In addition to my previous comment, the way you fix the problem is by reversing the current account balances(as Keynes pointed out in the 30s). If you reverse the current account balances, the production/consumption balances will basically fix themselves and the incomes will be there to pay off the debts.
I agree. I'd add one more point though. There's a difference between using tariffs to protect growing industries vs using tariffs to subsidize particular companies. I also don't think it's necessary for countries to run current account surpluses to develop(the US ran current account deficits and had a highly unstable banking system in the 19th century, but that's the best real wealth creation I can think of over such a period).
(cont) A further distinction should be made between the effects of local physical efficiency and global physical efficiency. It is oversimplifying to assume that any local efficiency increase will by definition lead to a global efficiency increase because any local change is going to affect a complex system. If you see local efficiency increases and the impacts increase worker pay expressed in physical units of production, then I think this might be what you are referring to.
"Btw, USD/CNY is not a freely floating exchange rate." I could be wrong, but my understanding was that the Chinese currency was allowed to float free *after* China imposes a massive distortion on the market by requiring export dollars to be converted to yen on the way back in (and by forbidding certain types of foreign transaction), so I would agree in spirit here...
(cont 2) If wages get too large compared with revenues you are lessening the efficiency benefit of worker competition, whereas if wages get too small compared with revenues you get large amounts of potential value creation not happening or sitting on the shelf simply because no-one can afford it. Notice how looking at this ratio neatly factors out the impact of inflation/deflation. Also notice that the ideal depends on the size of the public sector.
... it looks like we are in complete disagreement on whether it's more important for employees to receive a large percentage of that value creation or whether you can ignore the percentage of value creation an employee takes home because somehow changes to the monetary units the employees are paid in and purchase their goods with will somehow preferentially benefit employees.
I look at this issue differently. What determines employment is the total level of spending. The reason we have more unemployment than we did before is because the total level of spending(aggregate demand) is less than it was before. Money can be spent from income or can be borrowed from a bank and can be used to buy goods and services or assets. We have less AD than before because we're not seeing the same amount of credit creation.
"Another problem is that the US is the world's reserve currency." I am not really sure the best approach for dealing with this. I don't know what you mean by a reset, but I am skeptical it would help because I currently like the idea that free-floating currencies prevent a lot of problems.
I never said it was because of the "greedy consumer". I think it's driven by the imbalances. When someone steals your foreign demand using mercantilist policies, you basically have 3 options: 1. Use the capital flowing in to invest 2. Use the capital flowing in to consume 3. Take on a recession. You can keep borrowing until you hit debt capacity constraints, which is exactly what happened.
What I mean is that if a country(China over the past 10-15 years/Japan in the 80s) tries to turbocharge growth and run a massive current account, the deficit has to show up elsewhere. Where is the deficit most likely to show up? In the country with the most flexible financial system that's the world's reserve currency. Basically, the "dollar exchange standard" is what screwed over the US(I know it's extremely ironic). Btw, USD/CNY is not a freely floating exchange rate.
(cont). In general, I think of developing countries using moderate tariffs and industry patronage to keep capital in place working for the benefit of all, rather than using currency controls for that, but I am willing to be persuaded... The key thing to keep in mind is that trade is generally presented as a zero-sum game plus competitive advantage benefits minus tariffs, but that's not a good model. A country's ability to fund it's growth internally depends on wages/revenues.
It's necessary to do so. You have to remember that private sector balance+public sector balance=current account(this is an economic identity). The Japanese financed the leveraging in the 80s under Reagan while the Chinese financed the US leverage and basically the entire housing bubble in the 2000s. The Chinese were buying US Tsy and agency paper to run a massive current account surplus and turbocharge growth. It will end in tears, just like it always has.
Although US industries in the 19th century were protected from foreign competition, domestic competition was absolutely brutal. The US financial system provided very risky lending to all sorts of entrepreneurs and allowed people to take risks while the overcapacity was quickly destroyed in the form of a crisis. I view the US up until around 1900 as the ideal model for a developing country to take on.
As for a larger government, sure. What we need is an effective social safety net, but I don't think we can take care of everyone and give everyone what they want 100% of the time. I'd also like to see a much more decentralized banking system that has much smaller banks with very varied lending practices. I'd like to see every single bank be too small to save(TSTS).
Also a larger government is helpful now because "quantities of scale" are now happening at much larger scales than 150 years ago. Just as an example, today's ores were useless castoff back in those days.
"If you reverse the current account balances, the production/consumption balances will basically fix themselves" We want production and consumption to balance by increasing consumption, not by decreasing production. To achieve that you need to reverse income inequality trends to restore a balanced internal market. Obviously this isn't sufficient by itself, but the US has all the other important precursors.
"whereby there is an international clearing union to penalize countries running mercantilist trade policies." But when we learned that mercantilism doesn't work we coincidentally stopped getting new first world countries, with the exceptions (Japan and South Korea) proving the rule. I don't have anything against your plan if you set government tariffs and patronage at the most effective level, but too many people in today's economic community assume that the correct level is zero.
If you define AD=I+dD/dt, it's easy to see the drop in AD. During the peak of the bubble, dD/dt peaked at +10% of GDP; now it's below NGDP. That's the reason for the unemployment.
The problem with mercantilism that always develops is that the creditor(China) develops an overcapacity issue while the debtor(US) develops an over consumption problem. It was exactly reversed in the 1930s with the US being the creditor and the UK being the debtor. Where I would disagree is that I think the US needs more (real) investment while China needs more consumption. China's had plenty of investment and the US has been overconsuming for a while.
"This supports the case for inflation helping" I disagree. Keeping bad debts serviceable helps those who made the bad loans. The correct decision is to restructure the debts.
I don't think that we need tariffs any more, we're a developed country now. Personally, I'd actually like to finance investment overseas; we do have the world's most flexible financial system and we really should use it. I actually think the 19th century banking system had a much larger effect than the tariffs. It allowed the bad debts to be liquidated, assets were quickly written down to fair market value, and the overcapacity was eliminated as the benefits were passed onto consumers.
Let me define things more clearly. I define supply-side deflation as the falling price of input materials of a given economy. If businesses can get cheaper input costs inside a given country, the surplus must either go into profits or wages. Either way, it's always good. Same reason why supply-side inflation is always bad. Of course, all of this will depend on the supply chain of an economy and will be different for different economies.
He quoted Andrew Mellon and implied that Herbert Hoover was a liquidationist. This is flat wrong. Hoover said in his memoir that he didn't listen to Mellon. Hoover raised taxes and had high spending. He called in the business men and begged them to not cut wages, because he believed in under-consumption theory. He thought that recessions occurred because consumers didn't have enough purchasing power.
I'm less focused on wages and incomes and more focused on improvements in the quality of life. What matters isn't "growth" or some number called GDP. What really matters are sustainable and healthy improvements in the quality of life.
(cont 3) Free trade takes away a country's most useful tool for manipulating this ratio and in essence puts downward pressure on this ratio. Growth in this setting can only come from: a) monetary expansion b) industry cycles / las vegas expected earnings (companies in dying, young, or "optimistic" industries participate at negative earning in hopes of being the exceptions) to balance out high earners c) Tax and spend d) Export e) Other similar. Tariffs are the most Pigovian other than C.
Honestly, I'd prefer a global financial system that Keynes envisioned of. A system with an international currency that was tied to some basket of commodities whereby there is an international clearing union to penalize countries running mercantilist trade policies. I'd also prefer fixed, but adjustable pegs, except for a few countries(like the US, UK, and a few others).
"However, a good start would be to not call the ability for Apple to make a better quality iPod or an iPhone for half the price deflation." A good start on the other side of things is to not call the ability for an employer to pay someone less to spend the same amount of time creating the same amount of value an efficiency increase. It sounds like we agree that physical value creation per hour worked is important, but (cont)
I don't get why we are pigeonholing China and Japan as "Export driven". I would argue that there are a lot of countries that are export driven and China and Japan (and of course South Korea) as being "Export driven *and* ...", and the and part is really more important than the expert part. Public private partnership, protected industries and strong wage laws would seem to be the difference between successful "export driven" economies and the multitudes of other exporters.
"you basically have 3 options:" I don't understand. Are you saying that there are policies that will lead to 1) and different policies that will lead to 2)? I would suggest that 1) needs further explanation because it could either mean pour more money into the investment marketplace or it could be something like tax and spend. "You can keep borrowing until you hit debt capacity constraints" This is just another way of saying "You can keep lending until you hit debt capacity constraints".
"For the first time after a major war the US didn't suffer a major recession" I would dispute this. I would agree that the US did a lot of things right at the end of the war, but compared to the New Deal growth rate of 10% a year from 1933-1942, the "coming home" years were a *major* slowdown in growth, and the only reason it did not dip way below zero was the massively high starting point. So technically no, but realistically yes.
"The Chinese were buying US Tsy and agency paper to run a massive current account surplus and turbocharge growth. It will end in tears, just like it always has." However we could just as easily become trade neutral and supercharge our own growth. The point remains that if we can limit the bleeding through any of the four methods mentioned, we can create some American growth at the expense of some Chinese growth, then internal growth policies can do the rest.
"Who are the most indebted? The middle class. Who own all the debt of the middle class? The 1% of the 1%." This supports the case for inflation helping, rather than hurting, although I think that inflation is a smaller player than the wage bargaining power that the middle class has.
I don't buy that argument. The key with positive deflation and negative deflation usually has to do with the supply side. Supply side deflation(cheaper input goods) is always good and productivity produced deflation is almost always supply side deflation. Supply side inflation is the bad kind of inflation. Demand pull inflation is almost always driven by credit growth, which is nonexistent right now.
The overconsumption is probably real, but it is driven by the imbalances rather than causing them as the "greedy consumer" school of thought likes to believe. You can tell by the fact that the "greedy consumer" idea requires a weak dollar, whereas in actuality it is a strong dollar causing "greedy consumers". Also, US has so much monetary investment that ROIs in all asset classes have headed to zero since 1980. Ironically, "real" investment is 100% demand-limited right now.
What you're saying could be true, but I'm not quite sure. I also think that China is still accumulating foreign bonds, but I could be wrong on that. Also, I don't think it's particularly healthy for developing countries to be having freely floating exchange rates. The movement of capital coming flowing into and out of the banking systems in those countries can be very destabilizing.
"Also, I don't think it's particularly healthy for developing countries to be having freely floating exchange rates." I have no argument on whether capital migration can be destabilizing. In extreme cases, expensive capital can be just as strong a headwind for growth as cheap capital caused by lack of consumers to chase after. I think that with sovereign currencies you are able to keep enough capital dollars in the system to prevent such problems, but in today's world of SAP's?
Since money spent(next cycle) = money earned(this cycle) * (wages / revenues) + government effects (eg. public projects, liquidity injections, etc) plus saving delta, the closer we can keep that ratio to 1, the less the government has to interfere to keep the economy from shrinking. Note that I don't mean wages precisely above. I mean income from all sources that falls within the radius of consumption. You and I have a better chance of winning the lottery than a Koch dollar has of buying lunch
" I view the US up until around 1900 as the ideal model for a developing country to take on." Interesting... I will note that the financial crises have always been a part of our system except for the period of the New Deal. I view the educational climate and protectionism as probably having been ideal, but I don't buy that you have to crash as much as they did. A larger government and a smaller financial sector (greater equality) help dampen the swings and steady the market for innovations.
You're right, but taking up mercantilist policies is like shooting yourself in the foot; it just takes time. I compare it to a night of heavy drinking followed by a hangover. You could just wait until the policy proves to be unsustainable though. Another problem is that the US is the world's reserve currency. This gets us to the primary international finance issue: the world's financial system needs to be reset.
If you include house price data in inflation calculations, inflation reached as high as 4-5% in 2005-2006. Today, we have asset price inflation. The top 5% own all 80% of the financial wealth in this country and monetary policy primarily works through the asset sectors. Also remember that a debt and asset are two sides of the same coin. Who are the most indebted? The middle class. Who own all the debt of the middle class? The 1% of the 1%.
I don't think tariffs are the best way to increase wages/incomes. I think a better way would be to have a system that removes overcapacity and helps the middle class out in the form of lower costs and deflation from increased productivity. I think the best way to help out the middle class is to create a system where debts are forgiven while increased innovation and risk-taking put a downward pressure on prices. Note: I do not want full-scale debt deflations though.
"I don't think that we need tariffs any more, we're a developed country now." I think you are referring to the competitiveness of our industries. I wasn't postulating that our industries were non-competitive, but rather that a moderate tariff on both sides would have the effect of raising wages, which a neoliberal would say decreases efficiency, but which can bring balance back to spending. The fundamental equation in macroeconomics is private money spent = private money earned. (cont)
"What determines employment is the total level of spending. " Employment as measured in dollars = spending times percentage of revenues allocated to wages. How are you doing the conversion?
Re: Geitner and Obama want to change the currency rate to fix the trade imbalance. This is a total non-sequitur. It would have the effect of moving production from China to the US, but he doesn't justify that this action would be any more zero sum than the three other actions he mentioned. In truth, it would depend on whether both companies were making the independant of trade steps to build internal market, which is orthogonal to the question of how big or small the trade deficit would be.
"I'm less focused on wages and incomes and more focused on improvements in the quality of life." How do you measure that? The only way I know to do it is with the "basket of goods" approach built into our GDP numbers.
"Demand pull inflation is almost always driven by credit growth" Again, I don't look at the problem in the same terms. Monetary expansion is sometimes looked at as something that reliably fuels inflation, but more precisely this extra money can have three outlets: a) Price inflation, b) expansion of the physical economy, or c) asset inflation. When demand is constrained, then only b) and c) are possible. When supply is constrained, only a) and b) are possible.
You really can't. However, a good start would be to not call the ability for Apple to make a better quality iPod or an iPhone for half the price deflation. It would mean to stop calling better production of technology for lower prices deflation and labeling deflation bad. Debt deflations are bad, but deflation from increased productivity is good. I really think the way to wipe out a middle class is by inflation. It's a cruel, cruel tax that just screws up how everything works.
"There's a difference between using tariffs to protect growing industries vs using tariffs to subsidize particular companies." Understood. My temptation is to set a flat tariff of 20% and every year adjust that down or up based on whether your economic indicators say you are poised for growth (neither labor nor capital has all the bargaining chips and R&D are well funded). Infant industry is a bit more direct, but also prone to abuse.
"The key with positive deflation and negative deflation usually has to do with the supply side." Let's separate out the factors. You are merging the concepts of deflation, economic efficiency and physical efficiency. To the extent that deflation and physical efficiency are the same, your statement above is justified, but to the extent deflation is physical efficiency it is most definitely not an artifact of central bank money control.
In addition to my previous comment, the way you fix the problem is by reversing the current account balances(as Keynes pointed out in the 30s). If you reverse the current account balances, the production/consumption balances will basically fix themselves and the incomes will be there to pay off the debts.
I agree. I'd add one more point though. There's a difference between using tariffs to protect growing industries vs using tariffs to subsidize particular companies. I also don't think it's necessary for countries to run current account surpluses to develop(the US ran current account deficits and had a highly unstable banking system in the 19th century, but that's the best real wealth creation I can think of over such a period).
(cont)
A further distinction should be made between the effects of local physical efficiency and global physical efficiency. It is oversimplifying to assume that any local efficiency increase will by definition lead to a global efficiency increase because any local change is going to affect a complex system. If you see local efficiency increases and the impacts increase worker pay expressed in physical units of production, then I think this might be what you are referring to.
"Btw, USD/CNY is not a freely floating exchange rate."
I could be wrong, but my understanding was that the Chinese currency was allowed to float free *after* China imposes a massive distortion on the market by requiring export dollars to be converted to yen on the way back in (and by forbidding certain types of foreign transaction), so I would agree in spirit here...
(cont 2) If wages get too large compared with revenues you are lessening the efficiency benefit of worker competition, whereas if wages get too small compared with revenues you get large amounts of potential value creation not happening or sitting on the shelf simply because no-one can afford it. Notice how looking at this ratio neatly factors out the impact of inflation/deflation. Also notice that the ideal depends on the size of the public sector.
... it looks like we are in complete disagreement on whether it's more important for employees to receive a large percentage of that value creation or whether you can ignore the percentage of value creation an employee takes home because somehow changes to the monetary units the employees are paid in and purchase their goods with will somehow preferentially benefit employees.
I look at this issue differently. What determines employment is the total level of spending. The reason we have more unemployment than we did before is because the total level of spending(aggregate demand) is less than it was before. Money can be spent from income or can be borrowed from a bank and can be used to buy goods and services or assets. We have less AD than before because we're not seeing the same amount of credit creation.
Great Law of comparative advantage quote! How many times have I wanted to say something like that!?!
"Another problem is that the US is the world's reserve currency."
I am not really sure the best approach for dealing with this. I don't know what you mean by a reset, but I am skeptical it would help because I currently like the idea that free-floating currencies prevent a lot of problems.
That's what the guy said. He just quoted Mellon. I didn't understand that he implied Hoover listen to him
I never said it was because of the "greedy consumer". I think it's driven by the imbalances. When someone steals your foreign demand using mercantilist policies, you basically have 3 options:
1. Use the capital flowing in to invest
2. Use the capital flowing in to consume
3. Take on a recession.
You can keep borrowing until you hit debt capacity constraints, which is exactly what happened.
What I mean is that if a country(China over the past 10-15 years/Japan in the 80s) tries to turbocharge growth and run a massive current account, the deficit has to show up elsewhere. Where is the deficit most likely to show up? In the country with the most flexible financial system that's the world's reserve currency. Basically, the "dollar exchange standard" is what screwed over the US(I know it's extremely ironic). Btw, USD/CNY is not a freely floating exchange rate.
(cont).
In general, I think of developing countries using moderate tariffs and industry patronage to keep capital in place working for the benefit of all, rather than using currency controls for that, but I am willing to be persuaded...
The key thing to keep in mind is that trade is generally presented as a zero-sum game plus competitive advantage benefits minus tariffs, but that's not a good model. A country's ability to fund it's growth internally depends on wages/revenues.
It's necessary to do so. You have to remember that private sector balance+public sector balance=current account(this is an economic identity). The Japanese financed the leveraging in the 80s under Reagan while the Chinese financed the US leverage and basically the entire housing bubble in the 2000s.
The Chinese were buying US Tsy and agency paper to run a massive current account surplus and turbocharge growth. It will end in tears, just like it always has.
Although US industries in the 19th century were protected from foreign competition, domestic competition was absolutely brutal. The US financial system provided very risky lending to all sorts of entrepreneurs and allowed people to take risks while the overcapacity was quickly destroyed in the form of a crisis. I view the US up until around 1900 as the ideal model for a developing country to take on.
As for a larger government, sure. What we need is an effective social safety net, but I don't think we can take care of everyone and give everyone what they want 100% of the time.
I'd also like to see a much more decentralized banking system that has much smaller banks with very varied lending practices. I'd like to see every single bank be too small to save(TSTS).
Also a larger government is helpful now because "quantities of scale" are now happening at much larger scales than 150 years ago. Just as an example, today's ores were useless castoff back in those days.
"If you reverse the current account balances, the production/consumption balances will basically fix themselves"
We want production and consumption to balance by increasing consumption, not by decreasing production. To achieve that you need to reverse income inequality trends to restore a balanced internal market. Obviously this isn't sufficient by itself, but the US has all the other important precursors.
"whereby there is an international clearing union to penalize countries running mercantilist trade policies."
But when we learned that mercantilism doesn't work we coincidentally stopped getting new first world countries, with the exceptions (Japan and South Korea) proving the rule.
I don't have anything against your plan if you set government tariffs and patronage at the most effective level, but too many people in today's economic community assume that the correct level is zero.
If you define AD=I+dD/dt, it's easy to see the drop in AD. During the peak of the bubble, dD/dt peaked at +10% of GDP; now it's below NGDP. That's the reason for the unemployment.
The problem with mercantilism that always develops is that the creditor(China) develops an overcapacity issue while the debtor(US) develops an over consumption problem. It was exactly reversed in the 1930s with the US being the creditor and the UK being the debtor.
Where I would disagree is that I think the US needs more (real) investment while China needs more consumption. China's had plenty of investment and the US has been overconsuming for a while.
"This supports the case for inflation helping"
I disagree. Keeping bad debts serviceable helps those who made the bad loans. The correct decision is to restructure the debts.
I don't think that we need tariffs any more, we're a developed country now. Personally, I'd actually like to finance investment overseas; we do have the world's most flexible financial system and we really should use it.
I actually think the 19th century banking system had a much larger effect than the tariffs. It allowed the bad debts to be liquidated, assets were quickly written down to fair market value, and the overcapacity was eliminated as the benefits were passed onto consumers.
Let me define things more clearly. I define supply-side deflation as the falling price of input materials of a given economy. If businesses can get cheaper input costs inside a given country, the surplus must either go into profits or wages. Either way, it's always good. Same reason why supply-side inflation is always bad. Of course, all of this will depend on the supply chain of an economy and will be different for different economies.
He quoted Andrew Mellon and implied that Herbert Hoover was a liquidationist. This is flat wrong. Hoover said in his memoir that he didn't listen to Mellon. Hoover raised taxes and had high spending. He called in the business men and begged them to not cut wages, because he believed in under-consumption theory. He thought that recessions occurred because consumers didn't have enough purchasing power.
I'm less focused on wages and incomes and more focused on improvements in the quality of life. What matters isn't "growth" or some number called GDP. What really matters are sustainable and healthy improvements in the quality of life.
great series
(cont 3) Free trade takes away a country's most useful tool for manipulating this ratio and in essence puts downward pressure on this ratio. Growth in this setting can only come from:
a) monetary expansion
b) industry cycles / las vegas expected earnings (companies in dying, young, or "optimistic" industries participate at negative earning in hopes of being the exceptions) to balance out high earners
c) Tax and spend
d) Export
e) Other similar.
Tariffs are the most Pigovian other than C.
Honestly, I'd prefer a global financial system that Keynes envisioned of. A system with an international currency that was tied to some basket of commodities whereby there is an international clearing union to penalize countries running mercantilist trade policies. I'd also prefer fixed, but adjustable pegs, except for a few countries(like the US, UK, and a few others).
"However, a good start would be to not call the ability for Apple to make a better quality iPod or an iPhone for half the price deflation."
A good start on the other side of things is to not call the ability for an employer to pay someone less to spend the same amount of time creating the same amount of value an efficiency increase. It sounds like we agree that physical value creation per hour worked is important, but (cont)
I don't get why we are pigeonholing China and Japan as "Export driven". I would argue that there are a lot of countries that are export driven and China and Japan (and of course South Korea) as being "Export driven *and* ...", and the and part is really more important than the expert part. Public private partnership, protected industries and strong wage laws would seem to be the difference between successful "export driven" economies and the multitudes of other exporters.
"you basically have 3 options:"
I don't understand. Are you saying that there are policies that will lead to 1) and different policies that will lead to 2)? I would suggest that 1) needs further explanation because it could either mean pour more money into the investment marketplace or it could be something like tax and spend.
"You can keep borrowing until you hit debt capacity constraints"
This is just another way of saying "You can keep lending until you hit debt capacity constraints".
"For the first time after a major war the US didn't suffer a major recession"
I would dispute this. I would agree that the US did a lot of things right at the end of the war, but compared to the New Deal growth rate of 10% a year from 1933-1942, the "coming home" years were a *major* slowdown in growth, and the only reason it did not dip way below zero was the massively high starting point. So technically no, but realistically yes.
"The Chinese were buying US Tsy and agency paper to run a massive current account surplus and turbocharge growth. It will end in tears, just like it always has."
However we could just as easily become trade neutral and supercharge our own growth. The point remains that if we can limit the bleeding through any of the four methods mentioned, we can create some American growth at the expense of some Chinese growth, then internal growth policies can do the rest.
"Who are the most indebted? The middle class. Who own all the debt of the middle class? The 1% of the 1%."
This supports the case for inflation helping, rather than hurting, although I think that inflation is a smaller player than the wage bargaining power that the middle class has.
"If you define AD=I+dD/dt, it's easy to see the drop in AD. "
Sorry, I am not finding a good reference on this at the moment to respond properly.
I don't buy that argument. The key with positive deflation and negative deflation usually has to do with the supply side. Supply side deflation(cheaper input goods) is always good and productivity produced deflation is almost always supply side deflation. Supply side inflation is the bad kind of inflation. Demand pull inflation is almost always driven by credit growth, which is nonexistent right now.
The overconsumption is probably real, but it is driven by the imbalances rather than causing them as the "greedy consumer" school of thought likes to believe. You can tell by the fact that the "greedy consumer" idea requires a weak dollar, whereas in actuality it is a strong dollar causing "greedy consumers". Also, US has so much monetary investment that ROIs in all asset classes have headed to zero since 1980. Ironically, "real" investment is 100% demand-limited right now.
What you're saying could be true, but I'm not quite sure. I also think that China is still accumulating foreign bonds, but I could be wrong on that.
Also, I don't think it's particularly healthy for developing countries to be having freely floating exchange rates. The movement of capital coming flowing into and out of the banking systems in those countries can be very destabilizing.
"Also, I don't think it's particularly healthy for developing countries to be having freely floating exchange rates."
I have no argument on whether capital migration can be destabilizing. In extreme cases, expensive capital can be just as strong a headwind for growth as cheap capital caused by lack of consumers to chase after.
I think that with sovereign currencies you are able to keep enough capital dollars in the system to prevent such problems, but in today's world of SAP's?
Why can't it show up in profits rather than wages?
Since money spent(next cycle) = money earned(this cycle) * (wages / revenues) + government effects (eg. public projects, liquidity injections, etc) plus saving delta, the closer we can keep that ratio to 1, the less the government has to interfere to keep the economy from shrinking. Note that I don't mean wages precisely above. I mean income from all sources that falls within the radius of consumption. You and I have a better chance of winning the lottery than a Koch dollar has of buying lunch
" I view the US up until around 1900 as the ideal model for a developing country to take on."
Interesting... I will note that the financial crises have always been a part of our system except for the period of the New Deal. I view the educational climate and protectionism as probably having been ideal, but I don't buy that you have to crash as much as they did. A larger government and a smaller financial sector (greater equality) help dampen the swings and steady the market for innovations.
You're right, but taking up mercantilist policies is like shooting yourself in the foot; it just takes time. I compare it to a night of heavy drinking followed by a hangover. You could just wait until the policy proves to be unsustainable though.
Another problem is that the US is the world's reserve currency. This gets us to the primary international finance issue: the world's financial system needs to be reset.
If you include house price data in inflation calculations, inflation reached as high as 4-5% in 2005-2006. Today, we have asset price inflation. The top 5% own all 80% of the financial wealth in this country and monetary policy primarily works through the asset sectors. Also remember that a debt and asset are two sides of the same coin. Who are the most indebted? The middle class. Who own all the debt of the middle class? The 1% of the 1%.
10.00 for Paul Davidson
I don't think tariffs are the best way to increase wages/incomes. I think a better way would be to have a system that removes overcapacity and helps the middle class out in the form of lower costs and deflation from increased productivity. I think the best way to help out the middle class is to create a system where debts are forgiven while increased innovation and risk-taking put a downward pressure on prices.
Note: I do not want full-scale debt deflations though.
"I don't think that we need tariffs any more, we're a developed country now."
I think you are referring to the competitiveness of our industries. I wasn't postulating that our industries were non-competitive, but rather that a moderate tariff on both sides would have the effect of raising wages, which a neoliberal would say decreases efficiency, but which can bring balance back to spending. The fundamental equation in macroeconomics is private money spent = private money earned. (cont)
"What determines employment is the total level of spending. "
Employment as measured in dollars = spending times percentage of revenues allocated to wages. How are you doing the conversion?
Re: Geitner and Obama want to change the currency rate to fix the trade imbalance. This is a total non-sequitur. It would have the effect of moving production from China to the US, but he doesn't justify that this action would be any more zero sum than the three other actions he mentioned. In truth, it would depend on whether both companies were making the independant of trade steps to build internal market, which is orthogonal to the question of how big or small the trade deficit would be.
"I'm less focused on wages and incomes and more focused on improvements in the quality of life."
How do you measure that? The only way I know to do it is with the "basket of goods" approach built into our GDP numbers.
"Demand pull inflation is almost always driven by credit growth"
Again, I don't look at the problem in the same terms. Monetary expansion is sometimes looked at as something that reliably fuels inflation, but more precisely this extra money can have three outlets: a) Price inflation, b) expansion of the physical economy, or c) asset inflation. When demand is constrained, then only b) and c) are possible. When supply is constrained, only a) and b) are possible.
You really can't. However, a good start would be to not call the ability for Apple to make a better quality iPod or an iPhone for half the price deflation. It would mean to stop calling better production of technology for lower prices deflation and labeling deflation bad. Debt deflations are bad, but deflation from increased productivity is good.
I really think the way to wipe out a middle class is by inflation. It's a cruel, cruel tax that just screws up how everything works.
"There's a difference between using tariffs to protect growing industries vs using tariffs to subsidize particular companies."
Understood. My temptation is to set a flat tariff of 20% and every year adjust that down or up based on whether your economic indicators say you are poised for growth (neither labor nor capital has all the bargaining chips and R&D are well funded). Infant industry is a bit more direct, but also prone to abuse.
"The key with positive deflation and negative deflation usually has to do with the supply side."
Let's separate out the factors. You are merging the concepts of deflation, economic efficiency and physical efficiency. To the extent that deflation and physical efficiency are the same, your statement above is justified, but to the extent deflation is physical efficiency it is most definitely not an artifact of central bank money control.
Why can't it show up in profits rather than wages?