Re: Self-correcting economic systems

[Basil Moore <bjm@xxxxxxxxxxxxxxxx>]

WILLIAM
MAY I REPLY IN CAPS?

At 05:29 PM 3/9/01 -0800, you wrote:
> Basil Moore wrote:
>
> >In my view at the essence of the Post Keynesian vision is the recognition
> >of the pervasive insufficiency of AD in all market economies. Labor and
> >capital are unnecessarily and involuntarily unemployed. Alternatively
> >expressed, capitalist economies are demand-constrained and not
> >supply-constrained. In the face of extreme poverty, human resources are
> >wasted, due to ignorance, but also in order to keep labor politically weak
> >and inflation in check.
>
> I agree with your basic thesis, that all market economies are
> demand-constrained, not supply-constrained.  Also that resources
> are sadly wasted, both through unemployment and through much
> wasteful enterprise, the latter mostly in the financial arena.
>
> If by "labor" you mean all those who must offer their services to
> employers for income, then I would say labor is inherently weak
> politically.  The choice of who and how many work is ultimately
> in the hands of employers.  It's hard to imagine how it could be
> otherwise in a free-enterprise market economy.  I am familiar
> with the ELR as proposed by Mosler et al, but have serious
> reservations about the practicability of that plan, and the
> likely unintended consequences.
I MEANT LABOR AS WORKERS WITH BARGAINING POWER (UNIONS) WHO ARE ABLE TO
PUSH UP WAGES MORE RAPIDLY THAN AVERAGE LABOR PRODUCTIVITY GROWTH, AND SO
CAUSE INFLATION BEFORE FULL EMPLOYMENT IS REACHED.

> >
> >PK's now understand that the CB sets the level of short term interest rates
> >exogenously, as its key policy instrument to attain its macro-economic
> >goals. I believe the PK policy recommendation should focus primarily and
> >centrally on persuading governments and CB's to lower interest rates, i.e.
> >to move towards a "cheap money" policy.
>
> Yes, cheap money but not so cheap as to create inflated asset
> prices.
WHAT DO YOU MEAN, "INFLATED" ASSET PRICES? iNFLATED IS A WEASEL WORD HERE
FOR "TOO HIGH"?
ASSET PRICES ARE THE CAPITALIZED VALUE OF FUTURE EARNINGS STREAMS RECEIVED
BY ASSET OWNERS. tHE PRESENT VALUE IS INVERSELY RELATED TO THE INTEREST
(DISCOUNT) RATE


> >
> >  Lower interest rates stimulate AD in three conceptually distinct ways:
> >1. Reduce the required return on investment projects, and so increase
> >investment expenditure.
> >2. Raise the market value of all marketable assets, and so the economy's
> >net wealth, net utility, and net expenditure on both C and I.
> >3. Reduce the cost of past borrowing, and so raise the net spendable income
> >of all debtor units, particularly  G.
>
> The only way I can see to reduce the cost of _past_ borrowing is
> through price inflation.  Is that what you mean?  Inflation is
> typically accompanied by an increase in nominal income but not
> necessarily real purchasing power.
NOOOOO! LOWER RATES REDUCE THE INTEREST EXPENSE ON PAST LOANS. THIS FOLLOWS
IMMEDIATELY FOR SHORT TERM FLOATING RATE DEBT, LIKE BANK LOANS. LONGER TERM
DEBT CAN BE CALLED AND REDEEMED  AT LOWER RATES. THINK HOW THE GOVERMENT
COULD BENEFIT BY REDUCING ITS INTEREST DEBT SERVICE EXPENSE.


> >
> >The third is a wealth redistribution effect, between debtors and creditors.
> >Debtor units by definition have a higher propensity to spend, which
> >explains why such a redistribution will increase AD.
>
> Firms are debtor units by definition, but I assume you are
> referring here to households.
> NO FIRMS TOO. ALL NET DEBTOR UNITS BENEFIT FROM LOWER RATES. DEBTORS HAVE
> A HIGHER MPSPEND.


> >Creditor units, the property classes, will initially be opposed to lower
> >rates, in their own perceived self-interest, since it reduces their income.
> >As they are the owners of most of the wealth, they will oppose cheap money
> >policy, on the pretext that it is inflationary. (Keynes' "euthanasia of the
> >rentiers".)
> >
> >But since lower rates also raise wealth values, creditors are made better
> >off by lower rates. In fact they are the prime beneficiaries in absolute
> >amount. A cheap money policy provides a very gentle "euthanasia" for the
> >lending classes.
> >
> >There however one major administrative problem with the above: Whenever
> >real interest rates are reduced by CB's below the real rate of growth of
> >the economy, the value of long--lived assets like land and equities rise to
> >indefinitely high levels, vide the recent experience on the Nasdaq, or
> >Japan. Very high asset prices (bubbles) historically have had negative
> >longer term effects on AD, since when they fall they reduce assetholder net
> >worth, and result in the bankruptcy of exposed and fragile financial
> >institutions, with lasting effects for the economy.
>
> It appears that you are proposing the real interest rate be set
> equal to the real rate of growth.  I am not sure that is any
> different from the policy objective of the Fed, although the Fed
> does typically err on the high side.  The problem is we can't
> know with any confidence what either of those variables are until
> well after the fact.  Models and forecasts are simply not very
> good.  So the question remains, given such inadequate date, how
> is this to be done?
LOWER RATES RAISE WEALTH VALUES. ONE CAN NEVER SET THE OPTIMUM RATE IN
ADVANCE. IT CHANGES OVER TIME.

BUT MONETARY POLICY IS SIMPLE: IF THE CB WISHES TO RAISE AD, LOWER RATES.
IF IT WISHES TO LOWER AD, RAISE RATES. THE CB MUST ESTIMATE THE TIME PERIOD
FOR RATE CHANGES TO TAKE EFFECT ON AD.



> >
> >But surely the proper policy message is to administer lower rates flexibly,
> >deliberately and carefully, so as to manage asset bubbles, rather than keep
> >rates at punishing levels in order to to keep labor in its place.
>
> It seems to me the Fed could have been much more aggressive in
> controlling bank lending rather than raising interest rates to
> combat "irrational exuberance."  It has the power to set rules on
> call loans and margin requirements, for example, but failed to do
> that.  Instead we find that banks have been lending large amounts
> to hedge funds and other very speculative ventures.  Credit has
> been not in short supply, until recently when it is now needed to
> avoid business failures.  The problem was that the credit issued
> helped to fuel the speculative boom that is now collapsing.
>
> William F Hummel

BILL
I LOVED KEYNES "EUTHANASIA" METAPHOR.???   I THINK IT IS VERY APT. BUT...
HE TEMPORARILY FORGOT THAT LOWER RATES BENEFIT LENDERS BY RAISING WEALTH
VALUES.

BASIL