Friday, June 10, 2011

Focus should be on income creation, as a consequence of creating jobs that produce sellable goods

Comments at Seeking Alpha are a veritable mine of new material. Some more comments and my answers over there:

Commenter: "money creation has never created wealth. heck, if it did, counterfeiting should be protected in the constitution.the author is entirely focused on growing the GDP number rather than meaningful production and real wealth. this is the very problem of GDP that econ 101 talks about."

You're right. Income creation, as a consequence of creating jobs that produce sellable goods does. Income creates the demand for the goods being produced by the jobs created. In contra to what commenters here claim, I'm not focused on GDP. In fact, everybody else in the comments are, focusing too much too much on output and production and plating crops to feed their family. The fact is, I'm focused on income creation, as a consequence of creating jobs that produce sellable goods. If you just print money ala QE2, well...see this next comment.

Commenter:"If this author's comments had even a shred of merit, Zimbabwe would have the most vibrant economy on Earth."

Zimbabwe did not spend to develop its citizen's capability to become self-sufficient. Zimbabwe printed money to give to everyone, even though there were no productive capacities to absorb the money. So the money just bid up the prices. What would have happened if Zimbabwe instead built cooperatives and supported grassroots businesses that would provide employment and income to the citizens. The income these citizens earn will give them the capability to buy the new goods they will be all creating. But if the government will just give money to the citizens all of who do not end up producing more, but will just all bid up the few remaining supplies in the economy... well, you get Zimbabwe.

"It is not a given that all of us need to save to pay down our debts. Some actually save to create wealth."

Who then funds the saving? All of us want to save in order to create wealth. That is why there should be a default spender otherwise, when we all do this simultaneously, we all stop earning income from one another

Commenter:"A growing GDP is supposedly a sign of growing societal wealth, do you agree? Wealth is created by human labor and innovation, not debt."

A growing GDP is just a sign of growing spending. To the extent that it leads to income for someone else in the economy, then yes, it's a sign of wealth for that person

"Let's say I start growing crops. I work my butt off for hours a day every day. After a few months, I have enough crops grown that I can feed my family. Who went into debt for that? Nobody. Was wealth created? Yes, I created enough wealth to feed a family for a year."

Let's say grew crops. You fed your family. Is that wealth for you? Yes. Did it grow the GDP? No, you did not sell it to anyone, so no one is counting that. If you sell that to someone in exchange for money, that person probably borrowed it. If he didn't, someone who paid his his income probably did. Or probably government originally spent that money into existence. Yet in your example, you planted and fed it to your family. If you didn't report a sale to the government, how can it be counted as GDP?(and why would you want to report it and be taxed for planting for your family?)

It's truly unfortunate the income tax was ever invented, since it continues to this day. It's a relic of the gold standard, a time when governments could only spend whatever money can be backed by their gold reserves. So when facing a a truly expensive undertaking, they need to confiscate from the people, and hence the income tax was born during a time of war.

Now that national governments are out of they gold standard, they can print money as necessary to spend. Nowadays, taxing people actually takes demand away from the private sector because when government takes money from the people, the people are out of money. Nowadays, only municipalities truly need to tax in order to raise funds.

Commenter:"This article is absurd and those who follow this line of thinking are not dealing with reality, rather they view reality through a socialist prism where government is all powerful and brings to the masses all that is good. A quick glance out the window would bring all the but the most delusional back to their senses."

I am not a socialist, just because I advocate that someone should step in when the private sector is not spending. In fact, I would much prefer a private sector solution, but what do you do when no one wants to step up. 2 and a half years, in the midst of the crisis, I wondered whether there could actually be a private sector solution. Can there be a private sector solution I concluded, yes there is. But it would entail massive bartering program on a global scale to take the place of the broken capitalist system. We can still have this, that is, if someone can operationalize it. Now if you still think this private sector alternative is absurd, I'd like to hear someone suggest options on how we can jumpstart this economy. Who buys the first million to start the recovery? You?

Commenter: "Some of us don't have any debt other than those incurred by the Gov't. So how did we get debt free? People sold us things because we had to buy things to continue our existence. We borrowed only for absolute necessities...We earn more than what we need by selling our skills and talents for a higher price than is required for a minimum existence."

Where did you get the money you used to buy your stuff. And where did the guy who gave you the money get his money? Who is creating this? A hundred years ago, there was just enough money going around as needed, give or take, a few million people going hungry. Now, we have billions of people, trillions of money circulating around the world economy. Where did all this money magically come from?

Commenter: "The growth comes from the growth of skills and talents anything beyond that is negation of the law of survival of the fittest"

But how does all this growing skills get paid if nobody has the money to buy them? Income creates the demand for the goods being produced by the jobs created. 3 questions to ask to check whether it is worth spending on:

1. Does this create productive jobs for those who would be otherwise unemployed?
2. Will the newly hired workers have meaningful income that they can spend back in the economy?
3. Is the output of the jobs adding to capacity of goods/services demanded?

If it generates income for the unemployed, aggregate demand will go up. If it adds to demanded capacity, there will be no inflation. If the output is demanded by people, there will be no wastage.
Commenter: "How do we know that government is printing just enough?"

Perhaps the best indication is that 100% of those looking for jobs found jobs- key word is LOOKING. And the jobs don't necessarily mean jobs that they have to like paying at exorbitant salaries, but jobs at the decent minimum wage at a close enough location doing community jobs. I think Billy blog has mentioned teaching, filling up service-intensive government agencies, cleaning parks, etc. Enough to keep them and their families fed without having to ask for handouts.

Commenter:"If you are so certain that we can't go broke then does it really matter what politicians spend the fiat money on?"

Yes, it matters because if politicians spend the money on useless things, we will have malinvestment, and we will end up with the bad driving out the good. While a government borrowing in its own currency cannot go broke, it is possible it prints too much to discourage people from holding it.

Commenter:"How did you decide that it wasn't enough? What would have been enough? If that had been squandered also (input was significant greater than the utility of the output), how much more should have been spent?"

Perhaps the best indication enough was spent is if 100% of those looking for jobs found jobs- key word is LOOKING. Enough to keep them and their families fed without having to ask for handouts. If previous spending been squandered, then we should vote the politicians who did so out of office. The recent bailouts are evidence of this. If some money had already been squandered, then that squandering should stop immediately, but it should not stop you from starting on the right path that leads to recovery- which is restoring aggregate demand via jobs, even if it would means more spending again. It is the recovery that will pay for both the right type of spending and the also for what has been squandered before.

Commenter: "How are you going to get all of the economists singing off of the same sheet of music so that the President's Council of Economic Advisers presents the same story of responsible spending (i.e. sound investment) as you and I agree on? "

I doubt you can ever be able to tell all economists singing the same sheet. Just look at all the comments on this thread so far, everyone has his own idea, and thinks it is what will solve the solution. All you can really do is make sure the most powerful elected politicians (the president, the heads of congress) understand and sing the same tune, and everybody else will have to follow. Right now, the politicians all have the idea that solving a demand deficiency is by pulling out government demand, hoping someone from the private sector will be brave enough to take its place.

Commenter: "Didn't a country called the USSR and its communist leaders try that?

Yes, but the USSR completely wiped out capitalism. What we are proposing is to augment capitalism, when it is being weak or not working.

Comment: " I still maintain Austerity in the long run is less painful than ruinous Squandering that leads to Zimbabwe"

Okay, this is the retired Mises talking. But a Mises who's only starting to get into industry, but has been unable to for the past 3 years, will feel otherwise. Let me give a simplified example. Rogue, Keynes, and Mises comprise an economy. Rogue wants to save more income today so he can spend more tomorrow. This leaves Keynes, who usually sells his service to Rogue, with no income to buy his meal from Mises. Therefore, both Keynes and Mises go incomeless today and all spending in the economy comes to a halt. It may not even come back tomorrow when Rogue plans to spend because he's now afraid to part with his money, now that he's seen the lack of spending by anyone else. It is now up to the government to buy Keynes' goods so he can buy from Mises, and he can buy from Rogue, and the cycle can go on.

In the real economy, the saving can go on because people are trying to pay down their debt. In which case, this is not new money that can be spent in the economy because it just extinguishes something that had already been previously spent. For example, Rogue is saving to pay down his debt to the bank because he previously speculated on gold. The bank doesn't earn new income here because essentially it's just getting its money back. Neither would it lend new money to Keynes and Mises to spend given that it now knows they are jobless bad credits with no way to pay back any new debt. Now: is government spending to take rogue's place still unnecessary?

Recession is a fall in production, because businesses overproduced in a previous cycle. A fall in demand is a fall in demand because people want to conserve their money. A recesion ends when the business' unsold inventory gets sold. A fall in demand doesn't end unless someone suddenly takes the place of the fallen demand.

Okay, 'complete stop of the economy' may be overstating it. But say the economy went to 10% unemployment because that is now the only sustainable employment for the new level of demand. The economy still goes on for the lucky 90%, but the 10% unemployed should abandon all hope. For them, the economy already went to a complete stop.

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