Would this solution work to control banks lending to people & corps and so creating *too much* cash? - Politics Forum.org | PoFo

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#14946834
As you-all should know I have been converted by the logic to become a MMTer.

This means I have read the MMT take on how the US banking system works.
This means I accept that banks create new dollars when they make loans.
Now, the Fed. Res. requires banks to keep on hand a certain amount of “reserves” so they can meet any reasonable one day's withdrawals.
Many people think this keeps banks from lending too much, but it doesn't. It doesn't because when the bank makes a new loan it deposits that amount into an account at that bank. It takes at least a day or the borrower to move the money to another bank. So, the deposit the bank made automatically covers the reserve requirement for at least one night. After that, the bank can always borrow at a very low rate in the inter-bank overnight system to get dollars to meet its reserve requirement on all future nights.

Thus the reserve requirement doesn't limit banks from making loans. As long as the borrower is creditworthy and the interest rate is high enough to make a profit over the cost of borrowing to meet the reserve requirement to loan will be good for the bank.

So, the US is awash in private debt. Prof. Steve Keen says that it was private debt that caused the GFC/2008. Not Gov. debt, it was private debt. Since 2008 the US has returned to its old ways and we have run up the private debt to very dangerous levels.

I'm asking you-all if this is a possible solution to slow this down?
Would it work to institute a new rule that all new loans are deducted from the cash on hand (which I think is the same as “reserves”) for some time [maybe 28 days]? So, bank A loans guy B $50,000 on Monday. That night the bank needs to have reserves to cover that amount. But, whatever amount of reserves it has at closing will be reduced by $50,000. so, that 1st night the bank has the $50,000 but it must deduct $50,000. This will continue for 4 weeks until a Monday 4 weeks later. So, when the borrower spends or moves the money, the bank will NOT have the $50,000 deposited and it will have to deduct $50,000 from its cash on hand. If this is not enough it will have to borrow reserves on the overnight market.
. . . Would this brake be effective in keeping banks from lending too much?

I know that some of you are worried about the ability of banks to create dollars like this. In practice, these new bank created dollars can not be distinguished from dollars created when the US Gov. deficit spends. This is why bank deposits are counted in the main M# that measures the US money supply. Dr. Keen agrees with the worriers that this can be a problem. So, would this be enough?

A second idea to solve an unrelated bank problem is ---
Would it be a good idea to institute a rule that the lending institution must split every loan in half and keep half on its books as an asset until it is paid off?
. . . This is intended to make the lenders care more about “how likely is it that the borrower can pay the loan back?” IIRC, one part of the problem in 2008 was that the lenders were selling the loans they make to suckers who didn't realize that it was a “liars loan”. They hid the truth by bundling the loans with other loans and selling small parts of them to many suckers. And then guaranteed them with “credit default slips” that were not fully funded insurance policies. When the shit hit the fan, the credit default slips became just more worthless pieces of paper.

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#14946927
I've said it before, but what you seem to regard as some revolutionary insight of MMT on the role of banks as money creators is nothing other than standard mainstream economic theory, known as the principles of fractional reserve banking. It's taught to anyone who takes a Principles of Microeconomics class (that is, 100 or 200 level in college). MMT seems to differ merely with respect to policy suggestions.
#14946938
Crantag wrote:I've said it before, but what you seem to regard as some revolutionary insight of MMT on the role of banks as money creators is nothing other than standard mainstream economic theory, known as the principles of fractional reserve banking. It's taught to anyone who takes a Principles of Microeconomics class (that is, 100 or 200 level in college). MMT seems to differ merely with respect to policy suggestions.

Two things ---
1] I am just repeating things that every professional Prof. of Economics MMTer says in their youtube videos. It is they who are making a big deal out of pointing out that those text books mostly leave out teaching the details of how the banking works because the Neo-liberal aka Mainstrean theory of economics says that it can leave banks and even money out of their theory and functionally assume that it is all a barder system because banks just introduce savers to borrowers, or maybe act as middlemen between savers and borrowers.

2] Some economists hold that Fractional Reserve Banking is a constraint on lending. MMTers say it isn't because the act of lending followed by depositing the dollars into the bank, creates additional deposits which create additional reserves. Again, this is not me, it is professional MMTers with tenure teaching economics who say this.

Do you need me to provide a link or 2? They are not hard to google. Some names are Randel Wray, Stephanie Kelton, Steve Keen, and Bill Mitchael. Plus MMT.

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#14946947
There was a referendum on full reserve banking back in June here in Switzerland. I was more or less indifferent about it, since I don't think it would have made much of a difference in a system where the central bank conducts monetary policy through interest rates (which I generally approve of and the initiative allowed for).

It was quite interesting to see however that pretty much the entire political establishment and non-establishment opposed it, not because of some conspiracy, but simply because they didn't understand it. Economists mostly said it's unnecessary and risky (I agree with the former), but since when do politicians listen to economists? :lol:

In any case, it was voted down 76% to 24%.
#14947355
Crantag wrote:I've said it before, but what you seem to regard as some revolutionary insight of MMT on the role of banks as money creators is nothing other than standard mainstream economic theory, known as the principles of fractional reserve banking. It's taught to anyone who takes a Principles of Microeconomics class (that is, 100 or 200 level in college). MMT seems to differ merely with respect to policy suggestions.

To this I replied that --- 1] This is not me it is professional MMTers.
And 2] Some economists hold that Fractional Reserve Banking is a constraint on lending. MMTers say it isn't because the act of lending followed by depositing the dollars into the bank, creates additional deposits which create additional reserves. Again, this is not me, it is professional MMTers with tenure teaching economics who say this.
To this you replied --- "If they say that [I assume that by "that" you mean what I said in #2 above] they are flat out wrong and that is all there is to it."

I think they are right. Here is my argument. First a link and a quote from it.
https://www.bostonfed.org/-/media/Docum ... conf1i.pdf
This is by Alan Holmes, a Senior Vice President, Federal Reserve Bank of New York, writing in 1969:
In it on page 73 he says ---
“... --- also suffers from a naive assumption that the banking system
only expands loans after the System (or market factors) have put
reserves in the banking system. In the real world, banks extend
credit, creating deposits in the process, and look for the reserves
later.”
And slightly later:
“In any given statement week, the reserves required to be main-
tained by the banking system are predetermined by the level of
deposits existing two weeks earlier.”

OK, this was way back in 1969, so the rules and process may have changed. If so, I'm sorry.
1] He says, the level of reserves was set 2 weeks before the loan was made. So, the bank has 2 weeks to gather the reserves to meet its requirement.
2] He says, the banks make loans and then find the reserves.
3] IIRC, the reserves required are calculated off the deposits in the bank. Since the loan was made with newly created dollars, the act of depositing the amount of the loan into the borrowers account at that bank; all by itself, will add deposits to the total banking system. These dollars can and will move from bank to bank, but 99% of the time do not leave the US banking system. So, these dollars will be in the US banking system and so will be available for the original bank to meet its reserve requirements by borrowing the in the "open market" system, aka the interbank overnight lending market.
4] IIRC, the reserve requirement is 10% that means that on a $1M loan to buy a house, for example, the bank now has $900K more lending ability and needs $100K more reserves. Or. it will need the $100K in 2 weeks when the loan effects its reserve requirement. But, by then all of the loan will likely have been spent to buy the house. So, if the dollars are not still in the bank how does the making of the loan effect the reserve requirements of that bank? It seems like those dollars don't.

Doesn't all this prove that the banks are only constrained by their willingness to lend. This willingness depends on --- a] can they find credit worthy borrowers, b] can they find suckers to buy all the stupid loans they make before it is clear they will be defaulted upon, and c] how does the bank feel about the future economic climate.
. . If not, where did I go wrong.
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#14947366
No. The 'multiplier effect' is implicit to the system of fractional reserve banking, which is the system based on reserve requirements. The 'multiplier effect' is the process whereby existing deposits become loan capital; and the loans are re-deposited and re-lent.

The constraint implied by reserve requirements amounts to the cost involved should banks fall below the required reserve and need to borrow money short-term from other banks or from the Fed (the 'lender of last resort'). The Fed sets the 'discount rate', which modifies the risk of this. This is what fractional reserve banking is about.

There is a certain hazard in academics (I'm talking about mainstream economics here, not MMT). The commentators and analysts sometimes don't genuinely understand the system they are analyzing. If some mainstream economists have overlooked the nature of fractional reserve banking, it is probably because of their own shortcomings, not a lack of information.

By the way, I made a mistake, these things are taught in principles of macroeconomics courses, not microeconomics.

To pick a source fairly at random:

According to traditional economics textbooks, the current monetary system amplifies initial monetary injections of money. The popular story goes as follows: if the central bank injects $1 billion into the economy, and banks have to hold 10% in reserve against their deposits, this will allow the first bank to lend 90% of this $1 billion. The $900 million in turn will end up with the second bank, which will lend 90% of the $900 million. The $810 million will end up with a third bank, which in turn will lend out 90% of $810 million, and so on.

Consequently the initial injection of $1 billion will become $10 billion, i.e., money supply will expand by a multiple of 10. Note that in this example the central bank has actively initiated monetary pumping of $1 billion, which in turn banks have expanded to $10 billion.

https://mises.org/wire/fractional-reser ... y-creation

The source goes on to present some alternative views and to analyze the situation in more depth. But relevant to my purpose, the above quote shows that this is indeed conventional theory.
#14947372
Crantag wrote:No. The 'multiplier effect' is implicit to the system of fractional reserve banking, which is the system based on reserve requirements. The 'multiplier effect' is the process whereby existing deposits become loan capital; and the loans are re-deposited and re-lent.

The constraint implied by reserve requirements amounts to the cost involved should banks fall below the required reserve and need to borrow money short-term from other banks or from the Fed (the 'lender of last resort'). The Fed sets the 'discount rate', which modifies the risk of this. This is what fractional reserve banking is about.

There is a certain hazard in academics (I'm talking about mainstream economics here, not MMT). The commentators and analysts sometimes don't genuinely understand the system they are analyzing. If some mainstream economists have overlooked the nature of fractional reserve banking, it is probably because of their own shortcomings, not a lack of information.

By the way, I made a mistake, these things are taught in principles of macroeconomics courses, not microeconomics.

To pick a source fairly at random:


https://mises.org/wire/fractional-reser ... y-creation

The source goes on to present some alternative views and to analyze the situation in more depth. But relevant to my purpose, the above quote shows that this is indeed conventional theory.

OK, that is what is taught.
The thing is, that is not unlimited more lending. It is 10 times more.
IIRC MMTers say that it is unlimited. because all those loans create more deposits. The dollars of those deposits are not marked as being bank made. All dollars are un-marked. The more deposits the bank system has the more it can loan.
Again, that [what you wrote] is what is taught. Consider that it could be wrong.
Like it also teaches that the Gov. needs tax dollars or borrowed dollars before it can spend. And that is flatly wrong.
It teaches that Gov. borrowing "crowds out" private borrowing. And that is flatly wrong.
It teaches that austerity is good for a nation. And, that is flatly wrong. It leads down, down into recession.
It teaches that the US Gov. running a surplus is like a family saving for a rainy day. And that is flatly wrong. It leads to a recession. Which is nothing like what happens when a family decreases spending to increase its saving, so it can spend those dollars later.

So, maybe the teaching that the multiplier effect is limited to 10 times more is just wrong.
#14947377
Steve_American wrote:OK, that is what is taught.
The thing is, that is not unlimited more lending. It is 10 times more.
IIRC MMTers say that it is unlimited. because all those loans create more deposits. The dollars of those deposits are not marked as being bank made. All dollars are un-marked. The more deposits the bank system has the more it can loan.
Again, that [what you wrote] is what is taught. Consider that it could be wrong.
Like it also teaches that the Gov. needs tax dollars or borrowed dollars before it can spend. And that is flatly wrong.
It teaches that Gov. borrowing "crowds out" private borrowing. And that is flatly wrong.
It teaches that austerity is good for a nation. And, that is flatly wrong. It leads down, down into recession.
It teaches that the US Gov. running a surplus is like a family saving for a rainy day. And that is flatly wrong. It leads to a recession. Which is nothing like what happens when a family decreases spending to increase its saving, so it can spend those dollars later.

So, maybe the teaching that the multiplier effect is limited to 10 times more is just wrong.

Most of these items are not consistent with conventional economic theory.

You are confusing mainstream economic theory with mainstream media punditry and political speak. The example of government running a surplus being like a family saving for a rainy day is a significant case in point. This isn't based on theory, this is based on political talking points.

On the particulars of fractional reserve banking: it is well acknowledged that this standard explanation is an oversimplification.

Additionally, economic theory never really purports to genuinely explain reality. It relies on abstract cases in which the conditions are set up for the purpose of the argument. This methodology is generally regarded as one of David Ricardo's key innovations, and it's been pretty much followed ever since. Marx used this methodology as well (Marx's economics was heavily influenced by Ricardo--as is contemporary mainstream economics). The method is known as freezing variables, so as to analyze a particular variable (or perhaps group of variables).

What this leads to is economics as an art, rather than a science. The abstract models or abstract study cases, based on frozen variables, serve as a reference point of sorts, and the analyst is left to figure out how to explain particular extant phenomena based in part on these reference points.

There's been a serious effort to convert economics into a science using mathematical techniques, and this has come into much prominence, but I don't think it is all it's cracked up to be, by a long shot. What happens is you get questionable data being used to contrive questionable conclusions.

That's not directly relevant to this particular topic, but is relevant to the overall picture.

I can accept the efforts of MMT adherents, and their ideas, in their application of the art of economics. The nature of the beast is nothing definitive comes from such analyses, and that is simply the way economics is. If I were King of America, I may consider their proscriptions, and weigh it against alternatives; and monitor the results of any policy direction which is opted for. The rub is that there is much in economics which is not under the control of policymakers, and this is because of the presence of autonomous actors in the economy.
#14947530
@Crantag, OK, you claim that economists *never* claim they are talking about reality.
That is hard to believe.
If this is so, then why the FUCK does anyone listen to them?

So then, when you talk to me, are you talking about reality or some fantasy? I Need to know this. BTW --- I think I am talking about reality.

You wrote, "Most of these items are not consistent with conventional economic theory." Here again, I'm just repeating what the prof. MMTers are saying in their videos and articles. If it is not what Mainstream economists really say then ... WTF.

Mr. Ricardo had the morals of a swindler, because he was also a swindler. I don't think anyone should rely on his opinions.
.
#14947549
Crantag wrote:If you don't stop with your appeals to authority I'm going to burn this place down. You also have the reading comprehension of a slug, it seems. I speak to you in good faith. It often seems like you just like to argue.

That is the 2nd time you said that you think that I "just" like to argue.
Be that as it may --- what did I say to make you say that?
What did I read and not understand?
.
#14960071
Steve_American wrote:
OK, that is what is taught.
The thing is, that is not unlimited more lending. It is 10 times more.
IIRC MMTers say that it is unlimited, because all those loans create more deposits. The dollars of those deposits are not marked as being bank made. All dollars are un-marked. The more deposits the bank system has the more it can loan.
Again, that [what you wrote] is what is taught. Consider that it could be wrong.
Like it also teaches that the Gov. needs tax dollars or borrowed dollars before it can spend. And that is flatly wrong.
It teaches that Gov. borrowing "crowds out" private borrowing. And that is flatly wrong.
It teaches that austerity is good for a nation. And, that is flatly wrong. It leads down, down into recession.
It teaches that the US Gov. running a surplus is like a family saving for a rainy day. And that is flatly wrong. It leads to a recession. Which is nothing like what happens when a family decreases spending to increase its saving, so it can spend those dollars later.

So, maybe the teaching that the multiplier effect is limited to 10 times more is just wrong.


Crantag wrote:
#1] Most of these items are not consistent with conventional economic theory.

#2] You are confusing mainstream economic theory with mainstream media punditry and political speak. The example of government running a surplus being like a family saving for a rainy day is a significant case in point. This isn't based on theory, this is based on political talking points.

#3] On the particulars of fractional reserve banking: it is well acknowledged that this standard explanation is an oversimplification.


Crantag, I would like to reopen our discussion. I numbered your points.
#1 Doesn't mainstream economics teach that Gov. borrowing "crowds out" private borrowing?
Doesn't mainstream economics teach that austerity is good for a nation?
Doesn't mainstream economics teach that the US Gov. running a surplus is desirable in part of every business cycle? Isn't the total size of the surplus supposed to equal the total size of the deficits during that business cycle?

#2 If my understanding is not what mainstream economics teaches about why a surplus is a good thing then what does it teach on this point?

#3 I would contend that making a theory that you know does not correspond with reality and then using that theory to make policy recommendations to the Gov. it quite dishonest. It is totally unscientific. Imagine if climate scientists tried to do that. I would expect the outraged shouting to be heard as far away as Mars.
. . It isn't like it is hard to correct the theory on this point. Either, all those bank loans do keep adding to the total bank deposits and so do create more than 10 times the lending or they don't.*

Seriously, I'm asking you?
.




.* . Maybe the MMTers are wrong. Maybe they misspeak or I misunderstand.
. . Maybe they mean that the Fed. Res. also lends reserve dollars at a very low rate to banks that need more reserves. Or maybe they mean that, "The world is awash with reserve dollars. There are about $20T reserve dollars in circulation in the form of US Bonds. Any bank can buy one and cash it in to get reserve dollars deposited in its reserve account to make more loans." Maybe.
#14960140
Steve_American wrote:Steve_American wrote:
OK, that is what is taught.
The thing is, that is not unlimited more lending. It is 10 times more.
IIRC MMTers say that it is unlimited, because all those loans create more deposits. The dollars of those deposits are not marked as being bank made. All dollars are un-marked. The more deposits the bank system has the more it can loan.
Again, that [what you wrote] is what is taught. Consider that it could be wrong.
Like it also teaches that the Gov. needs tax dollars or borrowed dollars before it can spend. And that is flatly wrong.
It teaches that Gov. borrowing "crowds out" private borrowing. And that is flatly wrong.
It teaches that austerity is good for a nation. And, that is flatly wrong. It leads down, down into recession.
It teaches that the US Gov. running a surplus is like a family saving for a rainy day. And that is flatly wrong. It leads to a recession. Which is nothing like what happens when a family decreases spending to increase its saving, so it can spend those dollars later.

So, maybe the teaching that the multiplier effect is limited to 10 times more is just wrong.


Crantag wrote:
#1] Most of these items are not consistent with conventional economic theory.

#2] You are confusing mainstream economic theory with mainstream media punditry and political speak. The example of government running a surplus being like a family saving for a rainy day is a significant case in point. This isn't based on theory, this is based on political talking points.

#3] On the particulars of fractional reserve banking: it is well acknowledged that this standard explanation is an oversimplification.


Crantag, I would like to reopen our discussion. I numbered your points.
#1 Doesn't mainstream economics teach that Gov. borrowing "crowds out" private borrowing?
Doesn't mainstream economics teach that austerity is good for a nation?
Doesn't mainstream economics teach that the US Gov. running a surplus is desirable in part of every business cycle? Isn't the total size of the surplus supposed to equal the total size of the deficits during that business cycle?

#2 If my understanding is not what mainstream economics teaches about why a surplus is a good thing then what does it teach on this point?

#3 I would contend that making a theory that you know does not correspond with reality and then using that theory to make policy recommendations to the Gov. it quite dishonest. It is totally unscientific. Imagine if climate scientists tried to do that. I would expect the outraged shouting to be heard as far away as Mars.
. . It isn't like it is hard to correct the theory on this point. Either, all those bank loans do keep adding to the total bank deposits and so do create more than 10 times the lending or they don't.*

Seriously, I'm asking you?
.




.* . Maybe the MMTers are wrong. Maybe they misspeak or I misunderstand.
. . Maybe they mean that the Fed. Res. also lends reserve dollars at a very low rate to banks that need more reserves. Or maybe they mean that, "The world is awash with reserve dollars. There are about $20T reserve dollars in circulation in the form of US Bonds. Any bank can buy one and cash it in to get reserve dollars deposited in its reserve account to make more loans." Maybe.


I'll try to answer this. First, I'll clarify the following, to which I wish I would have added additional details:

#2] You are confusing mainstream economic theory with mainstream media punditry and political speak. The example of government running a surplus being like a family saving for a rainy day is a significant case in point. This isn't based on theory, this is based on political talking points.


Based on my understanding of conventional economic theory:
I'll double down on the treating government like a household has nothing to do with conventional economic theory (and is from the realm of political punditry, specifically it's a meme crafted by rightwing so-called deficit hawks (the irony of which is self-apparent following Bush and Trump)).

I'll offer that a better analogy is a government as compared to a corporation, which issues bonds to pay for investment. Borrowing money can lead to an expansion of the economic base, and so productive borrowing is considered to be a virtue (and it applies to the level of a national economy, just as well).

Going back to the olden days, countries borrowed money to build railroads. Some people got rich off of lending the money, but in many cases the railroads also paid dividends to the countries involved.

That's just one example (about infrastructure), but the distinction is productive borrowing vs unproductive borrowing.

Even at the level of the household. If you accumulate credit card debt drinking at the bar, or buying things you don't really need, etc. etc. etc., it is unproductive. If you accumulate credit card debt in order to fund your day-to-day expenses for a month or two or so, while you move to a new city to take on a new job, it is likely to be productive (otherwise, why'd you even take the job?)

Anyway, without further ado. Although, I'll be upfront that I'm not entirely sure how well I'll be able to answer your questions (and I welcome input of others, as well, who may be so inclined).

#1 Doesn't mainstream economics teach that Gov. borrowing "crowds out" private borrowing?
(2) Doesn't mainstream economics teach that austerity is good for a nation?
(3) Doesn't mainstream economics teach that the US Gov. running a surplus is desirable in part of every business cycle?
(4) Isn't the total size of the surplus supposed to equal the total size of the deficits during that business cycle?


There were 4 questions, and I added some numerals. On 1, I'm not sure, but it sounds familiar. But, I'm honestly not sure if that is a tenet or not. If you've heard it is, it may well be, but I'm not sure of the mechanisms by which that is supposed to occur, and would be interested to know.

On 2. I don't think this is accurate. It is certainly not accurate of Keynsian economics, by a long shot. But mainstream economics has been corrupted by monetarism (Milton Friedman-ites). They may well think that austerity is good, and their argument for it may have to do with their ideas of the high virtues of small government. It sounds more like Grover Norquist than Friedman though, a little bit.

On 3. What is mainstream economics? This is a real question, because it was Keynsianism, before the neoliberal (counter-)revolution. Keynsianism definitely didn't teach that. I don't think neoliberalism really does either. I think this is more politics. I actually think neoliberalism really doesn't address this issue; whereas Keynsianism has, seemingly, been borrowed by MMT. The ideas on this topic you attribute to MMT (run a surplus in good times and a deficit in bad times) is really directly from Keynes (which is fine, theories build on other theories).

4. I don't really know, but that might be Keynes' ideal.

#2 If my understanding is not what mainstream economics teaches about why a surplus is a good thing then what does it teach on this point?


I honestly didn't hear much on this topic from contemporary mainstream economics (as I noted above). Maybe I simply wasn't exposed to it in my experience, but if that is the case, I simply don't know and am ignorant on the subject of what mainstream economics teaches on this. I don't recall it being a part of any of my undergraduate or graduate curriculum (and that's actually a little bit of a bad look for mainstream economics, but I guess maybe they ignore the inconvenient things to write about. Not that no 'mainstream economist' has written on it, but I don't recall it from any textbooks).

#3 I would contend that making a theory that you know does not correspond with reality and then using that theory to make policy recommendations to the Gov. it quite dishonest. It is totally unscientific. Imagine if climate scientists tried to do that. I would expect the outraged shouting to be heard as far away as Mars.
. . It isn't like it is hard to correct the theory on this point. Either, all those bank loans do keep adding to the total bank deposits and so do create more than 10 times the lending or they don't.


Economics deals with abstract models. I have said before, that economics is more art than science, in my view. The abstract models provide proxies, which can be applied to the artistic interpretation of extant phenomena.

Perhaps ironically, the most scientific economist, in my opinion, is Karl Marx.

He explicitly acknowledged the limitations of economics in terms of quantitative analysis, given the lack of precise data available. Economics is in the realm of metaphysics (the philosophy of which Marx mastered, long before he turned his energy to economic analysis). Physics is quantifiable in precise manner, but economics isn't. Scientific analysis of economics more belongs to philosophy than it does to mathematics (as Marx demonstrated). Logic vs math, essentially.

Marx evaluated at length the nature of value, of class relations, of production, of the working day, etc. But he sought to do so in a scientific manner; based on philosophy methodology.

In short, I don't disagree with your assessment. But I think that Marx (to a greater extent) and Marxist economics (to a somewhat lesser extent) do aim for scientific analysis, and that in doing so, they are exceptions.
#14960291
Crantag wrote:Based on my understanding of conventional economic theory:
I'll double down on the treating government like a household has nothing to do with conventional economic theory (and is from the realm of political punditry, specifically it's a meme crafted by rightwing so-called deficit hawks (the irony of which is self-apparent following Bush and Trump)).

I'll offer that a better analogy is a government as compared to a corporation, which issues bonds to pay for investment. Borrowing money can lead to an expansion of the economic base, and so productive borrowing is considered to be a virtue (and it applies to the level of a national economy, just as well).

Going back to the olden days, countries borrowed money to build railroads. Some people got rich off of lending the money, but in many cases the railroads also paid dividends to the countries involved.

That's just one example (about infrastructure), but the distinction is productive borrowing vs unproductive borrowing.

Even at the level of the household. If you accumulate credit card debt drinking at the bar, or buying things you don't really need, etc. etc. etc., it is unproductive. If you accumulate credit card debt in order to fund your day-to-day expenses for a month or two or so, while you move to a new city to take on a new job, it is likely to be productive (otherwise, why'd you even take the job?)

Anyway, without further ado. Although, I'll be upfront that I'm not entirely sure how well I'll be able to answer your questions (and I welcome input of others, as well, who may be so inclined).

Sorry to quote myself and essentially double-post, but the above is about the distinction of productive vs unproductive borrowing, essentially.

In the case of the government, it is indeed not quite so simple, as any spending will create demand in the economy.

The supply-siders don't believe in this, but they are simply shills, in my opinion.

I said before, you put 5 economists in a room, and you'll get at least 5 different opinions. I think that most economists believe that government spending is more than the sum of it's parts, and are more in line with your thinking on the topic (and I agree with your view on it), but there may be some who don't.

The thing is, some of the economists that get publicity are basically just prize fighters for corporate interests, and are not true to academics.
#14961977
Crantag wrote:Based on my understanding of conventional economic theory:
I'll double down on the treating government like a household has nothing to do with conventional economic theory (and is from the realm of political punditry, specifically it's a meme crafted by rightwing so-called deficit hawks (the irony of which is self-apparent following Bush and Trump)).

I'll offer that a better analogy is a government as compared to a corporation, which issues bonds to pay for investment. Borrowing money can lead to an expansion of the economic base, and so productive borrowing is considered to be a virtue (and it applies to the level of a national economy, just as well).

Going back to the olden days, countries borrowed money to build railroads. Some people got rich off of lending the money, but in many cases the railroads also paid dividends to the countries involved.

That's just one example (about infrastructure), but the distinction is productive borrowing vs unproductive borrowing.

Even at the level of the household. If you accumulate credit card debt drinking at the bar, or buying things you don't really need, etc. etc. etc., it is unproductive. If you accumulate credit card debt in order to fund your day-to-day expenses for a month or two or so, while you move to a new city to take on a new job, it is likely to be productive (otherwise, why'd you even take the job?)

Anyway, without further ado. Although, I'll be upfront that I'm not entirely sure how well I'll be able to answer your questions (and I welcome input of others, as well, who may be so inclined).

Steve wrote:
#1 Doesn't mainstream economics teach that Gov. borrowing "crowds out" private borrowing?
(2) Doesn't mainstream economics teach that austerity is good for a nation?
(3) Doesn't mainstream economics teach that the US Gov. running a surplus is desirable in part of every business cycle?
(4) Isn't the total size of the surplus supposed to equal the total size of the deficits during that business cycle?



There were 4 questions, and I added some numerals.
On 1, I'm not sure, but it sounds familiar. But, I'm honestly not sure if that is a tenet or not. If you've heard it is, it may well be, but I'm not sure of the mechanisms by which that is supposed to occur, and would be interested to know.

On 2. I don't think this is accurate. It is certainly not accurate of Keynsian economics, by a long shot. But mainstream economics has been corrupted by monetarism (Milton Friedman-ites). They may well think that austerity is good, and their argument for it may have to do with their ideas of the high virtues of small government. It sounds more like Grover Norquist than Friedman though, a little bit.

On 3. What is mainstream economics? This is a real question, because it was Keynsianism, before the neoliberal (counter-)revolution. Keynsianism definitely didn't teach that. I don't think neoliberalism really does either. I think this is more politics. I actually think neoliberalism really doesn't address this issue; whereas Keynsianism has, seemingly, been borrowed by MMT. The ideas on this topic you attribute to MMT (run a surplus in good times and a deficit in bad times) is really directly from Keynes (which is fine, theories build on other theories).

4. I don't really know, but that might be Keynes' ideal.

#2 If my understanding is not what mainstream economics teaches about why a surplus is a good thing then what does it teach on this point?


I honestly didn't hear much on this topic from contemporary mainstream economics (as I noted above). Maybe I simply wasn't exposed to it in my experience, but if that is the case, I simply don't know and am ignorant on the subject of what mainstream economics teaches on this. I don't recall it being a part of any of my undergraduate or graduate curriculum (and that's actually a little bit of a bad look for mainstream economics, but I guess maybe they ignore the inconvenient things to write about. Not that no 'mainstream economist' has written on it, but I don't recall it from any textbooks).

#3 I would contend that making a theory that you know does not correspond with reality and then using that theory to make policy recommendations to the Gov. it quite dishonest. It is totally unscientific. Imagine if climate scientists tried to do that. I would expect the outraged shouting to be heard as far away as Mars.
. . It isn't like it is hard to correct the theory on this point. Either, all those bank loans do keep adding to the total bank deposits and so do create more than 10 times the lending or they don't.


Economics deals with abstract models. I have said before, that economics is more art than science, in my view. The abstract models provide proxies, which can be applied to the artistic interpretation of extant phenomena.

Perhaps ironically, the most scientific economist, in my opinion, is Karl Marx.

He explicitly acknowledged the limitations of economics in terms of quantitative analysis, given the lack of precise data available. Economics is in the realm of metaphysics (the philosophy of which Marx mastered, long before he turned his energy to economic analysis). Physics is quantifiable in precise manner, but economics isn't. Scientific analysis of economics more belongs to philosophy than it does to mathematics (as Marx demonstrated). Logic vs math, essentially.

Marx evaluated at length the nature of value, of class relations, of production, of the working day, etc. But he sought to do so in a scientific manner; based on philosophy methodology.

In short, I don't disagree with your assessment. But I think that Marx (to a greater extent) and Marxist economics (to a somewhat lesser extent) do aim for scientific analysis, and that in doing so, they are exceptions.


Then Crantag wrote again:
Sorry to quote myself and essentially double-post, but the above is about the distinction of productive vs unproductive borrowing, essentially.

In the case of the government, it is indeed not quite so simple, as any spending will create demand in the economy.

The supply-siders don't believe in this, but they are simply shills, in my opinion.

I said before, you put 5 economists in a room, and you'll get at least 5 different opinions. I think that most economists believe that government spending is more than the sum of it's parts, and are more in line with your thinking on the topic (and I agree with your view on it), but there may be some who don't.

The thing is, some of the economists that get publicity are basically just prize fighters for corporate interests, and are not true to academics.

Sorry it took so long to reply. 1st the election. Then I had to think about a reply. Than I got distracted by trying to solve a puzzle that involves a game.
There is a lot to respond to and I have combined your 2 replies by adding your 2nd to the 1st one.

OK, I can accept your correction that comparing a nation to a company is a better analogy. I think it doesn't matter much.

OK, economists don't agree on anything. And yet we are told that economists agree that the Gov. must not deficit spend too much. In other words I'm going to continue to argue against what the media says is why the Repuds and Dems in Congress behave the way they do. I do this because [as you say] economists are a large mixed group so they have no 1 opinion to argue against, and because I want Congress to act a different way so it is their opinions that matter. Also, the public's opinions matter and they only hear what the media tells them is true about economics.

So, I assert that it doesn't matter what the professional economists publish if they let the media distort it. I am trying to change the perceptions of Congress and the public. What the media syas is what I'm taking as the other side of the argument. If you can't accept this then we will just have to agree to disagree.

On #1 you asked where I heard it and how it is supposed to work.
I heard it from the MMTer Stephanie Kelton. She explained that it begins with the idea that [just like back when we were on the gold standard] there is just so many dollars in the world. Imagine there is a big pile of them in the corner of the room. Now imagine every one of those dollars magically moves to millions of small piles
that belong to every person, comp., bank, nation, etc. in the world.
. . Now the Gov. wants to deficit spend, so it needs to sell a US Bond. To do that someone with a pile of dollars must exchange their dollars for the Bond. This means that he/she/it doesn't have the dollars any more to lend to a Corp. that wants to borrow dollars to [for example] build a new factory. Thus, Gov. borrowing does crowd out private borrowing and will therefore drive up interest rates.
. . Stephanie said that this is incorrect. She said that in fact when the Gov. deficit spends it 1st writes and sends out the checks or auto-deposits the dollars into someone's bank account. The Fed. Res. honors those checks even though they are kyted. Then the Treas./Fed. offers a US Bond for sale. Thus the dollars to buy the bond have already been added to the economy before the Bond is sold. The dollars are already added to the deposits of the banking system and so the banking system can lend 90% of the amount of the Bond right off, and 10 times the value of the Bond in total. Thus, even if we ignore the way that deposits create 10 times their value in "lending potential", the banking system can lend 90% of the amount of the Bond right off. AND, all this ignores the fact that you and I have alredy agreed to, that the banking system can pretty much lend all the dollars it wants to without ANY limit because the world is awash with 'reserve dollars' and banks can buy some, add them to its reserve account, and lend 9 times that amount.

On 2, [remember I'm talking about what the media says] when Clinton ran a surplus this was seen as a good thing. It is still hailed as one of his accomplishments. Keynes did say that the nation needs to run a surplus in the boom part of the business cycle, right? It follows logically that he thought a surplus was a good thing during booms. OTOH, Keynes changed his teaching later on, but this part of his teaching is what is fixed in the public's and the media's mind.

On 3, I addressed this first thing above. By mainstream economics I mean what you hear in the media when it explains economics.
. . However, I think you are confused about what I said or meant to say. MMT does not suggest the a surplus is called for during the boom pat of the business cycle. MMT says that a surplus in only called for if inflation is getting out of hand because of shortages in the real resources that can be bought. All the rest of the time [at least as long as there is a trade deficit] there needs to be a deficit. This deficit needs to be as large as the trade deficit plus the amount the public wants to save [and does]. If it isn't that large then year after year there will be less dollars in the economy and this will cause a recession eventually.
. . Notice that MMTis seems to be claiming that the business cycle is a product of the gold standard with its limit on the money supply or Neo-liberal economics with its self-imposed limit on the money supply. That without this limit, there will not be recessions. Well, if there is also a limit on private debt levels.
. . BTW --- the need for some limit on private debt is the reason I started this thread.

On 4, OK, I think it was Keynes idea. So, we seem to agree this might be so.

On #2, as I said, I'm reacting to what the media says the economists say rather than what they do in fact say. Again, I do this because it is what the public hears and thinks the economists are saying. If economists think the media has it wrong, then shouldn't they find a way to reach out to the public and tell them directly what they think? Maybe create some Youtube videos by the various economics depts. or schools of thought or something.

On #3, OK, economists mostly create models that they don't believe correspond to reality and then they make policy recommendations based on the results of those models. Is this what you are saying?
. . Again I ask, why do they get away with this? Why? Is it that the media is now owned by rich people and they want to deceive the public? If so, then the media is leading the world and all of humanity over a cliff.
. . You said there that you don't disagree with my assessment [was it that it is dishonest to base policy recommendation on models that you know have nothing to do with reality?]

Your 2nd reply --- mostly I have already responded to.
. . You did say the 'supply-siders' are just shrills. Meaning liars.
. . MMT makes a big, big deal out of explaining that in reality the economy is driven by sales [not by excess supply]. That comp. will hire people and add to their ability to deliver their product or service ONLY when they see more effective demand than they can supply with their current levels of staff and equipment.

Sorry about the wall of text.
#14962370
Crantag wrote:On 2. I don't think this is accurate. It is certainly not accurate of Keynsian economics, by a long shot. But mainstream economics has been corrupted by monetarism (Milton Friedman-ites). They may well think that austerity is good, and their argument for it may have to do with their ideas of the high virtues of small government. It sounds more like Grover Norquist than Friedman though, a little bit.


That is a curious thing to say. From what I read about Marxian theory it's very abstract/simplifying. It assumes an economic equilibrium given by an input-output model, equal wage and profit rates across industries and that profit equals surplus value (transformation problem). All of which might be approximately true, though you can say the same about neoclassical theory.
#14962371
Crantag wrote:On 2. I don't think this is accurate. It is certainly not accurate of Keynsian economics, by a long shot. But mainstream economics has been corrupted by monetarism (Milton Friedman-ites). They may well think that austerity is good, and their argument for it may have to do with their ideas of the high virtues of small government. It sounds more like Grover Norquist than Friedman though, a little bit.


In mainstream theory taxation is always distortionary (unless it corrects a market failure). So whether running a deficit/surplus is beneficial depends on whether it avoids distortionary taxation now or in the future. That depends largely on the effect deficit spending has on the tax base (~GDP). I'd say mainstream economics largely rejects long-term deficits because they usually fund consumption/redistribution and not investment, and least in developed countries. Developing countries have large infrastructure needs with arguably great effect on GDP.

Crantag wrote:Economics deals with abstract models. I have said before, that economics is more art than science, in my view. The abstract models provide proxies, which can be applied to the artistic interpretation of extant phenomena.

Perhaps ironically, the most scientific economist, in my opinion, is Karl Marx.

He explicitly acknowledged the limitations of economics in terms of quantitative analysis, given the lack of precise data available. Economics is in the realm of metaphysics (the philosophy of which Marx mastered, long before he turned his energy to economic analysis). Physics is quantifiable in precise manner, but economics isn't. Scientific analysis of economics more belongs to philosophy than it does to mathematics (as Marx demonstrated). Logic vs math, essentially.


That is a curious thing to say. From what I read about Marxian theory it's very abstract/simplifying. It assumes an economic equilibrium given by an input-output model, equal wage and profit rates across industries and that profit equals surplus value (transformation problem). All of which might be approximately true, though you can say the same about neoclassical theory.
#14963243
Rugoz wrote:That is a curious thing to say. From what I read about Marxian theory it's very abstract/simplifying. It assumes an economic equilibrium given by an input-output model, equal wage and profit rates across industries and that profit equals surplus value (transformation problem). All of which might be approximately true, though you can say the same about neoclassical theory.


There is some merit in this statement. Neoclassical economics and Marx have a common heritage: namely David Ricardo, who is thought to be basically the inventor of this approach of constructing models to analyze single variables.

As such, Marx did analyze based on abstract notions of perfect competition. This was done in the process of attempting to reach scientific conclusions, such as with respect to the genuine nature of value.

Also, Marx was working in London in the midst of the industrial revolution, so he was analyzing the factory system. As such, he assumed that the tendency toward perfect competition was essentially pertinent in the conditions which he knew, though he didn't assume it to have permanence.

I believe he saw a tendency toward concentration and monopolization. Further, my understanding is that his work on this subject was not mature, and the analysis of this was left to later scholars like V.I. Lenin, Rudolf Hilferding, and later Paul Sweezy, Paul Baran, and finally Paul Sweezy & Paul Baran in their co-authored work Monopoly Capital.

I don't disagree with your statement on some of Marx's methodology, which I believe was inherited from Ricardo. As such, some of Marx's analysis is more of a pathfinder than a genuine description of reality, in the same way I have characterized neoclassical economics. At the same time, Marx did aim for scientific conclusions, such as with respect to the nature of value. But the dynamic nature of economies does indeed involve constraints on the genuine proximate descriptive ability of any conclusions in economics.

Marx also didn't know about electricity and the petroleum economy. I think that modern energy technology probably must modify his analysis. He did know about coal of course, but I don't know that he treated this very much. This final paragraph is merely something I've thought about. Marx did analyze the nature of machines and technology, but these were specific to his era. He didn't know about the role that computers and artificial intelligence now play, and these things have all been game changing.

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