Tuesday, 10 September 2013


Listening to or reading only people you know you pretty much agree with on everything is unlikely to lead to much original thinking so I endeavour to read economists who might be called 'conservative' or with whom I might disagree on various topics.

One such economist is Miles Kimball. He writes for various outfits, most notably Quartz and his blog, Confessions of a Supply-side Liberal, is extremely interesting. As he himself puts it, "In calling myself a supply-sider I am saying that I believe the harm to the productive performance of the economy caused by taxes and regulations is serious (though seldom serious enough that a reduction in taxes would raise revenue).  In calling myself a liberal, I am saying that in addition to an attachment to the liberty, limited government, constitutionalism, and rule of law emphasized by Classical Liberalism,  I hold to a view based on both classic Utilitarianism and contested elements of modern economic theory that, generally speaking, a dollar is much more valuable to a poor person than to a rich person, and that therefore, there is a serious benefit to redistribution that must be weighed against the serious distortions caused by the usual methods of redistribution".

This last bit obviously put Miles Kimball at odds with much of the "truly conservative" economists or the more politicised ones (The Heritage Foundation blog, for example) who would reply that, apart from cutting spending on the poorest/the middle class and cutting taxes on the richest/the corporations, no political action is required, nay, no political action is valid (well, apart from, maybe, bombing brown or yellow people from time to time as long as the President is not Obama).

So I got interested.

And I will probably spend more time in other blog-posts discussing various topics that Miles Kimball comments upon including discussing the whole "supply-sided liberalism" bit but, for my first blog-post in reply to Prof. Kimball, I wanted to hit on some of his current/on-going pet idea.

Because, you see, Prof. Miles Kimball is a fan of 'seigniorage' - that is, having money losing its nominal value over time explicitly rather than through 'standard' inflation.

The general idea, assuming I understood Prof. Kimball correctly, starts from the obvious fact that, in the on-going quagmire that is our economy, people do not want to consume and corporations do not want to invest i.e. AD is depressed.

It is widely accepted that, in such a situation, a government can legitimately try a variety of things to bring economic activity back to a level more consistent with full employment. One can, for example, try to cut taxes in order for people to have more disposable income. That's usually seen as a variety of fiscal stimulus as the likely consequence of a tax cut is to depress near-term fiscal income and thus increase deficits.

Fiscal stimulus is widely seen as one of the two major levers, the other one being, of course, monetary stimulus.

Just as fiscal stimulus, monetary stimulus can take a variety of forms - from Noah Smith's love of (moderate) inflation to Scott Sumner's NGDP targeting.

Prof. Miles Kimball starts with the fact that, during recessions, the Central Banks lower interest rates until they get low enough to convince people to borrow and spend or companies to invest. After all, with low interest rates, all kind of investment projects become possible and profitable. But, in our present-day situation  we have hit the Zero Lower Bound i.e. interest rates can't fall below zero. Yet the lack of AD 'proves' that the interest rates are still too 'high'.

Thus, while other advise to let inflation go up in order to generate negative real rates (i.e. nominal rates less inflation), Prof. Kimball says we should be more direct and should have outright negative interest rates.

So, if you've got $10,000 in your bank account, in one year time, you'd only have $9,900 (assuming negative interest rates of -1%).

This, in his opinion, would convince both private individuals and companies to try and get rid of their value eroding cash - thus spurring consumption and investment.

I'll leave asides the practicalities of the proposal. Prof Kimball goes into some details on the practical and political realities of implementation and I don't really have any insights into these.

But this is less important inasmuch as I vehemently disagree with the principal.

In my opinion, Prof. Kimball is guilty of putting too much emphasis on interest rates as the deciding factor in consumption/investment decisions.

As an aside, via Kevin Drum, I got to read an interesting IMF working paper showing that, with an elderly population funding its consumption mainly off past investments, low rates would be far less effective in triggering increases in consumption/investment.

But my main contention, mentioned before when discussing monetary policy and macro-economics, is that people do not consume and companies do not invest because interest rates are low, NPVs positives or profit margins high.

People consume and companies invest when they feel confident.

Confidence has gotten a lot of bad press in recent years. Krugman is quite famous for having coined the term "confidence fairy" as a way to characterise some conservatives' justification for austerity in the face of a recession. For more on the confidence fairy, this and this articles by Krugman (among many others) are good.

But, here, we're talking about a different kind of confidence. Keynes called it "animal spirits" and the various consumer and business confidence indices that are regularly published are the best approximations we got for it.

In my opinion, as long as our 'animal spirits' remain depressed, low interest rates will not be very effective. It's nice and it might even be necessary but it won't be sufficient.

And outright negative interest rates, just like noticeable inflation, will only be seen as a tax on savings, a confiscation, financial repression in earnest. Indeed, compared to mild inflation, it might be particularly politically inflammatory.

Why do people save? These days, they might be trying to de-lever. But, assuming that some of us in the remaining middle class don't have too much debt, why are we saving?

Again, I know it's dangerous to take one's case and try to build economic generalities on it but, personally, I want to save for three main reasons; The first one is health-care. I've lived in the UK and I now live in Ukraine - Trust me when I say these are not countries where you want your health and that of your loved ones to depend on the publicly-provided health care system... Even assuming that I will eventually move back/retire to France, I am not convinced that, by then, the French vaunted health care system will still be best-in-class.
The same is certainly true of retirement. Given the political situation and the evolution of retirement schemes across the modern world, it seems pretty certain that the state's promises/social contract will be voided/critically impaired when my generation reaches retirement age. So not only am I paying for my parents' generation retirement but I have to provide for my own old age all by myself.
And, finally, I have the same concerns about the continued ability of the state to provide with regards to my children's education. I suspect that options for a high-quality, more or less free tertiary education will be gone or on the way out by the time my children reach university.

Health care, education, retirement.

Beyond a roof over our heads, food on the table and clothes on our back, those are three massively important items for happiness/contentment (and, as 'safety' items, they're actually pretty low on the Maslow's hierarchy of needs) and, while I may hope that radical technological improvements and consequent social upheavals will render my present-day worries entirely pointless, I am not going to bet the farm on that hope.

Thus, inasmuch as possible, I save. Regardless of the low interest rates or threats of inflation and, therefore, negative interest rates or stronger inflation would just make it harder for me to achieve my desired saving objectives.

The true solutions to our doldrums do not lie in this direction...

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