{"id":294,"date":"2011-11-25T15:47:43","date_gmt":"2011-11-25T23:47:43","guid":{"rendered":"http:\/\/www.halepassage.org\/?p=294"},"modified":"2011-11-25T15:47:43","modified_gmt":"2011-11-25T23:47:43","slug":"death-by-hawkery-nytimes-com-2","status":"publish","type":"post","link":"http:\/\/www.halepassage.org\/?p=294","title":{"rendered":"Death By Hawkery – NYTimes.com"},"content":{"rendered":"

Death By Hawkery – NYTimes.com<\/a>.<\/p>\n

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What the world needed in this global deleveraging crisis was deficit spending and higher inflation targets. What it got was fiscal austerity and obsessive concern with inflation risks that weren\u00e2\u20ac\u2122t real. Hence the catastrophe now unfolding.<\/p>\n

Judging from recent comments, many readers missed my earlier analyses on these issues \u00e2\u20ac\u201d I\u00e2\u20ac\u2122m still getting the \u00e2\u20ac\u0153You idiot, debt got us into this mess, how can debt get us out?\u00e2\u20ac\u009d type of comment. So let me re-repost my discussion of this whole issue<\/a> in full, followed by a couple of brief notes on the European situation.<\/p>\n

 <\/p>\n

The original post<\/em>:<\/p>\n

Sam, Janet, and Fiscal Policy<\/p>\n

One of the common arguments against fiscal policy in the current situation \u00e2\u20ac\u201c one that sounds sensible \u00e2\u20ac\u201c is that debt is the problem, so how can debt be the solution? Households borrowed too much; now you want the government to borrow even more?<\/p>\n

What\u00e2\u20ac\u2122s wrong with that argument? It assumes, implicitly, that debt is debt \u00e2\u20ac\u201c that it doesn\u00e2\u20ac\u2122t matter who owes the money. Yet that can\u00e2\u20ac\u2122t be right; if it were, we wouldn\u00e2\u20ac\u2122t have a problem in the first place. After all, to a first approximation debt is money we owe to ourselves \u00e2\u20ac\u201c yes, the US has debt to China etc., but that\u00e2\u20ac\u2122s not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth \u00e2\u20ac\u201c one person\u00e2\u20ac\u2122s liability is another person\u00e2\u20ac\u2122s asset.<\/p>\n

It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn\u00e2\u20ac\u2122t created equal \u00e2\u20ac\u201c which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.<\/p>\n

To see my point, imagine first a world in which there are only two kinds of people: Spendthrift Sams and Judicious Janets. (Sam and Janet who? If you\u00e2\u20ac\u2122d grown up in my place and time, you\u00e2\u20ac\u2122d know the answer: Sam and Janet evening \/ You will see a stranger \u00e2\u20ac\u00a6 But actually, I\u00e2\u20ac\u2122m thinking of the two kinds of agent in the Kiyotaki-Moore model.)<\/p>\n

In this world, we\u00e2\u20ac\u2122ll assume that no real investment is possible, so that loans are made only to finance consumption in excess of income. Specifically, in the past the Sams have borrowed from the Janets to pay for consumption. But now something has happened \u00e2\u20ac\u201c say, the collapse of a land bubble \u00e2\u20ac\u201c that has forced the Sams to stop borrowing, and indeed to pay down their debt.<\/p>\n

For the Sams to do this, of course, the Janets must be prepared to dissave, to run down their assets. What would give them an incentive to do this? The answer is a fall in interest rates. So the normal way the economy would cope with the balance sheet problems of the Sams is through a period of low rates.<\/p>\n

But \u00e2\u20ac\u201c you probably guessed where I\u00e2\u20ac\u2122m going \u00e2\u20ac\u201c what if even a zero rate isn\u00e2\u20ac\u2122t low enough; that is, low enough to induce enough dissaving on the part of the Janets to match the savings of the Sams? Then we have a problem. I haven\u00e2\u20ac\u2122t specified the underlying macroeconomic model, but it seems safe to say that we\u00e2\u20ac\u2122d be looking at a depressed real economy and deflationary pressures. And this will be destructive; not only will output be below potential, but depressed incomes and deflation will make it harder for the Sams to pay down their debt.<\/p>\n

What can be done? One answer is inflation, if you can get it, which will do two things: it will make it possible to have a negative real interest rate, and it will in itself erode the debt of the Sams. Yes, that will in a way be rewarding their past excesses \u00e2\u20ac\u201c but economics is not a morality play.<\/p>\n

Oh, and just to go back for a moment to my point about debt not being all the same: yes, inflation erodes the assets of the Janets at the same time, and by the same amount, as it erodes the debt of the Sams. But the Sams are balance-sheet constrained, while the Janets aren\u00e2\u20ac\u2122t, so this is a net positive for aggregate demand.<\/p>\n

But what if inflation can\u00e2\u20ac\u2122t or won\u00e2\u20ac\u2122t be delivered?<\/p>\n

Well, suppose a third character can come in: Government Gus. Suppose that he can borrow for a while, using the borrowed money to buy useful things like rail tunnels under the Hudson. The true social cost of these things will be very low, because he\u00e2\u20ac\u2122ll be putting resources that would otherwise be unemployed to work. And he\u00e2\u20ac\u2122ll also make it easier for the Sams to pay down their debt; if he keeps it up long enough, he can bring them to the point where they\u00e2\u20ac\u2122re no longer so severely balance-sheet constrained, and further deficit spending is no longer required to achieve full employment.<\/p>\n

Yes, private debt will in part have been replaced by public debt \u00e2\u20ac\u201c but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy\u00e2\u20ac\u2122s problems will have been reduced even if the overall level of debt hasn\u00e2\u20ac\u2122t fallen.<\/p>\n

The bottom line, then, is that the plausible-sounding argument that debt can\u00e2\u20ac\u2122t cure debt is just wrong. On the contrary, it can \u00e2\u20ac\u201c and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.<\/p>\n

European twists<\/em><\/p>\n

The European mess is pretty well described by the story above, with the Sams mainly in the periphery and the Janets in the core; what we\u00e2\u20ac\u2122re getting is forced austerity in the periphery with no offsetting expansion in the core, and now everyone is shocked, shocked that the whole continent seems headed for recession.<\/p>\n

In Europe\u00e2\u20ac\u2122s case, however, higher inflation is even more crucial than for the United States \u00e2\u20ac\u201d because Europe also needs a large adjustment of relative prices that will be very hard if not impossible<\/a> to achieve with low overall inflation.<\/p>\n

So as of this morning, the 5-year German breakeven<\/a> \u00e2\u20ac\u201d an implicit forecast of inflation \u00e2\u20ac\u201d is only 0.9%.<\/p>\n

This is not going to work.<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Death By Hawkery – NYTimes.com. What the world needed in this global deleveraging crisis was deficit spending and higher inflation targets. What it got was fiscal austerity and obsessive concern with inflation risks that weren\u00e2\u20ac\u2122t real. Hence the catastrophe now … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-294","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"http:\/\/www.halepassage.org\/index.php?rest_route=\/wp\/v2\/posts\/294","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.halepassage.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.halepassage.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.halepassage.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.halepassage.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=294"}],"version-history":[{"count":0,"href":"http:\/\/www.halepassage.org\/index.php?rest_route=\/wp\/v2\/posts\/294\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.halepassage.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=294"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.halepassage.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=294"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.halepassage.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=294"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}