December 19, 2013
2013 Festivus Airing of Grievances – I’ve Got a
Lot of Problems with You People!
Paring Unemployment
Insurance Benefits / Food Stamps Is Bad for the Economy
I
often hear this from some of the cable news hosts and their guests. You see,
according to these “economic theorists”, when the unemployed and/or
lower-income populace receive various types of funds from the government, they
spend these funds, thus increasing nominal aggregate
spending in the economy. What could be wrong with that in an economy that is
operating below its potential? Although I am all in favor of stimulating
aggregate demand if it is demonstrably below potential aggregate supply, it is
not entirely clear to me how increasing government transfer payments will
accomplish this. The fundamental question I would ask those who make the claim
that it is so is from where does the
government get the funds to make these transfers?
If
the funds are obtained by cutting other government expenditures, then some
entities’ spending will be decreased by the amount that the recipients of the
transfers spending increases. The result is no
net increase in nominal aggregate
spending.
If
the funds are obtained by raising some entities’ taxes, then the spending of
those paying the increased taxes will decrease, offsetting the increased
spending of the recipients of the transfer payments. But, good Keynesians that
the cable news economic theorists are, will say that those subject to the
higher taxes (the RICH?) will not cut
their spending fully by the increase
in their tax bill, but rather will meet some of their increased tax bill by
cutting back on their saving. And that won’t imply a cut back in some other
entities’ spending? One man’s saving is another man’s borrowing. And most
entities borrow in order to spend. If the taxpayer cuts back on his saving,
this means that he is cutting back on his lending. And if he cuts back on his
lending, then this means that a potential borrower/spender will remain just
that, potential rather than actual. Only if the taxpayer chooses to
run down his cash balances to pay some or all of his increased taxes will his
or his borrower’s spending not decrease. More on this run down in cash balances
will be discussed below.
If
the funds are obtained through increased government borrowing, then the
purchasers of this increased supply of government bonds will be curtailing
their lending to other borrowers/spenders or will curtail their own spending in
order to purchase the government bonds. Either way, someone else’s spending
will decrease in order to fund the increased spending by the recipients of
government transfer payments. The result is no
net increase in nominal aggregate
spending.
Now,
it might be argued that the purchasers of the increased supply of government
bonds used “idle” cash to pay for them. That is, it could be argued that the
velocity of money increased in order to fund the government transfer payments.
Perhaps. But can you be sure of this? With the elimination of Reg Q decades
ago, bank deposit rates now tend to move up and down with open-market interest
rates. So the interest sensitivity of the demand for deposits is not what it
used to be because the interest differential
is now more stable. MV ≡ PT. If PT, nominal transactions (the Price level times real Transactions), are to increase and M,
the money supply, stays constant, you have to explain why V, velocity,
increases.
Under
another special circumstance (other than an increase in velocity of money)
transfer payments can result in a net
increase in nominal aggregate
spending. That circumstance is when the increase in transfer payments is funded
by a corresponding increase in the sum of Fed and depository institution
credit, i.e., total thin-air credit. In this case, the recipients of the
transfer payments will increase their spending and, by virtue of the fact that
the funding of these payments is created, figuratively, out of thin air, no
other entity need cut back on her/his current spending.
Why
do you think unemployment insurance benefits and food stamps are called
transfer payments? Because these government spending programs transfer income from certain segments of
the population to other segments. If income is being transferred, it’s a good
bet that spending also is being transferred. The nomenclature is a tip off that
transfer payments do not, except
under special circumstances, result in a net increase in nominal aggregate
spending in the economy. Rather, transfer payments tend to redistribute a given amount of income and spending.
The
above is not meant to be an argument
against transfer payments. I believe that the arguments for or against transfer
payments are largely moral and philosophical. My only problem with you people arguing in favor of transfer payments
is when you try to justify it in terms of macroeconomics.
Congress Should not
Oppose an Increase in the Minimum Wage as It Would not Involve an Increase in
Government Spending or an Increase in Taxes
I
heard this one on cable news, too. As
far as it goes, it is true. But, in my opinion, it does not go far enough. As I
tried to illustrate in the comments above, the government has to obtain the
funds it spends from some source – the nonbank public through taxes or
borrowing or from the Fed and depository institutions. You might think of the
government as an intermediary in the collection and distribution of funds. But
just as the funding from an increase in government transfer payments has to
come from somewhere, so, too, does the funding from an increase in the minimum
wage. Who will get the bill for McDonald’s increased wage bill? McDonald’s
customers through increased menu-item prices? McDonald’s stockholders through
decreased profits. McDonald’s suppliers through decreased orders for
merchandise from them. So, no, an increase in the minimum wage would not
directly involve an increase in government spending or an increase in taxes.
But it would involve a redistribution in income and spending away from McDonald’s customers, away from McDonald’s stockholders, away from the stockholders and employees
of McDonald’s suppliers and toward
McDonald’s employees. So, just as transfer payments redistribute spending and
income, so does an increase in the minimum wage.
I
have also heard cable news economic theorists argue that an increase in the
minimum wage would result in a net increase in nominal aggregate spending. Really? Explain to me how M goes up and/or V
goes up in MV ≡ PT as a result of an increase in the minimum wage. Or does P go
up and T goes down? If, in fact, an increase in the minimum wage were to result in a net increase in
nominal aggregate spending, then we
could eliminate any shortfall in aggregate demand relative to aggregate supply
by merely boosting the minimum wage to whatever level necessary to eliminate
the gap. If only.
Let’s
assume that the argument for an increase in the minimum wage is a moral one,
not an economic one. Let’s further assume that we as a society believe that
people who work are entitled to some minimum income. If their wages do not
yield this minimum income, then we as a society feel honor bound to, one way or
another, boost their income to the minimum. If so, as a matter of equity, why
should the customers of McDonald’s, the stockholders of McDonald’s and the
suppliers to McDonald’s bear the biggest burden in boosting McDonald’s
employees’ income to the minimum via an increase in the minimum wage? If we as
a society believe that McDonald’s employees are entitled to a minimum income,
then should not we as a society be willing to have our taxes increased in order
to “top off” McDonald’s employees’ market-based wages either through a wage
subsidy or an increase in the earned-income tax credit?
I
don’t even want to get into the economic argument as to whether an increase in
the minimum wage results in someone’s loss of employment. To paraphrase an old
joke, if you ask an econometrician what is the effect of an increase in the
minimum wage on employment, he will answer, “What do you want it to be?”
On the Wednesday
Preceding Employment Friday, It Was Reported that Private Employment Increased
by X Thousand
This
is not what I hear on cable “current events” news channels but on the cable financial news channels, whose producers
should know better. On the Wednesday preceding Employment Friday, ADP/Moody’s
releases its estimate of what it perceives the BLS is going to report as the change in private nonfarm payrolls
for the prior month. The media might mention parenthetically, if at all, that
this is an estimate of an estimate. Although the median absolute difference
between the revised ADP/Moody’s
estimate and the revised BLS estimate
is only 44,000 between April 2001 and October 2013, there were 22 occasions in
this timespan in which the monthly absolute difference between the two revised series was 100,000 or more. If
the ADP/Moody’s estimate is that nonfarm private employment increased by
100,000 in a given month and two days later the BLS estimate is of a 200,000
increase, which estimate do you think will have the largest impact on the
financial markets? If you answered as I, the BLS estimate, why does anyone care
what about the estimate by ADP/Moody’s?
The (Fill in the Blank)
Economic Report Showed a Change Greater than / Less than What Economists
Expected
Ask
an economist for a number and he will give you a number. To illustrate, some
economists actually provide estimates of the ADP/Moody’s monthly employment
report. Why? Because someone from the media asked. But if the media wanted to serve a useful
function, they would ask two follow-up questions when requesting a forecast
from an economist. How has that economist’s past
estimates of a particular economic statistic compared with the actual reported statistics? And, how did the economist arrive at his
estimate? That is, what’s his model – explicit or implicit? If these follow-up questions
were asked and answers obtained, I wonder if anyone would really care what
economists “expected”.
Then
there’s the post-release interview. Economist A’s forecast of the number was plus
100,000, but the actual number turned
out to be minus 100,000. In the
post-release interview, in which Economist A’s errant forecast is rarely
mentioned, Economist A with great confidence can fully explain after the fact why the number turned out
to be plus 100,000 and will tell you that next
month’s number also will likely be near the same magnitude (it’s the
chameleon method of forecasting) without missing a beat or exhibiting a hint of
shame.
Along
the same lines, economists shy away from giving a definitive forecast of a
binary event. Rather, they like to hedge their forecast “bets” by giving a probability of a binary outcome. For
example, Economist B thinks that there is a 50% probability that the Fed will
announce today a tapering in the amount of securities it will purchase. Either
the Fed will or will not make such an announcement today. It is not going to make a
25% announcement, a 50% announcement or a 75% announcement. It’s all or
nothing!
It’s Another Festivus
Miracle!
Festivus
(celebrated on the evening of December 23, i.e., erev Christmas Eve, how’s that for ecumenicism?) is not only a time
for the airing of grievances, but also a time of miracles. And as Festivus 2013
approaches, the Kasriel household has observed two miracles. The first miracle
is that our daughter, who has one more semester of law school left, has
actually received an employment offer from a well-respected law firm. What is
miraculous about this is unrelated to our daughter’s qualifications – they are
excellent (thanks to her mother’s genes) – but is related to the depressed
nature of the employment market in the legal profession. The other miracle is
the recovery in one of our kitties’ health. After twice-weekly hydrations for
kidney failure over a nine-year period (again, thanks to my miraculous wife),
our otherwise healthy little Dee took a sudden turn for the worse last week.
Now, miraculously (and with stepped up hydration) she seems to have rallied
back to her lovable, quirky, independent self.
Happy
Festivus everyone,
Paul
L. Kasriel
Econtrarian,
LLC
1-920-818-0236
Sturgeon
Bay, WI 54235
