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Some thoughts about secular stagnation

by Cyrille Mon Nov 18th, 2013 at 05:35:10 AM EST

Via Paul Krugman, I saw that Larry Summers had given a presentation on the topic of secular stagnation at the IMF conference (admittedly, I wasn't invited this year, well, the letter must have been lost in the post ;-) ). If you'd rather read than watch, Krugman's summary is a nicely written one, and adds a few comments which can be interesting in themselves.

Well, I have not usually been inclined of late to say nice things about Larry Summers, although that was probably more about Summers the political persona. His academic research deserves more credit. So, much of it is interesting, although some of the conclusions he derives (and here Summers the neoliberal may be showing, for instance when he suggests that proper financial regulation may be a bad thing in the context of stagnation, which is bonkers) appear to either be there purely for provocation sake, or to be pre-conclusions looking for a justification. Still, I would have a few things to add, and I believe that the conclusions fall short in a couple of ways.

front-paged by afew


(This is crossposted on my bloc Anachronicles)

First of all, I'll start by the end of Krugman's description: "What Larry did at the IMF wasn't just give an interesting speech. He laid down what amounts to a very radical manifesto." Well, while this is probably true in the circles of power, this may be saying more about those circles than about the speech itself. For those points have long be made on many an economics or politics blog -European Tribune very much included.

I will not spend too much time on the reminding that, in a liquidity trap (and yes, we really should call the situation by its name, even if the name makes us think of Keynes, which seems to make some people sick. The problem is with them, not with Keynes), increasing savings is folly, and reducing State spending is deep in insane territory. This has been obvious for five years, and in fact well documented for 80 years, it is conventional macroeconomics, even though a whole cult developed that is dedicated to ignoring those facts.
I will simply add that, where Summers congratulates himself on the successful stoppage of the crisis 4 years ago, only to wonder about the lack of rebound, it was in fact forecast all along by the simplest of Keynesian analysis that the stimulus was way too small, indeed, there was no net stimulus once the effect of local government reduction in spending was taken into account.



So, Summers suggests that since 1980, the economy has needed bubbles to be at full employment, as evidenced by the colossal rise in household debt. This is evident in the graph for the US (courtesy to Paul Krugman):

Ratio of household debt to GDP

And it is very much the same for the UK. A proper academic or, for that matter, a proper blogger, would have the graph at hand to insert, but I don't right now. Still, the extremely high level of household debt in the UK since the 80s is a well reported fact.

Now, debt does not prove Summers' point that it was needed for full employment. After all, maybe the economy was overheating? But, as Summers points out, then you would have had to expect either strong inflation, high interest rates, or both. But what happened was falling inflation AND interest rates, quite the opposite.

Again, this very argument has been made on economic blog (OK, on liberal economic blogs) for as long as I've been reading them, which is around 10 years now, and maybe more. Its being revolutionary is a sign of the isolation of people in power.

Summers then suggests that this is due to secular stagnation, and there I fear he may be sleazy. Krugman doesn't jump on him at this point, though I expect that Dean Baker already has by now.

The thing is, while I have much admiration for Krugman, I have long believed that he has a blind spot there. He has it for very commendable reasons actually: because his personal inclinations would make him want to make what is, I believe, a correct conclusion, he is especially careful about it and, since his reading of the data does not show it, he excludes it from his further reasoning until proven.

This is the correct way to proceed, and also an extremely rare one. There are many reasons why it is rare. One is confirmation bias. But careerism too: my career has certainly suffered a lot from proceeding on those lines, even though it made my conclusions more robust. And this may be why Summers' speech appears revolutionary: people who made it to the positions where they could influence the circles of power probably mostly had a policy to conclude what their bosses wanted them to conclude.

Anyway, here is what is, I believe, a correct assessment of the key cause: inequality. Krugman is careful of reaching that conclusion because he already has many reasons to believe inequalities should be reduced, and:

-You can make a theoretical model of an economy serving a small subset of super rich people with full employment
-If you look at the data, there was no negative correlation between the increase of inequality and growth.

We can quickly dispose of the first objection: yes, you can build them, but they require hypothesis that seem at odds with the real world. The consumption rate simply does not stay as high as incomes shoot up, despite all the conspicuous consumerism at the top. Besides, super wealthy are largely a transational class these days so the model would only work if most of the world applied it (admittedly, we're well on our way...), otherwise much of the top incomes' spending would get spent elsewhere, thereby reducing domestic consumption some more. And that is whil excluding the likelihood of civil unrest.

The second objection is a much stronger one. But there's the catch: yes, there was no negative correlation in the US and the UK. But, the observation that the economy had needed a debt bubble to be sustained is restricted to... the US and the UK (more generally, English-speaking countries, who adopted the Thatcher-Reagan mantra). The absence of high household debts in countries like France was well-noted (and indeed, Sarkozy, our very own would-be Thatcher, claimed during his campaign that this was a sign of France being an archaic economy and that encouraging private debt was the way to make France competitive. Way to go, right-wing economics). And so was the lack of super-concentration of income and wealth. Courtesy of Simon Wren-Lewis:



While the English-speaking world was busy returning to the Gilded age, other countries stayed more or less stable. And those countries experienced similar growth, without needing the bubbles. In effect, the household debt bubble replaced the income that was being lost by all but the top 1%. Because it came as a replacement, it had no additional inflationary effect. But it was not sustainable.

In other words, if you are going to have an economy dedicated to the top 1%, you need to run unsustainable private debts -unsustainable to the point where they will not be repaid. You might argue that it is possible, provided you have a debt jubilee every now and then. Indeed, that was a recurrent solution in history, usually as a result of too great inequalities there too. But then, you are de facto giving extra income in the form of the debt forgival and thus have not managed to keep your unequal economy running. That societies did resort to the chaos of debt jubileed when the alternative was too awful to contemplate should have given us pause long ago.

And so Summers, while correct in pointing out that the US economy as it is has been feeding on credit bubbles for over 30 years, he is missing the elephant in the room by not noticing how the period neatly corresponds to the launch of Reaganomics. Revert the inequalities, and watch this effect disappear. Larry, there are non English-speaking world economies out there. It's time to include them in your radar, and not just to scare the audience. Neoliberals have spent those 30 years (and more) stating that this was the only way to run an economy. Well, it's time to wake up to the fact that they were just forgetting the words into the ground.



So, do I reject the idea of secular stagnation? As it happens, no. While the effect that Summers identifies should be attributed largely to inequalities, I also strongly believe that we long ago passed the point when the long term trajectory should stop being upwards. We have long past the point where we should expect to be able, long-term, to produce as much as our productivity would allow.

There are (at least) two major reasons for that:

-Companies have long needed planned obsolescence and increasing efforts of marketing to play on the worst of our insecurities and other flaws to make us purchase things and services that we have little need for and soon regret buying. Just looking at the room where I type this, and despite being a particularly reluctant consumer, I can see many things that serve little purposes. Many of them were received as "obligatory" gifts, often for our two sons, despite our insistence that no present was the best policy on their birthdays. Productivity has become too high for genuine needs to absorb it -this should not be a problem if we could find a way to convert that into extra free time rather than extra useless consumption.

-Resource constraints are with us now -in fact, they have been for a long while, but we could keep depleting without noticing too much until recently. No matter how hard you try, exponential growth cannot keep going forever, and indeed the right time to stop was 35 years ago at least, so now we even have to do a considerable amount of reversing.



But -aye, there's the rub- the first remarks of Summers that I quickly passed remain true: all things equal, reducing consumption will lead to deflation and sky-high unemployment. And those two are terrible things we should avoid at all costs (indeed, we realise now, better than 80 years ago when Keynes was writing, that employment is so very important not just for income sake, but also for the feeling of belonging in society). Still, even with a Brave New World level of planned obsolescence and manipulation to consume, you can't beat physical constraints. So what gives?

It's the "all things equal" that must -and that is where the solutions given by Summers are not adequate, rooted as they are in the old paradigm. Employment should be favoured. This can be done in several ways: strong regulations (and taxation of externalities) that would favour labour-intensive processees over resource-intensive ones; reducing the work week, increasing holidays, earlier retirement...

In the short term, it may lead to renewed investment (if the processes have to change, you may need to rethink your whole production system), but certainly the restriction of the quantity produced could reduce it in the long run, with a deflationary effect, and I did say that deflation should be avoided. Well, that too can be fought. For instance, the central bank could credit every resident of the country with an equal sum, and keep increasing it until the desired inflation is achieved. It would do wonders for the reduction of inequalities, too. Or governments could increase the minimum wage by the desired inflation plus a fixed percentage. I am not saying that this is the best solution necessarily, just pointing out that the problem can be solved.



I realise that such actions are unthinkable in the current paradigm. But, precisely, Summers shows that the current paradigm is inherently flawed. He then proceeds to suggest solutions rooted in the old neo-liberal paradigm (less regulation to promote lending, thus not addressing the increasing inequality, and boosting production, ignoring the physical constraints that make a secular shrinking unavoidable). We should welcome that the ideas of the unsustainability of conventional policies, and the folly of austerity, should be making it into the circles of power. But they should not be allowed to become a justification for doubling up on neo-liberal madness.

Display:
And, indeed, Dean Baker has made much the same points there.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Sun Nov 17th, 2013 at 10:18:27 AM EST
From the Dean Baker article:
First, while the economy may presently need asset bubbles to maintain full employment (a point I made in Plunder and Blunder: The Rise and Fall of the Bubble Economy), it doesn't follow that we should not be concerned about asset bubbles. The problem with bubbles is that their inflation and inevitable deflation lead to massive redistribution of wealth.

Summers probably would like to use the idea of 'secular stagnation' as a justification for continued bubbles. The problems Baker sees with asset bubbles Summers likely sees as features. (BTW, Plunder and Blunder is a free 186p book in PDF.)

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 17th, 2013 at 07:25:40 PM EST
[ Parent ]
...deflation should be avoided. Well, that too can be fought. For instance, the central bank could credit every resident of the country with an equal sum, and keep increasing it until the desired inflation is achieved.

Problem with this is a person with a high debt load would be better off using this central bank credit to pay down debt rather than consume.  Further, a person who pays down their debt while other people go out and consume would win The Game: reduce their debt load AND receive the benefits of a reviving economy from all the financially ignorant spending their central bank credit.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Nov 17th, 2013 at 12:40:13 PM EST
What is the problem? If you receive a windfall sum and want to reduce your debt, do so. It is likely to make you less liquidity constrained in the future, which should not harm your consumption. It would reduce household debt, which is fine. And a reviving economy is good for everyone.

Anyway, some people will benefit more from any policy. That's OK. The alternative being too awful to contemplate, I can live with some people (and they would not be among the wealthy at the start) doing somewhat better than others.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Sun Nov 17th, 2013 at 12:52:24 PM EST
[ Parent ]
Problem with this is a person with a high debt load would be better off using this central bank credit to pay down debt rather than consume.

For Steve Keen that was a feature. His proposal was to give each household $100,000 with the requirement that it be used first to pay down debt. If a given household had no debt they could use the money as desired. This had the virtue of reducing the household sector debt level and providing a stimulus to those with no debt or less than $100,000 debt. Futher, those who had not gone into debt or gone in debt so far would be rewarded for their prudence - or whatever, but at least rewarded.

Another proposal I have seen notes that, were the current $85 billion/month distributed on a per capita per month basis it would constitute an additional $300/month income for all individuals. For a family of three that would be an additional $900/month. If we have been doing this for years for the financial sector why can't we do it for the private sector - at least until we start seeing inflation.  

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 17th, 2013 at 07:34:38 PM EST
[ Parent ]
(I made this post in the weekend news section before I saw this diary, which is obviously where the comment belongs.)

More from Krugman's post:

   So you might be tempted to say that monetary policy has consistently been too loose. After all, haven't low interest rates been encouraging repeated bubbles?

    But as Larry emphasizes, there's a big problem with the claim that monetary policy has been too loose: where's the inflation? Where has the overheated economy been visible?

    So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers's answer is that we may be an economy that needs bubbles just to achieve something near full employment - that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn't just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.

OF COURSE all the growth since Reagan can be associated with bubbles. When wages are suppressed in all but the financial sector almost all discretionary income ends up in the hands of the already well off. Wealth holders seek profitable employment for their wealth and find it in a series of asset bubbles. And this is largely invisible to 'Mainstream Economics' as it wants to 'look through the veil of money' and take a Net Money View, which treats all debts and credits between private domestic sector agents as merely debts owed between agents INSIDE the economy which should be netted out. Nothing to see there. Move on folks. It is unseemly for you to stare at the wealth of the rich. They stole their money fair and square - right before your eyes. You couldn't see it because of the economics they had spent so much of their wealth teaching you - if you did not remain a confused, ignorant wretch.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Nov 17th, 2013 at 07:42:05 PM EST
[ Parent ]
He asks where the inflation is. The answer maybe in house prices and in China.
by oliver on Wed Nov 20th, 2013 at 05:31:23 AM EST
[ Parent ]
That was five years ago. Today is now.

To impose deflation today to compensate for inflation yesterday is industrial-grade distilled insanity.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 05:01:29 AM EST
[ Parent ]
with Summers', slightly less with Krugman's, and still evident in Baker's analyses is a basic mischaracterization of inflation. They all seem to miss the fact that commodity inflation has been rampant at the end of every bubble. Yes, it's primarily based in cost/price increases in fossil fuels; and, yes, that is also a function of the EROI of production.

To say, however, that inflation is low is a class-unconscious attitude. (And Greenspan, the minister of bubbles, was class-conscious enough to 'reform' the U.S. inflation-statistics' terms in 1983 in order to hide the class nature of inflation in the real economy.) Electronics, lumber, and real real-estate prices were deflated; fuel, food, clothing, postage, tire prices inflated - especially during the recent Depression. Who buys the largest portions from which categories? We plebeians buy - have to buy - the more inflated products, along with the odd computer now and then.

Ultimately, this differential is another factor in the transfer of wealth from the masses to the new aristocracy. The hub is, of course, the petroleum oligopoly. The rise in all commodities' prices serve the rise in the petroleum companies' profits. This also influences - in my opinion - the bounds of the discussions by Summers and the rest. They cannot discuss carbon or commodity prices or peak-fossil-fuel-energy in terms of effects on their models, because their worldview is bounded by consumption.

One observation - I read the comments at both the Krugman and Baker sites. For what it's worth, the overwhelming majority of them contained insights such as those described above.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Sun Nov 17th, 2013 at 01:13:20 PM EST
this is because Krugman make a difference between core inflation and price index.
I think I have understood that the inflation economists usually talk about is a measure of the economical activity: if and when the economical activity is running at or near full potential, you have what they call core inflation.

If and when you have resources shortage, you will also have price inflation, but at the same time you will not be running at full capacity.

The core inflation measurement is meant to get the difference between a capacity shortage and a resource shortage.

The end effect for the consumer is the same. But applicable solutions are different.

by Xavier in Paris on Mon Nov 18th, 2013 at 05:25:19 AM EST
[ Parent ]
That is: "The end effect for the consumer is the same." The class question is answered.

As to: "But applicable solutions are different", I disagree. There is only one solution, and that is to level income and asset distribution to a major extent. That is the class-based solution. After that - or along with that - we can work on social, energy-related, and economic-control issues.

Income and asset inequality do get themselves resolved - temporarily - every so often at the same time that a lot of economic and social resources are destroyed. That's where we are headed. Meantime, we should continue to try to resolve the main issue - the class issue - because it's possible that the process of solidifying a class-conscious solution might create conditions for a larger solidarity of opinion on the other issues.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Mon Nov 18th, 2013 at 05:37:15 PM EST
[ Parent ]
I disagree.

Inflation is not per se an action of class war, quite the contrary: core inflation destroys the revenues from capital and is, by definition, constituted by an increase in wages and salaries. Core inflation may be progressive in its consequences. Look for example to the consequences of the WW1 in France: A Society of rentiers (before the war) is replaced by a society of salary-men and women after the war, because it is no more possible for the former landlords to extract enough revenue frome their lands or possesions as before, all of that because of inflation (caused by the need to offset state debt issued to finance the war).

External inflation is due to a resource shock. The only available solution is to answer to this shock. If the constrained resource is energy, as has been the case for some while, you need to find other energy sources, to begin rationning energy or to adapt the society, and therefore the economy, to a rarer enrgy source.

All three have been used in the las (1973) oil shock (at least in France): a new energy source, nuclear power, has massively emerged. Rationning took the form of energy savings, propaganda campaigns and increased energy prices, and energy efficiency has been increased.

Energy efficiency: Green, before 1982, red afterwards

GDP per capita - world average - in constant 2012 dollars (vertical axis) plotted against the world oil consumption in million tonnes oil equivalent (horizontal axis), from 1965 to 2012. Green: data from 1965 to 1982, red: data from 1983 to 2012. The correlation is better for recent years, which shows that the world economy is not less dependent on oil: the dependency has increased, even though we get "more GDP per barrel" today than before.
Author's calculation on primary information coming from BP statistical review & Shilling et al. (energy) and World Bank (GDP).

La chasse au gaspi

The gaspi (from "gaspillage", waste) was this animal, with a funnel on the head, characteristic of the gasoline filling stations at the time (1970-1980) and there was small films and advices to avoid wastes.

The cost of energy (notice external shock inflation on energy prices in the 70's)

by Xavier in Paris on Tue Nov 19th, 2013 at 06:52:25 AM EST
[ Parent ]
Xavier: "Inflation is not per se an action of class war, quite the contrary: core inflation destroys the revenues from capital and is, by definition, constituted by an increase in wages and salaries."

Inflation is a way to re-balance the effect of class war by reducing the burden of debt that the wealthy have imposed on the rest through their privileged access to the levers of power and superior understanding of the operation of a capitalist economy. And the French nuclear fleet was not built with the savings of French investors so much as by the creation of credit by banks based on a national consensus of the need to develop a non-fossil fuel based supply of electrical power. Had there not been that consensus the interest rate charged would have made the power produced much more expensive, not to mention the cost of obtaining product liability insurance for the plants.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 19th, 2013 at 10:39:31 AM EST
[ Parent ]
More than that, inflation seems to coexist quite happily with a decrease in political power for the capitalist classes and an increase in power for everyone else.

It's not until you get hyperinflation that everyone loses. But hyperinflation != inflation.

In the media, 'inflation' was always the word used as a substitute for 'don't be greedy and claim more than your fair share of the wages and salary pie.'

And when we had epic inflation in the 70s in the UK, 'everyone knows' it was caused by greedy unions, and oil price shocks were incidental to the point of being irrelevant.

In fact, inflation cannot be caused by bankers or corporations, by definition. So when the British energy industry is hiking prices, or when the BoE and the government are deliberately trying to create a property bubble, or when supermarkets keep prices artificially high, that's not inflation - that's an unavoidable and entirely understandable increase in consumer prices.

As far as mainstream narratives are concerned, it's only when workers ask for more money that inflation happens.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 19th, 2013 at 11:27:21 AM EST
[ Parent ]
I usually find your comments understandable enough, however oblique in many cases. However, I'm lost on this one. Perhaps you are engaging in a very subtle sarcasm.

"In fact, inflation cannot be caused by bankers or corporations, by definition." Pardon me? Whose definition? OK - maybe government policy is the important causation. Then who controls the government?

At least in the U.S., where the government has steadily eroded the 'social safety net's system' response to price increases (better term than inflation?), the effect is wealth transfer from this system to the main beneficiaries of the other government-based welfare system - corporations and banks (particularly the military-industrial complex).

paul spencer

by paul spencer (paulgspencer@gmail.com) on Tue Nov 19th, 2013 at 01:20:32 PM EST
[ Parent ]
I'd have assessed that at the "dripping in sarcasm, applied with a large ladle" level.
by Colman (colman at eurotrib.com) on Tue Nov 19th, 2013 at 01:24:04 PM EST
[ Parent ]
so I'm naive.

paul spencer
by paul spencer (paulgspencer@gmail.com) on Tue Nov 19th, 2013 at 01:56:37 PM EST
[ Parent ]
That wasn't sarcasm so much as irony.

To spell it out - the major cause of spending power erosion for working people is corporate and financial action.

In reality, there is no other cause. Between increased costs due to speculation, oligopolistic profiteering, and overbilling for government services, with a bit of corruption to grease the wheels, wage demands and government welfare spending are pretty much irrelevant. (And when was the last time you heard of someone making a wage demand?)

The 'by definition' part is the fact that even on those rare occasions when corporate and financial action is quietly - very quietly - allowed to have created inflation, the only acceptable remedies are further downward pressure on wages, and cuts to government spending.

Price - i.e. profit - controls are utterly unacceptable.

In economic propaganda-land, there is no causal link whatsoever between increased prices created by asset/commodity profiteering+speculation, and official unicorn fart inflation, which is the number that gets bandied around on the news as a target.

Only worker demands and public spending can create inflation. No other economic agent is ever responsible.

If it starts to look like some other agent might be responsible, you can - and should - change the technical calculation used to define the inflation figures, and all is right with the world again. (E.g. I understand that by using vintage definitions of inflation, the real rate in most Western countries is very much higher than the 2% or so we're told it is.)

Of course all of this is insane double-think, and a naked lie. Even so - it's a very popular and persistent lie.

I don't doubt some economists have a more sophisticated understanding. But if they do they won't get a lot of air time, and they'll have even less opportunity to set policy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 19th, 2013 at 02:27:23 PM EST
[ Parent ]
I apologize for doubting you.

paul spencer
by paul spencer (paulgspencer@gmail.com) on Tue Nov 19th, 2013 at 05:06:44 PM EST
[ Parent ]
"A Society of rentiers (before the war) is replaced by a society of salary-men and women after the war ... all of that because of inflation." All caused by inflation? I think that you might want to modify that statement.

Perhaps my main point is lost in the particular subject of inflation. The salient point in our current historical context is class war - as in most historical contexts. In the current epoch it is almost a global truism that distribution is more skewed than usual and that any improvement in socio-political conditions must reduce the differential.

External inflation via resource shock? Again, so what as far as the main argument? I submit, though, that such junctures are merely ruling classes at war via different means.

I also submit that both your and ARGeezer's comments about the French response to the petroleum crisis of the '70s are important to the real need, which is development of solutions: namely that the government stepped in via policy and investment.

As to discussions of core, external, cost-push, etc. inflation - please review my characterization in my first post. Please tell me how commodities-prices inflation, centered on petroleum-price inflation, is not class war.

paul spencer

by paul spencer (paulgspencer@gmail.com) on Tue Nov 19th, 2013 at 01:10:15 PM EST
[ Parent ]
commodities-price inflation, or external inflation as I labelled it is not necessarily class war because it may be related to an actual scarcity of resources.

This is a well documented case for oil I think.

I really do believe that we should dissociate economics from politics here. Economics as in "study of the production mecanisms in society" are not political per se. mainstream media spin about austerity is political, because it serves the interests of a particular social group.
But the fact that economic lingo is used to promote an agenda do not imply that economical studies are not giving insight on which kind of societies do work, as in stable and productive societies.

Even in a context of huge de-growth to keep our pressure on environment and natural resources would we need economic studies.

Because the fundamentals of economics -when honestly done- is about designing a productive process that optimizes resources: natural and human (as in work and capital). You could have whole studies of economic parameters like money supply/inflation usw without having made the slightest hypothesis on inequalities or democracy.
But you can also, given an objective of democracy and low inequalities, look for economic parameters that would favor this kind of society.

Example: you might achieve equality with a strong state which directly manage all productive processes so that no capital owner would gain power from riches. Or you could give instructions to your central bank to permanently run a light inflation so that it would constantly erode the capital owned by the richer citizens.
The first method requires a numerous administration and may have some political and social drawbacks (corruption or a tendency to conservatism), the second is more open, as it leaves autonomy to the citizens to develop a professional activity that will have consequences in the economical field.
I repeat my assertion about the french society after the first world war and rentiers euthanasy at the time.

by Xavier in Paris on Tue Nov 19th, 2013 at 06:02:26 PM EST
[ Parent ]
Economics as in "study of the production mecanisms in society" are not political per se.

I'd argue it is, because of the way the question is framed.

What does 'productive' actually mean? Who defines it? In what contexts?

is about designing a productive process that optimizes resources: natural and human (as in work and capital).

Both 'work' and 'capital' are purely political concepts. They have no meaning in cultures that don't assume capitalist notions of growth and development.

Now, you could certainly start from scratch and begin by asking what kind of human activity is useful, what resources are available at what cost, and with what potential innovation multipliers.

You can then maybe create accounting systems with an explicit aim of encouraging stable, non-destructive long-term investment over short-term spivery.

But all economic systems are primarily value systems. And all value systems are political, in the sense they privilege some individuals and organisations, and handicap others.

The challenge isn't to be 'productive', but to make sure the political morality is as sane and stable as possible, and that public debate is based on accurate facts and not on deliberate lies, spin, PR, misdirection, theology, dogma, or other intellectual poisons.

Only then can you start creating an accounting system that measures the right things for the right reasons. And then you may - perhaps - finally be able to do some useful economics.

But if you don't do it in that order, whatever you create won't be politically stable.

My biggest criticism of economic theory isn't just that it's wrong or misleading, but that it ignores the nature of political feedback loops.

The feedback loops create inevitable, entirely predictable, explosive instabilities. So you not only get the economic meltdowns on a clock-like cycle, you also get the same tendency to repeated political and social catastrophe.

If there's a solution, it's going to come from reframing policy in completely new terms. Tinkering around the edges won't fix the underlying issue, which is that power tends to concentrate, and unchecked concentrations of power inevitably become self-serving and toxic.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 19th, 2013 at 10:08:14 PM EST
[ Parent ]
I respectfully disagree on your definition of economics: a society that produces only food and shelter has an economy. The fact that this economy seems not to fit in traditional neoclassical views is an aside.

  • Work is the fact that any human being, in any society, will get up in the morning to get something to eat.

  • Capital, in any human society, is the fact that this human being will probably not get his food without a tool. That tool is capital. (in all senses ^_^)

  • Politics is the fact (relatively well established, I think) that human beings are social animals, evolved from other social animals, in a species group (apes) characterized by the existence of coalition of animals that give an edge in the reproduction processes of the individual and are then selected by darwinian mechanisms.
  • We may prefer to implement liberal social organizations, because our personnal philosophies tend this way or because some scientific aspects have convinced us that societies which value equality or freedom for all are better than others, or because we do not belong to the favorized classes. But this is totally independent from the fact that a democracy or a dictatorship will have to feed their populations to survive as societies, and therefore they will have some economical mechanisms that can be studied.

    But all economic systems are primarily value systems. And all value systems are political, in the sense they privilege some individuals and organisations, and handicap others.

    I probably agree with that, provided that you allow that some value in intrinsic, not politically dependent. And I add that the (scientific) study of these economic systems is not political by itself. Anyway, the overall economic organization, the fact that some activities or possessions are privileged may be policy dependent, in a low level, diffused, kind of way, as in cultural politics.

    What i call a "productive process" is the physical processus that allows food to be found in our environnement (and eaten). You can apply that to other needs that may arise, be it understood that I do not say anything on the nature of these needs, that may be culturally defined (as in: a primitive society living in the rainforest has no deterministic reason to have the same preferred needs as a pastoral society from central asia or an urban society from Europe). The choices between these different kind of societies may be determined by the reciprocal influences of culture on the members of each society. It seems that the occidental model is quite attractive at the moment, as everybody wants to emulate it - with some differences-, maybe for wrong reasons (comfort, life expectancy, sense of luxury...)
    It seems also that it is quite predatory, as the regulation (or lack of) we have decided to apply to our economical system since the 18th century is favorizing the accumulation of capital over work or natural resources preservation.

    Other societies may have made different choices in the past (like in amerindian societies in the US, where work and preservation of natural resources where privileged). This choice is cultural. and therefore political also, I will agree with you on this: culture is maybe a way to justify some kind of power repartition in society.

    by Xavier in Paris on Wed Nov 20th, 2013 at 08:34:46 AM EST
    [ Parent ]
    I still disagree. Words like 'work', 'capital' and 'productive' are pure capitalist theology.

    I doubt Amazon tribespeople think in those terms at all. So far as I can tell, based on a little reading and no experience, they have a much richer and more complex relationship with their environment and with their history.

    It's true that people need food and shelter, and some kind of social structure. But that is not the same as accepting that the provision of food and shelter are a primary problem for everyone, in the way they are in capitalist cultures.

    It's a famous factoid - it may even be true - that in some cultures, provision of necessities takes no more than four hours a day. So why it does take between eight and twelve in this supposedly superior one?

    To paraphrase Iain Banks, economics is synonymous with poverty. If you want global prosperity, you're very unlikely to get it by thinking purely in terms of resource allocation, 'work', and 'capital'.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 20th, 2013 at 11:39:52 AM EST
    [ Parent ]
    but amazonians people still eat... Replace "work" by "activity" if you think the word is too much western centered. You will still have a fact: these guys spend some time looking for food and some time doing other things. The choice between time spent looking for food and time spent doing other things reflect a value, and therefore an economic system.

    The fact that, in that kind of cultural environement, people do not consider as a need the use of TV entertainment or whatever only says something about their cultural values. Not about the existence of men, of man made objects and of natural resources needed to craft these man-made objects. Work, capital and resources. Economy.

    I really want to make clear that "work", in my post, is not equivalent to "wage-earning job" or other system we know. "Capital" is not equivalent to "money". But I don't think it is possible to avoid looking at these three production factors, whichever denomination you use. Even animals will have to evolve in this frame. It's some kind of population dynamics study.

    I prefer using terms already defined rather than having to recall my own definitions each time. Because the important thing for me is more on the discussion of the set of rules to choose, as a society, to regulate these three factors. Should we give precedence to capital, to work, to natural resources? What is the maximum amount of work that can be used at a given time? (ie: productivity, worked hours...) What is the right use of natural resources? Should we use all our knowledge to produce things without regards to the resources available? should we force a reduction of work hours so as to reduce the amount of natural resources used and have more time to do other things?

    by Xavier in Paris on Wed Nov 20th, 2013 at 03:38:39 PM EST
    [ Parent ]
    • Work is the fact that any human being, in any society, will get up in the morning to get something to eat.

    • Capital, in any human society, is the fact that this human being will probably not get his food without a tool. That tool is capital. (in all senses ^_^)

    • Politics is the fact (relatively well established, I think) that human beings are social animals, evolved from other social animals, in a species group (apes) characterized by the existence of coalition of animals that give an edge in the reproduction processes of the individual and are then selected by darwinian mechanisms.

    Do the notions of work, capital, productive mechanisms, etc. apply to non-human social animals, e.g. chimpanizees, rhesus monkeys, bats, bees, ants, etc., as well as to humans?

    What, if anything, is qualitatively different between non-human economic systems and those of humans?  Is it the flexibility of social arrangements that humans have to mediate economic relations between individuals in these groups (presumably in large part due to language and other symbolic systems)?

    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

    by marco on Wed Nov 20th, 2013 at 04:04:39 PM EST
    [ Parent ]
    Humans are the only species of social animals to use crude tools to build better tools to any significant extent. This gives human societies a lot more ability to store (and thereby to concentrate) wealth - you can collect far more food for yourself if it won't spoil in a few days, you can only really begin handing down wealth to your children if you have tools which require other tools to build and maintain.

    This gives a scope to human politics that is absent in other primate politics.

    Then of course comes the invention of long-distance communication and transportation, which adds a geographic scope to the politics. But that's tacked on much later in the evolution of primate politics.

    "Social" insects are arguably different, and not particularly social at all, in that the "organism" level is the hive rather than the individual specimen - a worker ant resembles a red blood cell more than it resembles a chimpanzee.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 05:40:59 AM EST
    [ Parent ]
    chimps also use tools. And I think I recall a study where it was proved that these tools were culturally different from one group of chimp to the other. (but I may be mistaken: this comes from my fuzzy memory)
    by Xavier in Paris on Thu Nov 21st, 2013 at 07:28:53 AM EST
    [ Parent ]
    He said "use crude tools to build better tools". I'm pretty sure he worded it that way to exclude chimps.
    by gk (gk (gk quattro due due sette @gmail.com)) on Thu Nov 21st, 2013 at 07:30:59 AM EST
    [ Parent ]
    Well, I don't know about using tools to build better tools. but they definitely modify the object to get an artificial tool.
    by Xavier in Paris on Thu Nov 21st, 2013 at 10:53:03 AM EST
    [ Parent ]
    link to the paper (pdf): tools and chimps
    by Xavier in Paris on Thu Nov 21st, 2013 at 11:25:33 AM EST
    [ Parent ]
    No, the fact that the chimps don't do it isn't the reason for my distinction. I make the distinction between simple and complex tools because complex tools present a bootstrap problem.

    Suppose you take a troop of chimps, take their tools away and displace them to an unknown area. They will be able to recreate their entire stock of tools in more or less the same state within a very short span of time. They have all the knowledge required, all the raw materials at hand, and all the cultural structure they need.

    Now suppose you do the same with one of the early Sumerian city-states. They still have all the raw materials readily at hand. They have all the culturally embedded knowledge. They have all the craftsmen and laborers they had in their city-state. But they would not be able to bootstrap a Sumerian civilization before they starved and died. Because they would not have the tools they would need to build the tools with which they were familiar. They would not have the irrigation systems that their forefathers built up over generations. They would not have the granaries to stockpile food, or the roads to transport it in from the farms. Or even the strains of food crops carefully cultivated and domesticated.

    I argue that this, more than anything else, is what distinguishes chimpanzee and human politics. Because the rest is a lot more similar than most people give the chimps credit for.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 11:03:10 AM EST
    [ Parent ]
    ok, you mean that our societies are a bit more complex than chimp's societies? ;-)

    But maybe the human society may "downgrade" and, whith some losses in lives, develop a new technical environnment.

    Anyway, I think we are quite far away the initial posts, and I personnally have a bit lost my thread here. But it was interesting to discuss things with everybody here, as I had never really took the time to write things down. Food for though anyway.

    by Xavier in Paris on Thu Nov 21st, 2013 at 11:22:48 AM EST
    [ Parent ]
    Humans, like cockroaches, are exceedingly easy to kill but very difficult to completely exterminate.

    Then again, our technological civilization could be argued to be a part of our extended phenotype - just as one might regard an anthill as a part of the ant colony, rather than a part of the ground. If one takes that view, then to extinguish a culture is tantamount to an extinction event.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 11:30:12 AM EST
    [ Parent ]
    I'm not optimistic. I think our culture and accumulated knowledge are unique, and uniquely endangered.

    Without that culture humans are just animals with unusually developed language skills. Humans as a species can survive without that culture.

    But I think in Darwinian terms the persistence and mechanical amplification of knowledge are a new symbiotic genus in their own right, and wholesale extinction would just as catastrophic as any other kind of extinction.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 21st, 2013 at 11:35:24 AM EST
    [ Parent ]
    Give it fifteen thousand years and the survivors of the nuclear Armageddon will have developed a new technological civilization. Humans are tenacious bastards like that.

    But it will bear so little resemblance to the one we currently live in that one might as well argue that mainline humans went extinct and a sub-species evolved to fill in the abandoned niche.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 11:53:24 AM EST
    [ Parent ]
    What makes humans different is externalised cumulative memory.

    In other species, individuals learn, but their knowledge disappears when they die. So each generation has to start from scratch.

    A few animals have very limited shared memory.

    Only humans externalise memory in physical form, so learning and culture don't just persist across generations, but become cumulatively detailed and increasingly widespread and accessible.

    Tool use isn't that unusual. A few animals can share tool strategies. Only humans can share tool strategies in a way that persists long after the original inventors died.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 21st, 2013 at 11:31:39 AM EST
    [ Parent ]
    Case 1: In bottlenose dolphins, all individuals from a single ancestor use tools, while their companions (as in "member of the same group, but of different ancestor") do not use the tool.

    Case 2: in chimps, tool use and learning most effective between age 3-5. A 16 year long longitudinal study.

    Case 3: Archeologists find remnants of continued tool use on the same site for 4300 years.

    by Xavier in Paris on Fri Nov 22nd, 2013 at 07:36:13 AM EST
    [ Parent ]
    You're missing my point.

    I can learn how to do integration by reading Wikipedia or buying a book. The point is not that I'm learning from other individuals, but that the knowledge persists and exists externally and independently.

    I can learn to play the blues by listening to recordings made by someone who died a long time ago. You're going to have a hard time convincing me there's any evidence of similar transmission in animals.

    Tool use is not the point here.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 22nd, 2013 at 08:47:07 AM EST
    [ Parent ]
    It's the case 3 for you, then: An archeological site were tools associated to chimps are found on a 4000 years duration. These tools are still used by chimps.

    Anyway: a knowledge exists in the brain of an individual (who has learned it). If this individual, chimp or human, do not teach it, then it is lost. Otherwise it is transmitted. Chances are that the second individual will be young (study about learning age 3-5 for chimps), so will survive its teacher: if he becomes a teacher in his time, then the knowledge has been transmitted to the next generation.

    Does knowledge exists independently from a living mind? This is a philosophical question I do not have an answer to.

    by Xavier in Paris on Fri Nov 22nd, 2013 at 09:31:50 AM EST
    [ Parent ]
    As I said - tool use is not the point. But you're not understanding the difference, so never mind.
    by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Nov 24th, 2013 at 01:06:59 PM EST
    [ Parent ]
    I understood you were talking about the transmission of knowledge in time.

    That's the third paper, talking about continuous transmission attested by archeological evidence during a period of time.

    If you're restraining your though to transmission through a media like writing, recording and so on, then what about human oral cultures or pre-historical ones?

    I feel the limit is much more tenuous and that it may be impossible to find something other than a difference in degree (of intelligence, communication, culture...) between species that are akin to ours.

    by Xavier in Paris on Mon Nov 25th, 2013 at 06:33:54 AM EST
    [ Parent ]
    I'm sorry if i didn't understood well your meaning.
    by Xavier in Paris on Mon Nov 25th, 2013 at 06:35:13 AM EST
    [ Parent ]
    The line goes:

    personal memory -> shared herd memory -> external persistent shared memory -> abstracted external shared memory.

    Each is a superclass of the previous one, and the differentiator - as I said - is that once memory is externalised, face to face transmission is no longer required, and it also becomes possible to symbolically abstract, summarise, model and share experience without having to living it personally.

    That's a difference in kind, not a difference in degree. It took humans a long time to invent it, but once it was invented it made a lot of other things possible, including brain tools like computers, which not only store information outside of individual experience, but can leverage innate intelligence in novel ways.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 25th, 2013 at 07:04:08 AM EST
    [ Parent ]
    In addition, it means that when aggressive males manage to kill themselves off, their cultural influence does not die with them, but persists and can be relearned by future generations. Which means we're worse off than baboons.

    Specifically, I'm thinking of the theory that European post-WWII Social Democracy is a consequence of two world wars in 30 years decimating the male minitaristic elite. But the effect of that did not survive the coming of age (1980s) of the generation born after WWII (1950s), because they could learn toxic culture from the "classic" writings of dead people.

    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

    by Carrie (migeru at eurotrib dot com) on Mon Nov 25th, 2013 at 07:10:54 AM EST
    [ Parent ]
    The corollary is that you don't change culture by persuading individuals, you persuade individuals by changing culture.
    by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 25th, 2013 at 07:32:59 AM EST
    [ Parent ]
    And what likely happened after WW II was that there was insufficient change in the underlying culture. Likely insufficient account was taken of the ability of the females and older generations of males to transmit the negative cultural traits that were attenuated in their expression after WW II by the reduction of living males in the 20-40 year old age group. So when more normal population demographics reappeared so did the traits that had led to them being skewed in the first place.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 25th, 2013 at 07:54:35 PM EST
    [ Parent ]
    No, the knowledge depends on you knowing how to decode it. It's not independent of anything - write the book in Chinese (guessing here) and it's not knowledge to you or me.
    by Colman (colman at eurotrib.com) on Fri Nov 22nd, 2013 at 09:46:39 AM EST
    [ Parent ]
    That depends on whether we consider knowledge to be a relative or an absolute thing. I may know something that is unintelligible to my teenage children, because they are not currently disposed to comprehend or accept it.

    Nobody could read hieroglyphs or Sumerian cuneiforms either. But the knowledge they embody was still there all the time, just waiting to be decoded.

    It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

    by eurogreen on Fri Nov 22nd, 2013 at 10:20:37 AM EST
    [ Parent ]
    Decoding was only possible because we had sufficient continuity of oral skills to link stuff we knew to stuff that was there. And whether our interpretation is correct or not is an issue of debate.
    by Colman (colman at eurotrib.com) on Fri Nov 22nd, 2013 at 10:33:47 AM EST
    [ Parent ]
    ummm so the information was there? sort-of there? not there at all?

    I don't really think oral skills had much to do with decoding hieroglyphs or cuneiforms. Archaeological evidence, and other writings, of various ages, were what permitted it.

    I postulate that encoded knowledge is objective and intemporal (but, obviously, contextual in its interpretation)

    It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

    by eurogreen on Fri Nov 22nd, 2013 at 11:10:54 AM EST
    [ Parent ]
    Nope, no more than DNA is.

    We were able to use the other writings because we knew how to read their descendants. Reading is a skill we pass on orally.

    by Colman (colman at eurotrib.com) on Fri Nov 22nd, 2013 at 11:18:58 AM EST
    [ Parent ]
    No, speaking is a skill we pass on orally.

    Reading and writing are enhanced language skills that can be learned after that. Humans are capable of teaching themselves to read (with difficulty, but it can be done - just as most people can learn the basics of most languages, given tapes and books.)

    The point isn't that language exists, but that enhanced skills allow information to persist and accumulate outside of human brains, and to be transmitted without personal contact.

    And it's not just writing. Some of the most popular language courses are spoken-word. They're recorded and replayed to order.

    Again, the key difference is that they continue to exist independent of direct personal contact. Just like iPad games for kids that teach them word basics when their parents aren't around.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Nov 24th, 2013 at 01:42:54 PM EST
    [ Parent ]
    Why does something have to make humans different? We do some stuff really well, but we're just animals.
    by Colman (colman at eurotrib.com) on Fri Nov 22nd, 2013 at 08:03:44 AM EST
    [ Parent ]
    You're asking that on the Internet.

    Just saying.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Nov 22nd, 2013 at 08:38:53 AM EST
    [ Parent ]
    Difference of degree, not kind. We're really shit at flying.
    by Colman (colman at eurotrib.com) on Fri Nov 22nd, 2013 at 09:47:09 AM EST
    [ Parent ]
    Er - no we're not. We're really good at flying - to the Moon and back good.

    We're really bad at flying by flapping our forelimbs around, which is something else entirely.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Nov 24th, 2013 at 01:50:12 PM EST
    [ Parent ]
    I'd still argue the notion of capital is inherently political. Tools aren't, but at the point you aggregate a hammer and a sickle and get some measure of "capital" you are no longer dealing with objective facts.
    by generic on Thu Nov 21st, 2013 at 03:33:09 AM EST
    [ Parent ]
    Which just emphasises the extent to which 'economics' is just campfire storytelling, and not an objective examination of what humans do, or why humans do it, or what humans could do that's different and/or better.

    If you want insight into those questions you're better off asking an anthropologist.

    by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 21st, 2013 at 12:54:57 PM EST
    [ Parent ]
    Among a litany of problems with Summers', slightly less with Krugman's, and still evident in Baker's analyses is a basic mischaracterization of inflation.

    The perfect accompanyment to this observation is the quote found in the Interfluidity article cited below by Migeru:

    "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists." - Joan Robinson

    I suspect that she had particularly in mind economists of the Chicago School, but Cambridge, Mass. as well - the left and the right pillars of NCE.

    "It is not necessary to have hope in order to persevere."

    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 18th, 2013 at 08:20:54 PM EST
    [ Parent ]


    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Sun Nov 17th, 2013 at 06:07:35 PM EST
    To be honest, Krugman does not advocate bubbles -Summers doesn't directly do so either, although it would be quite a natural conclusion from some of the things he said. He mentions that Summers spoke of secular stagnation and finishes with "I fear he is right".

    Expansion of public services would be good, although I would like to reverse inequality directly first. But we can't just expand because of the physical constraints (and even from the fact that there is only so much we can meaningfully consume) -so we'll have to restrict individual production to maintain full employment.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

    by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 18th, 2013 at 02:41:17 AM EST
    [ Parent ]
    You can expand services which don't consume material resources.

    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Mon Nov 18th, 2013 at 04:20:03 AM EST
    [ Parent ]
    Well, yes, to a considerable extent. However:

    -There may not be quite as many such services not consuming any material resources as we'd like
    -Especially not as many services for which there really would be a demand
    -We don't just need to stagnate but to go back on resource use -and to go back a lot. So expansion of services, which I would very much welcome (more teachers, for instance, and not just at school but even for adults), will not be enough.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

    by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 18th, 2013 at 04:27:32 AM EST
    [ Parent ]
    There is expansion in creating the conditions for reduced (finite) resource use, ie creating infrastructure for the energy transition, building new and refitting old constructions to be as energy-neutral as possible, transforming agriculture  from its current trend of rapid destruction of soil fertility and water to practices that actively foster those resources (yes, there is a gain to be had there).
    by afew (afew(a in a circle)eurotrib_dot_com) on Mon Nov 18th, 2013 at 05:18:15 AM EST
    [ Parent ]
    Absolutely, and that is what I meant when I said that short term, a policy of restricting resource use (and even total production) would increase investment.

    My point about a need for solutions to avoid deflation was for the period after that, which is not anytime soon. I wanted to deflect any argument that stagnation was totally incompatible with full employment and avoiding deflation.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

    by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 18th, 2013 at 05:26:26 AM EST
    [ Parent ]
    I visited in 1999, 2002, and 2003. Tokyo to Fukushima to Kyoto to Takefu. All that I saw was forests, small-scale agriculture, clear streams, egrets, high-speed trains, and a working populace in the countryside. Kyoto was clean and seemed prosperous. Tokyo was busy, much cleaner than most big cities - gleaming actually. Good food - seemed very wholesome. Helpful people with possible exception of one railroad clerk; 1 slightly obese person out of thousands observed; 1 beggar in Tokyo.

    The business people that I knew there worked for one of the largest chemical firms in the world. I heard that the boss of our division made about 4 times the salaries of the office people. Nobody seemed to begrudge it, even after an evening of sake.

    If that's stagnation in action, it looked good to me.

    Slight change of subject in line with afew's and others' comments: I read a Reuters' article yesterday about the 'failure' of the current solar-energy initiative in Japan. It was one of the most egregiously stupid articles that I have ever read. Because they have only installed 3+ GW of solar in one year out of 20+ GW projected over the life of the policy, the initiative is a shambles. One other thing that I love about the Japanese - they don't spike the ball in the endzone (maybe occasionally run around the pitch a bit after scoring). They just listen, drink their sake with friends, and move on to the next problem.

    paul spencer

    by paul spencer (paulgspencer@gmail.com) on Tue Nov 19th, 2013 at 01:48:41 PM EST
    [ Parent ]
    Interfluidity: The negative unnatural rate of interest (November 8th, 2011)
    I think this aberrationist view is quite wrong. I don't think you can make sense of the last decade without understanding that the so-called real interest rate has been trying to fall through zero for years. Only tireless innovation by the men and women of Wall Street prevented negative rates long before the traumas of 2008. A deep cause of the financial crisis was a simple expectation: That lenders ought to earn a "decent" real, risk-free yield even while a variety of trends -- skyrocketing incomes for the 0.1%, the professionalization of investing, leverage-induced risk aversion, China -- were creating Ben Bernanke's famous savings glut. The market response to a global savings glut ought to have been sharply negative real interest rates for low risk savers. But as a society, we resent and resist that capitalist outcome. It is well and good for markets to drive the price of undifferentiated labor asymptotically towards zero. But God forbid that "savers" not be paid for supplying a factor that turns out not to be scarce. Instead, an alphabet soup of financial innovations was conjured to transform bad lending into demand for low risk money, and thereby support its price. Now those innovations have failed, and the fact of negative real interest rates is plainly before us. But we are still, desperately, resisting it.

    ...

    Ideally, a special class of borrowers, entrepreneurs, would invest borrowed funds in projects precisely designed to meet savers' future consumption requirements. But in a sufficiently unequal society, the marginal saver may have vastly more wealth than is necessary to endow her own future consumption (including proximate bequests). There may be lots of ways to turn today's resources into "future wealth" in a general sense, but goods and services in excess of what today's lenders will be able to consume or reinvest in future periods are worthless to the people who set the price of money. The marginal productivity of investment may remain high technologically even as its marginal productivity to existing lenders turns sharply negative. (More accurately, both the marginal present and future dollar may have no consumption value to a lender, but in a accounting terms the value of a present dollar is fixed, while the relative value of a future dollar is flexible as long as there is inflation or some other means of circumventing the nominal zero bound.) It is the marginal productivity of investment to existing lenders that sets a floor beneath market interest rates. If we posit satiable consumption and sufficient inequality, market interest rates can approach -100% even while technologically fruitful projects go unfunded, because the projects would be of benefit only to people with little to offer the marginal lender.

    ...

    Our current negative real interest rates are not an aberration, but a product of longstanding and continuing trends. However, since neither those trends nor the negative rates are conducive a decent and prosperous society, it is foolish to refer to them as "natural". We need to alter the circumstances under which full-employment requires that lenders pay borrowers to spend. We need to reshape "nature" until the new natural rate is positive. We need to understand the circumstances that lead investors to accept negative real returns rather than finance new ventures. We have to think about issues like income and wealth inequality, the structure of labor markets, institutional investor incentives, financial risk-aversion and deleveraging. We need to transform existing institutions, or invent new ones.

    (my emphasis)

    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Mon Nov 18th, 2013 at 06:01:09 AM EST
    This critique of the view that secular stagnation is unnatural brings to mind J.A. Hobson's work http://www.marxists.org/archive/hobson/1902/imperialism/, 1902, wherein he described Imperialism as being necessary to capitalism as the capitalists paid their workers too little to consume what their factories could produce and didn't want to pay them more. The solution was to sell their output into captive markets in the Empire and to invest in rent producing enterprises in the Empire, such as railroads in India. In the US Henry Ford instinctively took the other view. I say instinctive because of the demonstrated vast ignorance of the world beyond auto manufacturing that Ford unwillingly provided under cross-examination in court.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 18th, 2013 at 08:36:45 PM EST
    [ Parent ]
    That's an excellent piece.

    I've noted in the past that we've been entering an equilibrium (I say entering because it is at different stages around the world) where there are large pockets of people with needs, but no money - and small pockets of people with money, but no particularly unserved needs.

    Economic analysis as operated by many economists breaks down at that point. SRW points to how you can analyse it... but in the end it becomes a political rather than economic problem...

    I think it's also really important because it points out how ideologically loaded the notion of "secular stagnation" really is. Conflating technological productivity with "lending productivity" allows lenders to claim a high ground that doesn't belong to them.

    It's interesting to me that Clayton Christensen, looking at all this "secular stagnation" stuff from the bottom up (he's a professor studying innovation) has come to very similar conclusions, although he sees it as money trapped in a cycle of financialisation that starves "real economy" innovations of investment...

    by Metatone (metatone [a|t] gmail (dot) com) on Tue Nov 19th, 2013 at 06:53:04 AM EST
    [ Parent ]
    There are no transcripts of the talk I was at. Here's some small tidbits from another event he spoke at:

    Clay Christensen warns CIOs that smart managers are doomed to fail

    There is more than one way to disrupt the market. In addition to disruptive market-creating innovations, which succeed by offering products or services to a class of customer that previously didn't exist, there are sustaining innovations. These succeed by replacing good products with better ones (Prius for a Camry). Efficiency innovations, on the other hand, succeed by offering the same product at a lower price (Geico). Each plays a different role in the economy. Market-creating innovation requires capital and creates jobs. Sustaining innovation is "replacetive" in nature and, while making the economy more vibrant, does not generate a lot of jobs. Efficiency innovation eliminates jobs but frees up capital for other things. It's kind of a neat system, Christensen noted.

    "As long as the market-creating innovations are creating more jobs than the efficiency innovations are taking out," he said, "and as long as the efficiency innovations are creating enough capital to fund the market-creating innovations, it is like a perpetual motion machine."

    But since the 1990s, this nifty machine -- the envy of the global economy -- has been under assault from the "Church of New Finance," his name for the doctrine taught at places like the Harvard Business School, he said, that measure profitability by how efficiently a company uses capital. What the new ratios offer is two ways to achieve good results. Return on Net Assets (RONA) comes out just fine by either increasing the numerator or decreasing the denominator. "Either way RONA goes up," Christensen said. The same holds true for internal rate of return, the ratio that basically expresses how quickly one can get money out of an investment. Innovation is hard. Since those market-creating innovations that generate jobs often take five to 10 years to pay off, wouldn't it make more sense to invest mostly in efficiency innovations?

    The end result of pursuing that strategy, however, is that profits accumulate but job growth declines. "That is why we are not getting out of the recession and why we are not creating jobs," Christensen said. And the doctrine makes no sense, he added, giving the audience a glimpse of the passion bordering on rage that fuels his pursuits. A scarce commodity when these measures took hold, capital is abundant today. The cost of capital is zero. America is awash in cash. Instead of hoarding capital, companies should be pouring it into innovations that create jobs. And yet, the management tenets of the Church of New Finance -- which protect capital at all costs -- "make it impossible for smart people to do what needs to be done to sustain growth in the industry," he said.

    by Metatone (metatone [a|t] gmail (dot) com) on Tue Nov 19th, 2013 at 06:58:30 AM EST
    [ Parent ]
    (He doesn't have the political awareness to make the connections that many here will make, but I think it's interesting to see someone articulating how SRW's thoughts are playing out in terms of money flows and institutions...)
    by Metatone (metatone [a|t] gmail (dot) com) on Tue Nov 19th, 2013 at 06:59:29 AM EST
    [ Parent ]
    I've noted in the past that we've been entering an equilibrium (I say entering because it is at different stages around the world) where there are large pockets of people with needs, but no money - and small pockets of people with money, but no particularly unserved needs.

    Economic analysis as operated by many economists breaks down at that point. SRW points to how you can analyse it... but in the end it becomes a political rather than economic problem...

    Of course it is, and of course you can, and of course it does. But Keynes already analysed that 80 years ago:
    There is, however, a second, much more fundamental inference from our argument which has a bearing on the future of inequalities of wealth; namely, our theory of the rate of interest. The justification for a moderately high rate of interest has been found hitherto in the necessity of providing a sufficient inducement to save. But we have shown that the extent of effective saving is necessarily determined by the scale of investment and that the scale of investment is promoted by a low rate of interest, provided that we do not attempt to stimulate it in this way beyond the point which corresponds to full employment. Thus it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of capital at which there is full employment.
    (my emphasis)
    There can be no doubt that this criterion will lead to a much lower rate of interest than has ruled hitherto; and, so far as one can guess at the schedules of the marginal efficiency of capital corresponding to increasing amounts of capital, the rate of interest is likely to fall steadily, if it should be practicable to maintain conditions of more or less continuous full employment unless, indeed, there is an excessive change in the aggregate propensity to consume (including the State).

    I feel sure that the demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. This would not mean that the use of capital instruments would cost almost nothing, but only that the return from them would have to cover little more than their exhaustion by wastage and obsolescence together with some margin to cover risk and the exercise of skill and judgment. In short, the aggregate return from durable goods in the course of their life would, as in the case of short-lived goods, just cover their labour costs of production plus an allowance for risk and the costs of skill and supervision.

    Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital. An intrinsic reason for such scarcity, in the sense of a genuine sacrifice which could only be called forth by the offer of a reward in the shape of interest, would not exist, in the long run, except in the event of the individual propensity to consume proving to be of such a character that net saving in conditions of full employment comes to an end before capital has become sufficiently abundant. But even so, it will still be possible for communal saving through the agency of the State to be maintained at a level which will allow the growth of capital up to the point where it ceases to be scarce.

    I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work. And with the disappearance of its rentier aspect much else in it besides will suffer a sea-change. It will be, moreover, a great advantage of the order of events which I am advocating, that the euthanasia of the rentier, of the functionless investor, will be nothing sudden, merely a gradual but prolonged continuance of what we have seen recently in Great Britain, and will need no revolution.

    Thus we might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce, so that the functionless investor will no longer receive a bonus; and at a scheme of direct taxation which allows the intelligence and determination and executive skill of the financier, the entrepreneur et hoc genus omne (who are certainly so fond of their craft that their labour could be obtained much cheaper than at present), to be harnessed to the service of the community on reasonable terms of reward.

    At the same time we must recognise that only experience can show how far the common will, embodied in the policy of the State, ought to be directed to increasing and supplementing the inducement to invest; and how far it is safe to stimulate the average propensity to consume, without foregoing our aim of depriving capital of its scarcity-value within one or two generations. It may turn out that the propensity to consume will be so easily strengthened by the effects of a falling rate of interest, that full employment can be reached with a rate of accumulation little greater than at present. In this event a scheme for the higher taxation of large incomes and inheritances might be open to the objection that it would lead to full employment with a rate of accumulation which was reduced considerably below the current level. I must not be supposed to deny the possibility, or even the probability, of this outcome. For in such matters it is rash to predict how the average man will react to a changed environment. If, however, it should prove easy to secure an approximation to full employment with a rate of accumulation not much greater than at present, an outstanding problem will at least have been solved. And it would remain for separate decision on what scale and by what means it is right and reasonable to call on the living generation to restrict their consumption, so as to establish in course of time, a state of full investment for their successors.

    (The General Theory, Ch. 24, section II)

    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Tue Nov 19th, 2013 at 07:02:26 AM EST
    [ Parent ]
    We have to think about issues like income and wealth inequality, the structure of labor markets, institutional investor incentives, financial risk-aversion and deleveraging. We need to transform existing institutions, or invent new ones. -SRW (MY bold)

    A good place to start transforming existing institutions might be pension funds. They play a key role in financial systems as they receive steady inflows of money today to cover obligations due in decades while paying out money today for obligations arising from money received decades ago. If they are not agencies of a country sovereign in its own currency then they can only pay out what they have received plus what they have earned on prior surplus receipts. Following inception they have a significant period in which inflows significantly exceed outflows. This serves as a source of capital for investment.

    In the '60s the New York State Pension Fund invested in Green Valley, a retirement community south of Tuson and at a somewhat higher elevation. This was an excellent investment as it produced an asset that could service the needs of retirees and in a milder climate with lower land and construction costs. But, with continuing financialization of the economy pension fund 'investments' became more problematic. Even state backed funds 'invested' in the oil commodity boom that broke in July '08 and, in the new reality of Zero Interest Rate Policies, they are having difficulty even keeping up with inflation. This is one of the major downsides to ZIRPs and the losses are likely to be absorbed by a combination of the pensioners and the taxpayers of states that guarantee these retirement funds.

    I can see only two real possibilities. Either the federal government assumes responsibility for shortfalls or we adopt sane macroeconomic policies. Some combination of both policies may offer the best result. I think this situation is symptomatic of an economy in which the financial sector has become many times the size of the underlying real economy. When that happens it is hard to keep the majority of the profits generated in the society out of the hands of financial sector executives and shareholders and it is even harder to keep them from controlling the government and using that control to their benefit and to the detriment of the general population. So the first step should be to cut the financial sector down to no more than twice the size of the real economy and keep it there.      


    "It is not necessary to have hope in order to persevere."

    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 21st, 2013 at 10:10:17 AM EST
    [ Parent ]
    Actually, under negative real growth rates you'd need not merely to avoid deflation, but to actively promote considerable inflation: What matters for the stability of the credit and contract network that underpins the  modern economy is continuous robust growth in nominal incomes. Which means that if an external constraint imposes negative real growth rates, then those must be compensated by inflation.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 18th, 2013 at 10:05:43 AM EST
    Yes, and this is where I threw two ideas, either raising the minimum wage very strongly each year, or simply crediting money on an equal basis until the desired inflation is achieved. Each year.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
    by Cyrille (cyrillev domain yahoo.fr) on Mon Nov 18th, 2013 at 06:16:34 PM EST
    [ Parent ]
    It is because of the instinctive revulsion that wealthy elites exhibit to either of the two above solutions to deflation that I fear that we will yet be plunged into a debt deflation death spiral. There may well be a limit to the ability to save people from themselves.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 18th, 2013 at 08:42:09 PM EST
    [ Parent ]
    Real World Economics Review: Paul Sweezy in 1982 on secular stagnation (November 17, 2013)
    So at bottom we are back where the debate of the 1930s left off: Why is the incentive to invest so weak? Hansen's answers are, I think, a good deal less, not more, persuasive today than they were when he first advanced them. And surely no one can follow the Schumpeter line of blaming anti-business policies for discouraging capitalists from investing in the years since the Second World War, least of all with an administration in power like the one we now have in Washington. We must look elsewhere.

    I suggest that the answer is to be found in analyzing the long period--twenty-five years or so--which followed the Second World War, during which we did not have a problem of stagnation. In fact during that time the incentive to invest was strong and sustained, and the growth record of the economy was perhaps the best for any comparable period in the history of capitalism. Why?

    The reason, I think, is that the war altered the givens of the world economic situation in ways that enormously strengthened the incentive to invest. I list in very summary form the main factors: (1) the need to make good wartime damage; (2) the existence of a vast potential demand for goods and services the production of which had been eliminated or greatly reduced during the war (houses, automobiles, appliances, etc.): a huge pool of purchasing power accumulated during the war by firms and individuals which could be used to transform potential demand into effective demand; (3) the establishment of U.S. global hegemony as a result of the war: the U.S. dollar became the basis of the international monetary system, prewar trade and currency blocs were dismantled, and the conditions for relatively free capital movements were created--all of which served to fuel an enormous expansion of international trade; (4) civilian spin-offs from military technology, especially electronics and jet planes; and (5) the building up by the United States of a huge peacetime armaments industry, spurred on by major regional wars in Korea and Indochina. Very important but often overlooked is the fact that these changes were in due course reflected in a fundamental change in the business climate. The pessimism and caution left over from the 1930s were not dissipated immediately, but when it became clear that the postwar boom had much deeper roots than merely repairing the damages and losses of the war itself, the mood changed into one of long-term optimism. A great investment boom in all the essential industries of a modern capitalist society was triggered: steel, autos, energy, ship-building, heavy chemicals, and many more. Capacity was built up rapidly in all the leading capitalist countries and in a few of the more advanced countries of the third world like Mexico, Brazil, India, and South Korea.



    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Mon Nov 18th, 2013 at 06:31:22 PM EST
    Funny how noone mentions as a factor the sudden drop in inequality that occurred with the combination of the Great Depression and then the war.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
    by Cyrille (cyrillev domain yahoo.fr) on Tue Nov 19th, 2013 at 12:46:49 AM EST
    [ Parent ]
    which is, I venture, a tried and true solution.
    by de Gondi (publiobestia aaaatttthotmaildaughtusual) on Tue Nov 19th, 2013 at 04:26:36 AM EST
    [ Parent ]
    Inequality is too explicitly political for economists, even Postkeynesians...

    A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
    by Carrie (migeru at eurotrib dot com) on Tue Nov 19th, 2013 at 05:17:13 AM EST
    [ Parent ]
    I am reminded again of a book titled The Dilemma of Muslim Psychologists, which dilemma was in large part that most of what needed being addressed constituted social taboos. It is similar to the dilemma of economists who see beyond the narrow limits of 'Mainstream Economics' yet still want careers in economics which currently would be undermined by the expression of such views.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 19th, 2013 at 10:54:59 AM EST
    [ Parent ]
    Why the future looks sluggish - The glut of savings in leading economies has become a constraint on demand | Martin Wolf, Financial Times
    The glut of savings, then, has become a constraint on current demand. But since it is connected to weak investment, it also implies slow growth of prospective supply. This difficulty predates the crisis. But the crisis has made it even worse.

    So what is to be done? One response to an excess of desired savings over investment would be even more negative real rates of interest. That is why some economists have argued for higher inflation. But that would be hard to achieve, even if it were politically acceptable. Another possibility, stressed by Andrew Smithers in The Road to Recovery, is to tackle obstacles to corporate investment head-on. His biggest villain is the "bonus culture", which encourages management to manipulate stock prices, via buybacks, rather than raise productive investment.

    Yet another possibility, discussed by Mr Summers and supported by many economists (including myself), is to use today's glut of savings to finance a surge in public investment. That might be partly linked to a shift to lower-carbon growth. Another possibility is to facilitate capital flows to emerging and developing countries, where the best investment opportunities must lie. It makes no sense for so much of the world's savings to seek investment opportunities where they do not apparently exist and shy away from places where, one hopes, they do.



    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
    by marco on Tue Nov 19th, 2013 at 05:09:37 PM EST
    The savings glut is a SYMPTOM of the loss of confidence in the future by investors. See Systemic Fear and the Future of Capitalism

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 19th, 2013 at 11:56:28 PM EST
    [ Parent ]
    Be that as it may, what Wolf says --

    use today's glut of savings to finance a surge in public investment. That might be partly linked to a shift to lower-carbon growth.

    -- lines up nicely with what afew wrote above:

    There is expansion in creating the conditions for reduced (finite) resource use, ie creating infrastructure for the energy transition, building new and refitting old constructions to be as energy-neutral as possible, transforming agriculture  from its current trend of rapid destruction of soil fertility and water to practices that actively foster those resources (yes, there is a gain to be had there).

    unless I read Wolf and/or afew incorrectly.

    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

    by marco on Wed Nov 20th, 2013 at 04:15:45 PM EST
    [ Parent ]
    No, you didn't read Wolf or afew incorrectly, so far as I can see. But my point is that we cannot expect the private sector to so use the savings glut. They are either too afraid due to uncertainty, conflicted by allegiance to fossil fuel interests or both. To fossil fuel interests the end of fossil fuel use seems more threatening than global warming - viewing the world as they do - through their pocketbook.

    The solution is for governments to do the investment directly and at current interest rates. It can either tax those who are holding the savings glut or just ignore that money and create new money, well, at least those sovereign in their own currency can. The Eurozone would be fucked on that score, but what else is new?

    My view is that global warming provides a challenge equivalent to that provided by WW II. It was when the business sector in the US and the UK and Commonwealth saw that their countries were committed to winning the war at any cost that the economies sprang back to life. The same would be true for a full on commitment to fighting global warming. We would get a twofer: put the economy back on track to full employment and do everything we can to save the planet. Sounds like an obvious winner to me.

    But to the fossil fuel industry that would look like THE END. But that is far from the case, even for them. Their reserves could be even more valuable as feedstock for high value plastics, even if at a reduced level of extraction and resultant revenue. But they have assets and expertise that likely could be redeployed profitably as well.  

    "It is not necessary to have hope in order to persevere."

    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 20th, 2013 at 04:36:17 PM EST
    [ Parent ]
    Agree with this:

    The solution is for governments to do the investment directly and at current interest rates. It can either tax those who are holding the savings glut or just ignore that money and create new money, well, at least those sovereign in their own currency can.

    and this:

    We would get a twofer: put the economy back on track to full employment and do everything we can to save the planet.

    and this:

    But they have assets and expertise that likely could be redeployed profitably as well.

    On this:

    But my point is that we cannot expect the private sector to so use the savings glut.

    Can't we influence them to start investing their savings glut productively by (1) penalizing savings over a certain amount and/or a certain amount of time; (2) taxing certain types of consumption and investment (e.g. on fossil fuels and their derivatives), and (3) providing incentives to invest on socially and environmentally "positive" investments, e.g. renewable energy?

    Though on that last point, there is this allegation:

    Like Mao urging peasants to melt down their pots, pans and farm tools to turn China into a steel-producing superpower overnight, Germany dished out subsidies to encourage homeowners and farmers to install solar panels and windmills and sell energy back to the power company at inflated prices. Success--Germany now gets 25% of its power from renewables--has turned out to be a disaster.

    As Germans rush to grab this easy money, carbon dioxide output has risen, not fallen, because money-strapped utilities have switched to burning cheap American coal to provide the necessary standby power when wind and sun fail. ...

    Germany Reinvents the Energy Crisis - A love affair with renewables brings high prices, potential blackouts and worries about 'deindustrialization.'
    Holman W. Jenkins, Jr., Wall Street Journal




    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
    by marco on Wed Nov 20th, 2013 at 05:03:04 PM EST
    [ Parent ]
    Behind paywall, so I don't have to read the argument before deconstructing.

    First, electrical power by source in Germany, just so we know what we are talking about.

    Now, Wall Street Journal would apparently have us believe that renewables steers the coal plant managers choices in coal purchases. Not bloody likely, what they mean is that coal is getting dirtier and not even getting huge rewards for it.

    Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

    by A swedish kind of death on Wed Nov 20th, 2013 at 05:22:37 PM EST
    [ Parent ]
    Try clicking on the article through these Google search results to view the article.

    I suspect it is more ideologically (and financially) driven propaganda than fact-based argumentation.   But,

    Consumption from renewable sources and hydropower in China grew by a quarter in 2012.

    But that growth came from a low baseline, and was more than offset by an increase of 6.4 percent in coal, which has a higher baseline. Coal accounted for 68 percent of Chinese energy consumption in 2012.

    Other significant CO2 increases occurred in Japan (+6.9 percent) and Germany (+1.8 percent), pushed by a switch to coal to offset dependence on nuclear.

    "CO2 emissions +2.2% in 2012, driven by China and coal"
    Phys.org

    In 2012 many countries increased dependence on coal. German emissions increased 1.8 per cent in 2012, with coal growing at 4.2 per cent.

    "Coal continues to dominate global carbon emissions"
    AlphaGalileo

    I think the thrust of the WSJ article is that wind and solar are still too inconsistent energy sources, and coal -- being abundant and cheap -- is the easy, convenient and logical thing to turn to to make up for that shortcoming, especially after dropping nuclear.

    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

    by marco on Wed Nov 20th, 2013 at 06:56:48 PM EST
    [ Parent ]
    A quick look at askod's graph leads me to ask: where is Germany to find relief? While I am sure that Powder Basin coal miners and US railroads are more than happy to sell Germany coal, but it is unlikely to be a very good deal. As capital costs are retired and wind power continues to decline in price it will have tremendous advantages over coal, even before considering the carbon. There is no fuel costs for renewables. And then there is the reaction of the German people.

    I will await the response of Crazy Horse, DoDo or Jerome for a better answer. But I remain suspicious of anything the WSJ might have to say about energy. It does seem that the cost of energy for manufacturing, as opposed to residential uses is posing a problem in Germany and industry, in conjunction with Merkel's conservative government, when it emerges, could do damage to Germany's world leading wind energy manufacturing industry. But where else can Germany get affordable power. Wind is roughly competitive with coal in the USA now, and doesn't have to include the cost of sea shipment, but no new coal plants are being built. This indicates that the issue is not based on the fundamental costs of the two sources so much as on who gets subsidized by whom.


    "It is not necessary to have hope in order to persevere."

    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 20th, 2013 at 08:21:44 PM EST
    [ Parent ]
    I guess the biggest take-away for me ― not only from the  WSJ, but from Phys.org and AlphaGalileo ― is that "German emissions increased 1.8 per cent in 2012, with coal growing at 4.2 per cent".

    It sounds like you think this is a temporary phenomenon and in the long run carbon emissions will go down as renewable power becomes more competitive and thus widespread in Germany.

    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

    by marco on Thu Nov 21st, 2013 at 09:16:32 PM EST
    [ Parent ]
    It sounds like you think this is a temporary phenomenon...

    That depends on whether energy incumbents in Germany can combine with industry wanting cheap power to kill the German wind energy business. Stay tuned.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 22nd, 2013 at 12:24:15 AM EST
    [ Parent ]
    You need to be a little careful with the electricity portfolios of small European countries (and in the context of electricity, the only not-small European country is Russia). Europe has a lot of cross-border load balancing, with France a major buyer of intermediate load, and Germany a major supplier. Since intermediate load is typically more CO2-intensive than base- and peak load, part of the German increase is probably attributable to increases in other parts of Europe (conversely, the French boast that their all-nuke strategy is carbon-neutral is... not totally true).

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 22nd, 2013 at 04:11:47 AM EST
    [ Parent ]
    part of the German increase is probably attributable to increases in other parts of Europe (conversely, the French boast that their all-nuke strategy is carbon-neutral is... not totally true).

    How much is attributable to that, and how much is attributable to burning coal imported from the USA.  There must be figures for that somewhere.

    Let's talk about energy. You say alternative energy can't scale. Is there no role for renewables?

    I like renewables, but they move slowly. There's an inherent inertia, a slowness in energy transitions. It would be easier if we were still consuming 66,615 kilowatt-hours per capita, as in 1950. But in 1950 few people had air-conditioning. We're a society that demands electricity 24/7. This is very difficult with sun and wind.

    Look at Germany, where they heavily subsidize renewable energy. When there's no wind or sun, they boost up their old coal-fired power plants. The result: Germany has massively increased coal imports from the US, and German greenhouse gas emissions have been increasing, from 917 million metric tons in 2011 to 931 million in 2012, because they're burning American coal. It's totally zany!

    ― Vaclav Smil quoted in This Is the Man Bill Gates Thinks You Absolutely Should Be Reading, Wired



    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
    by marco on Mon Nov 25th, 2013 at 03:58:14 PM EST
    [ Parent ]
    Energy transitions are slow because we are sitting with our thumbs up our asses and waiting for them to happen automagically, instead of devoting an actually meaningful share of the gross planetary product to making it happen.

    Pissing around with a few hundred billion here and there just isn't gonna cut it.

    - Jake

    Friends come and go. Enemies accumulate.

    by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 25th, 2013 at 06:02:23 PM EST
    [ Parent ]
    This article argues that the increase in coal is a short-term "bump" in the road, with three primary reasons:

    ... The increased coal burn that has occurred (and it has) comes from existing units. But this is due to short term economic factors, not a long term revival of coal's economics (which are terrible). In the EU, coal use has been growing since 2009 (after a steep drop in the preceding two years) but it is still below 2007 levels and well below increases in renewable energy generation.

    There's a lot of reasons for this short-term bump. The most important are: 1) strict new air pollution rules that ensure a huge amount of coal-fired capacity will be retired or constrained by 2016; 2) rock-bottom carbon prices; and 3) national level coal policies. But some of these same factors will conspire to have the exact opposite effect in the long run. ...

    "Europe's 'Coal Renaissance' Masks Industry Downfall"
    by Justin Guay, Washington Representative, Sierra Club



    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
    by marco on Tue Nov 26th, 2013 at 01:31:54 AM EST
    [ Parent ]
    "1) strict new air pollution rules that ensure a huge amount of coal-fired capacity will be retired or constrained by 2016"

    Here in the UK, the usual opinion among energy consultants (those I've spoken to, at any rate) is that these rules will be ignored and the plants will stay online.

    Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

    by Cyrille (cyrillev domain yahoo.fr) on Tue Nov 26th, 2013 at 02:51:17 AM EST
    [ Parent ]
    The easiest solution would be to produce the power outside Germany, in places where the climatic/political conditions are more amenable to it, and then run HVDC lines.

    Clean Options, alphabetical:

    Advanced nuclear : Build molten salt reactors in the Czech republic, France. (these are two of the nations with the most actual, current, research into this)

    Boring nuclear: Same, but with PWR's.

    Renewable: Solar: Longer HVDC lines. Into north africa. Lots, and lots of solar. Mostly this gets you increased reliability and removes the "winter" problem.

    Renewable: Wind: North sea floating windmills, produced shipyard style. Domestically, build http://eduard-heindl.de/energy-storage/energy-storage-system.html to level out supply.

    by Thomas on Mon Nov 25th, 2013 at 10:04:35 AM EST
    [ Parent ]
    Call me irrational and/or simple-minded, but after Fukushima, I am completely anti-nuclear.

    At the top of your list, I would add two options:

    • reduction in consumption
    • efficiency (e.g. better insulation)

    Passivhaus construction -- which is even spreading to China now -- is in line with these two.

    Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire

    by marco on Mon Nov 25th, 2013 at 04:04:42 PM EST
    [ Parent ]
    Reductions in overall electricity consumption are not going to happen.
    Cleaning up the rest of the economy - transport, chemical and industrial processes currently run of fossil inputs and so on means that the grid is going to have to supply a lot more juice. Currently electricity is roughly a third of our energy use, in a zero-emission economy, it will be well north of ninety, with the remainder being things like food production waste based fuels for niche applications and ambient heat sucked in by heat pumps. So even large efficiency gains still imply electricity production that is overall quite a lot higher than at present.
    So production plans need to be scaled for that, and the main point of efficiency gains is to limit just how much additional cabling you are going to have to bury.
    by Thomas on Mon Nov 25th, 2013 at 04:20:28 PM EST
    [ Parent ]
    Some of the extra consumption isn't actually going to impact the last-mile grid too badly. If we go down the path of "all electric motoring, and all electric home-heating via heatpumps" (you cant do district heating off a windmill.) then that demand can all be time-shifted trivially, so existing wiring out to residences would need only modest upgrades. But the production side? That is going to need beefing up. A lot.
    by Thomas on Mon Nov 25th, 2013 at 04:38:01 PM EST
    [ Parent ]
    You're irrational and/or simple-minded.

    Like me.

    by afew (afew(a in a circle)eurotrib_dot_com) on Mon Nov 25th, 2013 at 04:21:10 PM EST
    [ Parent ]
    Can't we influence them to start investing their savings glut productively by (1) penalizing savings over a certain amount and/or a certain amount of time; (2) taxing certain types of consumption and investment (e.g. on fossil fuels and their derivatives), and (3) providing incentives to invest on socially and environmentally "positive" investments, e.g. renewable energy?

    1. Yes, this is what inflation does for you. To generate inflation, in the present environment, the only tool available (barring explicit price controls) is public spending.
    2. This will not encourage productive investment. It will discourage garbage investment. Which is also generally a good idea, but slightly tangential to the point.
    3. Yes, but with the exception of certain market regulations (feed-in laws, etc.) which you want to impose anyway, this is basically just outsourcing the public spending from point 1).

    - Jake

    Friends come and go. Enemies accumulate.
    by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 21st, 2013 at 05:31:28 AM EST
    [ Parent ]
    And unfunded direct public spending is a LOT easier to pass than increasing taxes on the wealthy. Which would the wealthy prefer? Oh, for New Deal attitudes about marginal tax rates.

    "It is not necessary to have hope in order to persevere."
    by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 25th, 2013 at 08:19:47 PM EST
    [ Parent ]
    As I noted on Yves Smith's blog, bubbles are necessary only because we've deliberately dismantled anything that can truly be called an economy and replaced it FIRE.  Generating nothing but paper, hot air, and econo-Quatsch is not an economy.  But if we actually started making things again, we might have the masses living other than hand-to-mouth, and people might actually live decent lives.  Can't have that.
    by rifek on Wed Nov 20th, 2013 at 09:38:41 PM EST
    Duncan Weldon adds some really interesting thoughts about mechanisms:

    (big block quote unfortunately, but important:)

    Secular stagnation, bubbles & inequality | ToUChstone blog: A public policy blog from the TUC

    The factors linking all of these outcomes is change in corporate behaviour since the 1970s. As Reuters' James Saft wrote this week:

    On one side stand households and investors who are responding to the very strong liquor which the Federal Reserve is putting in the punch. By buying up bonds and keeping rates low, the Fed encourages risk taking and drives prices for assets - real and financial - higher.

    That's leading to record prices for everything from art to social media companies to Manhattan real estate. This isn't just a phenomenon for the rich, though the rich do get the cream. Real estate is going up fairly strongly in a wide variety of markets, as are the stocks owned in so many people's retirement funds and accounts.

    On the other side are corporate executives, who don't seem to have read their economics textbooks. Rather than responding to high profit margins by investing and competing, they seem happy to milk their cows without adding much to their herds.

    He does on to quote research from Andrew Smithers.

    Smithers contrasts the early 1970s with today. Then companies invested about 15 times more in new equipment and ventures than they returned to shareholders via dividends. Now the ratio is less than two. As recently as the 1990s, this number was as high as six.

    Why? The change toward ever greater executive pay, doled out in share options which are highly sensitive to short-term stock price movements, has changed how CEOs behave.

    That, in combination with the market obsession with making quarterly earnings targets, has resulted in a corporate landscape in which legitimate long-term projects can't get a hearing because they are not in the best interest of those making the decisions. Why fund a project which will only bear fruit when you, the CEO, are out of office and no longer getting huge yearly allocations of shares?

    We have stumbled into a system whereby corporations are often run not for their own long term benefit but for the benefit of top staff. As Mariana  Mazzucato has argued with are all too often rewarding value extraction rather than value creation.

    by Metatone (metatone [a|t] gmail (dot) com) on Thu Nov 21st, 2013 at 10:25:37 AM EST
    Another take on Summers from Marco Nappolini on Pieria:

    Secular stagnation and post-scarcity

    While there will be fevered debate over the possible causes of secular stagnation one thesis I would like to advance is that of over-supply. Summers suggests that in order to soak up idle resources in developed economies policymakers have had to make a habit of pumping up asset bubbles. Yet he notes they have apparently done so without stoking rampant inflation.

    A possible answer to this puzzle is that inflation has remained constrained because of increases in the productive capacity of developed economies that have far exceeded growth in aggregate demand. Over the boom period inflation is kept low as supply is always ready to respond to (or over-meet) any increase in demand. No matter how large the bubble grows inflation fails to respond even with unemployment below a level that would have been assumed to start exerting upwards pressure on prices.

    This is not a problem as long as the bubble persists. Unfortunately that same over-supply can also hold back recovery.

    by afew (afew(a in a circle)eurotrib_dot_com) on Fri Nov 22nd, 2013 at 06:00:02 AM EST


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