Tuesday, April 26, 2011

Increasing prosperity, increasing deficits

To maintain full employment, a sovereign currency issuer must generate sufficient net financial assets to satisfy the savings desire of the non-Govt sector. In other words, the Government must print enough money so the private sector can reach its savings target and have low unemployment. This money printing that shows up as deficit spending.

One question is whether deficit spending, all things equal, necessarily must go up as a State becomes more wealthy. ESM makes a clear argument for why it should here:
Once your level of consumption reaches an acceptable level, doesn’t it make sense to create a nest egg of financial assets equal to at least a low single-digit multiple of your annual income? If everybody could do that, you’d have government debt into the several hundred per cent of GDP range, without even considering the dollar savings desires of the rest of the world (which is understandably large given the stability of the government and the property rights in the US).

It all makes perfect sense to me that as the world develops and as people become wealthier, financial wealth will become a larger fraction of GDP than it is right now.
This is true. If 50% of the US decided to bank 1 years household salary, the USG would need to run a massively higher deficit than it does now.

Friday, April 22, 2011

Comments on Interfluidity

Steve Waldman's been trying to get his head around MMT. Here are his criticisms of it. My response is below.

While the flow of net private sector financial assets does strike me as an important and powerful tool for macroeconomic policy, it is not a uniquely effective tool. Changes in the relative price of financial assets (the object of conventional monetary policy) and in the distribution of financial assets can also powerfully affect behavior, and there are costs and benefits associated with each lever. What is the justification for focusing almost exclusively on managing the level of “net financial assets”?
This is the weakest of Steve's points, and reflect the fact he's in a PhD program and a Progressive. What evidence is there that changes in the relative price of financial assets is much influenced by the Fed, regardless of what it's "objectives" are? And, even if these relative prices are influenced by the Fed, what evidence is there that they are a potent macroeconomic tool. Does Japan not exist? Aren't we in the Year 2011? Does reality never get a chance at bat in the ivory tower?

I'll disregard the distribution question for obvious reasons.
It is unassailable true that a government cannot be forced into insolvency for want of capacity to pay in its own currency. But a government might find itself politically or institutionally unable to meet an obligation despite access to the printing press, and there might be a sharp run on government obligations even without the focal point of formal insolvency that usually occasions private sector runs. It strikes me as an open question the degree to which protection from formal insolvency protects government obligations from disruptive races to redeem. Point #7 below strikes me as stronger protection.
A government can always choose not to make an obligation, and indeed, Russia made this very choice in 1998. What protects a government from disruptive races to redeem is its ability to tax.
MMT-ers are right, I think, to argue that, for fiat-money issuers who borrow in their own currency, conventional government solvency criteria are false. They are right to argue that such governments have a great deal more latitude to issue money and debt than conventional theories suggest. But that shouldn’t be taken as license to defend carelessness in the distribution of new claims, or to treat expansions of money or debt as entirely cost-free. To be fair, this is a bit of a straw man.
To be accurate, this is entirely a straw man. Again, Japan? Reality? Tinkerbell? The difference between a dependent and independent variable?
So, I’ll to acknowledge TC’s objection as important and potentially valid, but defend my positing of an MMT “solvency” constraint, at least with scare quotes in place. I don’t think it’s reasonable for MMT-ers or anybody else to write off the possibility of sharp and unexpected changes in the value of a fiat currency. The possibility is dangerous enough that it should focus the mind in a precautionary way. If MMT policy advice is to be taken seriously, it must offer a some assurance of safety against that scenario. The absence of formal default hazard provides some assurance, but without Point #7 as a backstop, not enough.
It's called sensibly designed fiscal policy with good automatic stabalizers. Oh yeah, and an academic class who knows an asset from a liability, a stock from a flow, and a bit from an atom. A lot to ask, for certain.
On the one hand, I consider this point is one of MMT’s deepest insights, and its secret weapon. So long as a government’s taxing power is strong, so long as it is capable of persuading individuals to surrender highly valued real goods and services for the ability to escape liabilities imposed by fiat, exercise of that taxing power creates a floor beneath which the value of a currency, in real goods and services, cannot fall.

However, relying too overtly on taxation to give value to a currency strikes me as dangerous and potentially counterproductive. A government’s taxing power is limited and socially costly. Governments must maintain a patina of legitimacy so that people pay taxes “voluntarily” or else they must intrusively or even brutally force compliance. In a decent society, it’s perfectly possible that governments will find it politically impossible to tax at the level consistent with price stability goals.
Here, Steve's Progressive instincts cloud the remainder of his mind. The US is certainly a decent society. But I don't pay my taxes voluntarily and neither does anyone I know. If taxes were voluntary, I wouldn't pay them. Maybe Steve can share how much extra tax he gave in 2011 (since it's 4/22, the 1040 should still be fresh in his mind)?

A Government that cannot tax is no longer a government. When a government dissolves, then its fiat currency dissolves as well. This is called "hyperinflation" and it has nothing to do with a government's "solvency" and everything to do with its existence.
I think this is true, a deep and powerful way to think about public finance. Note that a government’s “political capacity to levy and and enforce payment of taxes” depends first and foremost on the quality of the real economy it superintends. The value that a government is capable of taxing if necessary to sustain the value of its obligations increases with the value produced overall.
Again, Steve's Progressive instincts cloud what remains of his judgement. A government's capacity to impose taxes has nothing to do with the quality of the real economy it oversees and everything to do with its sovereign power. The King of some remote village will be able to collect goats in tribute so long as he is the True King. etc. A soverign who oversees a more productive economy will certainly get a richer vig, but what does that have to do with anything?
The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.
What crap. It's like the Pope saying to Gallileo, "if you were only nicer about this whole earth revolving around the sun the Church would listen to you more". MMT is rejected because it is heretical.

Krugman says MMT again

He really needs to stop doing this. What's next -- Yglesias is going to bring it up? Back to Krugman:
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

And may I say that now is an especially peculiar time to think that taxes matter only if they reduce consumption. We have lots of excess capacity in the economy; the government can easily buy more goods and services without requiring that the private sector buy less. The only reason to raise taxes now, or promise future rises, is to address solvency concerns.
The Government can acquire real goods and services without spending money at all. Conscription. Kelo. Extension of the copyright act. The list goes on. Taxes, first and foremost, are a manifestation of sovereign power and thus lay the groundwork for fiat money. By draining the private sector of the funds it needs to purchase it's own output, they create room for the Government to take that output without generating inflation. Contra Krugman, now is an excellent time to understand how taxes reduce consumption because we are in a recession due to lack of aggregate demand due to lousy household balance sheets, and high taxes are preventing those balance sheets from being repaired. Last point to Krugman:
Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
So true. Also, people with Nobel Prizes in economics demonstrate the same failings.

Monday, April 18, 2011

Angel investment hurts the VC market

This is something I've observed as well, and highlights another problem for the traditional VC industry:
I bumped into a friend last week who sold his company a few years ago. He spent the required time with the buyer and then left. He's been spending his time since starting a family with his wife and investing in startups. He told me he's not sure he'll make a lot of money angel investing, but he's hoping to at least breakeven. So he's not doing it soley for the returns. He's doing it to stay connected to startups and support other entrepreneurs. I am certain he's not alone in his approach to angel investing.
It's fun to found a hot startup, and then cash out. The problem is that now you are no longer the founder of a hot startup, you're the guy who founded a hot startup a while ago, and then cashed out. So, after time, the conference invitations dry up, you're no longer the center of attention at parties, and Wired magazine isn't emailing you asking for your vision of Web 3.0 (or whatever)?

So what do you do? You become an angel investor, and even if you aren't the guy founding hot startups, you're the guy funding guys funding hot startups. So, now you get invited to conferences again, people want to talk to you at parties, and Wired magazine is once again asking for you to grace their pages. It's all great so long as the money keeps flowing.

Discussion question: Is the above dynamic likely to fuel bubbles, or not?

Friday, April 08, 2011

Lack of IPOs hurt the Venture Market

An interesting post from Dan Primack's excellent term sheet on the lack of an IPO market hurting VCs:
Publicly, VCs may have to support the SEC's newfound flexibility [in enabling companies to have privately traded shares]. They cannot be seen by entrepreneurs as trying to force unwilling companies into the public markets, or hindering the ability of those companies to raise private capital. Today's VCs are desperate to appear buddy-buddy with the entrepreneurial community, because they believe that generates preferable deal-flow. Remember, John Doerr wore a hoodie to appear Zuckerberg-y.

Privately, however, VCs should be concerned. The relative dearth of VC-backed IPOs was a very hot topic at this past week's National Venture Capital Association annual meeting, with many investors privately grumbling that the lack of a mega-hit (i.e., Facebook) was holding back other, less well-known portfolio companies. "We need a giant marker of validation for our companies," one longtime VC told me. "Kind of like a market comp for our industry, rather than for Facebook or Zynga's industry. We need [the public markets] to trust us again."
Back in the .com boom, when companies went public everyone would use their valuations to create whatever comp they wanted. The lack of big, public IPOs is probably hurting second and third tier VCs with their portfolio's loaded with Facebook, Zynga, and Twitter also rans.