger of the Taylor rule as well as the utter ineptitude and irrelevance of the whole orthodox macroeconomic profession, this post somehow tends to remind me of Princess Leia pointing out how the tighter the Empire grasped, the more star systems would slip through its hands.
Equilibrium: γ*ES  = (1-αd)*d + (1-αi)*i + (1-αw)*w + (1-αC)*C  (3)

This means that the spending of existing savings exactly matches the amount being saved without any new debt being taken out. This is the true equilibrium in an economy that we need to aim for.

In any case, you can see how the dividends, interest and wages from GDP at time t, as well as the external sources of money (from existing savings, new loans and new central bank money) make up the next period nominal GDP.

What has gone wrong:

I would say that during the 1945 to 1975 period, a period of excellent growth across the developed world, we were broadly in equilibrium. The savings broadly matched the spending of exisiting savings. Governments, using Keynesian policy tools would increase their spending (the government component of L) when savings were too high and reduce when more savings were being spent than new savings made. It all worked pretty well.

What changed in the 1970s was the rise of credit. Looking at the Equilibrium equation (3) above, the share of GDP going to interest and dividends went up relative to the share going to wages. The coefficients of consumption (α) for the interest and dividends is lower than that for wages so we had the following inequality:

γ*ES  < (1-αd)*d + (1-αi)*i + (1-αw)*w + (1-αC)*C

This means that the economy is out of equilibrium. The GDP shown in figure 1, will now go down because of the excess savings.

Previously fiscal policy would have been used to stimulate growth and return the system to equilibrium.

Increased government debt is far more efficient at stimulating the economy than increased private sector debt. I show here that a 10% net increase in private sector debt stimulates the economy and adds approximately 1.1% to GDP growth in the year that the debt is taken out. So the multiplier of private sector debt to GDP here is 11%. However, the cost in future years due to the increase of interest repayments at the expense of wages is 0.15% of GDP for every year going forwards.

The same amount of increased government debt costs only 0.9% of GDP going forwards, but crucially the multiplier on this spending is much higher. Therefore much less government debt is needed to create the same amount of economic stimulus as private sector debt. In fact, I estimate that government debt is an order of magnitude more efficient.

 One problem with the Taylor rule is that it uses a linear trend extrapolation. But the increase in debt means that the growth potential of the economy is lower each year so trying to keep it at the previous trend means more and more debt.

Another point which I disagree on, is that the inflation targeting does not separate inflation with a domestic source compared to that with a foreign source. I discuss the error that I believe that they are making here.

But the main problem is that, as with the whole orthodox macroeconomic profession it seems, is that IT IGNORES PRIVATE SECTOR DEBT.

I can not stress how obvious this is. It assumes that debt can grow indefinitely. It assumes that previous debt has no impact on growth. It creates a positively reinforcing feedback mechanism that ends in stagnation.

This is the real danger of the Taylor rule, Dr Bernanke.
Far from the mainstream notion that private sector debt is irrelevant, I would argue that it makes more sense to measure the macroeconomy - to the extent that we bother pretending it even exists, which is the subject for another day - in credit money. This method would have its flaws, of course, because credit money can evaporate in a heartbeat, but it would have the benefit of providing a much more accurate snapshot of any given moment in macroeconomic activity than the woefully irrelevant Samuelsonian GDP model.

This observation on the negative correlation between private sector debt and GDP growth by Dr. Andricopoulos should be particularly educational for empiricists:
A few weeks ago I wrote this post which showed the results of my empirical study on the effect of private sector debt on the economy. It found that a 10% increase in the level of private sector debt corresponded to a 0.15% decrease in GDP growth every year going forwards. Considering that the levels of private sector debt in many advanced economies is around the 200% level, this is a pretty big drag and on its own would explain the current secular stagnation.
Now, according to the Keynesians and Neo-Keynesians, this shouldn't be any more possible than the stagflation of the 1970s. Once more, even by its own supposedly empirical standards, Keynesianism, or more properly, Samuelsoniansim, is seen to be a failure.

It's also worth noting that even Dr. Andricopoulus's history is an inaccurate summary, at least as far as the USA goes. Below is a chart showing the annual growth of total public and private sector debt, aka "credit money", in the US economy from 1948 through 2014. Where is this sudden "rise of credit" that is supposed to have taken place in the 1970s? Is it the increase from 8.58 percent in 1969 to a peak of 16.03 percent in 1985?

Labels:

83 Comments:

Anonymous PhillipGeorge©2015 May 14, 2015 7:15 AM  

Money, paper instruments, contracts are mere utilities in human interaction. Unless they represent the volition of human will as expression of honesty and respect they will fail. Not sometimes, every time.
If economics isn't a morality play, you don't see what's happening.

Debt, dishonestly arrived at, isn't debt. Tomorrow's tide erases all today's sand castles. Well that me reading tomorrow's papers in advance.

Blogger ScuzzaMan May 14, 2015 7:16 AM  

I still find it hard to escape the conclusion that all of this is just so much smoke and mirrors, thrown at the reading public as an exercise in arguing over the placement of deck chairs on the proverbial ...

And the court intellectuals serve their appointed purpose; of generating an eternity of heat with very little light. Arguments between Keynesians and other economists tend to ignore that they're almost all of them employed by the same state, either directly in tis various agencies, or indirectly through academe. A relative handful are employed using private money, and most of those are think tanks, i.e. political lobbyists for one faction or another.

Very few people see any need to pay economists for their thoughts, because mostly their thoughts are irrelevant to the lives of the rest of us, having no detectable material nor intellectual impact.

I do believe that economics is a vital subject that everyone who is intelligent anc curious should learn. But the economics taught in government conformity factories is about as useful as the history; it is an emasculated subservient ghost of the real thing.

See, for example, the Bank of England's belated discovery of the Law of Supply and Demand: http://www.mirror.co.uk/news/uk-news/rising-number-migrants-britain-keeping-5694400

Anonymous jack May 14, 2015 7:22 AM  

Even with the reading done here, primarily, I feel lost in all this economic theory. The thing that glared out at me from the article colored in blue above, was 'savings were too high, and government debt was more efficient than private.
Forgive me but this seems insane. How can a thrifty people be saving too much? And, who in their right mind would trust this government to do right things 'for the good of the people.' Maybe this guy forgot we are in a depression.
I'll have to leave it all for the educated theorists, like Vox maybe, to sort it all out and hope it all holds together. Mainly, I just wish the THEY would just leave things the F___ alone.
[good luck with that last]

Anonymous zen0 Economicus May 14, 2015 7:36 AM  

I dutifully slogged through Dr A's symbol salad, almost swooning at one point, and was rewarded (NOT!) with the conclusion:

There is nothing to fear from allowing the government to create money instead of relying purely on private sector debt to fuel the economy. The sooner we realise this, the better for us all.

Nothing to fear.

The good thing is, all this reminded me I have to pay some bills today out of my meager income and savings. Hopefully, the government will see fit to create some money for me. I don't need a lot, and it would be a nice gesture.

Blogger Nate May 14, 2015 7:41 AM  

one more time we see not only are the tools in the tool box sub-optimal.... in fact they are out right broken.

The problem with the samuelsonian measures is not that they are merely inaccurate. Its that they provide so much information that is exactly false. i am reminded of how in the event of hyper inflation, their beloved equations would in fact tell them that the problem is not hyper inflation.. but widespread deflation.

And this is the whole problem with what we call economics today. Look we can make up equations all day long. The fact that the equations happen to be balanced shouldn't impress anyone. After all.. they were just thought up.

Create any two equations you want... X-1 = y y+1=X. Now you assign magic words to X and Y. And you assert then you use the equations to prove each other correct.

Congrats. You're a super genius now.

Modern macro is the intense study of maps of lands that do not exist.

Anonymous MendoScot May 14, 2015 7:43 AM  

On top of this, the graph is interesting because they have shaded the periods of US recession. You can see that every single one of the last 10 recessions coincided with a drop in the value of compensation to workers.

Oooo. I feel a conspiracy theory coming on.

Anonymous PhillipGeorge©2015 May 14, 2015 7:45 AM  

/vox, I think there was a time when it could be said the strength of the American economy was in the integrity of it;s people/ expressed in the work of their hands. Who would volunteer such an assessment today?

Who would fly into the USA and expect an honest deal from Monsanto or Halliburton? Rather, who, in their right mind would fly into the USA? God bless America. I think Kennedy tried to as well.

Blogger Nate May 14, 2015 7:50 AM  

" I think there was a time when it could be said the strength of the American economy was in the integrity of it;s people/ expressed in the work of their hands. Who would volunteer such an assessment today?"

others would say the strength of the american economy was in the fact that none of its factories had been bombed while the rest of the world's manufacturing facilities were in ruin.

Blogger Josh May 14, 2015 7:57 AM  

Who would fly into the USA and expect an honest deal from Monsanto or Halliburton?

Yeah, those folks at Exxon and BP must be insane to hire Halliburton for field services...

Blogger VD May 14, 2015 7:59 AM  

others would say the strength of the american economy was in the fact that none of its factories had been bombed while the rest of the world's manufacturing facilities were in ruin.

The Broken Window Fallacy is not a fallacy so long as you break all the windows in the next town over.

I added a chart that casts further doubt on Dr. Andricopoulos's equilibrium. The "rise of credit" ended in the USA in 1985. In fact, it shows that the last 30 years have been "the fall of credit growth". Since 2005, the Government sector share of total credit has increased from 16.03 percent to 27.16 percent. Private sector debt hasn't increased much in 10 years, so an excess of it can't be the problem.

Blogger Josh May 14, 2015 8:06 AM  

I loved this:

This is a remarkable graph for a number of reasons. The first is that it shows that the percentage of wages as share of GDP has gone down from around 50% until the mid 1970s to around 42.5% today. The greater corporate interest payments caused by corporate debt must have taken a large proportion of this.

And then...no numbers on corporate debt payments today or in 1970. And yeah, I get that it's just a blog post.

But the idea that "well if it's not this, it must be that" and then not bothering to go look is a good example of why economists miss things.



Blogger Josh May 14, 2015 8:13 AM  

Where is this sudden "rise of credit" that is supposed to have taken place in the 1970s? Is it the increase from 8.58 percent in 1969 to a peak of 16.03 percent in 1985?

He must be looking at total debt and not just the year over year change.

Blogger Nate May 14, 2015 8:13 AM  

"But the idea that "well if it's not this, it must be that" and then not bothering to go look is a good example of why economists miss things."

Well that and they get blinded by their math boners.

Blogger Josh May 14, 2015 8:24 AM  

Reading more, this guy does seem to be more self aware of the limits of very simple models than most.



http://www.notesonthenextbust.com/2015/04/a-view-on-economic-model-debate-from.html?m=1

It is not that the systems are linear. They are hugely complex. My problem is that they are too complex to model even with non-linear models. My belief is that linear models do have to be used but with a full understanding of the non-linearity of real life. Also, the whole building of macro-models from first principles, based on 'rational' agents, is a complete joke of a way to design a model that is supposed to be used in the real world.

Blogger Nate May 14, 2015 8:27 AM  

"My belief is that linear models do have to be used but with a full understanding of the non-linearity of real life."

I-really-don't-believe-this-but-I'm-saying-it-so-you-want-call-me-one-of-those-kookie-austrians

Blogger Antonio From Spain May 14, 2015 8:31 AM  

That Leia scene always reminds me of "even the stones would cry out."

Anonymous joe doakes May 14, 2015 8:33 AM  

"Increased government debt is far more efficient at stimulating the economy than increased private sector debt."

I still don't believe it. I believe stimulus money is efficient at changing the numbers in the formula to make the policy look good. But I don't believe it has put more jobs on the street. That's the fundamental flaw in the Helicopter Ben reasoning: it looks good on paper, but it doesn't work in real life.

Yes, I'm a mid-wit that can't understand the math. Yes, I'm arguing from personal anecdotal evidence. But am I wrong?

Blogger dc.sunsets May 14, 2015 8:35 AM  

As VD alludes, among the silly concepts macroeconomists use is that all debt is the same.

Why is it that concepts that violate every iota of common sense gain currency when some Ph.D. clown bloviates about them.

Borrowing for consumption is folly. It only pulls spending forward in time, at the cost of burdening the future with interest payments. Borrowing to meet profitable marginal demand makes sense, and is part of the entrepreneurial risk/reward calculation. The notion that politicians can EVER mimic this calculation is childishly naive, so political borrowing (the term "government" obscures reality) cannot possibly be wise, given the perverse incentives that pollute all political calculation.

Self-liquidating debt vs non-self-liquidating debt should be the fulcrum on which all discussion of this subject occurs.

Blogger dc.sunsets May 14, 2015 8:37 AM  

@joe doakes, as you know, when someone starts building a PowerPoint full of obscure mathematics to sell you some idea, it's usually time to check that your wallet is still in your pocket.

Blogger Nate May 14, 2015 8:44 AM  

"I still don't believe it. I believe stimulus money is efficient at changing the numbers in the formula to make the policy look good."

stimulus money changes the map. Not the land.

Blogger dc.sunsets May 14, 2015 8:50 AM  

"Debt, dishonestly arrived at, isn't debt. Tomorrow's tide erases all today's sand castles."
Accuracy in word use strikes me as quite useful.
"Government" in today's usage is actually politics.
Politics, in Bastiat's view, is synonymous with criminal enterprise, the polar opposite of production-and-trade, i.e., the voluntary sector of society.
Debt is actually simply an IOU.

So today, we have unimaginably vast wealth that is actually an ocean of IOU's. Paradoxically, much of the presumed-safest IOU ocean is IOU's issued by politicians, backed my their coercive power to tax future subjects, presumably with up to 100% of property being within their grasp.

Market transactions represent exactly zero money movement: for every buyer there is a seller, so "cash" never moves in or out of a market despite endless morons on Bubble TV claiming so. What actually occurs is the mass perception of wealth rises and falls.

People who perceive themselves to be wealthy enter other markets and bid prices higher, in a positive feedback loop, so the Groupthink consensus of total wealth grows and grows and grows.

Systems governed by positive feedback loops cycle wildly out of control, running to over-speed, breakdown, collapse, and rubble phases before coughing back to life and beginning the cycle anew.

The notion that macroeconomics describes even a tiny piece of reality is laughable when it is mass human psychology that animates the processes.

Blogger Josh May 14, 2015 8:51 AM  

Stimulus works in the same way that going out and spending $50,000 on credit cards works to increase your standard of living.

Blogger W.LindsayWheeler May 14, 2015 9:02 AM  

I'm a luddite but what the hell is "secular stagnation"? "Secular" is opposed to "Religious". Is there "religious stagnation"? Does he mean "Period" stagnation? "Secularum" in Latin means "of the ages". But his use of "secular" does not translate well into common language if he is suggesting a time frame.

Can someone elaborate?

Blogger Josh May 14, 2015 9:05 AM  

Does he mean "Period" stagnation? "Secularum" in Latin means "of the ages". But his use of "secular" does not translate well into common language if he is suggesting a time frame.

Yes, secular means a relatively long time frame.

Blogger Nate May 14, 2015 9:09 AM  

"Can someone elaborate?"

econ nerd with math boners are not very good at verbal communication... or common language.

Anonymous Rolf May 14, 2015 9:27 AM  

WA state is currently having some issues with "fully funding" education, and resulting teacher/union unrest, etc., etc., etc. Being a math teacher, I have to look at both sides of an equation. When the subject came up in class a little while back, and a student said 'of course they should pay teachers more!", I asked the simple question "who do you want to take the money from to do it? Your parents by raising taxes, so they can't take you on vacations, or borrow the money so that you have to pay, yourself, a decade from now when you are working... meaning they can't spend your tax dollars on you, then? Or do you want to them to cut parks funding, police funding, roads funding, social services funding, etc., to put a few dollars in my pocket? TANSTAAFL. Who pays?"

The discussion was brief and inconclusive, but quite instructive for them I think. Don't get me wrong, I'd love to get paid more, but at what cost?

Blogger Student in Blue (#21) May 14, 2015 9:29 AM  

@dc.sunsets
As VD alludes, among the silly concepts macroeconomists use is that all debt is the same. [...] Borrowing for consumption is folly.

Isn't the same true ('all debt is not the same') for "consumption debt" as well? Assuming I'm not misunderstanding your use of consumption, that is.

Getting a home mortgage when payments (and tax, and budgeting for repairs) is less than renting doesn't seem to be folly.

Anonymous Geoff May 14, 2015 9:34 AM  

Why use simple terms like "short" and "long" when "cyclical" and "secular" sound way more smarter?

Blogger Nate May 14, 2015 10:17 AM  

"TANSTAAFL. Who pays?""

administrators. fire 50% of all california education bureacrats. the savings to the teachers. done.

Blogger Nate May 14, 2015 10:21 AM  

"Getting a home mortgage when payments (and tax, and budgeting for repairs) is less than renting doesn't seem to be folly."

on the surface it looks good.

Until your housing market crashes.

as a home owner you are assuming all the risk. As a renter... you risk nothing. House needs a new roof? not a renter's problem. People look at rent and say "you get nothing in return for that money". But when they sell a house... they look at what they paid.. and what they sold it for. And they never consider the 3 years of house payments they made. So they'll tell you with a straight face they "made" 10k selling their home... because they sold if for 250 and only paid 240. They will never mention the 36,000 in house payments they made over the 3 years they lived there.

Blogger Titus Quinctius Cincinnatus May 14, 2015 10:37 AM  

Aren't economics non-linear?

Blogger Titus Quinctius Cincinnatus May 14, 2015 10:44 AM  

"Why use simple terms like "short" and "long" when "cyclical" and "secular" sound way more smarter?"

Good grief, why do you even have to query that interrogative?

Blogger Student in Blue May 14, 2015 10:47 AM  

@Nate
House needs a new roof? not a renter's problem.

That's why I said "when payments (and tax, and budgeting for repairs) is less than renting".

Hypothetically, if you could rent for $400/m or get a shit house for $300/m (including tax and budgeting for repairs), is renting still the smarter option especially if you're not leaving the area anytime soon?

People look at rent and say "you get nothing in return for that money". But when they sell a house... they look at what they paid.. and what they sold it for. So they'll tell you with a straight face they "made" 10k selling their home... because they sold if for 250 and only paid 240. They will never mention the 36,000 in house payments they made over the 3 years they lived there.

So? I'm not so naïve as to think that a house is a magical money maker. I'm just saying that if it's cheaper *per month* to get a house, why not?

Blogger ajw308 (#98) May 14, 2015 11:12 AM  

My belief is that linear models do have to be used but with a full understanding of the non-linearity of real life.
This is why politicians think raising taxes will increase income, that they can make a product more expensive, but people will keep buying it at the same rate.

Anonymous Roundtine May 14, 2015 11:15 AM  

Assuming he's right, this is the Rogoff argument. The stock is more important than the flow. It's your debt levels that matter, outside of very rapid debt buildups like in China from 2009-2013.

"Increased government debt is far more efficient at stimulating the economy than increased private sector debt."

Another interpretation is that government debt does not have the same cost as private market debt because the government doesn' t have to pay its debt. If you're a consumer or a business, you have to repay debt. This is a cost and a drag on long-term growth in the economy if the debt isn't very efficiently used. For the government, the cost is very little even if they waste the money on digging and refilling holes because the new credit money exists in perpetuity. The lower efficiency of private market debt is a feature, not a bug.

Blogger Nate May 14, 2015 11:30 AM  

"So? I'm not so naïve as to think that a house is a magical money maker. I'm just saying that if it's cheaper *per month* to get a house, why not?"

because it isn't. 500 rent vs 400 house payment. Rent is still cheaper.

Anonymous WaterBoy May 14, 2015 11:35 AM  

Nate: "So they'll tell you with a straight face they "made" 10k selling their home... because they sold if for 250 and only paid 240. They will never mention the 36,000 in house payments they made over the 3 years they lived there."

So their effective cost of living there for 3 years was ($36000 - $10000 =) $26000.

Meanwhile, renting it according to the parameters that Student In Blue submitted would have been more -- say $1100/m to rent -- which would have been $39600 for the three years...more than the effective cost of $26000 to own (with other factors like utilities being the same).

A simplistic example, to be sure, since it also doesn't factor in things like sales commission (there goes the net gain on the sale), repair costs (which SIB accounted for but which are not in your example), etc. But in basic terms, it does support his point.

It also depends on the time frame -- it's generally harder to justify on a short-term living basis than a longer one.

Blogger Student in Blue May 14, 2015 11:46 AM  

because it isn't. 500 rent vs 400 house payment. Rent is still cheaper.

Oh? Do tell.

Blogger Nate May 14, 2015 11:51 AM  

' But in basic terms, it does support his point."

and mine... which is that its not nearly as cut and dried as people think. There is a lot more to it than just "which payment is lower".

For example... look at what you would actually have to sell that house for to truly break even.

the delta of rent to mortgage payments over 3 years is 3600 bucks. .. but your sales commission is between 6 and 8 percent depending on where you live. That's going to be several times your rent delta right there and we haven't even talked about appreciation vs repairs and the cost of your upgrades.

unless you live in a place were house values are booming... buying is rarely as smart as people think it is.

Houses are a liability. a ton of risk... and very little reward for that risk.

Blogger Nate May 14, 2015 11:53 AM  

"Oh? Do tell."

you don't spend 20k remodeling the kitchen on a rental house. You do on a house you "own".

Blogger Nate May 14, 2015 11:55 AM  

that's not to say that it is never smarter to buy. for example... my house puts between 40 and 70k every year back into my pocket that would otherwise go to the IRS. no amount of rent savings could ever make up for that kind of cost reduction.

Anonymous BigGaySteve May 14, 2015 11:57 AM  

PhillipGeorge I think there was a time when it could be said the strength of the American economy was in the integrity of it;s people/ expressed in the work of their hands. Who would volunteer such an assessment today?

Certainly not Japanese economist Yuji Aida has argued that it will be very difficult for America to remain a leading industrial power if Hispanics and blacks become the majority in this country:Do blacks and Hispanics, for instance, have the skills and knowledge to run an advanced industrial economy? If the answer is yes, America will maintain its vitality through the next century and beyond. But I’m skeptical.

To compete in a high-tech age dominated by microelectronics requires a disciplined, well-trained labor force. Brilliant inventors and innovative engineers are not enough...Unfortunately, relatively few national groups meet these exacting requirements
America’s Ethnic Achilles’ Heel, San Francisco Examiner, April 9, 1991

as a home owner you are assuming all the risk. As a renter... you risk nothing. House needs a new roof?

Section 8 housing gets placed next door and the refugee resettlement program uses your taxes to dump Somali moslems in it? Public transportation system changes to dump blacks into your neighborhood was worth over $1000 per household to prevent in Chevy Chase as posted in the vote gaming thread.

Blogger RobertT May 14, 2015 12:04 PM  

Overly simplified perhaps, but when I look at your bottom graph, this is what I think. When there are profits to be made, debt is a good thing and in demand; if there are no profits to be made, debt is just a burden and will not be in demand. Whether it's families flipping houses every couple of years so they can buy a new boat, or businesses, this graph displays the demand for debt today.

Anonymous Jack Amok May 14, 2015 12:05 PM  

Forgive me but this seems insane. How can a thrifty people be saving too much?

Economics is one of the best examples you can find of what Vox often calls "mistaking the map for the country." People get so caught up in counting dollars (or euros, or whatever the monetary unit is) that they lose track of what the money stands for.

It's not a thing. It's a claim on future productivity. What does "saving" $100 really mean? If we ran on a pure barter system, what would the equivalent be? If you were a farmer, it might mean that after trading some of your grain for a new plough today, instead of trading the rest for a bottle of whiskey, you hang onto it so you can trade it to the blacksmith next year to sharpen the plough, but that requires the blacksmith to be in business next year and the grain to have not spoiled. For the blacksmith, it's even harder. How does he "save" and hour of his labor today so he can "spend" it next year? Well, at least he could maybe build and extra plough and hang onto it (of course he needs some storage space, and has to worry about rust), but what about the doctor? He can't "save" his time for use later.

Alternately, the farmer buying the plough (instead of the whiskey) has a far bigger impact on his future than saving some grain. The plough makes him more productive next year, more grain for the same amount of work. The blacksmith building a new forge (or fixing his old one) is the same thing, as is the doctor studying and improving his skills. But all of that is "investment" instead of "savings" and in fact most of it would show up as negatively impacting the official "savings rate" of our little village.

Investment in things that increase productivity is the source of future prosperity. Savings doesn't lead to prosperity unless it leads to investment. Consider the farmer. If instead of buying the plough he "saved" the grain, then the savings rate would be better, but next year we would have a smaller harvest. In fact, this year we would need more people farming to feed everybody because a big chunk of Farmer A's grain is slowly rotting in his silo instead of getting baked into bread, so we need Farmer B's output to make up for what Farmer A has withheld from the economy.

But when we transform everything into numbers that no longer carry information about what's actually going on, we lose the ability to distinguish between savings and investment.

Anonymous Jack Amok May 14, 2015 12:06 PM  

others would say the strength of the american economy was in the fact that none of its factories had been bombed while the rest of the world's manufacturing facilities were in ruin.

And I might say that when the American economy lucked into the strength of having the only intact manufacturing base in the world, it gave up on a lot of it's old strengths.

Anonymous BGS May 14, 2015 12:09 PM  

"Houses are a liability. a ton of risk... and very little reward for that risk."

Ferguson had 2 section 8 housing complexes built. Anyone that didn't sell before the population got >10% black lost money.
In 1990, Ferguson was 73.8 percent white and 25.1 percent black
•In 2000, Ferguson was 44.8 percent white and 52.4 percent black
•In 2010 Ferguson was 29.3 percent white and 67.4 percent black [Chart: Inside Ferguson's Changing Demographics, Forbes, 8-19-2014]
Forgive me but this seems insane. How can a thrifty people be saving too much? ~ Since the dollar lost 25% of its buying power during Obama's first term there isn't anyone saving too much.

Anonymous cheddarman May 14, 2015 12:18 PM  

I liked his observation about debt and growth. By his numbers, our debt load is causing a -3% drag on economic growth

Anonymous Quartermaster May 14, 2015 12:24 PM  

There's a Macroeconomic profession? Since when?

OpenID mattse001 May 14, 2015 12:45 PM  

"The GDP shown in figure 1, will now go down because of the excess savings."
We should also take ALL the seed corn and use it to feed people. Think of how much hunger we'll eliminate this year!!!!
LOL

OpenID mattse001 May 14, 2015 12:49 PM  

"In fact, I estimate that government debt is an order of magnitude more efficient."
This may be the stupidest thing I've read this week. Government creates a MICROSCOPIC amount of value compared to the private sector, if any at all on net.

Anonymous WaterBoy May 14, 2015 12:52 PM  

Nate: "There is a lot more to it than just "which payment is lower"."

Indeed...and that cuts both ways.

Blogger Student in Blue May 14, 2015 12:59 PM  

you don't spend 20k remodeling the kitchen on a rental house. You do on a house you "own".

That example is probably more applicable to those who are married. Also remodeling like that generally does get reflected on a house's price... just not the full amount.

I can't fathom how dropping 20k on a kitchen is necessary. Wanted definitely, but in no way necessary. So I guess if you're the kind of person who's dropping tens of thousands on luxury stuff you're probably better off renting just so you're not tempted to waste money.

Your initial reply to me was essentially "but what about repairs?" which was odd because my point was on the presupposition that the buyer was accounting for repairs.

The only other risk you talked about was if the price of the house dropped. Which is basically a silly risk, not because houses Always Increase In Value™ (which is a lie), but because if your expenditures have dropped by buying a house, then even if it burns down in the end and you never sell the land, you've still lost less money.

Anonymous Geoff May 14, 2015 1:05 PM  

Student in Blue, if you don't have granite counter tops these days, its embarrassing.

Blogger Nate May 14, 2015 1:16 PM  

"I can't fathom how dropping 20k on a kitchen is necessary. Wanted definitely, but in no way necessary. So I guess if you're the kind of person who's dropping tens of thousands on luxury stuff you're probably better off renting just so you're not tempted to waste money."

As Geoff says... at a certain point... the house becomes all but unsellable. The only people who seriously look at houses without solid surface counters are flippers... and flippers are cheap by their nature.

all of these things go into owning a house. you spend the money without even thinking about it... much less actually accounting for it.

OpenID mattse001 May 14, 2015 1:18 PM  

Nate said: "As a home owner you are assuming all the risk. As a renter... you risk nothing."
Also, most US residential property tax rates are between 0.5% and 1.0% of home value. If you pay off your home and own it for 30 years, you've lost about 25% of it's value to the government.
Even ownership is renting.

Blogger Nate May 14, 2015 1:18 PM  

and speaking of the economics of the housing market... man I cannot believe they are dumb enough to do this again... but I swear the developers are already repeating their 2004 mistakes.

Their is a massive nationwide shortage of houses in the 150 to 225 thousand dollar price range... and how are the builders responding to this?

By building houses in the 350s.

/facepalm

Blogger Student in Blue May 14, 2015 1:23 PM  

Ah, strike that last paragraph of mine, I was wrong.

Anonymous joe doakes May 14, 2015 1:24 PM  

My parents live in a 1950's house in a suburb built in the 1950's. Perfectly maintained, but dated. They asked a realtor friend: "We're thinking of making improvements to increase resale value, where should we put our money?" He told them honestly: "In your pocket. In this market, at your age, you'll never get out what you invest before you need to sell."

Blogger Student in Blue May 14, 2015 1:24 PM  

@Geoff

I actually couldn't tell if that was joking or not.

Blogger Nate May 14, 2015 1:28 PM  

"I actually couldn't tell if that was joking or not."

I wish.

Basically everyone under 40 is completely retarded when it comes to the housing market. I've seen millennials refuse to make an offer on a great house because of the paint color. When we explained they could just paint it what they wanted they responded "we're not looking for a fixer upper".

It really is all going to shit.

Anonymous Geoff May 14, 2015 1:29 PM  

@SiB,

I was commenting on the ridiculous state of consumerism today.

Ironically, it supports both you and Nate.

Blogger Joshua Sinistar May 14, 2015 1:31 PM  

Economics is not really a science. Its a PR agency for bankers to explain to people they gypped that the fault lies in the stars and not the crooks running the banks. John Dillinger said that the reason he robbed banks was because that's where the money is. If he was a little smarter he would have realised the easiest way to rob a bank is to own it and he wouldn't have been gunned down by the government, they would have been working for him.
Economics like Psychology assumes that you can model human behavior based on pattern recognition. They have impressive looking formulae to impress the Math illiterate that there is something more than smoke and mirrors to this show, but there really isn't. If you've ever seen the performance of the "Chairman" of the Federal Reserve before an amazed row of buffoons from Congress, you should now realize his expertise at predicting the market is worse than the weatherman in New England and far less accurate than a Magic 8-ball.
That's why men are engineers and women are psychologists.

Blogger Student in Blue May 14, 2015 1:40 PM  

@Nate
I wanted to point out that in your example to Waterboy, if you're sticking around for only three years, you'll probably want to rent regardless, because from what I've heard, selling a house is a gigantic pain in the ass.

I think if you're sticking around in a house long enough to pay off the mortgage (and it's cheaper than renting factoring in repairs and taxes), it really doesn't matter what the housing market does.

Blogger Student in Blue May 14, 2015 1:46 PM  

Well, uh... back to my original question, Isn't the same true ('all debt is not the same') for "consumption debt" as well? Assuming I'm not misunderstanding your use of consumption, that is.

Anonymous WaterBoy May 14, 2015 1:54 PM  

mattse001: "If you pay off your home and own it for 30 years, you've lost about 25% of it's value to the government.
Even ownership is renting.
"


You're making those same tax payments whether you bought the house or are just renting it. Landlords include those costs into their rental calculations, too. In addition to making his PITI payments for him, you also give him a little profit on top of it...which is why on the surface buying is typically less than renting.

Student in Blue: "I think if you're sticking around in a house long enough to pay off the mortgage (and it's cheaper than renting factoring in repairs and taxes), it really doesn't matter what the housing market does."

Generally speaking, for long-term situations where the house will actually be paid off, it will be better to purchase. Whereas you eventually make a final mortgage payment on a house you own, you will continue making rent payments indefinitely.

Anonymous patrick kelly May 14, 2015 3:49 PM  

" Whereas you eventually make a final mortgage payment on a house you own.."
Only if there is some governor or limit on property taxes.

In our area if the valuations and tax increases continue at the average rate most peoples property tax payments will be more than their mortgage payment was when they bought the house.

Anonymous WaterBoy May 14, 2015 3:58 PM  

patrick kelly: "Only if there is some governor or limit on property taxes."

No. A property tax payment is not the same as a mortgage payment, even if the former grows in size to match what the latter previously was, for the simple fact that the PI part of PITI is no longer there.

And if the property tax payment grows that much on an owned home, it will surely also increase the commensurate rent payment accordingly on a rental home. The cash difference between the two will remain.

Blogger RL (#0052) May 14, 2015 3:59 PM  

Test

Anonymous patrick kelly May 14, 2015 4:13 PM  

"No. A property tax payment is not the same as a mortgage payment,"

Woop-de-do a distinction without difference if I'm living in my home and not renting or selling it .......

Anonymous Giuseppe May 14, 2015 4:20 PM  

Smoke and mirrors is right.
There is only one real economy.
Gold at the lower echelons.
Lead and copper at the higher ones.

Anonymous WaterBoy May 14, 2015 4:27 PM  

patrick kelly: "a distinction without difference"

Oh, but there is a difference. Do I have to spell it out?

T+I ≠ P+I+T+I, where P+I > 0.

Anonymous patrick kelly May 14, 2015 4:30 PM  

Do I!

There's still money going out of my pocket to someone else in order for me to live in the house I "own"........fuck your math......

Anonymous WaterBoy May 14, 2015 4:45 PM  

patrick kelly: "There's still money going out of my pocket to someone else in order for me to live in the house I "own""

Which has absolutely nothing to do with what I said about making a final mortgage payment. But thanks for playing!

Anonymous EH May 14, 2015 5:29 PM  

@Jack Amok 12:05 PM

You have explained the foundational idiocy of economics perfectly.

Blogger Joshua Sinistar May 14, 2015 5:42 PM  

Someone has to explain to me how you really own anything if I have to pay to keep it. This idea of property tax sounds good for business and commercial property, but when I have to pay someone to keep my home that's just extortion.
This isn't Government, its a criminal organization shaking people down with threats of force and violence. Why do people who don't have kids have to pay for schools? Public Education doesn't teach anyone anything anymore, its a communist indoctrination center run by the Party to mold opinions and enforce Party Lines. The only thing I learned in school is to hate the Government. Most of my English teachers were men and my Math teachers were women. Also, my gym teachers were fat and out of shape. Worst experience of my life...

Anonymous Daniel H May 14, 2015 8:11 PM  

>>others would say the strength of the american economy was in the fact that none of its factories had been bombed while the rest of the world's manufacturing facilities were in ruin.

This is stated so often that it has become axiomatic in any investigation of post WWII economics. Where is the evidence for this? Where are the statistics? The Germans militarily occupied much of western Europe, they didn't destroy it. Battles were fought and manufacturing plant was destroyed incidentally, but the vast majority of the land- and urban- scape were untouched by battle. As for Japan, Hiroshima and Nagasaki were utterly destroyed, and Tokyo took a severe beating from the bombings of 1945, but otherwise Japan was virtually untouched. I would guess (and this is just a guess) that at least 75-90% of her manufacturing base survived the war untouched. Yes, Germany was pummeled, her industry was specifically targeted and much was lost, and both the Germans and Soviet Union destroyed any manufacturing plant they could get their hands on whilst retreating in the eastern war, but still it seems (to me, at least) that most of the world's basic manufacturing capability was untouched by the war. I'm probably wrong, but I would like to see some evidence for why I am so. I just can't believe that 1) most of the world's manufacturing capability was destroyed by the wary and 2) this was the fundamental reason for the 3 decades of undisturbed prosperity after the war.

Blogger Cuca Culpa May 14, 2015 11:27 PM  

Rolf: the upside of cutting police funding is that you also save money on lawsuits the less lunkhead cops you have. That seems to be the one union the right never has the guts to put in its place. Loosen gun laws and pay teachers and firemen more. They actually work for a living instead of getting their union to manipulate the emotions of the public to earn more.

Deep sea fishing is the most dangerous job, not revenuers.

Blogger Cuca Culpa May 14, 2015 11:33 PM  

Nate: mortgage interest isn't tax deductible in other countries, so the allure of borrowing is less.

My parents in Canada rented all their lives, then built a home with cash. Dad's an accountant, so he never bought into the bs bank sales tactics. Also, with rent control, they were paying much less than borrowers as they lived in the same rental for 30 years.

Blogger rycamor May 14, 2015 11:48 PM  

Nate May 14, 2015 10:21 AM

as a home owner you are assuming all the risk.


Yes, as a for-instance: I am currently renting (but looks like will be forced to buy soon). We live at the end of a corner off a dead-end street--actually our place IS the dead end. The street stops in front of the neighbor's house. So we aren't even technically on the street. Some new neighbors moved in up the street (couple of elderly northerners), and the guy decides to complain to the city about the quality of the street heading in here. The minute I heard of it I thought "Nooooooo!!" in my head, but it was too late. City comes in, fixes a few potholes and bills every homeowner up and down the street $5000. Except our landlord. He had to pay $10,000 because his place had been amalgamated from 2 properties. This is just one example of the risk you take.

I really don't want to buy the place, but family situation makes it very difficult to up and move right now. Argh...

Anonymous Sevron (#0358) May 15, 2015 11:17 AM  

How can paying rent on the house be cheaper than owning it, unless the landlord is a complete idiot? Say the house racks up an extra $20,000 in repairs this year he didn't figure on. So the renter didn't have to pay it because it wasn't factored into the rent. This year. Next year, rent is magically much higher, or high enough that the landlord will get that $20,000 back in a time frame he finds acceptable.

My wife is Chinese, and most of her friends have rental properties. They charge enough to cover the mortgage and maintenance, and when costs are higher than expected, rents go up next term. They always make a little profit as well. When they sell the houses eventually, when the mortgage is paid off, it will be almost pure profit. Are they geniuses, or is every other landlord retarded? I grant there's the possibility of not being able to find a renter for some period of time, and rents aren't completely elastic- you can't raise yours grossly above the market rate- but from what I've seen so far, it's a pretty flawless scheme. Several of her older friends have become quite wealthy doing this. Of course, they only rent to Asians or Whites.

Anonymous Jack Amok May 15, 2015 11:55 AM  

as a home owner you are assuming all the risk. ...I really don't want to buy the place, but family situation makes it very difficult to up and move right now. Argh...

Conversely, as a homeowner, it's more difficult to up and move when you need to (another risk). But, that gives you incentive to make the community livable. Which is why restricting the voting franchise to homeowners isn't such a bad idea.

Anonymous WaterBoy May 15, 2015 3:40 PM  

Sevron: "Say the house racks up an extra $20,000 in repairs this year he didn't figure on. So the renter didn't have to pay it because it wasn't factored into the rent. This year. Next year, rent is magically much higher, or high enough that the landlord will get that $20,000 back in a time frame he finds acceptable."

And it is at that point that the renter could move to a different place, one with rent comparable to the old amount. That particular renter won't end up paying for the repairs, so his rent cost could be lower than ownership cost.

In the context of Rent vs Purchase, this should also be considered.

Anonymous Jack Amok May 16, 2015 12:57 AM  

The debate about renting vs being landlord isn't the same as the debate about renting vs home ownership.

Being a landlord is like having any other sort of business - you might make money, you might lose money, depends on a combination of skill and luck. It's a business, and if you want to discuss the risk/reward tradeoffs, you need to compare it to other businesses, not to domestic issues like owning the house you live in.

The risk/reward tradeoff between renting and owning your residence is totally different. If you are renting, you are fairly well insulated against unexpected expenses that specifically hit your landlord and no one else. If the hot water tank busts, flooding the ground floor and causing $80k of water damage, you're not on the hook for it. If the landlord wants to raise your rent to cover those costs, you just go find another place to rent. And if you're renting, you'll never lose $150k when the real estate market tanks. But you also can't just up and remodel the place to add on a bedroom or an extra bathroom.

Of course, neither can the guy who owns his own house, unless he knows who to bribe down at the Planning Dept. Or lives where building inspectors fear to tread.

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