Macro: The Austrians vs. The Modern Monetary Theorists

[bmichaud]

It is my experience that economic theory (at leas macro) is often aimed to fit a theory to explain some prior event and then test the "fit" with some econometric analysis. What I truly like about the Austrian school is (1) its emphasis of not knowing better (let the market decide) and (2) always be aware of perverse incentives. When I look at MMT discussion being cited on the thread, it just (1) seems risky (as Moore points out, when do you know when the deficit is to big? When it is to late? In that case your passing the bill to your children) and (2) it is only applicable in a leading economy with a strong currency (if the economy is to small a major risk would be a sudden stop situation).

 

Deficits, come about when we spend more than we take in, both on a governmental level (budget deficits) and on a private level (trade deficits). When we print money to subsidize these structural flaws, there are three ways we get screwed down the line.

 

1) Our productivity goes down as our debt load rises.

 

Moore, I am a bit confused by you connecting productivity and debt. As I see it, you could for example increase productivity by adding debt and reducing labor. Perhaps you are talking about household debt? Could you please elaborate?

 

Consider the incentives to be unproductive when the government gets involved.  For example, the first stimulus money made available to my state was directed to the university system so that the professors and other staff didn't have to forgo scheduled raises or face layoffs.  This meant that the producers in the private sector in a small way had to suffer cutbacks disproportionately.

 

That 's one little cut to the productive part of GDP.  Add up a thousand cuts, and the economy is dragged down in a meaningful way.  Multiply even more those cuts in productive enterprise squeezed out by subsidized non productive activity, and you have got the whole economy like a government work crew where one man digs a ditch while five other men paid directly or indirectly by the government sit around smoking cigarettes and  criticize the guy doing all the work.

 

Government debt works the same way for as long as investors will buy it.  It subsidizes all the unproductive things the government does.

 

However, the essential functions of government such as protection against people or gangs bashing their neighbors and stealing their property, are not only conducive for prosperity, but essential.  :)

 

How is the private sector forced to cut back disproportionately? If teachers receiving stimulus money turn around and spend that money into the private sector, thus benefiting the private sector, doesn't that then mean the private sector doesn't need to cut back as much as it otherwise would? Either way the deficit puts money into the private sector in aggregate - I'd much rather see the deficit in the form of a lower tax rate for me versus stimulus money for lazy state workers, BUT, either way the state worker or myself turns around and spends that money, thus preventing the private sector from needing to cut back as much as it would otherwise through higher revenue....

 

I'm not against the teaching profession.  A number of close relatives are or have been teachers.  Education engaging motivated students and good teachers can be a highly productive investment for the future.  The point is that government largess will insulate the recipients at the nonproductive margins from entering or moving to other occupations that could be productive.

 

An extreme example of this was the poverty and very low productivity of the disfunctional soviet bloc countries two or three decades ago.  The saying there was, " They pretend to pay us, and we pretend to work." 

 

The fewer people there are in a society doing substantial, productive work, the poorer that society will  become, compared to what it might become, ceteris paribus.

 

However, necessary functions of government such as police to serve and protect us from bashing our neighbors to steal their property and rape their women are not only productive, but essential for prosperity.

 

I was asking specifically why stimulus crowded out the private sector, not specifically RE the efficacy of propping up teachers versus policemen...

 

Trust me I get how bad it is to have a bloated, unproductive govt payroll....I just don't get how getting money to states in order to keep their payrolls up crowds out the private sector when those on state payrolls turn around and spend on private sector goods. If those on state payrolls are unemployed, the local grocery and hardware stores lose revenue, reduce their own payroll, reduce investment in the local economy etc...etc....

 

If we want to return the country to normalcy, we should be writing down private sector debt instead of bailing out the banks....private sector demand would return bc the private sector would not be wallowing under a crushing debt load, then deficits would naturally correct through reduced uneploy,net and higher tax collection. Just my opinion.

[racemize]

This line of thinking has nothing to do with political party affiliation, but a simple understanding that every dollar of public sector I've posted Dalio's stuff several times, which is by far the best construct for how to deal with depressions.

 

Yes, I forgot to mention that I read Dalio as well--that's been my favorite so far, thanks!

[Mark Jr.]

I'm not entirely sure why A) supporting deficits in a deleveraging environment is indicative of being a democrat (which I'm not...and FWIW, Bush ran deficits while Cinton ran a surplus.....PRESIDENTS DO NOT MATTER!!!) and B) why being a democrat would be indicative of my age....

 

The Clinton "surpluses" were largely mythical, the national debt did not go down, at best he narrowed the deficit, slightly. What really happened was that the "public debt" decreased (those were the claimed "surpluses") while the intra-governmental holdings increased, as the social security administration enjoyed higher inflows relative to outflows (boom years) and used the excess to buy government debt (as they are in fact mandated to do). The total national debt actually increased under Clinton, as it has under every president since Eisenhower (the last president to really, actually pay down on the national debt).

 

The only reason I know this is because we were talking about it on Facebook today. :)

 

Good article on it here:

http://finance.townhall.com/columnists/craigsteiner/2011/08/22/the_clinton_surplus_myth/page/full/

 

[mikazo]

I've read some books on Austrian economics and as I understand it, their argument against government spending is that when one societal group or profession is subsidized or given funding, all the other groups or professions lose out, and there's no way of knowing whether the government spend the money optimally. But how does anyone else (i.e. the market) know whether they're spending optimally either? There is no actual invisible hand that dictates what each individual should spend their money on. The economy is just an example of emergent behaviour from a collection of simple agents. Let's say there's some private sector businessman that held on to a ton of cash during all these bad times. He sees that now might be a good time to spend it and do his part to help the economy recover. Let's say he chooses to spend it on building a new railway or opening a new university or paying people to dig a ditch from one end of the country to the other. Not he, nor anyone else can really tell what would have been the best way to spend that money (although I'm guessing that digging a ditch across the country won't be all that useful to society). You just can't measure these kinds of things, nor can you see what alternative outcomes would be.

 

With regard to the US dollar and inflation, the topic of Triffin's dilemma is particularly interesting: http://en.wikipedia.org/wiki/Triffin_dilemma I learned about this and quite a few other interesting things from the book Crisis Economics by Nouriel Roubini and Stephen Mihm. I'd highly recommend reading it for a good overview of what's wrong with the economy of today. http://www.amazon.ca/Crisis-Economics-Course-Future-Finance/dp/1594202508