Help! My Econ Professor Is a Keynesian

[ababba]

Was not talking about IS-LM. Was talking about Keynesian Cross. Keynesian cross depicts an "aggregate expenditure" line (C+I+G) intersecting with the 45 degree line (where spending = income). "I" (investment) is most definitely included in the Keynesian aggregate expenditure line. But it is considered to be determined outside the model ("exogenous"), and therefore unaffected by an increase in G. My question is how and why Keynes assumes that an increase in G doesn't simultaneously diminish both I and C equally, as the classical school suggests.

See last sentence in second paragraph:

http://www.george.irvin.com/MASD1/session4.htm

I'm on board with what you are describing now, thanks for clarifying. I don't think the assumption is that investment is exogenous but just that it doesn't depend on output (or maybe more precisely the deviation of output from the natural rate). In the treatment of the Keynesian cross I saw, the cross was used to derive the IS curve. A single Keynesian cross diagram applies to a fixed interest rate, then you shift the interest rate and the equilibrium output shifts as well and you use this relationship to trace out the IS curve. The reason why the change in the interest rate shifts the C+I+G line is because higher interest rates lower investment. The model assumes that the only endogenous variable that impacts investment is the real interest rate.

 

[PierzStyx]

If you pick and choose it isn't so hard. Hoppe wrote a good article about Hayek's views, quoting from "The Road to Serfdom".



So I think that isn't too hard. Being a fan of Mises and Keynes though would be a lot harder.

I do think it is relevant to point out that in latter years Hayek renounced his earlier belief that government could legitimately provide any welfare-type service. My edition of The Road To Serfdom, the most recent one, has all the author's notes and introductions in it form the previous publications. It is in one of those he makes the statement that he had changed his mind. Its an excellent work but if you read his later works you can see how it was an early work in an expanding intellect. The Fatal Conceit is a much stronger defense of Austrian Economics and renouncement of any type of socialistic tendencies in government.

 

[low preference guy]

I do think it is relevant to point out that in latter years Hayek renounced his earlier belief that government could legitimately provide any welfare-type service.

Thanks. I didn't know that.

 

[RobHino]

2 cents

This is one of the most incorrect things I've heard about economics in years. You hear these fallacies all the time, that anything good for public policy is good for an individual. Its a bad principle in general. Lets take taxes as an example. I might be perfectly willing to pay 25% of my income to the government in exchange for some goods and services if everyone else agrees to do the same thing, but not be willing to do it if nobody else contributes. This is just common sense. I might be willing to contribute 1/100 of the cost for a park but not pay for the entire park myself. There is nothing inconsistent about wanting the government to do something and not be willing to do it by yourself.

I think your argument is a little skewed because as individuals we can't tax someone else, but we can lend our own money out. So your example, in my opinion, is invalid. There is a little inconsistency in not stealing personally, but allowing government to do so. The point being made seems logical....if someone generally believes that lower interest rates are a positive for the benefit of everyone, would that same someone have the same feeling with his own money?

Now lets talk about the case of interest rates. The Fed doesn't just set interest rates. They change the money supply and interest rates adjust endogenously. What that means is that these are equilibrium real interest rates. People in the free market are willing to borrow and lend at these real interest rates. In a low interest rate environment, everyone that loans out money still chooses to loan that money out and the interest rate clears the market.

You're correct about the Fed not directly increase interest rates, but you admit they control the money supply. I'm not sure the term "equilibrium real interest rates" is justified. "Equilibrium" yes due to natural laws of supply and demand of money, but not "real". How can they be real if they're fixed at near zero percent since 2009? To suggest interest rates are just produced from within, independent of the money supply, is not a fair assessment. http://www.moneycafe.com/library/fedfundsrate.htm

 

[ababba]

I think your argument is a little skewed because as individuals we can't tax someone else, but we can lend our own money out. So your example, in my opinion, is invalid. There is a little inconsistency in not stealing personally, but allowing government to do so. The point being made seems logical....if someone generally believes that lower interest rates are a positive for the benefit of everyone, would that same someone have the same feeling with his own money?

In both cases the question to me comes down to whether a rational person can be consistent if they would like everyone to do something but not be willing to do it unilaterally. The principle to me is the same. You can volunteer extra revenue for the government just like you can volunteer to lend money at below market interest rates.

You're correct about the Fed not directly increase interest rates, but you admit they control the money supply. I'm not sure the term "equilibrium real interest rates" is justified. "Equilibrium" yes due to natural laws of supply and demand of money, but not "real". How can they be real if they're fixed at near zero percent since 2009? To suggest interest rates are just produced from within, independent of the money supply, is not a fair assessment. http://www.moneycafe.com/library/fedfundsrate.htm

Does the supply of loanable funds equal the demand for loanable funds at this interest rate? Yes, so this is a market equilibrium. In the case where the price of rent is held at a floor, demand for apartments is greater than supply. This disparity doesn't exist in the market for loanable funds. As argued countless times, interest rates vary all the time even in an economy with no government intervention. This can include periods of extremely low real interest rates, so there is nothing inconsistent about a free market with low interest rates, its just wrong to assume that. The only way to know that interest rates were low relative to the alternative case without government intervention would be to know what the economy would look like without government intervention. If you have a model of the economy this good, it has certain implications for policy that people aren't internalizing.

 

[anaconda]

I'm on board with what you are describing now, thanks for clarifying. I don't think the assumption is that investment is exogenous but just that it doesn't depend on output (or maybe more precisely the deviation of output from the natural rate). In the treatment of the Keynesian cross I saw, the cross was used to derive the IS curve. A single Keynesian cross diagram applies to a fixed interest rate, then you shift the interest rate and the equilibrium output shifts as well and you use this relationship to trace out the IS curve. The reason why the change in the interest rate shifts the C+I+G line is because higher interest rates lower investment. The model assumes that the only endogenous variable that impacts investment is the real interest rate.

Again, I was originally referring only to the Keynesian cross diagram, and my question for the OP's professor was why the aggregate expenditure line shifts up with an increase in G, in light of the classical theory that G "crowds out" I and C in an amount exactly equal to G. Interest rates are not part of the Keynesian cross model.

 

[ababba]

Again, I was originally referring only to the Keynesian cross diagram, and my question for the OP's professor was why the aggregate expenditure line shifts up with an increase in G, in light of the classical theory that G "crowds out" I and C in an amount exactly equal to G. Interest rates are not part of the Keynesian cross model.

That is only for a fixed interest rate, which is part of the implicit assumptions in the Keynesian cross. In the full Keynesian model, crowding out happens precisely because the increase in output after a shift in IS raises the interest rate and lowers investment. Investment is only exogenous if the real interest rate is fixed. This is obviously a bad assumption but it can be used to see how the trade off between interest rates and output represent by the IS curve shifts.

 

[anaconda]

That is only for a fixed interest rate, which is part of the implicit assumptions in the Keynesian cross. In the full Keynesian model, crowding out happens precisely because the increase in output after a shift in IS raises the interest rate and lowers investment. Investment is only exogenous if the real interest rate is fixed. This is obviously a bad assumption but it can be used to see how the trade off between interest rates and output represent by the IS curve shifts.

The interest rate increases due to the government competing for loanable funds. The crowding out occurs for two reasons: 1) households divert their income from consumption into savings due to the more attractive higher interest rates. And 2) firms invest less due the the higher cost of borrowing. A classical school graphical analysis of this shows that the reduction in household consumption and private investment exactly equal the amount of government deficit spending. For a net zero gain. My suggested question for the professor, once again, is why we should believe that an increase in G should shift the aggregate expenditure line upward in the Keynesian cross diagram.

 

[Steven Douglas]

The Fed engages in government intervention. Keynesian economics does not equal government intervention. It is sticky prices and a liquidity trap. It is a positive description of how economies work not a normative description of what policy should be. Your question doesn't make any sense.

Well, let me expound a little with some needed context, in the hopes that my question might make more sense.

Keynesian economics purports to be positive and non-normative, but I view this as a very bold claim, as it assumes that whatever philosophies and a priori assumptions Keynes proposed, which necessary included value judgments and normative assertions, somehow play no role in any positive descriptions that are later yielded by Keynesian mechanics.

Keynesian economics is not only descriptive but predictive, which, in many cases, has the effect of being "self-prescriptive". For the sake of illustration, I posit that Keynesian economists are to the economic policy makers of every stripe as a navigator is to a pilot. If I am the Keynesian navigator and I say, "If you do X, you will be safer than if you do Y, which will place your craft at risk." And I even proceed to quantify this for the pilot, using one of my navigation models. Note that as a navigator, I have not told the pilot what he "should" do. I have only given information that is strictly descriptive and predictive, not normative. The decision to act remains at all times firmly in the hands of the pilot. As a simple navigator, so the reasoning goes, I don't even have a single control in front of me, how could I exercise control? That is the fallacy. The lie, even, of the "strictly positive" Keynesian economists. The reality is that the pilot relies very heavily - even exclusively in most cases, on everything that I tell him, and assuming the pilot's objective is to survive, his only logical and reasonable choice, based on the limited information I have given him, is to do X, and avoid Y.

Keynesian economists say, in effect, that "We merely describe the terrain, and attempt to predict various outcomes, based in part on actions and policies that are observed and placed into our models." In other words, the Keynesians are the "Scientific Oracle" upon which the vast majority of policy-makers, and indeed the vast majority of the modern banking world, relies in one form or another. This is a virtual monopoly of influence - and therefore very much a form of control.

The problem I see with Keynesians referring to themselves as positivists who are somehow insulated from all things normative is that they assume no responsibility for the accuracy or correctness of their assumptions, descriptions, models, etc., that very much influence global economic policies.

Take the so-called Paradox of Thrift, central to Keynesian Economics, as but one example. It does not emphatically offer a normative "should" or "ought", but it does predict, using the simple Keynesian multiplier model, that increases in savings may be harmful to an economy (with multiple euphemistic tautologies which make essentially the same claim). Regardless of the degree to which the Paradox of Savings/Thrift serves as an reliable predictor, and regardless how well accepted it may be in its myriad forms by Keynesians, it is not a universal law, but more of an axiom which Keynesians believe to be self-evident based on a simple multiplier model. I think it can be safely argued that this is self-prescriptive, with a normative assertion implied, since it is understood that anything which a reasonable and prudent person believes may be "harmful" will be actively discouraged, while anything that avoids harm will be actively encouraged.

So there it is - my first, but slowly evolving two cents, for whatever it is worth, that calls into question the ubiquitous claim that Keynesian economics is somehow strictly positive. I see the washing of the hands, but I don't see clean hands. The Keynesian handprint is on virtually everything - albeit always by proxy.

 

[ababba]

The interest rate increases due to the government competing for loanable funds. The crowding out occurs for two reasons: 1) households divert their income from consumption into savings due to the more attractive higher interest rates. And 2) firms invest less due the the higher cost of borrowing. A classical school graphical analysis of this shows that the reduction in household consumption and private investment exactly equal the amount of government deficit spending. For a net zero gain. My suggested question for the professor, once again, is why we should believe that an increase in G should shift the aggregate expenditure line upward in the Keynesian cross diagram.

Its a good question, and one that shows a deeper understanding of the material so you should definitely talk about with the professor about it. The Keynesian cross diagram is basically done without the two assumptions you talk about above. That's I always think about it more as a building block than a model in itself. Its designed to graphically demonstrate the multiplier. The Mankiw book doesn't work with assumption (1) for most of the text, and there are a lot of good reasons why changes in interest rates have ambiguous effects on consumption from Microeconomics.

It is still a useful diagram if you put it in an IS-LM context because it tells you how big the horizontal shift in the IS curve is. That is, its somewhat important to know how much output would shift if interest rates did not change at all and then how much output would shift if crowding out happened so you can see the effects of crowding out. You need the full IS-LM model to see this. The classical model results are equivalent to a vertical LM curve, which is equivalent to saying that money demand does not depend on the opportunity cost holding money or interest rates. If the LM curve is not vertical, crowding out is less than full in the model.

 

[ababba]

Well, let me expound a little with some needed context, in the hopes that my question might make more sense.

Keynesian economics purports to be positive and non-normative, but I view this as a very bold claim, as it assumes that whatever philosophies and a priori assumptions Keynes proposed, which necessary included value judgments and normative assertions, somehow play no role in any positive descriptions that are later yielded by Keynesian mechanics.

Keynesian economics is not only descriptive but predictive, which, in many cases, has the effect of being "self-prescriptive". For the sake of illustration, I posit that Keynesian economists are to the economic policy makers of every stripe as a navigator is to a pilot. If I am the Keynesian navigator and I say, "If you do X, you will be safer than if you do Y, which will place your craft at risk." And I even proceed to quantify this for the pilot, using one of my navigation models. Note that as a navigator, I have not told the pilot what he "should" do. I have only given information that is strictly descriptive and predictive, not normative. The decision to act remains at all times firmly in the hands of the pilot. As a simple navigator, so the reasoning goes, I don't even have a single control in front of me, how could I exercise control? That is the fallacy. The lie, even, of the "strictly positive" Keynesian economists. The reality is that the pilot relies very heavily - even exclusively in most cases, on everything that I tell him, and assuming the pilot's objective is to survive, his only logical and reasonable choice, based on the limited information I have given him, is to do X, and avoid Y.

Keynesian economists say, in effect, that "We merely describe the terrain, and attempt to predict various outcomes, based in part on actions and policies that are observed and placed into our models." In other words, the Keynesians are the "Scientific Oracle" upon which the vast majority of policy-makers, and indeed the vast majority of the modern banking world, relies in one form or another. This is a virtual monopoly of influence - and therefore very much a form of control.

The problem I see with Keynesians referring to themselves as positivists who are somehow insulated from all things normative is that they assume no responsibility for the accuracy or correctness of their assumptions, descriptions, models, etc., that very much influence global economic policies.

Take the so-called Paradox of Thrift, central to Keynesian Economics, as but one example. It does not emphatically offer a normative "should" or "ought", but it does predict, using the simple Keynesian multiplier model, that increases in savings may be harmful to an economy (with multiple euphemistic tautologies which make essentially the same claim). Regardless of the degree to which the Paradox of Savings/Thrift serves as an reliable predictor, and regardless how well accepted it may be in its myriad forms by Keynesians, it is not a universal law, but more of an axiom which Keynesians believe to be self-evident based on a simple multiplier model. I think it can be safely argued that this is self-prescriptive, with a normative assertion implied, since it is understood that anything which a reasonable and prudent person believes may be "harmful" will be actively discouraged, while anything that avoids harm will be actively encouraged.

So there it is - my first, but slowly evolving two cents, for whatever it is worth, that calls into question the ubiquitous claim that Keynesian economics is somehow strictly positive. I see the washing of the hands, but I don't see clean hands. The Keynesian handprint is on virtually everything - albeit always by proxy.

I think this is an interesting response but now we would need to talk some about the philosophy of logic and argument. My view of this discussion is that you should try to find your opponents best argument for their position and criticize that. The best arguments for the Keynesian framework are positive, based on extended periods of sticky prices and recessions near the zero lower bound on nominal interest rates. Regardless of the motivations for developing the model, if its not true, you can criticize the logical pieces that make up the puzzle. Someone can misread a treasure map and still stumble on the treasure chest by accident. The only question should be whether you in fact have found a gold chest or not.

 

[Mashedtaders]

All of your econ profs will be Keynesians. Just ignore them but try to learn the points to their argument so you can get a new perspective and then counter their arguments in the future.

 

[Steven Douglas]

I think this is an interesting response but now we would need to talk some about the philosophy of logic and argument. My view of this discussion is that you should try to find your opponents best argument for their position and criticize that. The best arguments for the Keynesian framework are positive, based on extended periods of sticky prices and recessions near the zero lower bound on nominal interest rates. Regardless of the motivations for developing the model, if its not true, you can criticize the logical pieces that make up the puzzle. Someone can misread a treasure map and still stumble on the treasure chest by accident. The only question should be whether you in fact have found a gold chest or not.

Actually, I am more interested in fundamentally accurate readings than misreadings, and not as a map to find "special" treasure - for myself or anyone else. Sticky prices, liquidity traps, and recessions near the zero lower bound on nominal interest rates are only a part of the broad picture, or scope of economics, which in a Keynesian framework necessarily attempts to describe and predict human activity. My attempt now is to focus on a smaller, perhaps even insignificant, part of the economy, and in terms that are neither normative nor scientifically controversial, but which are fully comprehensible within even a Keynesian framework.

Take, for example, those who already have a chest, like a single mother and waitress who has savings in the form of a coffee can on her fridge that is stuffed full of hard-earned crumpled fiat notes, but finds a gaping wound every time her own chest is opened, in the form of real value that has been invisibly siphoned, without her knowledge or consent, generally speaking, and is irrevocably lost.

I can trace this, quite accurately and predictably, to a certain Keynesian Paradox of Thrift, which was postulated and accepted, a priori and axiomatically by Keynesian economists, which was fed into a simple multiplier model, which in turn suggested that the human activity of placing currency into a coffee can (aka "savings" - aka "private accumulation of capital") might be harmful to "the economy" (whatever "economy" means - certainly not hers).

What I can also state, positively and not in a way that is normative, is that the continual, irreversible decrease in the value of this particular woman's personal economy (if such a thing as "her economy" can even be said to exist, let alone be acknowledged as meaningful), happened based on other human activity that was entirely predictable, but moreover caused by, reliance upon that same Keynesian model.

Now, whatever the waitress in my example or anyone else thinks should/ought to be done about this is entirely normative, of course, and therefore for others to decide. I am approaching this with a Keynesian mindset, as I merely attempt to describe in positive terms precisely what is happening, and in a way that illustrates that while I do question the validity of the Paradox of Thrift, that does not mean that I am in disagreement with Keynesian models that very much predicted what I described above.

Which is why I am not interested in so much in motivations for developing a model, or even challenging the accuracy of the results, so much as I would like to document, coldly, rationally, precisely what is caused by reliance upon that model, and was entirely predictable using that same model.

And stuff and such...

 

[ababba]

Actually, I am more interested in fundamentally accurate readings than misreadings, and not as a map to find "special" treasure - for myself or anyone else. Sticky prices, liquidity traps, and recessions near the zero lower bound on nominal interest rates are only a part of the broad picture, or scope of economics, which in a Keynesian framework necessarily attempts to describe and predict human activity. My attempt now is to focus on a smaller, perhaps even insignificant, part of the economy, and in terms that are neither normative nor scientifically controversial, but which are fully comprehensible within even a Keynesian framework.

Take, for example, those who already have a chest, like a single mother and waitress who has savings in the form of a coffee can on her fridge that is stuffed full of hard-earned crumpled fiat notes, but finds a gaping wound every time her own chest is opened, in the form of real value that has been invisibly siphoned, without her knowledge or consent, generally speaking, and is irrevocably lost.

I can trace this, quite accurately and predictably, to a certain Keynesian Paradox of Thrift, which was postulated and accepted, a priori and axiomatically by Keynesian economists, which was fed into a simple multiplier model, which in turn suggested that the human activity of placing currency into a coffee can (aka "savings" - aka "private accumulation of capital") might be harmful to "the economy" (whatever "economy" means - certainly not hers).

What I can also state, positively and not in a way that is normative, is that the continual, irreversible decrease in the value of this particular woman's personal economy (if such a thing as "her economy" can even be said to exist, let alone be acknowledged as meaningful), happened based on other human activity that was entirely predictable, but moreover caused by, reliance upon that same Keynesian model.

Now, whatever the waitress in my example or anyone else thinks should/ought to be done about this is entirely normative, of course, and therefore for others to decide. I am approaching this with a Keynesian mindset, as I merely attempt to describe in positive terms precisely what is happening, and in a way that illustrates that while I do question the validity of the Paradox of Thrift, that does not mean that I am in disagreement with Keynesian models that very much predicted what I described above.

Which is why I am not interested in so much in motivations for developing a model, or even challenging the accuracy of the results, so much as I would like to document, coldly, rationally, precisely what is caused by reliance upon that model, and was entirely predictable using that same model.

And stuff and such...

I think the first point is that she can invest the money in bonds or money market mutual funds and earn a rate of return greater than inflation over long periods of time.

On the other hand I recognize that some people are stupid and might not understand this. Inflation is a tax on holdings of currency. However, this tax is an extremely small fraction of government revenue, it is dwarfed by payroll taxes, income taxes and capital gains taxes. This is because most money is not held in the form of currency but invested in assets that earn a nonzero rate of return. In addition, from a positive perspective, the biggest holders of currency are foreigners and criminals, two groups that would seem like the groups we should place the greatest marginal tax burden on for various reasons.

If you agree that taxation at all is justified, then you have to ask what the distribution of the tax system is. This isn't something you do in isolation. For instance, the payroll tax is regressive because it is capped. But because income tax is progressive enough, the entire tax system is progressive. As a result, the waitress, even including the inflation tax, is paying a very small proportion of the total tax burden relative to her income. She spends most of her money instead of saving it and doesn't face any capital gains or inheritance taxes. She probably has a substantial amount of debt, and surprisingly high inflation helps her in that respect.

Mainstream economists don't really think about savings the way you are describing in your caricature. In my mind, they think about it as a trade-off between the long-run and the short-run. They have models of the economy in the long-run like the Solow model and they recognize that an increase in the savings rate increases living standards. However, in order to do this, you have to give up consumption today in order to make the sacrifice and invest for the future. The average Keynesian economist in academia wants to increase the savings rate in the United States but not necessarily overnight. They only favor fiscal stimulus when monetary stimulus has become ineffective, and many believe this is when nominal interest rates are zero. The paradox of thrift is something that they think you should keep in mind but by no means definitive. The baseline Keynesian model is really only a model of short run fluctuations. You need some way of weighing short-run versus long-run objectives to think about policy. However, there are times when fiscal stimulus doesn't raise interest rates and crowd out private investment, and that it something important to consider when thinking about policy.

 

[Steven Douglas]

Firstly, thank you for the time you took to respond.

The example I used, which could be any number of millions of people in the U.S., happens to be an adopted niece of mine. So we can explore her anecdotal specifics, and just talk about it, human to human.

I think the first point is that she can invest the money in bonds or money market mutual funds and earn a rate of return greater than inflation over long periods of time.

My niece, like so millions just like her, has no comprehension of what you just wrote and take for granted as useful knowledge. Perhaps that is part of the treasure map you were talking about. But it does not apply to her, because you are talking to her from an isolated bubble that she simply does not, and likely never will, comprehend. It is not part of her world, part of her lexicon, part of her mode of thinking. In fact, she can't even tell you what inflation is - not even so much as "is that when prices go up all the time?" Not even that far.

Her education level goes no higher than a GED, so she is ignorant of many things, but far from stupid. Wisdom and intelligence are not the same things, and one does necessarily follow the other, as I would stack her raw, innate wisdom against any number of intellectuals I know, but are complete and utter fools in their own ways. A lot of people are truly too stupid to realize this, but my niece is hardly exceptional. Functionally semi-literate, she could be easily classified as the classic lower middle "working" class American proletariat. Some really daft bigots might even refer to her as a trailer court queen. Nevertheless, a giant swath of very, very hard working Americans are squarely in this same category.

She is extremely frugal, and tries to save for medium sized purchases, but otherwise lives from paycheck to paycheck. Her mother was on welfare for much of her life, but she is absolutely death on welfare for herself. She is almost debt free, mainly because she has never had any credit extended to her to begin with, but also because her mother is very anti-credit. "Don't let nobody rip you off, Honey, you pay cash for everything, and own everything you own outright." I said almost debt-free because she is making payments on an emergency room visit totaling just over $300.

Her crappy little used car was paid for with cash that she had saved, partly because of what her mother taught her, and partly because she doesn't know any other way. But it belongs to her. Kind of. In reality, license fees, inspection fees, mandatory insurance, etc., all of which drain a significant part of her earnings, and which totals more than the value of her car each year, the one that she ostensibly "owns", makes it more of a rental. And that's just the beginning of her story, that I won't belabor, except to say that it is not exceptional.

I posit that she is one of the unintended consequences of the Paradox of Thrift and how it has been applied in this land where money itself is now reckoned only as another form of debt (with straight faces no less). She is paddling frantically upstream on the edge of the Keynesian waterfall where the disappearing middle class go to die when they "are too stupid" to realize what wonderful alternatives were available to them - if they only knew.

Inflation is a tax on holdings of currency. However, this tax is an extremely small fraction of government revenue...

I absolutely love that frank acknowledgment of something that is not obvious or understood by MOST Americans - not just those in my niece's class.

Furthermore, I love the fact that you followed it with how it relates in proportion to "government revenue" - not "her" revenue, which is an entirely different story when one considers the real, albeit entirely relative value of each and every fiat dollar that manages to make it into her coffee can (literally - Maxwell House even).

When inflation taxes her "holdings of currency", it is insignificant only to government revenue - not to her. To her it is taxing her very means of survival. How her pitiful "contribution" might be "dwarfed by payroll taxes, income taxes and capital gains taxes" is a slap in her face, because there isn't even an acknowledgment or mention of the impact on her - unless you reckon her through your eyes, based not on who she is, but what you imagine her to be.

This is because most money is not held in the form of currency but invested in assets that earn a nonzero rate of return. In addition, from a positive perspective, the biggest holders of currency are foreigners and criminals, two groups that would seem like the groups we should place the greatest marginal tax burden on for various reasons.

Ah. See, Shelly? Look on the bright side of why you are being taxed without your knowledge or consent, and without any representation or recourse whatsoever - in perpetuity, no less: Why, most people only need to survive on a fraction of their money, and the rest isn't saved, because it would be taxed out of existence if it was saved, in much the same way your money is. Silly you for not knowing that, but the bright side is that at least it is also a tax on foreigners and criminals who "should" be taxed for hanging onto cash. Sorry that you had to be in the same class as foreigners and criminals, but take one for the team anyway, it's better for "the economy".

If you agree that taxation at all is justified, then you have to ask what the distribution of the tax system is. This isn't something you do in isolation. For instance, the payroll tax is regressive because it is capped. But because income tax is progressive enough, the entire tax system is progressive. As a result, the waitress, even including the inflation tax, is paying a very small proportion of the total tax burden relative to her income.

Once again, you are viewing this from a "relative contribution", and only from a government revenue POV, without a single ounce of regard to the fact that this "currency holding tax" does not go to the government. It is a tax without representation siphoned by a private entity that holds a monopoly on the issue of the currency which she is obliged by law to accept as payment. The value that was siphoned from her inures, ultimately and primarily to the benefit of all the institutions involved in the inflationary chain of transactions, beginning with the private Federal Reserve. The relative significance of the size of her 'mandatory' contribution depends entirely on whose perspective you view it from. To the Fed, nothing. To the government, NADA. To the commercial banks - zip. That is, when you look at just her. But to her, it is life and survival itself. And I am absolutely certain, based on all your assumptions, that you have never, ever walked in her shoes.

She spends most of her money instead of saving it and doesn't face any capital gains or inheritance taxes. She probably has a substantial amount of debt, and surprisingly high inflation helps her in that respect.

She does spend most of her money instead of saving it, because she must in order to live. But when it comes to savings, and she does save, she is a warrior in my mind. I would stack her money management skills against a thousand corrupt, super-intelligent fools with advanced degrees in all the corporate mega-bailout-whores in my country. She wasn't responsible for any of that, and her "contribution" to all of that can only be considered "insignificant" if you view from a perspective other than hers.

Mainstream economists don't really think about savings the way you are describing in your caricature.

I am fully aware of that. Private accumulation of capital has been an economist taboo for so long that it is difficult to conceive of a society that where such capital actually competes head-to-head (rather than being taxed out of existence) with inflationary credit from a fractional reserve lending system controlled by a central bank, in our "money-only-equals-debt" Mainstream Keynesian mindset.

Yeah, Shelly would make you a mean cup of coffee. On her. But she wouldn't understand a word we talking about. It is, I firmly believe, why the Keynesian system, and particular the Fed, has survived for nearly a hundred years without a violent uprising and a lot of people being lined up and shot. Because if she and everyone in her position could be made to understand, in strictly positive terms, precisely what policies and theories have been accepted by the mainstream and implemented - and what their effects have been on her and others like her - NOT from a government or Economy Statist point of view, but on their lives, their labors, their savings and and their ability to survive: Heaven help everyone in their path.

 

[2_Thumbs_Up]

The only assumptions in IS-LM are that investment depends negatively on interest rates, consumption is an increasing function of disposable income and money demand depends on the cost of holding money (nominal interest rate) and your transactions demand for currency (real GDP).

Its an amazing model for such simple assumptions that we would all agree to. Try to approach it without preconceived notions about whether it is correct or not. The critiques are much more subtle than you think.

The assumptions are wrong, most importantly the first one. At any point in time, the amount of real capital is fixed, and thus it does not change with changes in the interest rate. The only thing changes in the interest rate can achieve is to reallocate the capital, which does not equal more investment, but just other investments. Austrians call these malinvestments.

 

[airborne373]

Tell your communist filth professor that slavery is over.

Not very diplomatic of me? How diplomatic should a slave be to his slave master?

 

[Thrashertm]

Yep, although I'm not surprised. He's actually a nice guy, and I have gotten him to talk favorably about Austrian views like sound money before. He is not familiar with the Austrian school or business cycle theory, though he has said he has read Hayek and liked him. Ultimately though, he is an avowed follower of Keynes, and a huge believer in me....err Bernanke. I was hoping some of you could give me some talking points to bring up in class. We are now exclusively covering demand side economics and it is starting to drive me crazy, haha. I'm fairly educated on Austrian economics, having read Hayek, some Mises (and Mises.org!) and of course Ron Paul, but I would really like some outside help, particularly when it comes to all the equations and models that aren't really presented in Austrian thought.

Last class we talked about the Keynesian cross, and how this revolutionized economics. Next we will be talking about the IS-LM mode (IS stands for investment and saving, LM for money and liquidity), which builds on the Keynesian Cross. A major part of the lecture will be on monetary stimulus. For those of you more familiar with Keynesian theory than I, what would be some good non-argumentative questions to raise or points to bring up?

Oh I found this interesting...the guy who wrote the textbook, N. Gregory Mankiw, was Bush's former economic adviser and is now the the adviser to Mitt Romeny. So one more strike against Mittens.

If you are going to confront the prof, I suggest doing so in his private office hours, and use the socratic method. http://www.youtube.com/watch?v=UjbPZAMked0 That is, position your stance as confusion with his points, instead of you flat out disagreeing with him. By doing this in his office hours, you won't be challenging him in front of the whole class, thus threatening his ego.

 

[ababba]

The assumptions are wrong, most importantly the first one. At any point in time, the amount of real capital is fixed, and thus it does not change with changes in the interest rate. The only thing changes in the interest rate can achieve is to reallocate the capital, which does not equal more investment, but just other investments. Austrians call these malinvestments.

Well in a years time I can build a new machine, so no capital is not fixed.

 

[ababba]

Firstly, thank you for the time you took to respond.

The example I used, which could be any number of millions of people in the U.S., happens to be an adopted niece of mine. So we can explore her anecdotal specifics, and just talk about it, human to human.



My niece, like so millions just like her, has no comprehension of what you just wrote and take for granted as useful knowledge. Perhaps that is part of the treasure map you were talking about. But it does not apply to her, because you are talking to her from an isolated bubble that she simply does not, and likely never will, comprehend. It is not part of her world, part of her lexicon, part of her mode of thinking. In fact, she can't even tell you what inflation is - not even so much as "is that when prices go up all the time?" Not even that far.

Her education level goes no higher than a GED, so she is ignorant of many things, but far from stupid. Wisdom and intelligence are not the same things, and one does necessarily follow the other, as I would stack her raw, innate wisdom against any number of intellectuals I know, but are complete and utter fools in their own ways. A lot of people are truly too stupid to realize this, but my niece is hardly exceptional. Functionally semi-literate, she could be easily classified as the classic lower middle "working" class American proletariat. Some really daft bigots might even refer to her as a trailer court queen. Nevertheless, a giant swath of very, very hard working Americans are squarely in this same category.

She is extremely frugal, and tries to save for medium sized purchases, but otherwise lives from paycheck to paycheck. Her mother was on welfare for much of her life, but she is absolutely death on welfare for herself. She is almost debt free, mainly because she has never had any credit extended to her to begin with, but also because her mother is very anti-credit. "Don't let nobody rip you off, Honey, you pay cash for everything, and own everything you own outright." I said almost debt-free because she is making payments on an emergency room visit totaling just over $300.

Her crappy little used car was paid for with cash that she had saved, partly because of what her mother taught her, and partly because she doesn't know any other way. But it belongs to her. Kind of. In reality, license fees, inspection fees, mandatory insurance, etc., all of which drain a significant part of her earnings, and which totals more than the value of her car each year, the one that she ostensibly "owns", makes it more of a rental. And that's just the beginning of her story, that I won't belabor, except to say that it is not exceptional.

I posit that she is one of the unintended consequences of the Paradox of Thrift and how it has been applied in this land where money itself is now reckoned only as another form of debt (with straight faces no less). She is paddling frantically upstream on the edge of the Keynesian waterfall where the disappearing middle class go to die when they "are too stupid" to realize what wonderful alternatives were available to them - if they only knew.



I absolutely love that frank acknowledgment of something that is not obvious or understood by MOST Americans - not just those in my niece's class.

Furthermore, I love the fact that you followed it with how it relates in proportion to "government revenue" - not "her" revenue, which is an entirely different story when one considers the real, albeit entirely relative value of each and every fiat dollar that manages to make it into her coffee can (literally - Maxwell House even).

When inflation taxes her "holdings of currency", it is insignificant only to government revenue - not to her. To her it is taxing her very means of survival. How her pitiful "contribution" might be "dwarfed by payroll taxes, income taxes and capital gains taxes" is a slap in her face, because there isn't even an acknowledgment or mention of the impact on her - unless you reckon her through your eyes, based not on who she is, but what you imagine her to be.



Ah. See, Shelly? Look on the bright side of why you are being taxed without your knowledge or consent, and without any representation or recourse whatsoever - in perpetuity, no less: Why, most people only need to survive on a fraction of their money, and the rest isn't saved, because it would be taxed out of existence if it was saved, in much the same way your money is. Silly you for not knowing that, but the bright side is that at least it is also a tax on foreigners and criminals who "should" be taxed for hanging onto cash. Sorry that you had to be in the same class as foreigners and criminals, but take one for the team anyway, it's better for "the economy".



Once again, you are viewing this from a "relative contribution", and only from a government revenue POV, without a single ounce of regard to the fact that this "currency holding tax" does not go to the government. It is a tax without representation siphoned by a private entity that holds a monopoly on the issue of the currency which she is obliged by law to accept as payment. The value that was siphoned from her inures, ultimately and primarily to the benefit of all the institutions involved in the inflationary chain of transactions, beginning with the private Federal Reserve. The relative significance of the size of her 'mandatory' contribution depends entirely on whose perspective you view it from. To the Fed, nothing. To the government, NADA. To the commercial banks - zip. That is, when you look at just her. But to her, it is life and survival itself. And I am absolutely certain, based on all your assumptions, that you have never, ever walked in her shoes.



She does spend most of her money instead of saving it, because she must in order to live. But when it comes to savings, and she does save, she is a warrior in my mind. I would stack her money management skills against a thousand corrupt, super-intelligent fools with advanced degrees in all the corporate mega-bailout-whores in my country. She wasn't responsible for any of that, and her "contribution" to all of that can only be considered "insignificant" if you view from a perspective other than hers.



I am fully aware of that. Private accumulation of capital has been an economist taboo for so long that it is difficult to conceive of a society that where such capital actually competes head-to-head (rather than being taxed out of existence) with inflationary credit from a fractional reserve lending system controlled by a central bank, in our "money-only-equals-debt" Mainstream Keynesian mindset.

Yeah, Shelly would make you a mean cup of coffee. On her. But she wouldn't understand a word we talking about. It is, I firmly believe, why the Keynesian system, and particular the Fed, has survived for nearly a hundred years without a violent uprising and a lot of people being lined up and shot. Because if she and everyone in her position could be made to understand, in strictly positive terms, precisely what policies and theories have been accepted by the mainstream and implemented - and what their effects have been on her and others like her - NOT from a government or Economy Statist point of view, but on their lives, their labors, their savings and and their ability to survive: Heaven help everyone in their path.

OK, lets put some numbers on it. Lets say she has 5000 in savings. The inflation tax takes away 100 per year in purchasing power if the inflation rate is 2%. This is still an extremely small part of her budget. Compared to payroll tax of 12.5% on her income, maybe something like 20,000, which would be 2500 dollars. So in all likelihood, her payroll tax burden is something like 25 times as large as her inflation tax burden. So its not just that her tax burden is small relative to government revenue, its small in absolute terms and small relative to her other tax burdens. Its also an extremely small part of her yearly income. And you haven't begun to talk about how much government revenue is spent on an average person during their lifetime, its not like the money just goes in a pit somewhere and disappears.

In addition, there's this this called the earned income tax credit which is a negative income tax for the poorest people in society. If she falls below the EITC cutoff, she gets more than one dollar for every dollar she earns, and that extra money comes from the government. The poor have a very low tax burden in today's society.

And you should get her on the phone, and tell her about vanguard and something about how to invest for the future instead of holding it in currency.

The inflation revenue does go to the government because the Fed buys Tbills with the money and then retires them.

Another implication of your arguments is that it would be disastrous if social security were privatized. If no one knows how to invest their money, they wouldn't be able to save for retirement, regardless of the rate of inflation.

And of course I should mention the more than 1 billion people in the world living on under a dollar a day. Some of them would break the law in order and risk their lives to have it as well as your niece. Border controls reduce welfare by many orders of magnitude more than inflation taxes.

And we haven't even gotten into whether positive inflation levels can have any benefits. In my mind, it lessons the probability of ever hitting the zero lower bound, and one bad recession like we are at right now more than usual is worse than 100 years of 2% inflation in welfare terms. Its also extremely difficult for firms to cut nominal wages, so positive inflation on average actually reduces wage stickiness.