Keynesian: Doing the math: what the FEDs 2% inflation goal and CPI fudging means for purchasing power

[ababba]

It's not sustainable to increase consumption and investment at the same time.

Why not with higher labor supply?

The higher Y=C+I comes from higher labor supply, not from a decrease in some other type of investment. As you said, long term project investment will increase more, but both will increase.

I think we might be here all day if we keep discussing the rest of the thread so I'd rather discuss this material if you don't mind. I don't think you need comparisons of utility to know that poor people have higher marginal utility. That's an assumption that will get us closer to the right answer than ignoring the distribution. I agree with you about GDP, but consumption is the ultimate goal of production and it moves very closely with GDP. In other words, all the empirical work could be done for consumption instead of just GDP and it would work just as well.

The point about the liquidity trap is subtle. I think the Fed thinks that monetary policy is less effective at the zero lower bound. I disagree, I think printing money would still be effective. But in a world where the Fed believes in liquidity traps, the higher inflation target is a second best alternative.

 

[Steven Douglas]

If increases in government spending are crowded out by decreases in private spending, then increases in government spending don't raise GDP.

No, it's a shift in GDP in many cases, one that is not even accounted for, and you failed to acknowledge the point that I made--that there are massive portions of the so-called "private" sector that are nothing more than recipients of public sector funds, and yet are counted as GDP. And that gets to the heart of the mind-bogglingly ludicrous assumption that high GDP is even necessarily a good thing.

While GDP doesn't account for government debt, all of the expenditures that created that debt are very much counted. More importantly, the GDP does not account for private SAVINGS. Debt money redistribution by a deficit spending of government is INFLATIONARY. That means it taxes savings. If that money wasn't redistributed and spent by government, some of that could have ended up as overall private savings in America, not spending, not GDP. Not only would I call that A Very Good Thing, despite the fact that it would show up as a sharp DECLINE IN GDP (oooh, bad thing, right?), but I would also call that DECLINE IN GDP pretty solid evidence that government spending DID, in fact, raise GDP--and in what could be considered A Very Harmful Way.

All I'm saying is that making not paying better makes more people not pay. How dense are you to just not acknowledge that and move on?

LOL! Let's look at that final distillation of an axiomatic summation of yours once again:

"...making not paying better makes more people not pay."

Final answer? Do you see how nebulous, overly-generalized and non-specific to the argument at hand you had to get to even be able to make that fuzzy non-point? That's not logic. It's not even fuzzy logic. It's logic-evasive gibberish.

 

[ababba]

No, it's a shift in GDP in many cases, one that is not even accounted for, and you failed to acknowledge the point that I made--that there are massive portions of the so-called "private" sector that are nothing more than recipients of public sector funds, and yet are counted as GDP. And that gets to the heart of the mind-bogglingly ludicrous assumption that high GDP is even necessarily a good thing.

While GDP doesn't account for government debt, all of the expenditures that created that debt are very much counted. More importantly, the GDP does not account for private SAVINGS. Debt money redistribution by a deficit spending of government is INFLATIONARY. That means it taxes savings. If that money wasn't redistributed and spent by government, some of that could have ended up as overall private savings in America, not spending, not GDP. Not only would I call that A Very Good Thing, despite the fact that it would show up as a sharp DECLINE IN GDP (oooh, bad thing, right?), but I would also call that DECLINE IN GDP pretty solid evidence that government spending DID, in fact, raise GDP--and in what could be considered A Very Harmful Way.



LOL! Let's look at that final distillation of an axiomatic summation of yours once again:

"...making not paying better makes more people not pay."

Final answer? Do you see how nebulous, overly-generalized and non-specific to the argument at hand you had to get to even be able to make that fuzzy non-point? That's not logic. It's not even fuzzy logic. It's logic-evasive gibberish.

All you have left with is to disagree with tautology, which is what I've descended to with you after you fail to see even the most basic logic. Disagreeing with the dictionary seems to be your new past time. Its one that I don't want to really participate in anymore. Take a lesson from Danan, and try a different approach where both sides learn something from a discussion.

Anyway, GDP accounts identity

Y=C+I+G+NX

If every increase in G is crowded out by a decrease in C, then Y doesn't change. How stupid can you possibly be to disagree with me about this over multiple posts?

The last thing is just basic incentives. If you encourage something by making it more beneficial, more people will do it. Our argument about banks got to the point where I had to sink that low, to put a synonym in for "people respond to incentives". Why? because you either fail to acknowledge stuff like this or just never get it.

 

[Steven Douglas]

Anyway, GDP accounts identity

Y=C+I+G+NX

If every increase in G is crowded out by a decrease in C, then Y doesn't change. How stupid can you possibly be to disagree with me about this over multiple posts?

I don't know if you're being deliberately obtuse, or if only the points you're wanting to make are the only ones actually visible to your brain. Whatever the case, we didn't disagree on that point. Go back, read (no, really, actually read what I wrote), and you'll see that clearly. I referred to such a thing as a "shift". Meanwhile, other points were made, which you didn't acknowledge or respond to at all, showing that the absence of government spending would not necessarily result in a zero sum shift, which, if true, would mean that government spending DID, in fact, increase GDP. Go back and read, and you will see that just as clearly as well.

 

[ababba]

Since that moronic collectivist abstraction called GDP INCLUDES GOVERNMENT redistribution of wealth in the private sector, making those that are solely dependent on government spending an extension of that government, it would be kind of absurd to say that government spending doesn't increase government, wouldn't it?

LOL, explain this then. I've read everything.

 

[Danan]

Why not with higher labor supply?

The higher Y=C+I comes from higher labor supply, not from a decrease in some other type of investment. As you said, long term project investment will increase more, but both will increase.

The artificial interest rate distorts the market. Capital goods are not all the same. It makes a huge difference in what you invest. Every change in interest rates changes the composition of investment. It's not sustainable in the long run, because the wrong goods are being produced.

I think we might be here all day if we keep discussing the rest of the thread so I'd rather discuss this material if you don't mind. I don't think you need comparisons of utility to know that poor people have higher marginal utility. That's an assumption that will get us closer to the right answer than ignoring the distribution. I agree with you about GDP, but consumption is the ultimate goal of production and it moves very closely with GDP. In other words, all the empirical work could be done for consumption instead of just GDP and it would work just as well.

No, we don't know if poor people have a higher marginal utility for money than rich people. That's an entirely unscientific statement, unless you can back it up with evidence. As long as we don't have a measurement device for "utils" we can't say something like that. The opposite statement, that rich people have higher MU, is just as true. If you really care so much about positive economics, you better keep redistribution out of the discussion, because that's an entirely normative matter, which you said you won't talk about.

The point about the liquidity trap is subtle. I think the Fed thinks that monetary policy is less effective at the zero lower bound. I disagree, I think printing money would still be effective. But in a world where the Fed believes in liquidity traps, the higher inflation target is a second best alternative.

You don't seem to get the point of the liquidity trap. If the Fed has an inflation target of 2% and the nominal interest rate is at almost 0%, they can't do anything to decrease real interest rates further. If they print more money they increase inflation over their target, which they are theoretically not allowed to. So they could bring real interest rates down even lower, but are not allowed to because of the target (thank god). I don't see any way around this argument.

Or to put it differently, the Fed already increases the money supply enough to reach a 2% inflation target. If they want to get real interest rates lower, they have to print money. If they print money, it's value goes down. If it's value goes down, inflation gets higher.

 

[Danan]

Y=C+I+G+NX

If every increase in G is crowded out by a decrease in C, then Y doesn't change. How stupid can you possibly be to disagree with me about this over multiple posts?

Let's say NX = 0.

Y=C+I+G

Let's also assume the government doesn't borrow: G = T

Obviously I+C=Y-T => I+C=Y-G

In this case, every increase in G does crowd out C+I, because if the government's only source of funding is taxation, every increase in G has to come from an increase in T, which lower C+I.

If the government can borrow money, however, it depends from whom it borrows. If it borrows only from people within the country, the demand for money goes up (a shift to the right) interest rates go up and overall funds loaned out increase, while private investment decreases (the private demand for money didn't change but the additional governmental demand created higher equilibrium interest rate, at which private businesses want to invest less). Also, since it's only borrowing from within the country, every Dollar loaned to the government has to be forgone consumption today (or a loan a private business didn't get, as explained earlier).

So as long as the Y=C+I+G identiy exists, every Dollar the government spends, is indeed a Dollar not spent by private individuals.

Only if we look at foreign debt, the picture changes a little bit. Norway for example exploited huge oil reserves and thus was attractive for investors all over the world. However, once the loans are repaid, the investors want to consume eventually. If there are many currency holders from outside the country wanting to consume goods, this obviously decreases domestic consumption (higher prices, etc.). That's not problematic in Norway's case, since they actually invested in something of real value to consumers, so they are still better off than without the loans.

The US is a little different because the Dollar is a reserve currency. Many foreign lenders hold Dollar-denominated debt just for the sake of holding it and keep renewing it, without any imidiate interest in consuming products made in the US. This is btw one the major reasons consumer prices in the US rise slower than asset prices. The US was not an attractive investment destination because of it's promising capital accumulating projects. In fact, the US blew all that additional money on consumption, either by the government or private consumption (just look at the enormous trade defict). And the investment projects they did engage in are not needed and have never been sustainable, for reasons already explained. At some point foreign investors are not going to invest into US bonds any longer. Not only is this going to be abysmal for the US treasury, causing the Fed most likely to expand the money supply even further, but that's going to mean a forced shift in the trade balance.

 

[ababba]

Interesting posts worthy of response. I'm on my iPhone now so I can't write out the details. Ill do it by tomorrow.

 

[ababba]

The artificial interest rate distorts the market. Capital goods are not all the same. It makes a huge difference in what you invest. Every change in interest rates changes the composition of investment. It's not sustainable in the long run, because the wrong goods are being produced.



No, we don't know if poor people have a higher marginal utility for money than rich people. That's an entirely unscientific statement, unless you can back it up with evidence. As long as we don't have a measurement device for "utils" we can't say something like that. The opposite statement, that rich people have higher MU, is just as true. If you really care so much about positive economics, you better keep redistribution out of the discussion, because that's an entirely normative matter, which you said you won't talk about.



You don't seem to get the point of the liquidity trap. If the Fed has an inflation target of 2% and the nominal interest rate is at almost 0%, they can't do anything to decrease real interest rates further. If they print more money they increase inflation over their target, which they are theoretically not allowed to. So they could bring real interest rates down even lower, but are not allowed to because of the target (thank god). I don't see any way around this argument.

Or to put it differently, the Fed already increases the money supply enough to reach a 2% inflation target. If they want to get real interest rates lower, they have to print money. If they print money, it's value goes down. If it's value goes down, inflation gets higher.

I will stipulate that the higher investment is unsustainable, in the sense that it will not continue forever. However, given that higher I and higher C both come from higher labor supply, they are not technologically unsustainable, they could be maintained with higher labor supply. However, we both believe in worlds where they will eventually come back down, so might as well not argue a technicality and just agree with you.

On the idea of the composition of investment. As I said, both short term and long-term investment increase, maybe for different amounts, but they both increase nonetheless. Even if they eventually go back to normal levels, that doesn't explain the recession. Why do you think I goes from a higher than normal level to a lower than normal level, when we have the alternative of going back to a normal level that seems more reasonable.

In other words, the notion that high investment is unsustainable, which we both agree to, does not imply a crash. It could imply many different things depending on how the economy works. Higher investment than optimal in a particular industry does not imply a crash either.

You basically have to come up with a reason why adding physical capital in any industry can be a bad thing. Remember the physical capital comes from extra work, not lost consumption or consumption of capital. Even if one industry has a lot more capital than it will need in the long-run, how is this ever a bad thing, if there is no industry with less capital than is optimal?

On the topic of liquidity traps, people generally don't understand the distinction between the zero lower bound, which is what you are describing and a liquidity trap, where dropping money from helicopters does not stimulate the economy or even create inflation. Its an old idea that when interest rates are zero, any money dropped is just saved in mattresses and has no economic impact. I don't think its reasonable and you probably agree but its important to understand how extreme of a position the liquidity trap is.

 

[ababba]

Let's say NX = 0.

Y=C+I+G

Let's also assume the government doesn't borrow: G = T

Obviously I+C=Y-T => I+C=Y-G

In this case, every increase in G does crowd out C+I, because if the government's only source of funding is taxation, every increase in G has to come from an increase in T, which lower C+I.

If the government can borrow money, however, it depends from whom it borrows. If it borrows only from people within the country, the demand for money goes up (a shift to the right) interest rates go up and overall funds loaned out increase, while private investment decreases (the private demand for money didn't change but the additional governmental demand created higher equilibrium interest rate, at which private businesses want to invest less). Also, since it's only borrowing from within the country, every Dollar loaned to the government has to be forgone consumption today (or a loan a private business didn't get, as explained earlier).

So as long as the Y=C+I+G identiy exists, every Dollar the government spends, is indeed a Dollar not spent by private individuals.

Only if we look at foreign debt, the picture changes a little bit. Norway for example exploited huge oil reserves and thus was attractive for investors all over the world. However, once the loans are repaid, the investors want to consume eventually. If there are many currency holders from outside the country wanting to consume goods, this obviously decreases domestic consumption (higher prices, etc.). That's not problematic in Norway's case, since they actually invested in something of real value to consumers, so they are still better off than without the loans.

The US is a little different because the Dollar is a reserve currency. Many foreign lenders hold Dollar-denominated debt just for the sake of holding it and keep renewing it, without any imidiate interest in consuming products made in the US. This is btw one the major reasons consumer prices in the US rise slower than asset prices. The US was not an attractive investment destination because of it's promising capital accumulating projects. In fact, the US blew all that additional money on consumption, either by the government or private consumption (just look at the enormous trade defict). And the investment projects they did engage in are not needed and have never been sustainable, for reasons already explained. At some point foreign investors are not going to invest into US bonds any longer. Not only is this going to be abysmal for the US treasury, causing the Fed most likely to expand the money supply even further, but that's going to mean a forced shift in the trade balance.

I know a lot of people have ideas like this, but its important to understand that Y=C+I+G is an accounting identity and says nothing about how these things are determined. Your statement about crowding out under a balanced budget is just mathematically untrue. In addition, the balanced budget assumption is a little absurd in light of the current political environment.

Anyway, a counter example would be enough to show you this.

Imagine C=a+MPC(Y-T) and I=constant

as a silly counterexample. This would be an IS-LM model with a horizontal LM curve. Anyway, a change in government spending deltaG and taxes deltaT of the same magnitude, which maintains a balanced budget, still raises Y.

deltaY=deltaG deltaC=0.

You can make I depend on the interest rate, and then there is some crowding out of G by decreased I.

Anyway, this is a silly example, but one counterexample is all you need to disprove a mathematical statement so there you go.

 

[Pauls' Revere]

I like the Big Mac Index:

http://blog.cwpub.com/post/5179859473/big-mac-inflation

To determine the Big Mac inflation or deflation rate for any one-year period, subtract the previous year’s price from the current year’s price, divide the answer by the previous year’s price and round to the nearest 1/10th percent. Here is an example using 2010 and 2011.

$3.80 - $3.73 = $ .07 $ .07 / $3.73 = .0187 = 1.9%