(This is Part II of III of the conclusion to a crazy debate on political philosophy. For the back-story to what follows, jump back to Factual Politics to start the whole thread. Or click here to read Part I)
3. The Need of Facts and Logic
Social Security
Benjamin said... See what I had to say about the inevitability of government debt and the driving force behind it. And [when it comes to Social Security] I'll ask you: by what right do other people have to take my property to pay for other peoples' living expenses?
Formally speaking, they don't. They take your money to buy insurance for you, not them. Social Security provides you with a safety net: an assurance you will not age in penury, when you are no longer able to work for a living or are weary of it from having persisted at it for half a century, plus an assurance that you will have income if you are too sick or injured to earn any, plus an assurance of the same for your spouse or children should you die unexpectedly, etc.
Social Security did not cause any public debt, by the way. It is so solvent, in fact, that the government borrows from social security, not the other way around (see my previous discussion of this fact in Part I). At any rate, it operates identically to any private insurance company. The difference is that human beings aren't rational, yet the security of insurance is only affordable when humans act rationally. The cost of insurance is divided by the number who pay in, thus the more who pay, the less everyone pays to get the same security. We had privatized social security for two hundred years. It didn't work. Few bought in, thus few had it, and they in turn had to pay a lot to get it, and even those who did buy in, could only buy into privatized funds that routinely vanished in economic crashes, frauds, and bank failures, and thus got nothing for their trouble.
This was such a tremendous and shocking social nightmare that our federal social security system was created specifically to end the public misery that the private system had caused. It costs vastly less, because it has everyone pay; it ensures everyone has it, so no one suffers the miseries of ill fortune; and it ensures it survives any economic crash or bank failure, hence it is vastly more reliable than private pensions.
Rational people would understand the economics of risk and insurance and thus voluntarily all pay into a reliable pension fund like this to insure themselves and their families against disaster and penury. Alas, people aren't rational. Compassion alone would call for a redress of the consequences of this irrationality, but simple self-interest intervenes anyway: a society subject to the insecurities of rising numbers of impoverished and homeless seniors and widows and orphans is a society subject to increasing crime and decreasing security for all, as well as decreasing financial security for ourselves (because a threat to our own life, property, and liberty is created when we ignore risks to ourselves and then when disaster strikes throw ourselves on the mercy of our fellow citizens--which we ought rather to have done by cooperative enterprise with them in the first place).
Thus Social Security protects our rights as individuals by ensuring we live in a safer, more secure, and more prosperous society, and by ensuring we are protected ourselves by financial guarantees against disaster and endless labor, all at relatively little cost. As long as we democratically decide to make paying for this universal security a part of our social contract, it makes moral sense as a public enterprise protecting human life and property. You are free to vote against it; but as long as you choose to remain a part of our community you cannot ignore this community's social contract.
So you must agree to pay for your insurance (Social Security) until you can convince a majority of the community to agree with you in respect to how we ought to pay for our shared public goods and needs. And then it would be right and proper to end (or alter) Social Security (since that would then become the new social contract). And you are at liberty to argue and persuade us to do this. But you are not at liberty to parasitically enjoy the fruits of the community's enterprise while not paying your share of their costs.
But in any case this debate has to begin with getting the facts straight: you are not being forced to pay for someone else's living, you are being forced to pay for your own insurance against penury and disaster.
And your reasoning from the correct facts has to be logical: you want something for free, yet you have no right to expect us to give it to you. The general well-being and security of the populace (compare those measures in 2010 with 1910 or even 1930) is a fact you reap tremendous material benefits from, thus you owe us for the cost of maintaining that stable and secure social environment for you to work and earn in. Otherwise you are just a thief, stealing goods we provided.
In effect, by paying a Social Security tax, you are paying a fee for having access to such a fertile and safe environment in which to work and live (as well as for having access to your own personal, highly reliable insurance against penury and disaster). If you don't want to pay that fee, you don't have to--all you need do is move to Somalia. But then you will see what a cost-free society looks like. You'll find yourself preferring to pay our fee. But if not, then that means you'll be happy in Somalia. So please go there. We'll be glad to be rid of you.
Health Care
Richard Carrier said... So far, [when it comes to health care] I see no public sector problem here, and if you are complaining about health care management and costs, those are private sector issues, so you can't blame government for them.
Benjamin said... Actually I can. All of the facts point to government as the lead cause of rising health care costs and decreased access.
That's fantasy, not fact. The vast majority of cost increases are the result of a free market dynamic between hospitals and insurance companies. You clearly haven't studied the issue.
Indeed, Obama Care actually instituted the very regulations you yourself ask for...
Benjamin said... The laws increase access to care without putting in place the kinds of policies that will reduce cost.
Which is exactly what Obama Care did: put in place the kinds of policies that will reduce cost. So why are you not counting this as an example of government working? You just said it should be done! But how can it be done without government? It can't.
As to "increasing access" you must mean either emergency care for the impoverished, or medicare. But medicare is just another insurance company (so it can't have made any difference not already made by every other insurance company), and emergency care for the impoverished is precisely why Obama Care is an improvement: it will greatly reduce the per-person cost by getting everyone to pay (the basic law of insurance I just discussed above). Moreover, this can't have been a major factor in the rise of health care costs, since cost increases (of hundreds of percent every few years) have occurred in non-emergency care centers equally. So requiring ER's to treat those in penury can't possibly explain it. Those pesky facts again. They really do hose you when you don't pay attention to them.
Here your facts are not only armchair fabrications rather than checked and confirmed truths, but you should have suspected they were false on mere logical analysis alone. When obvious logic casts strong doubt on what you are claiming, you are obligated to check the facts to make sure you are right. You never do that. Which makes discussing politics with you a complete waste of time.
Benjamin said... If you just increase access it becomes unsustainable and then the government will have to ration care.
Care is already rationed--by money. Those with enough, get treated. Those without enough, don't. The only difference that government requirements for treatment create is that those without enough get access to care they would not have had access to under privatization. Thus it's disingenuous to say that care for the poor is "rationed" when the alternative is zero care for the poor. Those are the two evils you have to choose from. It's obvious which is the lesser.
Thus "rationing" is a perfectly irrational grounds to object to government-subsidized medical care. That's like saying "If I can have rationed care or no care, I prefer no care." Only an idiot would say such a thing. Because that's exactly like saying "If I can have a thousand dollars or no dollars, I prefer no dollars." Are you a dufus?
Sound political debate must be not only factually correct but logically valid. Yet this exemplifies the kind of illogical reasoning you keep spilling out in comments. There's no use in arguing with such an irrational man.
Benjamin said... [When you said the Cato Institute report on the failings of the Health Care Act fails to cite a source,] you mean like the way they pretty much made it plain and clear on page 26? It came from the CBO.
Wrong. The claim I quoted is not made on page 26. It's made on page 34 (look at the actual white paper). There is no reference given. The claim made on page 26 actually contradicts the claim made on page 34 (different years are given, different numbers are given, and the claim made on page 26 avoids claiming they are counting "Americans," whereas on page 34 it's falsely said to be a count of "Americans," when even on page 26 they admit one third won't even be Americans). As for the source they cite on page 26, you can see it says just what I had said (CBO blog).
Which gets us back to my original point: the Cato Institute paper wants to dupe you into thinking this is a failing of the Health Care Act, and it does so by slyly avoiding telling you that their number of uninsured is irrelevant, and by not directing you to the information that would allow you to see it is irrelevant. That is how they are manipulating facts to control you. And it worked. You remain their puppet. Even after I told you how you were duped, you didn't even listen and fretted about typos and page numbers, forgetting that the issue is that the data itself is completely irrelevant to their argument.
Because the original CBO reports say what I said: that this was the tally who might (not will) be uninsured, that it was only an estimate, and that all of those were illegals, exempt Native Americans, and voluntary opt-outs. Which is why this number is completely irrelevant to the Cato Institute's claim. It would be absurd to expect a health care act insuring American citizens to also insure illegal immigrants. And it can't be a failing of any health care bill that it doesn't cover people who choose not to be covered. When you subtract those two irrelevant groups from the Cato Institute's reported number, the number of people left whom the health care act doesn't cover is exactly zero.
You have to be able to attend not only to the correct facts (which you didn't do), you also have to be able to see how they are being used in violation of all sound logic (which you didn't do). Since you repeatedly and persistently fail to do both, conversations with you are a waste of anyone's time.
Quantitative Easing
Benjamin said... The reason [the Federal Reserve is trying to increase inflation by quantitative easing] is to discourage people from saving money because they think that spending is what makes an economy run. But in fact, without people saving, banks have little investment capital for businesses to start and grow which makes the economy worse not better.
This shows you are both fact and logic challenged.
Logic: Businesses cannot start or grow if people don't increase spending on their stuff. You can't have one without the other. Thus expansion requires spending. Period. The economic thinking you are referring to is based on the belief that people have to be in the market waving dollars around before businesses will rise to meet them. Businesses are less likely to rise first to meet not-yet-observable customers in the mere hope that they will appear. You might not like it, but history proves this theory correct.
In fact, this very economic timidity of business is what necessitated TARP: though the rational thing to do was for private investors to lend money to banks to save the banks and themselves, everyone, out of irrationally-miscalculated self-interest, held onto their money fearing bank failure would result in the loss of their investment. And yet by not saving the banks they were guaranteeing their own bankruptcy, from the precipitous devaluing of their goods and collapse of all their business enterprises that would result. So the government borrowed the money from those same timid investors (since they have more confidence that the government would pay them back than that a failing bank would) and then loaned it to the banks (as those private investors should have done in the first place) thus preventing those banks from failing, thus rescuing all those timid investors from themselves.
Likewise in the economy generally, businesses have to be convinced there is money to be made (therefore, there has to be a pre-existing and observable demand, which they can be sure will realize profits), before they will invest in any effort to get that money (thus expanding their business). It's not entirely rational, but any sound economic theory must accept the findings of psychology and sociology now, that people aren't rational and don't operate in the market as rational agents. That's simply a fact.
Facts: The Federal Reserve is not seeking to increase inflation to increase consumer spending. I don't know where you heard that, or if you just got confused by what you did hear, but "quantitative easing" is a tactic that specifically aims not to increase inflation (in fact its objective is completely thwarted if it does, since inflation causes a decrease in consumer spending!). Quantitative easing is by definition the increase of the money supply in such a way that does not increase inflation (hence if it increases inflation, it's no longer called quantitative easing).
QE is mathematically and economically sound in principle, it's just dangerous, because you have to be very precise and finely tune your behavior to avoid causing inflation. Whether attempting it is wise is a practical question, not an ideological one. But before you can debate if it's wise, you first have to get straight what it even is. You failed at even that. It's impossible to converse with such a person.
4. Where Do Rights Come From?
In my book I discuss two kinds of rights (Sense and Goodness, pp. 389-390): inalienable rights (rights that are necessary for human happiness) and negotiable rights (rights created by law but only by mutual agreement of the corporate body of the people). Negotiable rights come into acceptable existence when the society as a whole enjoys a sufficient surplus to afford them, and agrees to enact them. They become the fee for enjoying that surplus, and for gaining the cooperation of your neighbors in the mutual defense of your inalienable rights that made the acquisition of that surplus possible. The distinction between these two kinds of rights is essential, even when they come with overlapping purposes.
Public Education
Benjamin said... By what right do you have to force other people to pay for education?
The right to protect our own lives, property, and liberty from the consequences of an uneducated populace. That's what right. Like a public road or sewer: we all need it, our lives and liberties depend upon it, so we therefore ought to all join in paying for it. It's a public necessity. Education is in fact an even more important public concern than maintaining an army. You are far more likely to be killed or robbed by an uneducated citizen than a foreign soldier. Even now. Imagine how much more so when half the public receives no significant education at all (do you really want to return to the 19th century?). Then add to that the consequences of uneducated voters deciding whether you should even get to have a right to life, liberty, and property in the first place, and public education becomes a no-brainer.
You keep complaining that the majority shouldn't have the power to take those rights away. I agree (that's what the Constitution is for), but who is going to take that power away from them? Only a state can protect your rights from millions who would take them away. The Constitution is meaningless if no one exists to enforce it. You can't protect your own rights from a million assailants. Only a state can mobilize the resources to do that. And that immediately creates the problem of who controls the state. And some form of democracy is the only fair system of control that is logically possible. There are better and worse forms of democracy as far as that goes (and our system is somewhere monotonously in the middle and perhaps sliding to the bottom), but there is nothing else to replace democracy with, which doesn't produce fundamental injustices that threaten all our rights in the long run.
Public Heath Insurance
Benjamin said... By what right do other people have to take my property to pay for other peoples' health care?
The same right that warrants all other public enterprises that we choose as a community to pursue. Your safety and security (and hence your liberty) require many public enterprises that ensure increased general prosperity and decreased crime and public cost and risk (armies, sewer systems and roads are obvious examples). Hence the same reasoning that warrants a social security tax that I discussed above warrants a health care tax, so long as it is more affordable to every citizen than the alternative (because if it were not, then the public good would indeed be better served by privatization, not government), and so long as it is agreed upon by democratic vote (because it is not an inalienable right, but the distribution of a surplus arrived at by mutual agreement).
The public good is your personal individual good. Increased crime and poverty threatens or harms your life, property, and liberty. Increased salaries, commercial spending, and availability of jobs reduces crime and poverty and increases your own access to goods. Reducing health care costs frees cash up to increase salaries, commercial spending, and jobs. Likewise assuming risks to your life, or welfare, or employment by having no means of affording medical care is a liability to you. Thus having affordable access to health care is a good you need. Thus having your own welfare insured not only protects your life, liberty, and property by reducing threats to them from the public and generating public goods that you reap a dividend from, it protects your life, liberty, and property directly. It's thus wise policy.
But this is still a matter of social contract: convince the majority to prefer privatization to socialization, and so it shall be. Democracy will always eventually prevail. The only alternatives are autocracy or anarchy. For examples of what those look like, there are plenty to choose from among the Third World. Once you realize there is no alternative to democracy, the question then becomes what contract to vote for. And deciding which social contract is mutually best for us all is a matter of outcome measures: whether public health care is more affordable than the system we have now. And that is a question of fact, not ideology.
5. Balancing Act
Pirates!
Benjamin said... I suppose it somehow makes more sense to protect peoples' right to property by violating their right to property.
Of course. I have to violate a murderer's right to life in defending my own right to life. I have to violate a burglar's right to liberty to defend my right to property. And so on. There is no right that, in being upheld, does not entail violating some other right. So the issue must be what balance of rights will procure the greatest overall allowance of rights to all, i.e. how much violation of rights is too little to protect the rights of others, and how much violation of rights is too much in protecting the rights of others. The ideal government is located in between those two answers. There is no other logically possible way to better govern ourselves than to collectively enact just such a government.
Benjamin said... Give me an example of a state solution to a "problem" that you think works and I'll debunk it.
Richard Carrier said... Piracy in the Aleutian Islands. Go.
Benjamin said... Initiation of force against foreigners throughout history. Done.
How would you stop "the initiation of force against foreigners" without ships at sea to do that? In other words, how would you prevent piracy in the Aleutian islands? Since you make no logical case for how abolishing anti-piracy patrols would end piracy, your political theory fails even the most basic test.
Benjamin said... I noticed that in the majority of these cases you attempted to provide a single instance of a good effect of a government cause.
Only to force you to address specific examples instead of vague abstractions divorced from reality. I could have given countless other examples. And even the ones I gave alone prove my point.
For example: piracy in the Aleutians. Only the continued operations there of the U.S. Coast Guard has prevented that (entirely--unlike the comparable environment of the islands south of the Philippines, for example). You can't have a U.S. Coast Guard patrolling the Aleutian islands (at all, much less with such decisive success) without a government. Period. And there is nothing you can say here. This example alone refutes your entire ideology. The dozen others I gave just make you look even more idiotic--so I needn't continue listing examples. You've done yourself in on these already.
As that same example likewise proves (as do all the others), government can be superlatively competent at many tasks. Coast Guard anti-piracy operations in the Aleutians are indeed superb, as with the many other law enforcement and search-and-rescue operations they perform there (which no one in that region could afford on their own, even by a fraction). Indeed I picked this example because I know it first-hand, inside-and-out, so I definitely know of what I speak: I served in the Aleutian island Coast Guard patrols.
Benjamin said... But it doesn't change the fact that fundamentally they're all immoral, and that they fail overall.
Whether they are immoral is not what you were being tested on. You said they were incompetently run. You have yet to prove this in even a single case. Thus you get a grade of F, top to bottom.
Whether they are "immoral" is another question, but one I've already adequately proved is lunatic nonsense. Coast Guard anti-piracy patrols, law enforcement, and search-and-rescue ops are all immoral? Need I any more proof of your insanity than such a claim as that?
Continue to Part III
13 comments:
Re: QE
The discussion on QE is pretty bad from both sides.
Inflation most certainly does not cause decreased consumer spending. Maybe I am not getting what you are trying to say. Inflation would decrease the quantity of goods purchased since each good costs more but the total amount spent doesn't go down. Especially in a situation like we have now it can even increase the total amount spent. Say I am socking away money because I am afraid of a rainy day on the horizon. But then inflation starts to rise. If my expectation is that it will continue to rise then I will move my spending from the future to the present. The reason is easy to see. If I just let my money sit in the bank it will purchase less in the future so I may as well get more bang for my buck now. So it seems you have this exactly backwards.
You are right that the main goal of quantitative easing isn't to create inflation... well , maybe. More accurate would be to say that it doesn't HAVE to create inflation. Typically it will be undertaken when , like now, the target interest rate the central bank wants to charge is actually negative! This gives the fed some room to move. Since the interest rate wants to be negative the Fed can print money and not worry about inflation until the desired interest rate gets back to zero or above.
So, why did I say maybe? Well during Japan's lost decade starting in the late 90's creating inflation expectations was one of the proposed remedies. Paul Krugman advocates this even now for the Fed. The idea is, unfortunately, what Benjamin said, to encourage people to spend now instead of hoarding for the future.
Now, Bernanke has said the Fed is "not in the business of creating inflation." But, people in positions like his don't always say what they mean. Bernanke is very familiar with the Japanese lost decade so he is well aware of the idea of creating inflations expectations as a way out of the slump. He also hired Paul Krugman to his current Princeton position before going to work at the Fed so he knows the arguments well.
I personally suspect he would like to create inflation expectations to get businesses to spend some of the record reserves they are sitting on. He could do this directly by promising not to withdraw the money created by QE until inflation had got to 3 or 3 1/2% ,but, that would be politically disastrous. So I think there is a good chance he and the Obama administration are using the right as useful fools, screaming about hyper-inflation just around the corner. I can't prove it but it is certainly within the realm of possibilities if you understand the arguments for increasing inflation expectations.
Take the example of a business selling their product in a 1 year contract at fixed price. If they think there will be inflation then they better include that expectation in the contract price. This is how the mere expectation of inflation can drive actual inflation. So, by creating this expectation they can get businesses to move their purchases and investments up instead of waiting until later.
To see more on this there is an absolute must read by Krugman from 1998. http://www.slate.com/id/1937/ It is a great story plus it covers much of what I was talking about. Be sure to follow the 2 links in the article text. They are to short footnotes/commentary on the main text. The bit about inflation expectations is in the final one (and near the end of the main article).
The rest of what Bejamin said is utter garbage. Banks have piles of reserves right now. They aren't lending it because they are being more cautious than in the past and because businesses just don't want to borrow. Businesses are also sitting on piles of cash and have less need top borrow and also have many resources sitting idle so why build new ones.
Also, it is undeniable that people saving more slows the economy if someone else doesn't come along and borrow that savings. Every dollar someone earns as income comes out of someone else's pocket as spending. If people are spending less then people are earning less income. This is basic accounting. In normal times when savings goes up the interest rate goes down. (i.e. the supply of borrowable money goes up so its cost goes down). But these aren't normal times. Even at a fed funds rate of basically zero businesses still don't want to borrow all the increased savings. So the economy contracts. Economists call this the fallacy of composition or the paradox of thrift. You can't have everyone save all at once. If someone is saving someone else needs to be spending more or the economy will contract.
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Are the insults necessary? it's childish.
This is kind of long and I couldn't finish it, but I think I get your overall point from reading the first 1/3 or so. I was a libertarian in college primarily because I had existential resentment about having so many obligations decided for me. Eventually I accepted that we're all slaves to the system if you want to look at it that way, and there is no absolute freedom in any society. Were all contingent and finite human beings and its no good complaining about it. I knew a lot of libertarians in college; none of them remained so long after. Mr Benjamin has a lot of growing up to do.
Mickey said... Are the insults necessary? It's childish.
They aren't childish when they are (a) correct and (b) of specific purpose. Both conditions must be met.
My choice of harsh language has been selective and deliberate, and I believe has had the actual intended effect. I believe Benjamin's arrogance and insular indifference to others was duly chastised by my choice of words, which was my exact intent in using the phrasing I did.
My wording was intended to have any of three outcomes: (1) to shock him out of his dangerously-smug self-centered perspective (certain persons I know are emotionally driven by such wording toward self-reflection when they know it might be correct or might genuinely seem to be), or failing that, (2) to enrage him to the point of showing his hand (certain persons I know start talking absolute crazy when they are accurately insulted, thus showing everyone they are indeed crazy, proving the very point I intended). Or (3) a third possibility would be that he would chastise me by actually proving me wrong (e.g. if he is a impoverished rape victim writing from an internet cafe in Bangladesh).
Any of those outcomes I would deem desirable and worth having produced. But only an extreme case would warrant the extreme measure I used, and I calculated this was one such case. Benjamin went Option 1 on me, which is very heartening.
Are We Sure What Inflation Does?
Vince said... Inflation most certainly does not cause decreased consumer spending.
All econ refs I have say it does. And for obvious reasons: things cost more, so people buy less. Of course other factors can overpower this effect, but we're talking all else being equal.
...[but] the total amount spent doesn't go down.
We must be talking to different economists. The way it has been explained to me is that inflation causes people to cut discretionary spending. They of course still maintain necessary expenditures, but otherwise save their money in anticipation of future rising prices (so they can be sure of meeting future necessary expenditures).
But then we may be quibbling over which dollars we're talking about (actual or inflated; see Consumer Spending Aalls in U.S. as Inflation Worsens and Consumer Spending Falls as Prices Soar).
If my expectation is that it will continue to rise then I will move my spending from the future to the present. The reason is easy to see. If I just let my money sit in the bank it will purchase less in the future so I may as well get more bang for my buck now.
Except that (though again, maybe I've been misinformed) no one actually reasons this way, and even if they did, the net effect is zero.
For example, you have to pay your heating bill, and you have to eat. You can't "spend all your money now" to pay either bill. You could perhaps stock up on food, but no one actually does that (ditto anything else; no one says "I had better go buy a car now, because next year it will cost more"; and insofar as anyone does think like that, they are a small minority among the total population and thus have no economic effect; to the contrary, what most people conclude is "I had better stick it out with the car I have now until cars cost less" and thus no car is bought; meanwhile they save their money to meet the rising prices of things they know in future they will need, unlike a new car).
And even insofar as people can buy "necessities" in advance (by stacking up jugs of gasoline in your backyard?), the total net expenditure remains the same: e.g. you still only use the same amount of gas--or in fact less, because it costs more: that issue again of real vs. inflated spending, i.e. I might spend the same amount in inflated dollars on gas, but I'm actually spending less in real dollars; and because I'm buying less gas, I'm killing jobs in the fuel industry, because there is less gas that needs to be extracted, processed, and moved around; ditto every other industry. Businesses thus might be spurred to "move up" an expense, but they would have met that expense anyway. So there is no net gain in spending--unless you only care about sudden spending, at the expense of less future spending, but as I understand it that wasn't the theory at issue here.
Thus, for example, historical trends show consumer spending trending down when inflation is trending up, and vice versa (compare the general direction of the graphs between years 1990 and 2000 and 2000 and 2011 for inflation and consumer spending: the one is a V and the other an upside-down V, in other words exactly the opposite, as I've been told is typical).
However, I recognize I am not an expert in economics, so if there are studies or sources that legibly disconfirm what I've been told, I would be delighted to be directed to them.
Are We Sure What Quantitative Easing Is?
More accurate would be to say that it doesn't have to create inflation.
As it has been explained to me, it's no longer QE if it does, i.e. it is no longer "easing" but just plain monetary expansion, and that QE can have the accidental consequence of increasing inflation, but then it is said to have failed (or to have been less successful than intended, if the inflation caused is deemed to have been less than expected).
Typically it will be undertaken when, like now, the target interest rate the central bank wants to charge is actually negative! This gives the fed some room to move. Since the interest rate wants to be negative the Fed can print money and not worry about inflation until the desired interest rate gets back to zero or above.
But as I understand it, that would then be an example of "less successful" QE, i.e. using QE to adjust that rate without raising inflation, but in consequence raising inflation a little anyway. See, for example, Krugman on The Big Inflation Scare.
Among the reasons I thought this are the following...
Does Krugman Mean QE?
During Japan's lost decade starting in the late 90's creating inflation expectations was one of the proposed remedies. Paul Krugman advocates this even now for the Fed. The idea is, unfortunately, what Benjamin said, to encourage people to spend now instead of hoarding for the future.
But that's not QE, is it? It's just inflation targeting.
Krugman 's 1998 paper does not say "creating inflation expectations [will] get businesses to spend some of the record reserves they are sitting on" but that "if people have low expectations about their future incomes [emphasis added], then even with a zero interest rate [much less a negative one] they may want to save more than the economy can absorb." He does reference a strategy of creating inflation expectation, but does not call it quantitative easing. To the contrary, he regards that strategy as very different from Japan's use of QE: "The way to make monetary policy [i.e. monetary expansion, which Japan was attempting via QE] effective, then, is for the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs. This sounds funny as well as perverse." In other words, it sounds funny and perverse because it's exactly what QE isn't supposed to do. His argument is that to increase spending requires "reduc[ing] the real interest rate; and the only way to do that is to create expectations of inflation," i.e. he doesn't say increasing inflation is what causes spending, but reduced interest rates that does (by causing people to borrow, not by causing people to empty their bank accounts), and he is arguing that increasing inflation will reduce real interest rates (because the real interest rate equals the nominal rate minus expected inflation), and therefore causing inflation can actually increase spending by increasing borrowing--which he says is counterintuitive (although I can see his reasoning).
As it is explained by the FRBSF: "demand for goods and services is not related to the market interest rates...[but] real interest rates--that is, nominal interest rates minus the expected rate of inflation. For example, a borrower is likely to feel a lot happier about a car loan at 8% when the inflation rate is close to 10% (as it was in the late 1970s) than when the inflation rate is close to 2% (as it was in the late 1990s). In the first case, the real (or inflation-adjusted) value of the money that the borrower would pay back would actually be lower than the real value of the money when it was borrowed." In other words, creating an expectation of higher inflation increases the attractiveness of loans, not direct consumer spending (except in the sense that that spending is done with loans).
Likewise, economist Hiro Ito summarizes Krugman's papers on this as so: "[Krugman] emphasizes the importance of creating expected inflation to get the economy out of the liquidity trap situation and doubts the effectiveness of any monetarist policies such as quantitative easing." Thus QE is not the interest rate targeting Krugman is talking about, but the absence of it.
Where have I gone wrong here?
All the Rest
Vince said... The rest of what Bejamin said is utter garbage. Banks have piles of reserves right now....Businesses are also sitting on piles of cash...Also, it is undeniable that people saving more slows the economy if someone else doesn't come along and borrow that savings. Every dollar someone earns as income comes out of someone else's pocket as spending. If people are spending less then people are earning less income. This is basic accounting.
All well explained. Thanks!
I'll shamelessly promote my own blog posts on this subject.
Since it's entirely apropos, useful, and well done, I fully support your shameless promotion here. In fact, I'll make it easier for everyone by hyperlinking the three you have so far: You Can't Cut Your Way to Growth: Part 1, You Can't Cut Your Way to Growth: Part 1B, You Can't Cut Your Way to Growth: Part 2.
The term QE hasn't been around very long so it has been used in various ways. I've never actually heard anyone say that if it fails then it is just monetary expansion (i.e. printing money) and not QE. However, there is nothing fundamentally wrong with putting it that way I guess.
The definition I'm familiar with doesn't say anything about inflation either way. It is just unconventional asset purchases to simulate lower interest rates. That's why Krugman and Koo can talk about inflation targeting in tandem with QE.
My point should be: QE does not exclude the possibility of inflation. The Fed expands its balance sheet (called by some printing money or increasing M0 aka base money) buys treasuries and unconventional securities. This is swapping money from the Fed's balance sheet for those securities. This increases the liquid reserves a bank has at the Fed. The banks can't loan the securities they once held but they can loan the new reserve money. If conditions were such that the banks started lending the new reserves then there could be inflation.
QE vs Inflation Targeting
Without going back and rereading everything I think you've got it right and I probably overstated or misstated. It is inflation targeting not QE itself.
What I was doing was speculating that the Fed may have a hidden motive. That they may be thinking that QE could generate inflation expectations to help with inflation targeting. Something they cannot do overtly for political reasons. Again, this is speculation on my part. Whether I am correct or not, the primary goal of QE is not to generate inflation. Maybe I just like this because there is a certain devious brilliance to it. Using people's ignorance (especially the loud conservative commentators) for the good of the economy.
With respect to inflation I was talking about sudden, short term moves, mostly by businesses and I now think I misunderstood you.
Vince said... The term QE hasn't been around very long so it has been used in various ways.
Yes, a quick survey of Google hits does indeed indicate inconsistency and confusion over the term.
The definition I'm familiar with doesn't say anything about inflation either way. It is just unconventional asset purchases to simulate lower interest rates. That's why Krugman and Koo can talk about inflation targeting in tandem with QE.
That's well put.
What I was doing was speculating that the Fed may have a hidden motive.
Always possible.
That they may be thinking that QE could generate inflation expectations to help with inflation targeting.
But according to Krugman, such a plan would only work if they credibly told everyone that's what they were doing and that they would reliably stick to it. The plan conspicuously can't work if no one is sure the Fed intends to increase inflation. For then there is no inflation expectation, only the same uncertainty that would obtain if they had no plan at all. Right?
Using people's ignorance (especially the loud conservative commentators) for the good of the economy.
That would indeed be brilliant. But I'm skeptical such genius exists in government. Not that I rule it out. I just assign it a low prior probability (the spectacular failure of Greenspan to foresee the risks in the global derivatives market ought to be cautionary tale enough).
But it would be interesting in five years to do a retroactive study of what actually happened and whether it conforms to your hypothesized plan (e.g. whether business and consumer debt-financed spending rose after this kerfuffle began, and whether it rose particularly among people who report trusting conservative news shows for financial decisions; notably one would not have to see inflation rise, since it would only have been the expectation that it would that would have had the desired effect--which would make the Fed even more brilliant still, if it could exploit the expectation without even producing a rise in inflation).
Carrier: "They aren't childish when they are (a) correct and (b) of specific purpose. Both conditions must be met."
I find it hard to agree with this. You should qualify (b) to something like (b’): of specific, morally sound and worthwhile purpose. For, any specific purpose will not do for reasons which I think are quite obvious. Granted, you did speak of your “purposes” as being “desirable” and “worth having produced”, but this need not be taken as the vocabulary of a moral language, nor would it save (b) from being too sweeping.
I don’t think this revision of (b) is present within this case, nor do I think it is present in any real case I have encountered. But, then again, I am probably speaking from the background of different moral convictions. In particular, these are some of the things that I, categorically, will not do because they sacrifice my own moral standing or civility. Indeed, as far as I am concerned, your response to him brought nothing but disappointment and distraction. In fact, I actually felt myself become less engaged with your writings upon reading your insults to him.
And again, speaking from my own background, whether (a) is met or not, I couldn’t care less. Now of course, I don’t mean to imply that your insults have been justified as meeting condition (a). You haven’t even tried to defend that, nor does it seem important to you. It was (b) which was the focus of your response. Just saying.
Mickey said... ...of specific, morally sound and worthwhile purpose.
The latter is a purely subjective measure. If all you are saying is that you think my stated purposes are not worthwhile, then you are just stating your opinion, which you are entitled to. That has no bearing on the facts of the matter. As to whether my aims are moral, you have not even addressed that question (my aims are stated in my original post and look sufficiently moral to me).
In fact, I actually felt myself become less engaged with your writings upon reading your insults to him.
Then you are an irrational person who allows emotion to cloud your judgment and interfere with your reason. I see nothing to commend in that.
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