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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Hawkish Comments from LBS

Posted by WARREN MOSLER on January 27th, 2011

The problem with the euro zone trying to keep the costs of imports down in this context is that it can only be done via a strong currency, which works against their desire to increase net exports, and even that doesn’t necessarily work if the foreign supplier has sufficient pricing power, as the Saudis do with crude prices.

It’s all about the struggle to optimize real terms of trade, which is difficult enough when the leadership understands the real issue as well as the monetary system.

Unfortunately they don’t seem to understand either one, and their real standard of living pays the price.

Karim wrote:

These are very hawkish comments from one of the more centrist and
pragmatic Governing Council members. ECB starting to realize that the
austerity measures taking place are only in 12% of Euro GDP (the PIGS).
The remaining 88% increasingly going in a different direction in terms
of macro performance.

 

5:31 ECB Bini Smaghi: “Core” CPI Losing Its Relevance
5:31 ECB Bini Smaghi: Deflation Risks Were Overestimated
5:30 *BINI SMAGHI: EURO AREA MUST `SIGNIFICANTLY’ CONTAIN COSTS
5:30 *BINI SMAGHI: RISING RISK OF `SECOND ROUND EFFECTS’ OF INFLATION
5:30 *BINI SMAGHI SEES HIGHER INFLATION FROM EMERGING MARKET PRODUCTS
5:30 *BINI SMAGHI: PAST SHOWS TENDENCY TO UNDERESTIMATE INFLATION
5:30 *ECB’S BINI SMAGHI: IMPORTED INFLATION CAN NO LONGER BE IGNORED

87 Responses to “Hawkish Comments from LBS”

  1. Rob Says:

    Warren-

    In the MMT framework, how should the government react to importing a rising level of prices? Let the price rise temporarily to reduce the real terms of trade while ensuring no distributional conflict between margin setters and demanded wages?

    Just curious as I am unclear of the MMT response to this latest neo-liberal angle to impose unemployment on the masses.

    Thanks!

    Reply

    Neil Wilson Reply:

    That’s my second unanswered question of MMT. I’ve seen it skirted around but there doesn’t appear to be a firm agreed policy proposal like there is with other elements. There was some mild discussion in the recent conference videos but it was quickly skipped around.

    It seems like a bit of an elephant in the room.

    Almost inevitably an introduction of MMT like proposals would cause a short term depreciation of the currency (if for no other reason than you are adding net-financial assets paying a lower return than the ones people are used to getting).

    So you get a situation like we have in the UK at the moment (for other reasons) where the currency is 25% down on where it has been and we have cost-push price rises from commodities and imports.

    How do we absorb that real cost without generating stagflation? Who absorbs it? Are there any MMT papers discussing this point?

    Reply

    beowulf Reply:

    This is the part where I don’t mention Bill Vickrey. :o)
    http://moslereconomics.com/2010/11/23/fighting-inflation-in-china/#comment-33640

    Reply

    Tom Hickey Reply:

    Maybe we should be considering allocation of scarce vital resources in terms other than strictly rationing based on price discovery through competitive markets. No way to do that, however, without sacrificing the sacred cow.

    Reply

    beowulf Reply:

    Ironically, that only works if you auction off the slabs of beef. :o)
    http://economistsview.typepad.com/economistsview/2006/06/tradeable_gas_r.html

    Tom Hickey Reply:

    I think that someone like Martin Feldstein recognizes that there is a problem, there is probably a problem. Lots of jaws dropping over that one. :)

    Neil Wilson Reply:

    Then we get into needs and wants, and separating income (access to resources) from work – another sacred cow.

    It’s be interesting to explore a framework there where ‘needs’ are allocated to a different system with some form of capitalism reserved for the ‘wants’.

    Tom Hickey Reply:

    We already have this to a degree in the concepts of public goods and public utilities, both contested by neoliberals and Austrians as contrary to the “free market.”

    Of course, we saw it during WWII, when there was government allocation iaw need for vital goods and materiels.

    WARREN MOSLER Reply:

    MMT just means you understand monetary operations, how the checks clear, the source of the price level, etc.

    It doesn’t say how you ‘should react’ to anything, though presumably if you did understand mmt you might react differently than those who don’t.

    Anyway, for an example, with regards to rising crude prices, i’d start negotiating long term prices with Canada and Mexico for our crude needs. they are afraid of lower prices and we are afraid of higher prices, so it should be a good fit.

    and with long term contracts they can safely invest in extraction infrastructure, and we can remove the price instability from that commodity.

    not much mmt there, sorry!!!

    Reply

    Neil Wilson Reply:

    If it is entirely passive Warren, how come you have any policy recommendations derived from the understanding of MMT?

    You don’t get out of it that easily :)

    Falling currency values puts the price of goods up. The neo-classical economic response to that is to raise interest rates and/or discipline labour through increased unemployment. That’s how they dealt with the Stagflation of the 70s. Or so they say.

    So you’re saying negotiating future contracts on important commodities would be the approach?

    Reply

    Tom Hickey Reply:

    Supply side cost-push inflation involves the inability to supply real resources in response to demand, generally owing to shortage of real resources. The only solutions are increasing production or providing substitution through increased investment and technological innovation, or else some kind of rationing through markets or otherwise. The fiscal policy option might be increased spending/tax incentives for increasing production or substitution, or else some kind of market rationing like tradable vouchers.

    Warren’s ploy of negotiating futures contracts at the state level is what China is now doing, much to the disapproval of the US, since the US claims that it violates the fundamental principles of neoliberalism, that is, open markets. But that seems to be the trend.

    WARREN MOSLER Reply:

    we could also officially recognize the saudi’s role of swing producer and attempt to use our influence to get them to behave to our liking

    WARREN MOSLER Reply:

    my policy proposals are consistent with the actual operational realities of the monetary system.

    in other words, they aren’t influenced by the mistaken belief that the govt has run out of money and is dependent on borrowing from china and leaving the debt to our grand children, as Ryan and Obama believe.

    :)

    I’m saying one option for stabilizing crude oil prices is long term contracts, rather than the interest rate policies espoused by others.

    Matt Franko Reply:

    Neil,

    Can the UK austerity itself be influencing exchange rates, ie I noticed the other day that when the unexpected UK 4Q gdp number came out, I believe the pound sold off?

    And a lot of this (price increases) of course goes to energy, and the world has OPEC which continues to go unaddressed. Steve Conover some time back came up with the idea of a new acronym: “A good name for such a partnership might be “Oil Buying and Importing Countries” — OBIC.”
    http://www.optimist123.com/optimist/2007/07/obic-stymies-op.html

    Here is an interesting report on energy costs embedded in food.

    Excerpt: “A 1998 study examined the distance that 30 conventional fresh produce items traveled to reach the Chicago Terminal Market.
    The Leopold Center found that only two food items, pumpkins and mushrooms, traveled less than 500 miles. Six food items including grapes, lettuce, spinach, broccoli, cauliflower and green peas traveled over 2,000 miles to reach the Chicago market.”

    http://attra.ncat.org/attra-pub/foodmiles.html

    The west sure could be using fiscal policy to hit this energy issue a lot harder, cooperatively.

    Neil Wilson Reply:

    It’s not really much of a sell off Matt. It’s sat around 1.60 US dollars. The real sell off was the change from 2.00 to 1.60 over the crash.

    There are obviously lots of things that affect the exchange rate, however if you issue currency and reduce bonds then there’s going to be an alteration in the price of those two assets just on a straight supply/demand basis.

  2. beowulf Says:

    Works politically, I mean. The Office of Price Administration was a rather remarkable agency. Bsides price controls on, well, everything, it also rationed fuel, food and clothing. The political issue is that rationing is only viable as a short-term emergency measure but to replace interest rates as the tool to fight inflation, we’d need a permanent price control regime. Nothing says permanent like “property interest” (to shut down a Vickrey gross markups or a Feldstein TGR market, Congress would have to buy out property owners at market price).

    Reply

    Tom Hickey Reply:

    In an increasingly globalized economy, some mechanism is gong to have to be devised, or there is going to be political blowback, and this can involve conflict. Nothing like food riots to concentrate politicians attention.

    Reply

  3. Anders Says:

    Tom – I can see that demand-pull inflation differs from supply-side/cost-push inflation in terms of historically how it arises, but don’t they both mean that AD > AS, and as such, that the ‘cure’ is the same in either case?

    If, ex hypothesi, we want to ‘cure’ inflation quickly, I’m not sure how Warren’s prescription to boost production as this seems more of a medium/long term solution.

    Reply

    roger erickson Reply:

    The entire extent of known history is a result of Agg Demand > Agg Supply

    Indirect solution have ALWAYS appeared, in the form of “Return-on-Coordination”, despite ever-presumed resource constraints.

    There’s no way to escape it, save suicide, so someone else can have a go.

    I believe that Return-on-Coordination answers Neil Wilson’s questions too. WWII proved that pretty well. The ramp up of output was spectacular, & all managed with paper & pencil, not with today’s tools.

    Reply

    beowulf Reply:

    Right, and France rapidly rebuilt after World War II using the “indicative planning” system introduced by Jean Monnet (many other countries, not including the US, copied Monnet’s system).

    Hmmm, I wonder what Monnet was up to during World War II…
    The name of this remarkable Frenchman seldom appeared in the press or the on the radio during the defense build-up prior to Pearl Harbor and the all-out mobilization in the challenging months in early 1942 just after the United States entered the war. Yet until Jean Monnet provided the leadership during the preceding year for setting much higher goals for American armament production, the prospects were dismal for the successful defense of Great Britain and Russia.
    http://books.google.com/books?id=SqgQTJ9qtSIC&lpg=PA67&dq=Jean%20monnet%20unsung%20hero&pg=PA67

    Reply

    Neil Wilson Reply:

    Good evidence. Thank you.

    Reply

  4. Anders Says:

    Roger Erickson / Beowulf – are you talking about an ambitious level of central planning / coordination of production / pricing?

    Disappointing if so: I was hoping for something that with a bit better chance of getting some traction with the mainstream. Such a prescription would surely need food rioting to have happened first.

    Reply

    beowulf Reply:

    What? I can’t speak for Roger but I’m a fan of (as Tom Hickey put it) “rationing based on price discovery through competitive markets”.

    Maybe you’re just feeling disappointed and are searching for a reason to explain those feelings. I kid I kid! :o)

    Reply

    Tom Hickey Reply:

    Right, all scarce resources are allocated base on some form of rationing. In market economies, the preferred means of allocation is price discovery in markets, where effective demand (bid) matches available supply (offer). The operative term is here is “effective.” Notional demand doesn’t cut it, you have to the wherewithal to close the deal. This means that rationing in market economies is based on wealth, which highly a highly regressive means of rationing.

    It is also why free markets also have to be fair markets. The wage is decided in the marketplace, and when economic rent is added to the mix, things get volatile, as Marx observed. But even before Marx, Classical economics was about reducing or eliminating the bias of economic rent, notably the land rent that was a holdover from feudal times and privileged the upper classes, or “rentiers,” who did not produce anything of substance.

    Reply

    WARREN MOSLER Reply:

    don’t forget the institutional structure that created treasury secs that don’t need to exist, that indirectly allocate disproportionate quantities of real resources toward those thriving on that extravaganza, etc. etc. etc.

    WARREN MOSLER Reply:

    comes from incomplete knowledge of game theory

    Reply

    roger erickson Reply:

    There’s always a bit of confusion propagating across the separable contexts where game theory, libertarianism, mass markets, and scalable coordination occur. It’s an issue of mobilizing at different scales & time periods, to meet the rate of change of context. If you can’t change fast enough, you’re limited to safe niches. The faster you can support more change, the more options – & niches – you have available.

    In short time periods, game theory & libertarianism are adequate.
    In medium time periods, crude pricing in mass markets become necessary.
    Over longer periods, personally unpredictable, un-”priceable” coordination is necessary.

    All known bio processes & systems have multiple kinetics systems operating simultaneously, usually referred to as short, medium & long-term processes (but there may easily be more than 3). These multiple strategies smooth survival potential over immediate, several and many succeeding contexts. Coordinating them is an art – and it’s obviously not easy.

    Simultaneous adaptation to at least 3 context filters requires staying within 3 sets of tolerance limits simultaneously. It’s perfectly intuitive if you come at it via matrix math or just by looking for simultaneous solutions to 3 sets of probability functions. Not so different than looking for quantized orbits or prime numbers. Point is that for complex systems, there are endless permutations possible, but only a very few are survivable. All complex systems constantly search for the next improbable permutation that allows bigger/better/faster/cheaper mobilization.

    No – it doesn’t require central planning. In fact, that’s an oxymoron since no subgroup can carry the bandwidth required for full group coordination. It’s not mathematically possible, and the Soviets pretty much proved it empirically, despite heroic efforts.

    Any network diagram shows the answer. Large aggregates continually reorganize as they pass from context to context, just as cellular & neural networks reorganize during development after sexual recombination. Population networks do the same, on a different scale, using different connectivity methodology, & with different kinetics.

    In each new context, the aggregate tends towards everything-connected-to-everything until response outcomes start to improve, AND THEN it rapidly settles towards the leanest possible connectivity that still allows navigation in a semi-stable context. As soon as the context changes, those aggregates that CAN re-mobilize expanded connectivity & boost group intelligence JIT/JAN, are the ones that survive long term.

    Group coordination, settling & re-connectivity rates roughly follow a simple mantra pattern.
    Interactions drive awareness.
    Awareness exposes emerging opportunities.
    Opportunities demand careful selection of coordinated group responses.
    Coordinated group responses generate specific interaction patterns. (back to step 1)

    This 4-step tango waxes & wanes per internal feedback, while tracking context demands. That’s how group-adaptive-rate predicts long term group survival. Social species can accrue greater resource buffers, react faster & support more indirection, and also scavenge & drag more resources between re-organized states – than any equal number of Libertarians can.

    Reply

  5. Tom Hickey Says:

    I would call demand side inflation “nominal” inflation and supply side “real” inflation to distinguish their causes. Nominal results from imbalance in the relationship of money and stuff, coming principally from the money side, while real is based chiefly on availability of stuff irrespective of money.

    Demand side inflation typically results from excessive credit extension and is addressed by acting on the demand resulting from “too much money chasing too few goods” at full employment when output potential has been reached. It’s pretty much a myth that inflation comes from excessive deficit expenditure or central bank monetary operations.

    MMT recommends dampening nominal aggregate demand by withdrawing non-government net financial assets through taxation. MMT’ers argue that this is less likely to provoke recession than raising the interest rate, as monetarism prefers. But there is little evidence of demand side inflation in recent years, regardless of all the hoopla from the hyperinflationistas so I don’t see this as an issue. It is essentially a distraction IMO.

    The excessive credit that led to the present crisis did not result in price inflation but a run-up in asset prices that could not be sustained when it reached the Ponzi stage, resulting in collapse of asset prices that is still working itself out. Inflation is still low in the developed world, although it is rising in the emerging world. This appears to be imported inflation due to emerging countries not allowing their currencies to appreciate in order to protect their exporting edge.

    So I would discount demand side inflation at this time.

    In recent times supply side inflation has come from petroleum when supply has been restricted by a cartel. There is no solid evidence of which I am aware than the cause has been shortfall in production owing to natural causes, other than temporary disruptions from weather, etc., although we are at “peak oil” in the sense that total production has plateaued.

    There are four ways to address this bottleneck that petroleum represents, first, by putting pressure on the cartel, which the US has favored in the past but it has not worked so well of late, secondly, by increasing production or providing substitutes, which is what the Obama Administration is now promoting, thirdly, through reducing demand through taxation or increasing the interest rate as with demand side, but taxation is probably out in this political climate while raising the interest rate risks recession, and fourthly, by some form of rationing, which is unpopular and considered to be anti-market.

    Given the increasing global demand for petroleum and the dwindling supply of cheap sources, the trend is toward rising global inflation. Modern agriculture is energy-intensive, for instance, so food price will rise along with energy cost. While food and energy are not figured in CPI, they are the measures of inflation that most people use as a rule of thumb. Talking CPI to them is futile. Moreover, the Third World is extremely sensitive to food prices.

    The only reasonable answer seems to lie in conservation and development of cost-effective alternatives through innovation. Conservation is the simplest, quickest, and more available solution, but even though the savings are considerable, conservation alone will not be enough. Inexpensive alternatives have to be developed quickly or global inflation is in store, creating economic disruptions that spill over into social disruptions that can turn into political crises.

    In my view the rising price of petroleum resulting from supply is one of the major factors capable of causing disruption in the global economy and geopolitics. There are a number of ways that problems in meeting increasing world demand for petroleum could arise, and it is impossible to anticipate them or prepare adequately for them. The world needs more decentralization and redundancy in energy, and it needs to get there quickly. Recovery from the current crisis will likely be hampered by rising petroleum prices, affecting the lives of billions of people, some only moderately, but many seriously.

    The principal obstruction to achieving this is vested interests that control the agenda presently. Until those blockages are reduced or removed, progress will be halting. I suspect that China and India are going to get out front on this and the West will be forced to play catch-up. This is going to be the new Sputnik moment, as President Obama anticipated in SOTU. We aren’t there yet, though.

    Reply

    beowulf Reply:

    In my view the rising price of petroleum resulting from supply is one of the major factors capable of causing disruption in the global economy and geopolitics.

    This is one area where China and the US can cooperate since we share a common interest, cheap fuel. Developing petroleum alternatives is difficult to do in this country, 1. because of the power of the oil lobby 2. Regulatory restrictions and 3. required govt funding for the necessary research and replacement infrastructure, whether its synthetic oil from coal or nuclear plant-powered electric cars (or retrofits for existing cars). Cooperation in this area would also reduce the trade deficit. Two things this country can still export– coal and nuclear plants.
    http://www.powergenworldwide.com/index/display/articledisplay/4286077939/articles/nuclear-power-international/volume-3/issue-1/nucleus/The_mPower_Modular_Reactor.html

    As for food, US foreign aid policy (by law) is to donate US crops instead of buying locally. Local farmers can’t possibly compete with free food shipped across the ocean from America. And of course there are still trade barriers that keep foreign crops (such as sugar cane and ethanol from Brazil) out of the US, there’s no economic reason for either. If Congress wants to continue subsidizing American farmers (and I have no doubt they do), as Warren suggested a few years ago, the government could buy up their excess crop production to create a strategic food reserve.

    Reply

    WARREN MOSLER Reply:

    in theory conservation could be enough

    Reply

    Tom Hickey Reply:

    Probably but enforcement is a problem, both as a practical matter and a cost. Better to commit the extra cost of full enforcement to development of alternatives?

    Reply

    ESM Reply:

    You don’t need to enforce conservation. It happens naturally through the price mechanism. I don’t frankly see a problem with oil like you do, but if there is any distortion in the market, it is that oil is not taxed enough domestically to make up for the very large subsidy that the US Navy provides (in the form of transport protection).

    WARREN MOSLER Reply:

    there are alternative to rationing by price. like requirements that cars get a minimum of a stated mpg, or that computers can only use so much electricity, or that air conditioners can only make a house so cold, or that you can’t buy scarce food and throw it away just because you can afford it, etc.

    Tom Hickey Reply:

    Who is the largest US consumer of petroleum?

    It’s the DOD (source). They don’t care about price. Moreover, every unit has an allocation. If that allocation is not used in full within the period, it is reduced.

    Guess what the incentive is. It sure is not conservation.

    Tom Hickey Reply:

    ESM: if there is any distortion in the market, it is that oil is not taxed enough domestically to make up for the very large subsidy that the US Navy provides (in the form of transport protection).

    There is also the huge negative externality of pollution. Price should reflect true cost, or else the upside is capitalized and the downside is socialized. There needs to be a significant tax added to petroleum, which would have the added advantage of making alternatives more economically attractive.

    Of course, raising the cost of petro products would tank the economy. But, heck, the banks tanked the economy, too.

    WARREN MOSLER Reply:

    nor would it stop the rich from using all they wanted.

    so it would just reallocate the supply, for the most part.

    the boss could drive his limo or take his private jet while the rest of us take the bus with the bad shocks

    i’m not against allocating by price per se. just that often there are other, more attractive options that aren’t even being considered

    ESM Reply:

    You’re worried that rich people would waste food? Like put it in their gas tanks instead of eat it? Heaven forfend that a market based distribution system would allow people to do that. We need the government to force them to do it instead.

    Look, if people want to buy expensive food and wallow around in it like pigs in slop, that’s fine with me. Presumably, it’s bringing them happiness. And if we have a free market in food, their demand (presumably for cocoa butter) will encourage more supply (and less demand from people who can substitute easily).

    As for regulating mpg for cars, that is simply the dumbest idea ever. People have so many diverse needs when it comes to cars that it is crazy to have one size fits all regulations like that. A family has 5 kids so they need a big car? SOL. A family likes to bring a small boat up to a vacation home on a lake and needs a car with a powerful drive train? SOL.

    Well, maybe the government can grant waivers to people on a case by case basis. That way bureaucrats can decide what’s best for each family or business. Sort of like Obamacare. No chance for any corruption there!

    WARREN MOSLER Reply:

    we already have fleet mileage standards and they work well best I can tell.

    and yes, when there is an excess supply of a perishable like food the surplus can go to whoever.

    and yes, it’s govt/institutional structure that makes it all happen.

    Including our pension fund arrangements and their passive commodity strategies that reallocate resources by altering costs of foods and fuels.

    JCD Reply:

    Warren sez:

    “i’m not against allocating by price per se. just that often there are other, more attractive options that aren’t even being considered”the

    Attractive to who? Attractive why?

    In my experience allocating scarce resources by anything other than price leads to corruption and a reduction in liberty.

    Reply

    Tom Hickey Reply:

    Tell that to the folks in the developing world that can’t afford food.

    JCD Reply:

    Free people do not starve.

    WARREN MOSLER Reply:

    Is that your definition of free people or are you describing a particular society, etc?

    WARREN MOSLER Reply:

    so all the non monetary systems the world has had all had more corruption than the US does? And less liberty. makes no sense?

    and proponents of allocation by price (which includes me in general) agree that monopoly and imperfect competition needs to be regulated, right?

    and, technically, the conditions for ‘perfect competition’ are never met, right?

    and the institutional structure is what all market forces necessarily must act within, right?

    so the formation of the institutional structure- the box that market forces act within- is political, and not itself a product of market forces per se, subject to corruption, a taker away of liberty, etc., right?

    And so how does institutional structure that establishes minimum miles per gallon for cars, which allows the fuel to be ‘shared’ by more people rather than allocated soley to the highest bidder, lead to corruption and a reduction of liberty?

    (For a given amount of fuel consumption, which I do think is too high, but that’s another story)
    Better to have one rich guy fill up his fleet of boats and planes and cars for personal use, than allow more people to drive to have access to the same fuel for their transportation?

    Better to have rich guys in Egypt get over fed and sell food used for fuel to fund their other consumption while working people starve?

    ESM Reply:

    “And so how does institutional structure that establishes minimum miles per gallon for cars, which allows the fuel to be ’shared’ by more people rather than allocated soley to the highest bidder, lead to corruption and a reduction of liberty?”

    As I’ve said before, some regulation is needed because of externalities, tragedy of the commons, etc., or perhaps to correct a distortion that exists due to other government regulations.

    However, such regulations should be used sparingly and to correct a very specific distortion.

    How do we know if a regulation is too crude or too inefficient?

    One way is to ask the following question: If we promulgate this regulation, and we allow individuals, households, and businesses to apply for waivers, how many meritorious applications will the government receive each year? If the number is so high that you need to hire more than one full-time bureaucrat to administer the waiver process, then the regulation should be thrown in the garbage.

    The minimum mpg regulation would clearly go too far, as there are just too many different uses for cars, many of which require larger, stronger, or more robust drive trains that get lower mpg.

    The waiver process of course is where corruption seeps into the system (and of course corruption leads to less liberty). Just look at Obamacare. That law has now given the administration awesome power to reward its friends and punish its enemies through the use of the waiver process (among other powers that the HHS Secretary has).

    JCD Reply:

    “Better to have one rich guy fill up his fleet of boats and planes and cars for personal use, than allow more people to drive to have access to the same fuel for their transportation?”

    And who is to decide who should get the fuel?

    ESM implies a regulation isn’t worth the trouble when the government will receive many meritorious applications.

    I think the rule should be when a black market/corruption arises in response, then we know the regulation is counterproductive.

    WARREN MOSLER Reply:

    so the rule should be the bond trader gets all the fuel he can burn in his private jet and suv, while the cancer researcher only gets enough to car pool?

    that’s what markets dictate under current institutional structure. I’m not advocating not using market forces. I am advocating revisiting the institutional structure to see if it serves public purpose.

    JCD Reply:

    “Is that your definition of free people or are you describing a particular society, etc?”

    Name me a people that are free and starve.

    Freedom correlates closely with standard of living. One may not think the link is causal, but I do.

    Irregardless, liberty is a first order public good. Increasing liberty serves the public purpose. It is desirable in it’s own right. In fact without it, all of the other things in life are hollow. I think Jefferson had it right in the Declaration when he said it is the purpose of government to secure and protect individual liberty.

    I believe it is human nature to want to be free, and I think that you need to look no further than Cairo today to see that.

    So when I think of the “public purpose” behind a law or regulation, I think first, “does this increase or reduce liberty — anyone’s liberty”.

    WARREN MOSLER Reply:

    not even close. total liberty is not most people’s first choice. most want murder to be illegal, for example.

    but you may not be defining liberty as is the convention.

    Tom Hickey Reply:

    JCD, name me a people that are “free.” According to Murray Rothbard, government is a gang of thugs. Is there a people without a state? What does anarchy look like?

    The Anatomy of the State

    WARREN MOSLER Reply:

    Somalia?

    JCD Reply:

    Fine.

    Freedom is relative, not absolute. One can only be more or less free.

    This doesn’t change the issue though.

    Mass starvation occurs because of tyranny and corrupt government. It does not occur because of the depredations of free exchange of goods and services.

    More freedom is better than less.

    People want to be free.

    It serves the public purpose to advance freedom, in fact our government is founded on the notion that it is the essential purpose of government to protect our liberty, and that if it fails at that the people have the right “to alter or abolish it”.

    Policies that redistribute wealth (or goods or services) to suit some individuals notion of fairness or equity do so at the cost to individual liberty.

    WARREN MOSLER Reply:

    we’ll only find out well after the fact how many tens of millions died of starvation in off the run locales because directly or indirectly their food was sold for fuel.

    Tom Hickey Reply:

    JCD: “I think the rule should be when a black market/corruption arises in response, then we know the regulation is counterproductive.”

    Booze during prohibition, and drugs now?

    WARREN MOSLER Reply:

    and cigarettes?

    JCD Reply:

    I can think of no more destructive federal program over the past 30 years than the senseless “War” on Drugs.

    beowulf Reply:

    True, a pity too that the DEA is focused on, obviously enough, the drug war. They really are a first rate law enforcement agency (“The Drug Enforcement Administration has been transformed into a global intelligence organization with a reach that extends far beyond narcotics”).
    http://www.nytimes.com/2010/12/26/world/26wikidrugs.html?_r=2&bl

    To paraphrase what Saigon correspondent Robert Shaplen said of General Abrams, “they deserve a better war”. And I have just the war in mind. I suggested to Bill Black a few weeks ago that since the FBI isn’t doing anything to investigate accounting control fraud that wrecked our banking sector, Congress should hand over jurisdiction to the DEA.

    Actually Congress doesn’t have to do anything (their core competence!). I looked up the DEA charter the other day, its given jurisdiction over anything the Attorney General assigns them:
    (a) Any officer or employee of the Drug Enforcement Administration or any State or local law enforcement officer designated by the Attorney General may…
    (1) carry firearms;
    (2) execute and serve search warrants, arrest warrants, administrative inspection warrants, subpoenas, and summonses issued under the authority of the United States…
    (5) perform such other law enforcement duties as the Attorney General may designate.

    http://www.law.cornell.edu/uscode/21/usc_sec_21_00000878—-000-.html

    Tom Hickey Reply:

    Of course, this would have to involve shutting down Swiss banking as the money laundering center of the world. :)

    roger erickson Reply:

    > In my experience allocating scarce resources by anything other than price leads to
    > corruption and a reduction in liberty

    No amount of experience guarantees adequate perception of context. See my comment above re group intelligence. Mkt pricing only applies to some, not all things. What’s the price for your kids, siblings, spouse, relatives and/or citizenship? Are they corrupted? Are they in scarce supply?

    The very existence of CONTINUOUSLY SCALING AGGREGATION, from single to multi (whether quarks, particles, elements, molecules, cells, physiologies, members ..) all the way up to social species, tribes, cultures, nations, markets & economies … pretty much demonstrates that improved survival means voluntarily giving up SOME local “freedoms” in return for SOME aggregate capabilities. It’s not always a loss of freedom, it’s a choice.

    Think of it as domesticating ourselves. Once domesticated, few are emigrating back to the wild.

    ESM Reply:

    WARREN MOSLER Reply:
    February 2nd, 2011 at 2:35 pm

    “so the rule should be the bond trader gets all the fuel he can burn in his private jet and suv, while the cancer researcher only gets enough to car pool?”

    Unequivocally yes. If you think cancer researchers are so much better than bond traders, then you should advocate for increasing government funding of cancer research by 10-fold. Then they’ll make enough money to afford an SUV and a private jet and thereby save their valuable time to do more cancer research. Better yet, you’ll attract additional smart people to the field.

    By the way, I am absolutely surrounded by cancer researchers where I live. I know at least a dozen. I don’t see that they’re so productive or doing such useful work, or spending even more than half their time actually doing research as opposed to jetting around the world to fun conferences or writing new grant proposals.

    I’m not smart enough to figure out whether the government is spending too much or too little on cancer research, but I suspect that we are at the point of exponentially diminishing returns.

    WARREN MOSLER Reply:

    that’s called altering the institutional structure so we agree.

    ESM Reply:

    Yes, but do you see that there is a difference in our approaches?

    People say, “oh, no, it’s bad that we burn all of this gasoline, so we should find ways to restrict consumption.”

    But they don’t ask why burning so much gasoline is bad. It is bad because of externalities. Well, if you tax it to incorporate the externalities into the price, then you will be indifferent to people burning gasoline, and demand and supply will be optimized. Furthermore (and perhaps even more important), the correct price signals will be sent throughout the market for anything that is even remotely affected by or related to gasoline.

    You implied that perhaps gasoline should be rationed so that poor cancer researchers can carry on with their important work more efficiently. But that is an indirect, Rube Goldberg-ish way of addressing the problem. The real problem is that you think not enough of the country’s resources are being directed to cancer research. That’s a lot easier problem to solve: as you’ve always said, just use the Fed’s computer to mark up some bank accounts.

    WARREN MOSLER Reply:

    understood.
    my point is there are options

    taxing gasoline with regard to externalities rations it by price which is highly regressive. other options include requiring higher efficiency, speed limits for gasoline powered vehicles, the use of social conscience type advertising (my turn the key, feed a terrorist sample ad), simple rationing, etc.

    we all know the ‘limits’ of rationing by price.
    when a boat sinks, should the available seats in the life raft be sold to the highest dollar bidder?
    etc. etc.

    yes, rationing by price is always an option, but not necessarily always the option that produces the most desirable outcome of humans expressing values.

    Tom Hickey Reply:

    ESM, the place that scarce resources are rationed pretty much exclusively by price is the Third World.

    ESM Reply:

    I disagree completely. In fact, it is quite the opposite which is a large part of the problem. Although I am hardly against aid organizations which deliver food to 3rd world countries, we need to recognize that such charity does undermine the development of local food production.

    The biggest problem in the 3rd world is a lack of enforceable property rights. This undermines the entire free market system. What good is it to accumulate capital stock if it can be seized from you by the government or by a local militia at any moment. What good is it to accumulate capital if there is nothing to buy?

    In the developed world, people have faith in property rights, even those participating in the black market.

    Tom Hickey Reply:

    Sounds to me like more armchair punditry, ESM. Do you have personal experience of the Third World? What I have seen is very rich people living in their own gated world and a vast poor population with bupkis, living hand to mouth. I know people that have worked for NGO’s and the government doesn’t really let them do anything serious. One of my friends received a message from a friend in the government one evening not to be in the country the next day at 9:00 AM. It would no longer be safe for him.

    ESM Reply:

    “Sounds to me like more armchair punditry, ESM. Do you have personal experience of the Third World?”

    Almost none, although I did live in Somerville, MA for almost two years.

    In my personal experience, personal experience is vastly overrated. I can read what other people have written. That’s sufficient in my opinion. If I’m wrong, then presumably you will catch me saying something stupid one of these days.

    Tom Hickey Reply:

    About my NGO friend that was warned to leave. He explained to me that he had been suggesting things that people could do to help themselves. He found that usually they did not need to be told how to do these things, only that they could do them. They already knew how to do it. Then they started thinking up thing to do by themselves and coming to him to ask OK to do them. This was not any kind of official permission. It was just someone “above” them telling them that they could do something they could do for themselves. Apparently the folks in charge didn’t like the people getting empowered to do things on their own without their getting credit for it. Who knows where that could lead.

    Another story from the opposite side. One of my Latin American friends once told me that when he was twelve, his father had taken him to the top of a mountain and told him to look around in every direction. Then his father said, We own all of this, as far as you can see. After telling me this, my friend then added, We aren’t very rich, actually. All we have is land. Now, L… (a mutual friend of ours from the same country), his family is really wealthy.

    Of course, these guys are of European descent, although their families have been there for generations. But the land that is “his family’s” has been the land of people that have been there for millennia. Property rights? They are pieces of paper drawn up by conquerors and imposed on the conquered, dispossessing them of their ancestral lands.

  6. Anders Says:

    Thanks Tom – that looks like a good account, although I don’t follow the logic as to why ‘nominal inflation’ and ‘real inflation’ are fundamentally different in nature (irrespective of their causes). The fact that increasing interest rates COULD lower ‘real inflation’ (albeit that MMT prefers other methods) indicates that ‘real inflation’ is again a simple problem of AD > AS.

    Separately, your sensible-sounding comments on how to address oil price driven inflation seem more medium term focussed. I’d infer that you think a government/CB seeing rising oil-driven CPI in the short term should simply tolerate this rather than (trying to build political support for) increasing taxes or otherwise withdrawing purchasing power from the economy.

    Reply

    Tom Hickey Reply:

    The way Bill Mitchell puts it is that supply side inflation involves availability of real resources that cannot be addressed monetary or fiscally, especially in the near term. So it devolves to the political kerfuffle over who is to take the hit. Bill’s advice is recognize this situation and come up with a shared solution politically. e.g., through some kind of voluntary rationing instead of imposing austerity on one faction or another. For instance, if price is used to ration scarce resources, then the wealth is the determining factor. This can be a real problem in countries that commit significant per capita spending to vital resources like petro products and food.

    But scarcity need not be only over price. While prices for gasoline rose markedly in the US during the oil crisis, it wasn’t price but availability that was the problem. Things turned kind of ugly in some places in the US in the ’70′s over fuel scarcity, for instance, even before the petro price hikes spread through the economy. Supply constriction is a big problem when it arises in vital areas long before it becomes across the board inflation. Governments should have contingency plans in place.

    Reply

    Neil Wilson Reply:

    Very similar to the first world war in the UK. Because there was no rationing people ended up eating cats.

    That lesson was learned for the 2nd war and the rationing system ensured that everybody at least had enough to get by.

    In all of this I get the feeling that there is are two classes of supply: ‘needs’ and ‘wants’. ‘wants’ can be price rationed whereas ‘needs’ ideally ought to be rationed out on a different basis.

    Reply

    Tom Hickey Reply:

    In all of this I get the feeling that there is are two classes of supply: ‘needs’ and ‘wants’. ‘wants’ can be price rationed whereas ‘needs’ ideally ought to be rationed out on a different basis.

    Yes. Markets apply to purely discretionary items. Necessities are another matter. Markets may work in a fairly equal society, but they don’t work in unequal ones, since they lead to social unrest and political conflict, especially when market are “free” but not fair.

    beowulf Reply:

    “That lesson was learned for the 2nd war and the rationing system ensured that everybody at least had enough to get by.”

    A great-uncle was a young GI stationed in England prior to D-Day. He boarded with a local family in the village near his base. He told me that bringing home food he’d sneak out of the US Army mess hall every evening quickly made him a welcome addition in the household. :o)

    ESM Reply:

    I’m beginning to sound like a broken record, but I guess somebody has to defend the free market around here.

    If there is a problem that people are too poor to afford basic necessities, then the government should give them enough money to buy those necessities. It should not give them the necessities themselves.

    Different people not only have different “wants;” they also have different “needs.” By giving people the power (i.e. the money) to decide for themselves what goods to acquire, you maximize utility and send the right demand signals to the marketplace (which further optimizes production).

    Tom Hickey Reply:

    ESM, I don’t think that anyone here disagrees that generally speaking competitive markets are preferable. (“Free” market is an oxymoron; all markets are policed to some degree or cheaters dominate.)

    However, we are speaking of occasions when price is not the optimal way to ration. While this may not occur often in the US, although it did during WWII and Nixon felt compelled to adopt wage and price controls due to wartime conditions, it does happen frequently abroad.

    For example, what I am reading suggests that the proximate cause of the Tunisian and Egyptian revolutions was exorbitantly high food prices in countries where food takes a high percentage of income (Egypt 40%).

    If extraordinary measures are not adopted, then social discontent can turn into social unrest, and eventually social breakdown. The question then becomes what extraordinary measures should look like in different situations.

    One of these situations is supply shocks, and it looks like the world is facing more supply shocks in the future. So maybe it is wise to think about this?

    JCD Reply:

    Outside of war, when is price not the optimal way to ration?

    What metric should an enlightened policy maker use to decide this?

    By the way, not all markets are policed by government. And in many of them cheaters do not dominate. For instance the black market for drugs is not policed by the government, and while I have no doubt that cheating does occur there, most transactions seem to occur without a hitch — much to government’s disappointment. I do not think Free Market is an oxymoron.

    Tom Hickey Reply:

    “Outside of war, when is price not the optimal way to ration? What metric should an enlightened policy maker use to decide this?”

    Hosni Mubarak is asking himself that question right now.

    “for instance the black market for drugs is not policed by the government, and while I have no doubt that cheating does occur there, most transactions seem to occur without a hitch”

    I haven’t been involved in that market for a long time but …… I think you are dreaming.

    roger erickson Reply:

    > Very similar to the first world war in the UK. Because there was no rationing people
    > ended up eating cats.

    Long term, they might have been better off eating Lords & other forms of Peerage that weren’t “needed” – even if wanted by some. At least cats keep the mice down. :)

  7. Kim Yuu Says:

    “For instance the black market for drugs is not policed by the government, and while I have no doubt that cheating does occur there, most transactions seem to occur without a hitch — much to government’s disappointment.”

    How would YOU know????

    Reply

    JCD Reply:

    There’s been talk …

    Reply

    ESM Reply:

    Freakonomics and Superfreakonimics presents data from illicit markets (specifically, drugs and prostitution), and the markets seem to function well.

    Also, you can just use common sense to see that JCD is correct. When an illegal drug transaction goes bad, the probability of violence is high, and in those cases where violence is used, the incidents are logged by the police. The violent incidents appear to be fewer than 100K per year across the country. but there must be tens of millions or even hundreds of millions of illegal drug transactions per year. So the cheating rate doesn’t appear to be large. Evidently, it is at least acceptably low to millions of illegal drug users…

    Reply

  8. Tom Hickey Says:

    The reason that markets “function well” is that cartels carve out territory with threats of violence and violence to back it up.

    The violence is not logged by police for several reasons. First, the police are bought off. Secondly, no one in an illicit transaction wants to bring the police into it. Do your really think that someone that gets ripped off is going to report it to the police. Thirdly, the police would rather not involved themselves because of the treat of violence to them. The people involved in the war on drugs are the special forces in the police department that specialize in violence.

    ESM, it’s pretty obvious you never spent any time on the street. It’s sort of like reading about the recent financial crisis and being unaware of the fraud. I was on the ground in CA while the crisis was going on and was total aware of the obvious fraud because it could both see it in operation and do simple arithmetic. Similar with the drug scene.

    Reply

    Matt Franko Reply:

    Tom, It seems there are more transactions gone bad in northern Mexico spilling into So. Arizona right now. It is like a low intensity conflict (warfare) scenario down there these days. The bad guys could not get away with that result here in the US, the people wouldnt stand for it, so perhaps Mexico is a better example of a so-called “Free Market” in this regard. Resp,

    Reply

    Tom Hickey Reply:

    Matt, this goes on in the inner cities and other ghetto environoments as intensely as in Mexico, and it has for a long time. Most Americans ignore it because it does not affect them directly.

    Reply

    roger erickson Reply:

    Exactly. If you want to steal & harm on a large scale, most Americans say to move it into the banks, where it belongs.

    beowulf Reply:

    The Mexicans drug cartels aren’t stupid, they’re pretty careful to stay on their side of the border. Uncle Sam has a lot of firepower on our side, not least the 1st Armored Division, which recently relocated from Germany to El Paso (Ft. Bliss).

    El Paso is across the Rio Grande from the Mad Max municipality of Juarez, which has the highest murder rate in the world (229 per 100,000 inhabitants). El Paso’s murder rate? 2.12 per 100,000. Only Honolulu (and sometimes New York) is lower.

    Reply

    Matt Franko Reply:

    Beo,
    That’s good to know they moved the heavy stuff down there. If Mexico implodes a la Egypt, it could be chaos and millions heading north. There was some chatter a while back about SOUTHCOM contingency planning for that type of event. This is from their site wrt counter-narcotics.

    http://www.southcom.mil/AppsSC/pages/counterNarco.php

    WARREN MOSLER Reply:

    right, any idea what the risk adjusted rate for loan sharking is?

    Reply

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