Stimulus and Inflation

We have, of late, been enjoying a booming economy.  The economy has been growing.  Jobs are up.  Unemployment is down.  GDP is heading up.  These are all good things meaning an improved standard of living for the American people.

However, as sure as death and taxes there will come a time when the economy takes a downward turn.  This is not a gloom and doom prediction.  The economy can continue to grow in the long term but there will be ups and downs along the way.  Given a long enough perspective we’ll see that the ups average bit higher, the downs not quite so low, and the general trend is up.

This long term general upward trend is why the average standard of living is higher than in the paleolithic age, or Roman times, or Medieval, or even the 19th and early 20th century.  But there will be stumbles and down turns along the way.  This is normal.

But when a down turn happens, people forget that it’s normal and don’t simply batten down the hatches, as it were, to ride it out.  Nope.  The urge is to do something.

In the modern era the thing people generally turn to in order to “do something” is government stimulus of the economy.  The government will spend money on public works projects or offer loans or outright grants to select businesses to “stimulate” economic activity and foster economic growth.

This sounds very good in theory but what about in practice?  Well, the first thing you have to do is ask where this money the government is spending comes from?  Since government does not generally produce and sell products in a competitive marketplace, there are really only three ways government gets money:  tax it, borrow it, and a third way I’ll get to shortly.

The problem with “tax it” is that the money the government puts into the economy must first be taken out of the economy.  More money in sector A, where the government “stimulus” is going is at the cost of less money in sector B.  Classic Peter and Paul situation.  The money taken from B cancels out the money put into sector A.  People in favor of this approach can only argue it on the basis that the “experts” in government will use the money more wisely than will the market if the money is left there.  In short, it’s a specific instance of the command economy theories that date all the way back to Plato’s “Republic.”

The history of actual planned economies suggest that nothing could be further from the truth.

The second way to get the money for stimulus is borrow it, take it as a debt on the future economy.  This has much the same issue as the “tax it” approach although it’s a bit slower in application.  The impact of taking that money out of other elements of the economy is not felt quite so immediately but the end result is the same.  Paul is very happy at Peter’s expense, but the net that they both have does not improve.

Then the third way.  And that way, one that has been very attractive to governments in history:  simply make more money.  In the days when most money was in the form of coins of precious metals, the way this was done was to debase the coins in various ways. They would do things like alloy the coins with base metals, make the coins smaller while retaining the same denomination, or even make the coin entirely of base metal and just give it a “wash” of the precious metal.  All of which meant more coins in circulation, more money which the government could use to pay for more goods and services (starting there, since the governments generally gave itself a monopoly on the making of money) and then the coins could be used by others to buy other things.

Paper money made that process easier.  Want more money?  Print more.  The paper for $100 bill costs no more than that for a $1 bill.  And in the modern age, they don’t even need to do that.  Much of the “money supply” consists of nothing more than electronic bank records.

So, when an increase of money supply significantly larger than the growth of economic output hits the market, what happens?  Businesses, and soon individuals, have more money to spend on things.  And that means they buy more.  For example, people might buy more pencils.  As a result, the dealers order more pencils from their distributors.  The distributors order more from the manufacturers.  And the manufacturers order more raw materials, maybe even hire more people to increase their capacity to supply the new increased demand for pencils.

The economy humming along and more people working.  A good thing, right?

Well, for a while.  You see, normally an increased demand for one particular product, pencils in this case, would be because people are choosing that product over some other product.  Increased demand in one would mean reduced demand in another.  Perhaps, say, the popularity of pencil drawing increased in the art world over that of pen and ink.  People would buy more pencils, but fewer pen nibs and less ink.  And these shifts would in the end (through various intermediate steps) divert resources from the manufacture of pens and ink to that of pencils, thus managing the allocation of scarce resources which have alternative uses.

But that’s not what happens with an increase in money supply.  Instead, the demand for everything  goes up.  So instead of resources being shifted from something that has decreased in demand to something that is increased, everybody is clamoring for the same resources.  The result is that they have to bid against each other and prices for those resources goes up.  The prices of the materials for manufacture of those pencils goes up.  The manufacturers have to charge more to the distributors, who charge more to the retailers, who charge more to you.

This doesn’t happen instantly.  It takes some time to work through the system.  You get an initial “stimulus”, then prices rise and eat up the result.  However, it’s done its job for the politicians.  They got their “stimulus” and enough time has passed that they can blame the problem of the increased prices on someone else.

By the time the prices have all caught up with the money supply, the stimulus effect is gone.  The demand is no longer being propped up by the increased money supply.  If anything demand can fall.   Someone who bought a bunch of pencils at the start of this doesn’t need any now.

So what’s the politician to do?  If you said “increase the money supply some more”, you get a gold star.  We get another “stimulus”, another rise in prices, and another flagging of the economy as prices catch up to supply.  Which means another increase and…

Thus you have the inflationary spiral.

The only way to get out of it is to stop increasing the money supply faster than economic output is growing.  The problem is, that “stimulus” that happened at the start?  It happens in reverse.  Demand falls.  People buy less.  Businesses do less business.  Unemployment goes up.  All things most people see as “bad”.  Now, with a bit of patience these will settle and the economy will go back to its normal operation.  The thing is, neither politicians nor their constituents are noted for their patience.  “Things will be fine if you can just hold out for the next few months” is not something that plays well in the political trenches.  Thus, as I’ve noted elsewhere, it’s not politically feasible to fix such a problem all at once.

That doesn’t mean that you can’t fix a problem with inflation.  It just has to be done gradually, in stages that are politically feasible.  You’ll still get the drops in demand with the concurrent reduction in business, but they can be kept to a smaller, less painful level.  It just takes longer.  That requires more patience.   But, again neither politicians nor their constituents are noted for their patience.

And so, here as well, Economics is the Dismal Science.

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The 11th Hour of the 11th Day of the 11th Month

100 years ago today the guns fell silent, bringing to an end the First World War, called at the time the “Great War” or, more fatuously, “The War to End War.”

The anniversary of that ending became a national holiday in the United States and other places.  In the United States it eventually became the holiday we know as Veteran’s Day, a day to remember not just those who died in our nation’s and the world’s defense, but all those who served.

The wearing of poppies has become a veteran’s day tradition although, like many traditions, it has much fallen by the wayside.  But that tradition has its origin in the poem “In Flanders Fields”:

In Flanders Fields

BY JOHN MCCRAE

In Flanders fields the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below.

We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved and were loved, and now we lie,
In Flanders fields.

Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields.

Snippet of a new one.

This opening just came bursting out yesterday.  The question is whether I have a story or a rhutabega.

I’m thinking probably a short, maybe as long as a novelette or novella.


The Chooser

The sleek black horse descended to land softly on the immaculately mowed front lawn.  Göll slid off the horse’s back to alight on the grass.  A frown carved ugly lines in the perfection of her face as she adjusted the sword at her side.

Some missions brought her joy.  But the ones like this, she hated down to her very core.

Three steps took her up onto the porch at the front of the sprawling ranch house.  The door, though locked, swung open at her touch.

Overturned furniture, scattered books, and shattered glass greeted her sight, sharp contrast to the pristine exterior of this house.  Göll’s frown deepened at the scent that assaulted her nose.  Blood and urine, both fresh.

Before Göll could step through the door, a young woman emerged from the shadows.  She said nothing but merely met Göll’s eyes.

With a sigh, Göll stepped aside.  No sense berating that one for what had happened here.  Even the lesser Norns, those who followed each person, dictating their fate, were far beyond her power to influence, far beyond even the Allfather’s.

The Norn emerged from the house, and in an instant was gone.  Göll entered.  She heard movement in the back of the house, then running water.  A low, masculine voice was swearing.  While Göll could speak all languages, the man’s words were of no interest to her.  Her duty lay elsewhere.

The voice was coming from the right.  Göll turned left.  A short hallway led her to a bedroom.  Overturned furniture and other wreckage filled this room, too.  Göll carefully stepped over the debris, leaving it undisturbed until she came to the small body.  A young boy, his head turned at an unnatural angle.  Not even eight years old.  Yet in his right hand he held a small craft knife, blade stained with blood.

A weapon in hand.  A death in combat.  That made the lad Göll’s business.

Slowly, Göll dropped to one knee.  She bent and touched the boy’s still-warm cheek.  His eyes opened, his head twisted as his neck straightened and bones popped back into place.

The boy scooted away from Göll, his eyes wide in terror.  Göll remained still, schooling her face into a soothing smile.  Even adults in this day, in this land, often greeted her appearance with fear.

“How are you called, boy?” Göll reached out with her power.  Meant to calm those killed on the battlefield who wake still in a battle frenzy, it also served to soothe wild-eyed fear.

“Kamil,” the boy said. “My name is Kamil.”

“There is no need for fear.  I am not here to harm you.  You are beyond harm.”

Kamil looked at the floor that lay between the two of them.  His eyes widened as he spotted the shell, his former shell, that remained twisted in death.  Göll saw understanding pass across his face.

“Are you…are you an angel?”

Göll made her smile widen. “Not as you think of it.  I am merely a…well, a Chooser of the Slain.”

She shook her head.  The truth was, despite what the tales might say, she did not choose who died.  Not even the Allfather chose.  The Norns chose.  She merely carried the fallen to their fate.

Kamil shuddered.  After a moment, he stood and bowed his head. “I am ready, then, Chooser.”

A chuckle escaped Göll’s lips.  She stood and held out her right hand. “Not so formal, young one.  But come.  We have far to go.”

The boy took her outstretched hand and she led him back through the house.

Knowing Things That Aren’t So

A bit of a cheat tonight. Here’s a good one from the redoubtable Sarah Hoyt.

According To Hoyt

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I am a bookish person and my family has always excelled in philosophy which is a required course in Portuguese High School. In a point system that theoretically went from 1 to 20 but in which, practically, 14 was an A and you rarely saw anything higher, Father, brother and I averaged between 18 and 20 in philosophy.  (And history.  And for me in English, but that might be personal.)

Philosophy is a neat thing, because most of it is the study of closed systems.  I.e. people build entire worlds in their heads and the philosophy survives or not depending on how well it describes the real world (and therefore how useful it is to the people to whom it is communicated.)

If you study the history of philosophy, you find that the theories get more and more fanciful as they go, and less and less applicable to anything that…

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The Social Security Deception

I have seen a lot of people sharing “memes” about how Social Security is not an entitlement (in the political sense), how they paid into Social Security, that it’s their money they should be getting back as part of their retirement, and how any attempt to cut/reduce social security is stealing their money.

Unfortunately, nothing could be further from the truth.  Yes, Social security was sold first as a way to insure that poor old people wouldn’t starve once they became too old to work in a society which, at the time, still relied quite a bit on manual labor.  Then it was sold as old-age insurance; your money is set aside and used to fund a retirement once you are too old to work.

Both of these sales pitches were lies.

The thing about preventing poor people too old to work from starving?  I am generally not a fan of the federal government being responsible for public charity, preferring instead that being handled locally and ideally privately.   Still, that is a subject on which reasonable people can disagree and if one does accept a governmental responsibility for aid to the poor then some program to assist those rendered destitute due to age has a certain logic to it.  Only Social Security has never worked that way.  Being destitute has never been a requirement for receiving Social Security.  And, if it’s really to help poor people, why are “poor and out of work due to age” any more worthy of that help than “poor and out of work due to other reasons”?  No, the “starving grandmothers” sales pitch was nothing more than an attempt to gin up emotional support for a program that was supposed to work otherwise.

The second pitch, that the government is putting aside your money to provide for your retirement, that it’s in a “trust” to be returned to you when you retire, is equally false.  First off, the “trust” is, and has been, held in government bonds–which basically means it provides funds for the rest of government to do with as it will.  But the big thing is that Social Security has never just set aside the money (even in the “trust”) to pay individuals back what they have put in.  The first person to receive Social Security is illustrative.  Ida May Fuller, after paying into Social Security for 3 years after paying a total of $24.75 (from 1937 through 1939) began receiving monthly checks of $22.54 in January of 1940.  She lived to the age of 100 drawing a total over that time of $22,888.92, more than 900 times as much as she paid into it.  That money wasn’t from “investing” her contribution.  That money, like all the Social Security payments to follow, was from current workers “contributions” being used to pay current retirees.

In the private sector a “business model” in which the investments of new investors are used to pay off earlier investors is called a Ponzi scheme and it’s a crime.  Such schemes usually fail quite quickly as the supply of new investors dries up.  The only real difference in Social Security is that the legal mandate to pay into it ensures a supply of new “investors” as people are born and grow into the work force.  Older “investors” are removes as they die.  Currently changing demographics–people living longer so more Social Security is being paid combined with falling birthrates after the end of the Baby Boom–are straining a system which is inherently unsustainable in the first place.

The upshot of this is that Social Security is not money being taken and set aside for your retirement.  It’s money being taken from you and given to someone else for their retirement.  And it always has been.  The “theft” isn’t in any possible future failure to pay you.  The “theft” has already taken place.

Look, if someone breaks into your house and robs you, that does not give you license to break into your neighbor’s house and rob him.  I think most people would agree with that.  Likewise, that you have had your money taken via the Social Security tax to pay for people currently retired does not give you the right to insist that future workers’ money be taken to pay for your retirement.

It sucks, I know.  Believe me.  I’ve had plenty of money taken from me too, but that still doesn’t make “turnabout” right.  It’s not even punishing the folk responsible for taking your money.  If anything it’s rewarding them and punishing people who had nothing to do with it.  There is no justice, no “right”, in continuing the taking from one generation to pay for a previous one.  It would be one thing to take back from the ones who took from you.  Even that may not be “right” in some larger sense, but there is a certain logic to it.  But taking from innocent third parties simply because others took from you?  There is no moral or ethical justification for it.  The old saw about “two wrongs” and all that.

Peter being robbed to pay Paul does not give Peter the right to rob John in turn.  It just doesn’t work that way.

Election day

Short one today.

Another election day has rolled around.  Yes, I did my civic duty and voted.

And yet, on my news feed in another forum I have been seeing a number of posts on the topic of how useless voting is.  One has this stock picture with text about how the person doesn’t vote because voting is choosing who will be master over ones neighbor and nobody has the legitimate authority to do that.  Another has a picture of the scene from Charlie Brown where Lucy is holding the football and Charlie Brown is getting ready to kick it (or not, as this generally goes) with “Go ahead.  It will be different this time.  And, of course, there’s the late George Carlin’s comedy routine on not voting.

Then there’s the old standby of insanity being defined as doing the same thing over and over expecting a different result. (Funny thing is, I’ve never seen an actual definition of insanity–which is a legal, not a medical, term–that said that.)

A lot of people, particularly among the conservative to libertarian folk, are very dismissive of the idea of voting.

I just have one question:  How is not voting supposed to help?  I mean, aside from giving the person taking that position a sense of smug self-righteousness?

Seriously, how is not voting supposed to help?  Are the candidates who win (candidates who don’t are a non-issue since they have no power, not being in office) supposed to look at low voter turnout and say “well, we need to change to appeal to all those people who couldn’t bother to vote”? Do you actually think that’s even a remote possibility?

Or perhaps you think that staying away will let things collapse that much faster and we can have a civil war and….  Um.  Whatever fantasies you might tell yourself, if you actually look at history, revolutions and civil wars have a very bad record when it comes to producing anything good.  The American revolution was very nearly unique in that regard and relied on a widespread popular support for the ideals of freedom (however poorly implemented at the time) that, if we actually have here would mean that we wouldn’t actually need a civil war to implement pro-liberty policies.  And if we don’t, what naive self-delusion makes you think a civil war followed by a Consititutional Convention–with delegates chosen by the same people who send representatives to Washington now–will produce any better results than voting does now.  And that’s assuming that other powers don’t use the idea of such civil unrest in the US as an opportunity to put their own thumb on the scales to their advantage rather than ours.

The best I reason I can come up with, really, is folk are denigrating voting simply to make themselves feel good, not to accomplish anything in the larger world.  If that’s what you want, then more power to you.

Just close the door and wash your hands afterward.