Re: Does Debt Matter

["Per Gunnar Berglund" <pgb@xxxxxxxxxxxxxxxxxx>]

In reply to Chas Anderson, James R. Olson, Jr. and John Gelles:

WARNING! LONG POST!!

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Chas Anderson wrote:
> Per, interesting approach. Could you give an example of how you would
incorporate the demographic (age structure) variable alongside the wealth
variable in your consumption function? <

Per:
Mind, I am not an expert demographer, so I guess my crude views could be
elaborated by people who know more. This said, the standard "life-cycle"
theory of consumption might indicate that both the mean age and the size of
the tails of the population age distribution matter. Plotting cohort sizes
(as percentages of total population) in order of age, the mean will depend
on how skewed the histogram is. If the elderly population is large compared
to the young, we may expect a somewhat lower propensity to consume (out of
wealth). I believe the mean age will function as a fairly good indicator of
this skewness -- the higher the mean age, the larger the "old" population in
relation to the "young". Moreover, the size of the non-working age cohorts
in relation to the working-age (e.g. 20--64) cohorts may also tend to affect
the aggregate propensity to consume. The larger the population share of the
"tails" of the age distribution, the lower the propensity to consume. This
hypothesis is more problematic, since I am not perfectly clear about how the
young (who are generally supported by their working-age parents) should
enter the scheme. Nevertheless the hypothesis could be tested by including
some dispersion measure (e.g. the standard deviation of the age-group
histogram) in the regressions. My own findings, based on Swedish data,
indicate that the standard deviation does not have a significant impact, but
that the mean age is very important an explanatory factor.

James R. Olson asked:
> Can you clear up your definitions of wealth and income?  I would think
that wealth would generally be defined as the sum of available liquid and
illiquid resources (money, non-consumed goods, and capital goods), while
income would be defined in terms of liquid acquisitions (money or easily
convertible goods), the spending (exchange for lower liquidity goods) of
which would constitute consumption. <

Per:
The aggregate wealth consists of all objects with exchange-value. The basic
notion of income is the exchange of wealth (oftenmost, as you indicate, in
the liquid form of money) for man's work, the aggregate of which makes up
the national income. We may for some purposes supplement this notion of
income with transfers (be they in terms of money or in kind) of wealth in
exchange for nothing, i.e. "transfers proper". The difference between income
proper and transfers proper is, of course, the lack of mutuality in the
latter type of transactions.

Obviously, income in this sense cannot arise unless someone exercises
demand, i.e. purchases of man's work. So, demand is a sine qua non, a
necessary condition, for income. The amount of spending will directly
determine the amount of income, not the other way around. Therefore I doubt
the usefulness of saying that income "causes" spending, since income is
clearly caused by spending. I believe it is more useful to regard wealth as
the source of spending, and hence as the source of income.

"Spending" is a word which tends to cause much confusion. First, spending is
often thought of in terms of money. But if you "spend" money on acquiring
some other form of wealth, I doubt there is any spending going on at all,
since your wealth position is not changed by this kind of "capital
transaction", as I prefer to call it. On the other hand, if you "spend"
money on purchasing services (man's work), your wealth position will
deteriorate, and this, I believe, is the true meaning of spending. It is
worth noting that spending in this sense need not involve money at all. Even
if you pay for the services by some other piece of wealth than money, your
wealth position will in fact be changed and therefore you are engaged in
spending proper. I should add here that transfers proper are problematic,
since it is generally perceived that spending takes place in exchange for
something. Since this is not the case with transfers proper, I would suggest
that this class of transactions are excluded from the spending category.

So, to sum up, there are three basic categories of transactions: (1)
"Activity transactions", or "spending", meaning the exchange of wealth for
man's work. All spending generates income; (2) "Capital transactions",
meaning the exchange of one form of wealth for another form of wealth.
Capital transactions do not create income; (3) "Transfers proper", meaning
the "exchange" of wealth for nothing. We may for some purposes use an
extended income concept (e.g. "disposable income") which includes both
spending and transfers.

John Gelles wrote, commenting on Basil Moore:
> If Gelles has the picture right, as demand increases, there will be
sufficient supply to meet it.  But as supply increases, there will not be
the necessary demand to buy it at a level price -- the price must descend
vertically to allow such supply to be bought. <

Per:
Careful here! "Supply" is a tricky concept. If you mean the national
product, which is the sum of the value of man's work carried out during a
specified period, demand (or "spending") must be the direct cause of the
national product. Services (man's work) must be sold on a "fix-price" basis,
meaning that the seller must fix the price and let the purchaser determine
how much to buy. P is fixed, Q is floating (which, of course, does not rule
out the possibility of frequent price-changes causing something that looks
like P-flexibility). For this reason, not only the value, but also the
volume (the "quantity") of national product is directly demand-determined.

Now, if "supply" is taken to mean the volume of national product actually
coming forward, then "demand will create its own supply", in an inverse
Say's Law fashion. But if "supply" is taken to mean the hypothetical level
of national product which will maintain prices unchanged over time, i.e. the
non-inflationary level of output, then there may be very little immediate
connection between demand and supply.

Since the same word is used for (at least) two concepts, the use of "supply"
is bound to cause confusion. Therefore I suggest that we distinguish between
(1) the "effective supply" of national product, to denote the
demand-determined, fix-price volume estimate of the national product, and
(2) the "equilibrium supply" of national product, to denote the
hypothetical, non-inflationary level of output.

So when Basil says Keynesians regard supply as demand-determined, he
probably has something like the "effective supply" in mind, while John's
assertion that inflation occurs whenever demand exceeds supply is based on a
notion of "equilibrium supply".

John is very concerned with the expansion of supply, meaning "equilibrium
supply". So am I. If we are to carry out a demand expansion, we must make
sure that equilibrium supply keeps growing at practically the same rate as
does demand, unless we shall face a steadily worsening inflationary spiral.

John has suggested subsidised automation and large-scale investment
programmes to deal with the supply-side problem. I think he is right, but I
fear the processes of automation might be difficult to get under proper
control.

Basil, Paul Davidson and others advocate imcomes policies to keep wages in
check when demand pressures mount and threaten to set off a wage-price
spiral. I think they are perfectly right, only you cannot expect
wage-earners to accept that a lid is put on money-wage increases by
governmental regulation.

Alan Isaac and many others recognise the importance of "functional" income
distribution, i.e. keeping the wage share of the national income high, in
order to hold back the "conflicting claims" causing money-wage pressures.
This is the kind of incomes policies I would favour, instead of outright
regulation or "persuasive" efforts on behalf of the government to have the
trade-unions work backwards and keep their members' money-wages down.

John doesn't like taxes. Who does?? I don't, and for very good reasons.
Taxation will tend to aggravate the inflationary pressures, by nibbling at
the take-home real wages of the workers. To my own surprise, I have found
this effect to be very considerable indeed. So I guess John's advocacy for
lower taxes would work in favour of lower inflation pressures at any given
level of output, which is the mirror image of an expansion of "equilibrium
supply" as defined above. John is frightfully right, even more right, I
imagine, than he understands himself! Much of his concerns about increasing
supply are really unnecessary, since his own tax-lowering policies will take
care of them. The only problem I see is that John has yet to recognise this
8-)

Best wishes,
Per


Per Gunnar Berglund
Lilla Sallskapets vag 60
127 61  SKARHOLMEN
SWEDEN

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