Basil,
Thanks for your comments. I have interspersed mine below.
>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.
OK, when you say "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" it appears that you are
referring to monetary policy based on the assumed validity of
NAIRU.
>> >
>> >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
>
I think the meaning of "inflated asset prices" is amply
illustrated in the 1999-2000 spike in security prices. Do you
really believe the enormous increase in the P/E ratios on all
indexes reflected an analysis of the capitalized value of future
earnings streams?
I would also note that while the P/E ratios set an all time
record, the discount rate remained well within its historic
bounds.
>> >
>> > 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.
>
Yes, when short term interest rates drop, that benefits those who
need to refinance with new loans. But the issuer of non-callable
high interest rate loans gain nothing from the drop in interest
rates. I bought a muni bond with a coupon of 13% in the early
1980s, callable after 10 years. The borrower continued to pay
over that period while the interest rate steadily dropped to less
than half that amount.
>> >
>> >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.
>
If monetary policy were that simple, it could be put on
autopilot. The polarity is correct here, but that is far from
the whole story. The devil is in the details, most of which are
not known until later than is needed to make good policy. The
time period for rate changes to take effect is itself a
significant variable, one that has continually frustrated policy
makers. And even if that period could be accurately estimated,
there still remains a problem of how large a change in interest
rates is needed. The notion that the monetary authority can
nudge interest rates around and watch their effects ignores the
time delays. I see the problem as much like trying to steer a
car by looking through the rear view mirror. You have to be
lucky as well as smart.
>> >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
>
Basil, I'm sure there is a wealth effect on AD that is beneficial
to a point. But that effect can also come back to bite, as a
great many households (and businesses) are now finding. For
example, those who bought expensive homes can find themselves
with negative wealth as their mortgage debts remain and their
"inflated assets" deflate.
William