Fighting the liquidity trap

by on November 17, 2008 at 11:02 am in Economics | Permalink

If you don’t like public spending you could do it this way: Give every voter a federal debit card. And put the money in their accounts. Tell them if they don’t spend it this month, the government will take it back.

Some people will try to cheat and find ways to save the money, but probably not many.

Some people will use the money to pay down their credit cards. That’s good. The less they pay in interest each month the more they can spend.

That’s J Thomas from the MR comments and you can think of it as Silvio Gesell plus some modern technology.  I’m not recommending this policy, just noting that in terms of stimulating aggregate demand it both vanquish a liquidity trap and it would outperform government spending or what I call "raising taxes in the future."

1 vm November 17, 2008 at 11:13 am

I don’t think I understand how this would be an improvement over a simple tax rebate considering money is the ultimate fungible good. ie, if my desire is to save any extra income, I will just use the debit card plus whatever fraction of my regular income is required on all my already budgeted expenses and save the remainder. The end result is no still no change in consumer spending. The only way I can see this having any effect is if the debit card limit is greater than my budgeted spending for the month.

2 Yancey Ward November 17, 2008 at 11:35 am

I would use mine to buy any high liquidity asset to evade the restriction.

3 Matt C. November 17, 2008 at 11:40 am

If I had to spend it on a conumption good, I would buy something then return it for cash later.

4 Corey November 17, 2008 at 11:46 am

This reminds me suspiciously of a Richard Pryor movie:

http://www.imdb.com/title/tt0088850/

5 J Thomas November 17, 2008 at 12:46 pm

Oh, the improvement over a tax rebate is that it’s completely clear you get the money this month.

A side benefit is you get an elaborate vote-fraud detection. All the debit-card fraud detection is available.

And it could be developed further at some expense. Put federal ATMs in all the post offices, and let people deposit their cash and checks into their federal accounts if they like. Then phase out FDIC.

6 John B. Chilton November 17, 2008 at 1:03 pm

Spread the word that Obama wants to end the sale of cars (or whatever). It’s working with guns.

7 ortega November 17, 2008 at 1:18 pm

But, is it for sure that the usa are in a liquidity trap already?
Please, can someone confirm this? If it is so, we may be going to a Japan style crisis and no summit will save us.

8 Michael November 17, 2008 at 2:22 pm

What happened to helicopters?

9 Anderson November 17, 2008 at 2:31 pm

How exactly does such a trick do any good after the month when the cash is spent?

Public-works projects at least have some temporal stretch.

I think the whole “throw a wad of money into retail” gimmick is dubious.

10 Tom Hanna November 17, 2008 at 3:34 pm

This is a solution to a non-problem. If money saved is saved in a bank or invested in a stock or bond, it’s not the same as hoarding gold coins in a hole in the back yard or stuffing cash in a mattress. The money is still in circulation. Supply creates its own demand.

11 DanC November 17, 2008 at 4:28 pm

If people spend the stimulus check to buy down debt, how much does that differ from the Fed buying bank stock. Both would help the bottom line of banks, and assuming that the banks are having a solvency crisis, wouldn’t making the banks more flush thus encourage them to lend.

If I don’t have a good investment to make with my stimulus check, what is wrong with me giving the money to a bank who can lend it to someone with a desire to invest.

Assuming that some people will invest, some will save, and some will buy down debt: in the end does it really matter that much. If GM decreases production while Toyota increase production in this country don’t we all gain if Toyota is the more effective user of resources. In the same way, isn’t it in our interests to let people decide what is the most effective way to use their stimulus check.

We are in the process of reallocating resources in our economy, from an over investemnt in housing to an investment in something else. That something else is still unseen at this point. But when people start to see opportunities in some area, they will start to place resources into that area. Assuming that we do not do what Hoover and FDR did, i.e. spend and tax which removed resources from the private sector.

12 Alan Brown November 17, 2008 at 8:39 pm

Please.

Everybody spends money every month. They just need to spend it out of one account instead of another and they can avoid spending any new money.

Spending and borrowing are not the answer to the current crisis. Neither is funding every piece of pork ever conceived.

Stabilize the dollar. Once people know where the bottom is, they will start buying things again. Otherwise, the smart people are waiting until the bottom is clear.

Remember when inflation began to ramp up and people stockpiled bags of rice in anticipation of inflation. During deflation the exact opposite occurs. People defer consumption and investment until the prices are no longer falling.

The cure for both situations is a stable dollar. This is the government’s primary failure.

13 Kevin Carson November 18, 2008 at 2:42 am

I’m not a social crediter, but as a libertarian I have to say this would be an improvement over the current system of fiat money.

If we’re going to have money created out of thin air, nothing could be worse than letting banks lend it into existence at interest. Social credit or a greenback system wouldn’t be any more of a fiat money system than we’ve got, and they’d be free of a major injustice of the present system: the power of banks to charge interest on money they created out of thin air. If we’re going to have a fiat system, it’s at least a tad more libertarian to have one whose yoke weighs less heavily on us.

14 ZBicyclist November 18, 2008 at 9:43 am

We got into this problem because we were spending money we didn’t have on things we shouldn’t have [e.g. big mortgages on overpriced housing].

So we get out of it by spending more money we don’t have on things we don’t need?

I suppose if I had enough degrees in economics this logic would make sense, but…

15 Bill Woolsey November 19, 2008 at 9:23 am

J Thomas…

You should study economics in a more systematic way.

It is not helpful to think about recession in ways inconsistent with scarcity.

No one has ever argued that in an ideal free market the population would fall to clear the labor market.

How about prices? The simple answer is that unemployment requires lower wages to clear the labor market.

Some of the discussion of money is at least partially correct.

While it is true that people supply things in order to demand things, there is no guarantee that the willingness to supply labor in the current peoriod is matched by a demand for the products of labor in the current period.

A surplus of labor might be matched by a shortage of things that aren’t the products of current labor.

The money equilibrium/disequilibrium approach argues that the only plausible problem, however, is a shortage of money–that is, the quantity of the medium of exchange in existence is less than the amount of it people want to hold.

People what to sell part of current output to hold money.

This is basically the only way you can get the “too little spending” problem, rather than some kind of problem based upon spending on things that we are not able to produce.

The free market solution of an imbalance between the supply and demand for money is a change in its purchasing power. In the “too little spending” scenario, the prices (including nominal incomes) need to fall enough so that the real supply of money equals the real demand for money.

The alternative is to increase the quantity of money to match the demand. In the “too little spending” scenario, that would be an increase in the quantity of money.

It is true that with existing monetary institutions, there usually needs to be some borrowing and lending going on to create money. However, the outstanding national debt of $5 trillion provides a huge potential for money creation even with a substantially smaller interest in borrowing and lending than today. Oddly enough, Federal Reserve policy of the last year has shown tremendous flexibility in creating money without purchasing government bonds.

A liquidity trap is a situation where this process, of increasing the supply of money, doesn’t work because people are willing to expand the amount of money they hold an unlimited amount.

16 Brian Macker November 19, 2008 at 9:05 pm

Yeah, why don’t we just repeal the laws against counterfeiting. I can’t believe this is being discussed seriously. It’s unfathomably idiotic thinking like this that got us into the current mess we are in. You guys seriously think you are doing “economics?” What a joke.

17 J Thomas November 20, 2008 at 5:39 am

Brian, you’re right that it’s thinking kind of like this that got us into our current mess. But notice that this is not particularly controversial. Everybody who’s studied the topic knows this stuff, and the government uses it. The problem isn’t that it’s incorrect (though it might be morally wrong). The problem is that it’s easy for the government to make mistakes trying to use it, and get bad results. But if the government tries not to play the game, that’s one of the mistakes. It gets bad results.

The consensus is that the government is supposed to “regulate the money supply” so that deflation doesn’t happen and inflation is low. To do that, it must sometimes take money away from people, and sometimes give more money to people. It can take money in the form of taxes, which nobody likes. It can give people money, and then people argue about who should have gotten more.

Or the government can borrow the money from rich people and spend it, which people also tend to dislike unless they get the business and jobs.

Or it can give the money to banks to lend to people who want to borrow. Somehow that is less controversial, somehow it doesn’t bother people that the government has given money away to the rich and powerful to make them richer and more powerful.

But this last method only adds money to the economy when the money actually gets loaned out. If the banks don’t want to lend it or if nobody with adequate credit wants to borrow it, then it just sits there.

18 J Thomas November 20, 2008 at 1:02 pm

Brian, I think we agree on a whole lot, and I’m unclear about which details we disagree on.

What you call the hoarding fallacy looks plausible to me, in the absence of various things that are present in today’s economy. But those other things are present, and so I can’t point to examples of deflation problems in reality. I tend to just accept it the way I do supply-and-demand and such. It’s generally believed whether it’s true or false.

There’s a reason to try to control the inflation rate, though you might not agree with it. It goes like this: With everything else that can be traded among multiple buyers and sellers, supply-and-demand takes effect. Price in theory will go up or down according to conditions. Money doesn’t have to do that because it’s a government invention — a medium of exchange, whose supply is arbitrary. To the extent that governments can keep the value of their money steady, people can have the illusion of a contract with the future. If you have money now but you want to buy a loaf of bread tomorrow or next year, you can estimate how much money you’ll need and set it aside. It doesn’t quite work like that since bread might be in short supply while rice is plentiful etc. But the idea is that if you want to save your money you should have a reasonable idea how much it will be worth in the future.

Governments don’t have a firm obligation to do that, and they may not be able to. But when it works it seems like a good thing — people can plan for the future. When it doesn’t work, when they get hyperinflation etc, they tend to get very upset.

Many americans learn in grade-school history class about spain and their latin american gold supply. They used gold for money, and so the amount of money depended on how fast gold could be mined. The european economies had booms and busts because of the varying gold supply — something that mostly served as a symbol to them. I’m not sure how true the story is, but many people believe it.

When we base the money on mined metals etc we get weird effects from the vagaries of mining discoveries. When we base it on government fiat we get weird effects when the government chooses to create weird effects. Which is worse?

They confuse, for instance, productivity driven price deflation, with fractional reserve driven monetary deflation.

Fractional reserve banking might usually prevent productivity driven price deflation by inflating the money to make up for it. Given current ideology, if the banks didn’t do it the government would have to.

The former is a good thing because it allows the value of the money supply to track larger quantities of goods.

I wouldn’t know. I don’t think I’ve seen it happen any more than I’ve seen the hoarding fallacy in operation.

The latter is also good but for a different reason, it allows fractional reserve driven asset bubbles to deflate.

I think it would be better not to have fractional-reserve-driven bubbles in the first place. It’s like a chain letter. The guy who starts it makes money. Maybe the first guys he recruits make money. After a little while the government steps in and stops the thing, and whole layers of suckers lose their money. It had to stop, but how is it a good thing that the perps got away with sacks and sacks of money while a bunch of suckers who got involved late all lose?

A smart economist views the inflating of the economic bubble as the true bad side of the coin. That is where all the malinvestment occurs.

Agreed.

I was very unhappy with Alan Greenspan back in 1997 precisely because I understood these and other differences. It was obvious that the “economic boom” was the flip side of a coming bust, and that it was driven by bad monetary policy.

Agreed.

I was livid when Bush allowed Greenspan to try to stop the correction of the internet bubble and therefore cause the inflating of the housing bubble.

Same here. But what could anybody do about it? Bush’s only skill is Texas Haldum.

Now the idiots in the government want to inflate some more, causing even more disruption to the economy.

I can almost sympathise with them. Why lock the barn door when the barn is already on fire?
A giant scam. And the most important perps are getting away with hundreds of millions or even billions of dollars each. And a whole lot of suckers who didn’t even buy anything much, who just tried to do an honest day’s work for an honest day’s pay are going to suffer a whole lot from it. There’s no surefire way to avoid getting hurt in this. Like, if your house is paid off but every nearby house is foreclosed and empty, you’re going to have a hard time paying the heighborhood utility bills all by yourself. A rising tsunami capsizes all boats.

19 J Thomas November 21, 2008 at 10:37 pm

I read your take on price stability above. You are mistaken. It is possible to have local monetary inflation due to mining discoveries but the amount of metal that has been extracted is so large that it is a minor concern.

That’s possible. I have the impression that more recent gold rushes were important, but it isn’t my field.

When you are talking about Spain you are talking about the wholesale theft and plunder of one set of civilizations by another. That’s not a good stituation to based your economic theories on. I hope you see why without me explaining further.

Sometimes extreme pathological cases show up the truth easier than the usual run of things. I think we can learn from the spanish experience, and I agree that it was a special case and not the norm.

Much of the instabilities and weird effects you seem to blame on metallic money systems were actually the fault of using fractional reserve systems and also because of government edicts. Your history has been prefiltered by a particular viewpoint, one that is used to justify governmental intervention in free markets.

That makes sense. Fractional reserve systems work for gold the same way as they do for paper money. Get rid of those in either case and you have what looks to me like a big improvement. A government that can be responsible about printing money might work as well or better than a gold system. But of course, the US government tried to stay on a gold system and they wound up printing paper money with fractional reserves….

If your concern is price stability then the original problem was not metallic standards. The original fluctuations were caused by fractional reserve systems. Instead of correcting that problem what our governments have done is tacked on a Rube Goldberg mechanism of fiat money. The problem is that they never fixed the original problem of fractional reserve.

Agreed. Metallic standards plus improving technology cause deflation, which is widely accepted as a problem. Legal banking causes far bigger problems, whether we agree that deflation is a problem or not.

It is a mistake on your part to think that productivity driven price deflation is a bad thing in the first place. With the discovery of new methods of making clothing our productivity increased by leaps and bounds. It is an economic mistake to try to maintain the clothing prices in such an environment. The price must drop and it’s no problem for the manufacturer or the consumers because, in fact, clothes are cheaper to make. Likewise with economy wide productivity increases.

The deflation problem makes logical sense to me. I’ve never seen or heard of it actually happen, though. Here’s the logic — Say you have money. You could spend it and then you won’t have it any more. Or you could invest in, say, new technology that makes something more productive. If you succeed you make even more money but if you fail you lose some or all of your investment. Or you could hold onto your money and wait for other people to invest in new technology that makes things cheaper. If they do so, you get some gains without risk. And in the meantime your gold is not circulating. So you can speculate in land — buy just the right land and do nothing with it but wait until its value increases. Or you could speculate in other resources that will be in demand. Or you could speculate in money.

It’s so much easier to argue about economic problems that are in equilibrium, that’s why so many economic arguments assume that. I won’t quite do that. Imagine that there’s no fractional reserve, and a gold standard. Your income lets you save half the gold you get under your mattress, and you spend the other half. Some fraction of the population does that, while another fraction has to spend everything they get. Eventually half of the gold is hidden under mattresses. Now let’s stop there and wait for a temporary equilibrium. At equilibrium, everything costs half as much as it used to, because nothing else has changed but the number of gold coins has been cut in half. Your income has also been cut in half, but you can still save half of wht’s left. So after awhile you and the other hoarders will have collected three quarters of the gold, and prices will be cut in half again. And eventually the hoarders will have enough money to buy everything in the whole economy eight times over, if they choose to.

By the assumptions I just made, this is a perverse situation but it isn’t terrible. The economy keeps running along just fine provided the savings happens at a predictable rate. Does it seem plausible that something kind of like this could happen, or is there a reason it couldn’t?

With the discovery of new methods of making clothing our productivity increased by leaps and bounds. It is an economic mistake to try to maintain the clothing prices in such an environment. The price must drop and it’s no problem for the manufacturer or the consumers because, in fact, clothes are cheaper to make.

Independent of the money question, I’ve seen the claim that this is something which sometimes gets discouraged by manufacturers. Keyword “disruptive technology”

http://en.wikipedia.org/wiki/Disruptive_technology

If the clothes are truly cheaper, then after the change the whole industry may have a smaller cashflow and likely smaller profits. If people buy lots more clothes because they’re cheaper then the industry might maintain its position but otherwise it’s likely to lose money. So industries that are dominated by a few large operators, particularly ones that have a lot invested in current technology, are likely to look for ways to stop the new methods. I think it would be good to find out how often that happens, and look for ways to make the rules of the game encourage adoption of innovation at an optimal rate.

“I wouldn’t know. I don’t think I’ve seen it happen any more than I’ve seen the hoarding fallacy in operation.”

Happens, every day. Look at the productivity increases in the computer industry.

Often we get better products at the same or higher prices. There was a time you could get an Apple II for $1000 and a Sorcerer for $400. Now you can get a very good laptop for $1000 and an eMachine for $400. But you can’t get an Apple II for $10 or a Sorcerer for $4, unless you happen to find the right yard sale.

Drives that go for sixty bucks would be selling for hundreds of millions.

Hard to get a drive for less than $60, though. The cheaper stuff came from a disruptive technology — flash drives first invaded markets taht hard disks couldn’t fill, and then gradually worked their way up into more standard market niches.

Not sure what you mean by having seen the hoarding fallacy in operation?

I haven’t seen CPI drop any more than I’ve seen the hoarding fallacy happen. I didn’t say that I’ve seen the hoarding fallacy in action, I said I haven’t seen deflation in action either. Maybe this year will be a first. More likely prices will stay high and number of sales will drop. I’d like a lot of deflation a whole lot more, since my savings might be worth something in that case. I have enough rice and flour and dried beans stored in hopefully-vermin-proof containers for a few months, and if I need them I’d sure rather have a lot of deflation than a lot of inflation when it’s time to replace them. It seems unlikely.

Fractional reserve banking is actually a sophisticated form of fraud that is very hard to understand. Similar to a ponzi scheme but just a enough of a difference that it takes a very keen eye to see how it operates. Even after it is explained straightforward very few people can comprehend how the trick was pulled.

It doesn’t seem that hard to me. Most people I try to explain it to seem to get it pretty quick. Except my father, he says I just don’t understand.

What the poor and those on fixed incomes should be experiencing is not price stability, but productivity induced price deflation. That way their real wages automatically go up, and their fixed incomes become more valuable. Shouldn’t savers get a share for what they have saved.

If you put it as a moral issue, I don’t know. How does it benefit anybody for me to put my gold under my mattress for a few years? If I buy into a startup that makes something better, then sure. If I buy stuff now that keeps people employed and lets people invest in new stuff, then sure, that’s good too. Why is “saving” good?

On the other hand, I don’t see that they ought to lose by it. When I was a little kid I could get a candy bar at the swimming pool for a nickel. Then the next year the same candy bar cost a dime. It would be nice if I could buy the candy bar now or later and pay the same price. If I could buy a candy bar for a nickel any time, then it would be like we were on the candy bar standard and the money is backed by candy bars. But no. If I had kept a lucky nickel back then, and I wanted to spend it now, it would be worth around a third of a cent compared to what it was worth then.

And we’re likely to get a lot more inflation post haste.

I don’t see a good solution. Say we do try to arrange a deflation. Then imports will be inflated and our own stuff will be deflated.

I remember when we were getting a whole lot of strawberries and honey from mexico, because they had something like this happening — we could get their stuff cheap and they couldn’t afford it themselves. Mexican beef, mexican corn, mexican beans. Their poor people had to scrape. If things got bad enough here we could become a net oil exporting nation. And not have enough hard currency to do much conversion to alternate energy. We’d have to admit we were third-world at that point, wouldn’t we?

20 Brian Macker November 23, 2008 at 10:46 am

Sorry about the unclosed html italics tag. I read your comment but don’t have the time to respond right now. One of the key things you need to understand is the answer to these two questions:

“If you put it as a moral issue, I don’t know. How does it benefit anybody for me to put my gold under my mattress for a few years?”

“Why is “saving” good?”

These are in fact pretty much the same question, although some would say they are very different questions if they accept certain fallacies.

In one of those prior links I provided I did discuss this. It was the one where I discussed lemonade and claimed that it was a capital good just like any other.

One doesn’t need to justify savings on the grounds that it is “good for everyone”. One need only do so on the grounds it is good for the person doing it. If that person values something they can buy in the future by saving that they couldn’t otherwise buy, and they value it more than the little things they could buy along the way, then that justifies the savings. Desiring any product, a car, a house, that costs more than a single paycheck requires savings. If not your savings then someone elses savings. Somebody has to save in order for you to buy the house. It can either be new savings or old but it has to happen.

Turns out that savings, like self interest in general, has other unintended beneficial side effects, even when the person saving is merely “hoarding gold”. See that link where lemonade was discussed. Turns out that by saving you are providing a capital mix to the economy that is available to increase production in the future.

I think in general you have forgotten that in order to hoard gold you have to produce stuff other people want. You’ve also forgotten that humans work on a division of labor, and specialization. One can’t jack up ones production in order to more gold since you’ll depress prices in the products you have specialized ing. You have also forgotten that under deflation the incentive to spend that hoarded gold increases over time. There are other checks on the ability of any person or group to hoard to a ridiculous level. It’s NOT a runaway process.

It’s like a cherry inside an upright bowl, not a cherry on top of an inverted bowl. There are forces that tend to push back.

One can certainly hoard gold to the level that is personally distructive, but you can do the same thing with model trains.

Eventually Scrooges die and since you like equlibrium models (I don’t particularly but they are sometimes useful) in the long run they die. If you assume a uniform quantity of them then they are dying all the time freeing up the gold they were hoarding. So they have zero effect.

I have better arguments but they actually require more verbiage than I have time for. I’d have to show you with examples that there is no difference between hoarding gold for a day, a month, a year, or a lifetime. I can do so via simple but long winded examples.

21 J Thomas November 23, 2008 at 9:02 pm

Brian, we do not have symmetric arguments here. You argue that “hoarding” is fair and good or at least not bad. I say that there are issues here I don’t have resolved. I could imagine it might be good, or bad, or sometimes either way, and I have no firm idea which it is on average. It might be sometimes fair and sometimes unfair.

Here is a central fact — the future is a different country. They do things different there, and you don’t yet know the rules.

When you do your trading all at the same time, you know what you’re getting. You could in theory find out who’s on the other side of your trades, and you could find out who your competitors are on your side of the trades. If you bring a pig to market and sell it, and use the money to buy a bunch of wheat, you know what you sold and you can inspect what you’re getting.

But when you save, hoping to buy in the future, you don’t know what you’ll get. You just don’t know. It’s a gamble. And of course, going into the future with no savings to fall back on is an even bigger gamble….

So let’s say there’s a gold standard and no fractional reserve banking. You have saved gold for the last thirty years, 20% of your gross income, and now you have 6 times your annual gross income saved. Pretty good, huh? You could buy a lot with that. But now there’s a famine. The rain didn’t come, and then it came hard just in time to ruin the harvests. Pirates have disrupted the sea trade, no help there. Somebody’s going to starve. You find that the price of wheat is forty times its usual price. But you can spend your life savings and stay alive. Good thing you had them!

But now it turns out there are rich people who have thousands of times as much gold as you do. Not because they have been more productive. Their great-grandparents saved gold back when there was a lot of it circulating. They didn’t do any more than you did, but they got a bigger result. They buy the whole harvest at a price you can’t afford, at their prices you couldn’t buy enough to live for two weeks. Is that fair?

And now they make an offer. Come to them, give them all your money and property and strip naked and give them your clothes, and if they like what they see they’ll let you be their slave and they’ll feed you. Your savings aren’t worth much, because the other guy’s great-grandparents got there first. Too bad your great-grandparents weren’t in a position to save the way theirs did. Is that fair?

Somehow we want to save for the future. But there are no real guarantees. It’s always a gamble.

Now I want to talk about something else. I’ve listened to foresters who believe it’s an utter waste when a tree falls in the forest and doesn’t get cut into lumber. I say there are animals whose evolution leaves them dependent on dead trees. There are animals that eat the bugs that live under the bark of dead trees. Animals that shelter in the rotten cavities of dead trees. Etc. But these foresters don’t care about those animals, they only care about the people who could have used the lumber. I think they’re wrong, trees that don’t get harvested are not useless. But now consider a human being who wants to work and make money he can spend or save, and he can’t find work. He could have been productive, but the opportunity is denied him. Through no fault of his own (except somebody else did get chosen to work, and he didn’t compete well enough for the chance) he is stuck with enforced leisure. (And while he lost the competition, if it wasn’t him it would have been somebody else.) The products he could have created don’t get made. The economy is poorer as a result, poorer than it would have been if he could have worked, assuming he actually produced something valuable.

When human labor is wasted, that’s truly a waste. Somebody wants to work and he can’t, and the hours, days, years of productivity that are lost can never be regained.

Suppose that on average people want to save more than they want to spend. You can imagine that the economy will immediately reach a new equilibrium and everybody will still produce just as much and buy just as much, but at lower prices. But what if that equilibrium comes slow? What if people who save actually do buy less? Then some other people don’t get the chance to work and save, because there’s less demand for their labor. Sad.

And then at some later time, maybe a time when the working-age population is smaller, the savers come back and want to spend. Now there’s plenty of work for the people who work, and money for them, but they can’t buy that much of what they produce because it’s going to the people who saved earlier. The new workers might as well save their money for later as try to spend it now. How is it fair that people who didn’t consume stuff in their own time, who wasted the labor that could have worked for them, get to take from a later generation with their deflated money?

However, while I don’t see that hoarding has good or fair results, I also don’t see an alternative that I would definitely call good and fair. It looks like a bunch of murky moral issues to me.

Like, let’s say that Tyler and I share a great-great-great grandfather who stole a forest from the indians. And I have another great-great-great grandfather who was a lawyer and stole the land from Tyler’s ancestor. Now you want to build a house, and you buy lumber that happens to come from my forest, and indirectly you’re paying me. But I didn’t plant the forest, or irrigate it, or keep it from getting budworm. All I did was sign a contract with the lumber company so they could clear-cut it. I’m not even a lawyer. Why should you pay me for the work my great-great-great grandfater did to steal it from Tyler?

As long as everything happens in the present it’s pretty clear. When we try to make deals with the future or the past it turns murky.

22 J Thomas November 24, 2008 at 1:05 am

Brian, it was 99.9% predictable that you would be so stuck on your own interpretation that you couldn’t see another. But I wanted to try anyway.

You forgot to add more history to your hypothetical, like how the Indian tribe that land was hypothetically stolen from in turn had been stolen from some other tribe prior, and before that yet another, going back 10,000 years.

How much do you want? Can you accept that property is theft? Well, it is. But I wouldn’t know how to start building an economic theory on nonproperty.

Stealing from those who save is in no way connected to justice for anyone. It’s just theft.

Try out this story. Here’s a man who knows how to farm, a former slave, and he has nothing. Here’s a man who owns farmland but he doesn’t intend it to be farmed, he’s going to sit back and wait for his saved money to become more valuable. If the second man would let the first actually farm his land then the land would not be worse off, it would perhaps be better. But he doesn’t want to and by the legal property/theft laws, he doesn’t have to. If you own something you have the right to sequester it, to keep others from using it whenever you want it not to be used.

Most of modern economics is about how to maximise production. They want to think of economics like a science, and there’s no science about who owns things — it’s only a matter of custom and law, there’s no truth to it. But the more that gets produced the less important it is to distribute it fairly. When there isn’t enough to go around the poorest die. When there’s far more than enough, everybody can do OK.

So economics looks at how to share resources to maximise production. And the banking system, for all its damning flaws, is the best example we have of that. Save your money in a bank and you don’t have to think about it — the bankers lend it out to whoever needs it and can pay it back with interest. You can spend your money whenever you want to, but until you spend it it’s being used.

And when that’s done well it’s a good thing. The better they choose their debtors, the more likely that new businesses succeed and produce new products and when you’re ready to spend your money you have more choices and better choices. You win by lending your money instead of hiding it under your mattress. But if they choose badly, they might lose your money.

Would it be better to do it yourself? Instead of putting your money in the bank or in your mattress, find somebody who needs investors for a business, and invest in him? Use your own judgement. His business might go bust. But if you put your money in a bank the bank just might go bust. And if you put it under your mattress it might possibly get stolen. When you save your money in the hope that production-driven deflation will make it more valuable, you’re hoping that somebody else does the investment it takes to cause that deflation.

You can treat it as a moral issue, and then I’m lost, I have no idea what moral position to take when i know property is theft. But I want a world where people can be prosperous independent of whether they’re thieves. I like the idea of maximising production within some constraints like saving the environment. So when you say that deflation works, I have to wonder whether it’s important that everybody know just how much money is circulating versus sequestered. I think it could work better when everybody knows that. Otherwise people don’t know how much of a pay cut to accept due to deflation, or how far to bargain down with that car salesman, etc. If you only find out how much deflation there is by watching prices drop, then the lag can hurt you badly. If deflation affected all prices instantly, then I think it wouldn’t be a problem. If everything stayed in equilibrium all the time….

But they don’t. When people don’t know how much inflation or deflation to expect, it makes it very hard for them to plan.

You are mistaken that saving puts people out of work as you are mistaken about many other things.

I understood your equilibrium argument about that. At equilibrium it doesn’t matter how much money there is because prices equilibrate. Everybody has the same jobs they’d have otherwise, except if you get 90% deflation then everybody will work for 10% the money they had before, and everything will cost 10% as much, and the only difference is you save some ink by not writing that last digit. Something that would cost $1000 is only $100.

But when we aren’t at equilibrium, can you agree that maybe sometimes some people are put out of work? Some people’s pay doesn’t drop as fast as deflation while other people’s pay drops faster? Etc. Can you imagine such things might be possible, away from equilibrium?

23 J Thomas November 25, 2008 at 12:55 am

Brian, I believe we are in agreement far more than disagreement. But somehow we focus only on the disagreements.

I agree with you about the value of nature preserves. It just doesn’t make sense to let anybody do anything they want, wherever they want. Somebody needs to be responsible and have some control. I’m not convinced, though, that the best way to choose who should have that control is to base it on who was best at stealing title to the land, or who spends the most money for those rights. And yet I’m not sure what alternative would be best. It should be a topic for research.

Saying that “property is theft” is taking a moral position. It’s just taking the wrong moral position.

No, if I see no moral basis for the choice, that isn’t taking a moral position about what alternative would be best. It’s just denying a moral basis to support this particular approach. It could still be the most practical approach in the short run even though I see no moral basis for it.

“If you own something you have the right to sequester it, to keep others from using it whenever you want it not to be used.”

There is nothing wrong with a non-owner being excluded.

I see a conflict among goals here. If you regard property rights as the most important, then you’ve chosen that side. If you regard productivity as most important, then there’s room to consider alternatives. I haven’t chosen, myself.

Can you see that there are other rights that can conflict with property rights? If there’s a war on and your property has vital strategic metals but you don’t want to mine them, how long can you keep them from being mined? Unless you are highly competent at extracting those resources yourself, your land will quickly be controlled by some competent miner. The government might pay you what they think the land is worth or they might mine in your name and maybe let you visit the place occasionally — ownership without control.

Could some other goals be as important as wars? I presented a candidate, and I’ll expand on that. Say you own farmland that you want to keep idle by whim, but there’s a food shortage and it’s clear that unless you allow farming on your land this season, 50 or so people will starve who could otherwise survive. Do you have the right to follow your choice?

The owner should have full control over his property and is responsible for any consequences his property has on others.

I agree that owners should be held responsible for any consequences. And yet, as a legal process that’s fraught with likely injustice.

I see a whole lot of moral issues around all this that I don’t have resolved.

And we have a lot of practical issues too. Like, you might think you have full control over your property. But if CPS visits and decides that your property is somehow unsafe for children — firearms available, dangerous wildlife to shoot with the firearms, too far from a trauma center, etc — they can take your children away and it might take you 18 years in court to get them back. You don’t have the right to raise your children on your property unless the CPS bureaucrats agree. Similarly for some other contexts. In practice, your rights as a property owner are conscribed and are getting conscribed tighter. I would argue that entirely apart from morality, it isn’t *practical* to run bureaucracies this tightly.

24 J Thomas November 25, 2008 at 10:42 pm

“Brian, I believe we are in agreement far more than disagreement. ”

Well, I think we are about as far apart on this as we could possibly be.

Brian, what can I say? You have led a sheltered life. You don’t imagine the full range of disagreement possible. Trust me on this — you and I mostly agree.

25 cheap kamas January 2, 2009 at 2:31 am

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