The Political Morass of Economics….

A recent comment raised an interesting discussion topic regarding the government’s use of private resources.  We know from Monetary Realism that resources precede government.  And we use government as a tool of society to move resources from the private domain to public domain for public purpose.  The general hope is that we will somehow increase the overall living standards of the nation in doing so.  So we build a large and powerful military that protects us from foreign enemies.  We establish entitlement programs that help take care of those in our society who can’t take care of themselves.  We use the government for many different public purposes.  Some excessive, some not so excessive.  You get the message….

The thing that makes all of this so contentious is the idea of increasing living standards and creating real wealth.  What is wealth to one person is not necessarily wealth to another person.  To a man without a job, he is wealthier if the government pays him unemployment benefits for a period of time.  But to the man who has a job those benefits are seen as a potential cause of inflation, maybe even a moral hazard that might reduce the living standards of others (a form of redistribution, if you will).  And to a business owner on the other end of this jobless man’s spending, the unemployment benefit is directly enriching him.  You see the tangled web here.  But what it all comes down to is what is real wealth?  Are we wealthier as a society if we take care of the elderly?  Are we wealthier as a society if we build bombs that get destroyed and kill other human beings in the process of protecting the nation?  Are we wealthier as a nation if we build bridges to nowhere?  What about bridges to somewhere?  And what if the workers building the bridge to nowhere help keep corporate profits high which helps keep unemployment low?

The answer in so many cases is “it depends”.  Welcome to the world where economics and politics collide.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • http://www.deltafinancials.com Delta Financials

    Brilliant. But what makes things ever trickier is the legitimate fights we have about how to get to an end we agree on. There’s been too much ideology getting reinforced by twisting the “facts” lately. The birth of political activism masquerading as journalism may have been the death of problem solving in the economy. We now disagree on the facts, forget about the solutions to those facts. “Numbers are like people, torture them enough and they’ll tell you what you want to hear”.

    I dream of a post-ideological world. Perhaps that’s your greatest contribution here – even if you are slightly liberal leaning. At least we don’t have to put up with canards instead of facts. So thank you, Cullen.

  • SS

    A fantastically succinct description of the problem of politics and economics. It’s fun to watch all the pieces of this puzzle come together Cullen. Thanks for all your efforts here. MR is a breakthrough in the way people think about all of this.

  • Geoff

    Cullen, your post talks about “wealth” in both financial terms (unemployment benefits) and real terms (bridges). In terms of a country in aggregate, would it not be preferable to think of wealth solely in real terms? For example, the Social Security program itself is not wealth, but rather the beds, hospitals, retirement homes, doctors to care for them etc.

  • http://www.pragcap.com Cullen Roche

    That’s the messy part here. Is my house more valuable to me than my health, for instance? Of course not, but what’s the value of health? Who knows. I’ve argued that true wealth is bigger than financial terms. True wealth is having the time to enjoy your loved ones and the things you’ve worked so hard for (maybe it’s a boat or a quiet time reading a book or a vacation or getting drunk with good friends, who knows?). But is the boat more valuable than the book or the vacation or the friends? It depends on the person. True wealth is different to us all. Economists calculate things in quantifiable real terms. But life is bigger than quantifiable real terms.

  • EconFan

    the redistribution could go the other way also e.g. tax code could be regressive as it is today with payroll taxes. This upward redistribution is what this country was like in colonial days e.g. with the Virginia company and its colonies

  • Cowpoke

    True wealth could also be seen as the mere ability to produce or be productive.

  • http://www.loandoctorsnw.com Roger Ingalls

    I rode the ferry twice that the “bridge to nowhere” was going to retire. While maybe not a sound public investment, it was never to nowhere, but to an island airport serving Ketchikan.

    http://www.reuters.com/article/2008/09/01/us-usa-politics-palin-idUSN3125537020080901

    I guess it is now a bigger than life metaphor…

    I wonder if any serious analysis has been made of the “shovel ready jobs” results…

    I find it curious that anyone would characterize CR as a liberal leaning

  • Colin, S.Toe

    Despite your heterodox understanding of economics, I see a conservative aspect in your underlying faith in the current ‘system’ (while I’m more and more seeing the need for fundamental changes).

    Regardless, thanks for continuing to raise the big questions, as opposed to having all the (easy) answers.

  • http://www.pragcap.com Cullen Roche

    I don’t express a “faith” in the system. I just explain the system we have. I don’t pretend to have all the answers to optimizing how the system should and shouldn’t work or be managed. Those answers are above my pay grade.

    Also, there’s nothing inherently liberal about heterodox economics. MMT is deeply liberal, but MMT is not all of heterodox econ. In fact, MMT is a very small sliver of heterodoxy and the most prominent heterodox school is Austrian econ (probably by a wide margin). If I were a heterodox economist with conservative leanings you’d read a lot more Mises and Rothbard here….That’s obviously not the case though.

    To me, it’s all about understanding the system’s institutional structure and explaining to other people how the system is designed. That’s really all I am after.

  • http://www.pragcap.com Cullen Roche

    When I criticize R’s I get called a liberal hack. When I criticize D’s I get called a conservative hack. Most people don’t seem to realize that my views really do fall pretty much right down the middle….

  • beowulf

    The govt should focus on the big picture instead of getting lost in the weeds. It should focus on aggregate numbers— keep unemployment, inflation and trade deficit as low as possible. Its best lever to accomplish these goals is adjusting the tax (or in the case of imports, tariff) rates countercylically. Its crazy how Congress loves to subsidize what they like, say, domestic oil production when it more easily get the same result using the tax code (levying an oil import fee).

    Milton Friedman was right that the welfare state should be replaced with a negative income tax. Steve Sailer had a piece today about “awardable housing”, when people qualifying for housing subsidies because they’re friends or family of local politicians (the Feds outsource administration of most welfare programs to state and local govt).
    http://isteve.blogspot.com/2012/09/awardable-housing-useful-neologism.html

    Even honestly run programs require a lot of bureaucrats to administer their own eligibility paperwork; 8% of food stamp (or SNAP) spending goes to overhead, 9% of the Section 8 housing spending (between the two, Uncle Sam spends nearly $100 billion a year). Meanwhile less than 1% of the cost of EITC tax credits go to overhead. Whether you think we should be spending more money or less on poor families– and I’d argue more– the money should be redistributed through the tax code (healthcare is sui generis, there’s really no alternative to making Medicare universal but the politicians aren’t done exhausting all other possibilities yet).

  • Johnny Evers

    You come off as a ‘defender’ of the system in that you don’t express any alarm about the size of the federal debt; in fact, you advocate increased deficit spending.
    I’m not always sure if your position that the federal government *can* borrow whatever it wants means you believe that feds *should* use that power.
    Solvency is something that people understand, but the concept that we are constrained by inflation is a vague one, especially as you don’t spell out how we would respond to a spike in inflation or the currency losing its value.

  • Dunce Cap Aficionado

    “maybe it’s a boat or a quiet time reading a book or a vacation or getting drunk with good friends, who knows”

    It quite possibly might be where all three overlap!

  • http://www.pragcap.com Cullen Roche

    Come to think of it, that sounds pretty nice right about now! Scrap the book part though.

  • Cowpoke

    Here’s a real life political morass to think about:
    Our 7th and 8th grade volley ball team has an over abundance of girls sign up. Now at this grade level there are no cuts and everyone makes the team.
    Here’s the rub, the fee to play went from $80.00 per child to $120.00; However, if the student receives Govt support via free or reduced lunch, then the school system uses this as a bench ark for it’s other extra curricular activities.

    So, now you have a situation where people who pay and people who don’t at best share playing time and at worst, the payers get nothing, I.E. sit the bench.

    As a community we now have to navigate this “political morass” created by good intentions. These are unintended consequences of political forces that force a reallocation of the private sectors assets way beyond it’s intentions.

  • Dan M.

    Cullen,

    Good post. I definitely love the MMR focus on Real Assets vs Financial Assets. I would definitely agree that resources precede government. Creativity, initiative, and hard work do as well. However, it takes government to truly fully realize the wonders of “Private Property” as we see it today. In no way, shape, or form could resources be as efficiently formed by creativity, initiative, and hard work into private property without a government backing of private property.

    One element of private property recognition, though, is much less inherantly natural than others. The “assignment” of natural resources (land, oil fields, etc) that is not really inherantly private in nature is government engineering, is it not? Neither is it really naturally owned by the entity referred to as gov’t, of course, so I’m not arguing some Bolsheviks vision on property. I’m simply stating that it’s a huge assumption of authority to be an entity deeding land as being owned by some individuals but not others.

    When government dictates resources as private, it’s engaging in a form of social engineering. It’s taking resources that are inherantly NOT private, and making them so. This is absolutely a good thing, IMO, but to say that government in 1790 can say that Joe Slaveowner owns a giant plot of land, and all the resources it can produce (ignoring for a second the slaves themselves), owns this land in some “natural” way free of government, but that government can’t pull resources from the private sector, seems a bit ridiculous to me.

    This is why I never understand the constant “coercion!” argument towards any form of government act by uber-libertarians… their favorite thing in the whole world, private property, is not just a function of free enterprise, but very much of government engineering.

  • Andrew P

    Here is the most amusing political ad I’ve seen this season. I’m sure you will want to argue/debunk the message, but this one is a real keeper.

    http://www.youtube.com/watch?v=OBC4-IMbsBM&feature=player_embedded

  • http://www.pragcap.com Cullen Roche

    Agreed Dan. As I like to say, govt is a tool that can be very powerful if used appropriately. And more importantly, it is a tool that facilitates and aids private sector prosperity.

  • Colin, S.Toe

    I’m mainly thinking of your defending the primacy of bank-created ‘money’, as a means of limiting governmental power (while I tend to feel the balance of power has tipped too far toward the banks).

    (Given Friedman’s embrace of Hayek, I was thinking of ‘heterodox economics’ as referring broadly to ‘post Keynsians’, though I suppose the more extreme Austrians should properly be included as well).

    I have certainly benefited from your description of the actual workings of the ‘system’ (although I am also concerned about addressing what, thanks in large part to your account, I’m coming to see as its structural imbalances).

    However, I think you underestimate the potential of your contributions toward improving matters: the key is your willingness to raise the hard questions.

  • Cowpoke

    Dan M:
    “When government dictates resources as private, it’s engaging in a form of social engineering. It’s taking resources that are inherantly NOT private, and making them so. This is absolutely a good thing,”

    Cullen C:
    “And more importantly, it is a tool that facilitates and aids private sector prosperity.”

    Am I understanding you two here clearly? , based on you two’s statements of how the govt taking something from someone and giving to another you see as O.K.?
    Am I reading this correctly?
    For clarification sake so I know where your thoughts are, what are your thoughts on the Kelo v. City of New London case:
    http://en.wikipedia.org/wiki/Kelo_v._New_London

  • Cowpoke

    And to give you two some extra cud to chew on (if it really is “However, it takes government to truly fully realize the wonders of “Private Property”), Ponder This decision of Wickard v. Filburn:
    http://en.wikipedia.org/wiki/Wickard_v._Filburn

  • Colin, S.Toe

    I support the principle of federalism – but the flip side of devolving power to states and localities is that federal funding should come with measures to ensure the funds are spent effectively (and any party affected adversely by favoritism or discrimination should have recourse to federal agencies and courts, for redress).

    However, I agree to the general point: ‘KISS’ is the way to go.

  • http://www.pragcap.com Cullen Roche

    I’m not defending it or saying it’s the optimal system. I am telling people what we have. We don’t have a state money system. We have a market based system run by the banks and for the banks. That’s just what it is. It’s not my design….I just tell people how it is and try to keep them from misunderstanding some of the various myths floating around out there….I think I offer a lot more value to society by helping explain the system rather than pretending I can fix it. The explanations are so bad and this stuff is so poorly understood that we really do need to start from scratch and get the basics right before we can begin optimizing how we use the system. That’s my hope anyhow.

  • http://www.pragcap.com Cullen Roche

    For the most part, we choose, as a society to take from some in order to be able to provide some public good for others. If we want the system changed then we need to change our elected officials….That’s just what it is.

  • Alberto

    CR you’re right and this is the reason because I enjoy this blog so much. It seems to me that because extreme and too ideologically biased positions are self banned from the blog the quality of the comments too is sometimes very high. Of course a blog is just a place where to find some triggers for deeper thinking and I found many triggers here.

    I hope that in the future there is place for deep arguments like economical sustainability and new paradigms that will let the human race to survive the next century. I’m finding terrible the lack of debate, we’re running short of time, our system is too complex, consumes too much energy, is deeply unstable and without big corrections is going to crash catastrophically in the near future.

    It’s not economics it’s thermodynamics, we’re not private resource constrained but earth resource constrained. 99% of the people have a messianic belief that science and tech will solve everything. But I’m a tech and I’ve studied science a lot. Scientists and techies know that a new big improvement needs tens of years, lot of work. You try hard and fail 90% of the times. May be it’s even too late to save the house but we’re not even trying. It’s sad, sad, sad.

  • Wantingtoretire

    My thoughts on reading the piece was is Cullen going socialist?

    Why did I think that? Because you don’t decry the need for government. To right leaning people, the government is evil and the source of all our problems….Reagan.

  • Wantingtoretire

    Its my experience that many people cannot grasp complex issues. They have to isolate and simplify, which is how many problems are “solved”. I say “solved” because in reality they are not usually solved.

    I have no problem with what your piece is saying. I would add another dynamic. What is wealth is not fixed, its variable depending on context and is obviously different to different people. The Republicans and Democrats are divided by “what is wealth”.

    At the root of all these differences is a serious lack of education

  • Johnny Evers

    It feels as if government has been taken over my the banking sector, and that public money is being used to absorb the losses of the banking sector.
    The most obvious example is that the mortgage loaner is being rescued while the mortgage borrower was not.
    Guys like Bernanke and Geitner see it as their job to save the current banking system instead of trying to promote a healthy banking system.
    This banking system has reached the end of its public utility and is only being gamed by private insiders for their own gains. It’s time to find another banking system … and put tech guys or car industry guys or any group of outsiders in charge of it.

  • Cowpoke

    what’s kinda ironic is it seems that the financial sector get’s to merge to become “to big to fail” while the oil company get’s broken up. The Big Standard Oil was actually a benefit to society.
    If Rockefeller had beaten Wall street to K Street, we possibly would still be enjoying sub $2.00 Gasoline

  • http://pragcap Michael Schofield

    Welcome to the world of sound bite mentality. The issues we face get more and more complex while our attention span gets shorter and shorter. One thing extremists seem to have in common is an ability to over-simplify, a neat, compact explanation that agrees with a particular group’s biases and convienently ignores any troublesome facts contrary to what one wants to believe. Unfortunately for “moderate” thinkers (and the country) moderate solutions take many things into account and are therefore too time consuming for too many to consider. Not to mention all of the unnecessary angst that can be avoided by not considering that all decisions are a compromise and are never perfect. No, it is better to live in la-la land where solutions are all simple and perfect. I would have to say that we are collectively getting the government we deserve. We don’t know so we elect people who don’t know.

  • http://www.pragcap.com Cullen Roche

    That’s just silly. You can be in favor of SOME govt. Frankly, I think this world of no govt is a myth that is totally unrealistic. It’s about understanding what the SIZE of our govt should be….

  • Wantingtoretire

    This nicely sums up America as I have come to understand it during the last 10 years of observation and study. Some things just hit you in the face, like the extent of gun power, and it takes a little time for it to sink in and to adjust your perceptions of what America is in reality.

    My latest realization is that everything is about win or lose. The football game mentality is deeply rooted in the business world. Everything gets reduced to a choice between this or that. Its like America cannot handle multiple choices.

  • Wantingtoretire

    Unfortunately, I cannot agree. Many Republicans state that government is only there to provide military, police and a fire fighting force to protect property when it is on fire.

    They just do not go beyond that.

  • Wantingtoretire

    The Federal debt does not matter……………why do you think it does matter….

  • Wantingtoretire

    I understand that you are only explaining the system and not defending it. But in the binomial world that is America, there is no middle. If there was it would be three sided. America is definitely two-sided so you will always be be assigned to one side or the other….

    Education is the key…America needs educating except I have to assume that the binomial world comes from the educational system in the first place……..

  • Wantingtoretire

    Ah yes, the Winston Churchill factor…America must try every alternative before resting on the right solution……..

  • Wantingtoretire

    I think you focus far too much on accounting as opposed to real life. Try the latter……its so much more enjoyable………

  • Cowpoke

    “If we want the system changed then we need to change our elected officials….That’s just what it is.”
    I agree this is a mutual understood point left for other philosophic threads.

    The point here is that the PRIVATE sector is using GOVT POWER to better benefit PRIVATE interest… NOT public.

    If ya have time, please revue this case of which I am some what familiar with because as my I.P. address shows i live in reason:
    http://www.nytimes.com/2005/10/05/realestate/05domain.html?pagewanted=all

    This is a GREAT case and could be college text book stuff BECAUSE where is Best Buy stock now?
    http://finance.yahoo.com/echarts?s=BBY+Interactive#symbol=bby;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

    SO, do we have to change elected official after the damage is done? OR do we do our best to put in place limitations in the first place?

    I my friend am starting to think that our govt needs to be EXPANDED.. But expanded in a way that represents us but adding more REPRESENTATIVES!!

    jmo

  • Old Dog

    A “Living” can be measured in wealth earned or accumulated.

    A “Life” cannot be measured that way at all.

    A truly “wealthy” person does not measure their success in dollars and cents. True wealth (family, friends, etc) defy such measures. In fact true “wealth” may even be inverse to monetary wealth.

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/ JasonH

    Rodger Mitchell explains it well with facts & data from Federal Reserve official inflation statistics showing that inflation even went down as federal debt/deficit spending increased, disproving ‘conservative’ economic mainstream theories by Austrians/libertarians:

    see charts at link:
    http://rodgermmitchell.wordpress.com/2012/06/14/why-not-increase-federal-deficit-spending-heres-why/

    Today, Americans are suffering from unemployment, which means Americans are suffering from lack of income — particularly the so-called “99%” who comprise the middle and lower income groups. And today, the political campaigns are in full swing, with politicians telling you what they think you want to hear.

    And today, they will tell you what they plan to do about our economy, and particularly about the federal deficit. So today, might be a good time to remind you, once again, why the federal government doesn’t increase deficit spending.

    After all, if the federal government would spend more on goods and services, while cutting taxes, this would create more jobs, reduce unemployment and put more dollars into the pockets of Americans. So, why not increase federal deficit spending?

    As you know, the federal government (unlike state and local governments, businesses, the euro nations and us private people) is Monetarily Sovereign. It has the unlimited ability to create dollars.

    If the government owed you a trillion dollars, it simply would instruct your bank to increase the number in your checking account by 1,000,000,000,000. Done! “Paying for” its debts is no problem for the federal government. It never can run short of dollars.

    The federal government doesn’t even need taxes. If federal taxes were $0, the federal government still could create as many dollars as it wished, and still could pay you that trillion dollars. So, why not increase federal deficit spending?

    According to Table S–6. Proposed Budget in Population- and Inflation-Adjusted Dollars (Government Printing Office), the total proposed 2012 budget is $3.7 trillion, of which $1.5 trillion is for Medicare, Medicaid and Social Security, which goes into the pockets of us Americans. That’s a good thing, right?

    So why not increase deficit spending on things like Medicare, Medicaid and Social Security?

    Another $884 billion goes for “Security,” much of which pays soldiers’ salaries and the domestic companies that make the guns, planes and ships for the military. We all hate war, but financially, paying soldiers as well as domestic companies that hire people, would seem to be a good thing for our economy. Right?

    If the federal government can create all the dollars it wants, and most of those dollars go into the pockets of Americans, why not increase federal deficit spending?

    Now, some people will tell you that although millions of Americans and American businesses are struggling financially, and although the federal government can create unlimited dollars, and although these dollars would go into the pockets of Americans, while supporting vital services like health care, education, infrastructure and defense, the deficit should be reduced.

    Why? These people will tell you deficit spending causes inflation.

    They will tell you that inflation is our biggest worry and we should remember the Weimar Republic and Zimbabwe hyperinflations. Never mind that the Weimar hyperinflation was caused by the onerous post-WWI conditions put on Germany by the Allies. And never mind that the Zimbabwe hyperinflation was caused by Robert Mugabe’s stealing of land from farmers and giving it to people who didn’t know how to farm.

    And never mind that despite wars, recessions, depressions and federal deficit spending, we never have experienced hyperinflation. Those people fear a hypothetical, never-experienced problem more than the real problem of a recession from which we have not yet recovered.

    So for those people, I again offer the following graph:

    Deficits vs inflation

    As you can see, there has been zero relationship between federal deficit spending and inflation. Zero.

    So if the federal government is capable of unlimited deficit spending, and if deficit spending helps cure unemployment and puts dollars into American pockets, and does not cause inflation, why do we not increase federal deficit spending?

    The answer: Ignorance and intent.

    Some of our leaders — politicians, economists and the media — are ignorant of the facts. And some of our leaders, knowing the federal spending which reduces unemployment and puts dollars in the pockets of the 99%, also reduces the income gap. They don’t want that. They are the servants of the 1%, bought and paid for.

    The next time you read about or hear someone saying the federal deficit is too high, “unsustainable” or should be reduced, know this: That person either is ignorant of the facts or intentionally wants to increase the gap between rich and non-rich. There are no other alternatives.

    Now, the challenge is to find a politician who will tell the truth about the economy. Good luck with that.

    Rodger Malcolm Mitchell
    http://www.rodgermitchell.com