jack

An analogy I frequently hear argued about is using an analogy of a household budget for a national economy. Usually, someone advocating cost cutting *implies* that analogy, and then someone opposed jumps in to point it out and say it doesn't apply.

The implication is something like, "we only have so much money, so we need to prioritise". Obviously the biases of the person talking are the obvious priorities, so obvious they don't need to explicitly justify them. Usually first in the queue is "whatever the status quo is, we obviously need to keep funding THAT". Obviously vulnerable people and non-voters get shafted. And worrying from a practical standpoint is, "oh, we can't afford long-term investment, we'll patch it quickly and accumulate infrastructure debt, I'm sure a later government will be happy to patch it up properly after it's been underfunded for decades" BZZZZZZT NO THEY WON'T THEY'LL CUT TAXES LIKE AS NOT BECAUSE THEY'RE JUST AS SHORT SIGHTED AS YOU.

And then someone else is like YOU DON'T HAVE A LIMITED AMOUNT OF MONEY YOU DELUDED COCKWOMBLE YOU'RE THE GOVERNMENT YOU CAN LITERALLY PRINT MONEY and then there's an argument about how much the government ever SHOULD print money. Usually Hitler is mentioned. I can understand Germans being twitchy about this, but you can be cautious about the wrong things.

Sometimes they don't actually SAY "deluded cockwomble", they just strongly imply it, or allude to a private eye legal letter which said it[1].

But anyway, there is a legitimate question, SOMETIMES you have to cut back necessary services to keep even more necessary services going. But if you're saving money in ways that are are only going to be more expensive shortly, 'saving' money by skimping on all the maintenance, turfing vulnerable people out of hospitals early, cancelling public transport, etc, but that are going to come back around as things fall down and need to be rebuild, now people need even more care, business steer clear because no-one can get to work, you have to ask, "is this cheaper overall, or only in the short term?" And if it's cheaper in the short term, is it ACTUALLY cheaper? Will you actually have a stronger economy in ten years time if you sabotage it now? Or not? If not, should you borrow money now to cover for this?

What are the counter-arguments to this? Well, with varying degrees of validity in various situations, they include: "government spending is a black hole which is essentially always wasted, so spending as little as possible and hoping people survive somehow is for the best", "the country is bust in the long term, we can't sustain the standard of living we have now, so the sooner we start letting people die of it, the sooner we can start rebuilding" and "I've got mine, lets burn the country to the ground as long as rich people end up on top of the pile". You can probably see which of these I sympathise with and which I don't.

But the thing that bugs me is, most of this is ACTUALLY TRUE OF HOUSEHOLD BUDGETS TOO. Getting deeper into debt is usually bad! But if you can borrow at government-bond rates it's a lot lot more attractive. And to some extent, if you're in a money crunch, you cut everything you CAN cut. But seriously, the car you use to go to work, the children's education, the medical care for the family members who are sick (to the extent that touch wood you have to pay for it yourself), cutting those is not normally "oh good, I'm more fiscally responsible now". It's "doom doom doom doom everything is about to collapse". Cutting YOUR SOURCES OF INCOME is an extreme short-term measure. There may be times when it's necessary. But I hate how people seem to be all smug and "oh, well, obviously" about it. The big things you can cut are (a) letting people die and (b) destroying the very things that make you money. Yes, half the time you DO have to cut those. But for god's sake, don't charge in with a machete chopping away with abandon, be sombre :(

[1] I made all this up. Don't cite me.

ZOPA

When two people are negotiating, they both have an implicit limit on what they're willing to accept. That limit may be a good one or a bad one depending how good your other options are (your "Best Alternative to Negotiated Settlement").

Between those two limits, the worst one person A will accept, and the worst one person B will accept is the range of possible agreements they can come to. In an ideal negotiation, there's a good range which is still very beneficial to both parties, and it's not important exactly where they split the difference, they're both better off.

In a modern society, we rarely actually negotiate -- buying mass produced goods at a fixed price is much more common. So when we do negotiate (a new job, a new house, or a new car), we're often stressed and unsure, and feel like there should be an objective "fair" price we can turn to.

Inequalities of negotiating position

Normally the fair price is "somewhere in the middle". If you're a statesman or a used-car salesman, you may have to spend a lot of effort shifting the potential agreement around within the ZOPA, which is necessary to your job, but ultimately useless to society.

If you're an idealist or a geek, you may avoid thinking about it and hope for the best -- if person A and person B founded google.com together, it would be unfair if one got 99% of the profit and one got 1% of the profit, but they're still millions of times better off than walking away and getting 50% of somethingelse.com.

But the unfairness is sometimes really obvious. The "fair" wage for a job is somewhere between "the minimum people will do it for" and "the most the company can afford to pay". It's not one or the other. But if there's a small number of companies and many potential employees, the company can ignore "what it can afford to pay" and just make the wage the least people will still work for. If there's one national union and a small number of companies, the wage may be "the most the company can afford to pay", or even more.

You can't say "this value is right", but you can often say "this value is wrong", if one party gets almost all the benefit out of the deal.

This is why people who say "if you agreed to something, it was by definition fair" are so tragically wrong. If the bargaining power is approximately equal, fairness will often emerge (sometimes with a helping hand). If the bargaining power is unequal, the result will usually be unfair.

Minimum Wage

This is basically what minimum wage does. People who paid less than minimum wage are typically in a bad bargaining position, so the proportion of the value they bring to the company which is reflected in their salary is prone to being "the least people will accept" and nowhere near "the most the company can afford to pay" (unless, by coincidence, those are identical, but there's no reason they should be).

Theoretically, the minimum wage should restore the equity to a position closer to what the free market would have found if the inequality of bargaining position hadn't distorted it (without waiting until people are desperate enough for general strikes and revolution).

If minimum wage were equal or more than the salary people bring to the business (with a small safety margin), then the naysayers would be right -- companies would literally be unable to afford employees and would shrink or go bust, or abroad, or employ people under the table.

So, the minimum wage should be somewhere in that range. I and many people think it could be higher. Other people think it's already too high. I've heard people describe a minimum wage which is too high, not in money, but in job security, and the bad result was that most people had temporary unofficial jobs outside the regular system. But in order to argue that, I think someone has to point specifically to those sort of problems, not just offer vague platitudes.

Government Debt

Krugman takes the reasonable-sounding but very surprising position that government debt is Not All That Scary Really. He says that the US government incurred MASSIVE debt in WWII, and that was never paid back -- but now is a tiny portion of the national debt.

Runaway debt is a problem, as is debt that is simply wasted (eg. spent on useless projects, subsidies to people who don't reinvest it, etc). But if the money is sensibly invested in the economy or infrastructure somehow, even via dubious projects such as a word war, it can be a good thing.

And he thinks in the current situation, the government should not be scared of more debt unless they're actually likely to default (which is hopefully still unlikely). This will need to be paid back by taxing more in the future, but hopefully that will be accomplished without raising taxes, but because the economy is much bigger.

I want to believe this because (a) it sounds reasonable and (b) it aligns with my ideology, but I know it's antithetical to out default assumption that it's fiscally irresponsible to borrow too much. But that that's different when we're looking at an economy as a whole (when net foreign debt is surprisingly small), when "paying it back" doesn't mean "giving it away to strangers" but "returning sensible dividends to pension schemes, investment accounts, etc, etc"

Gold standard

Krugman didn't really mention this, but it helped me think about it.

As I understand it, the advantage of the gold standard is if you think the government is prone to imploding, and may take the currency with it, having money backed by something that easily transfers internationally or privately is useful.

However, the disadvantage is that the effects of the government and central bank adjusting the money supply and interest rate have generally been better than letting them be determined randomly by the number of gold mines discovered, and a gold standard gives up on that.

It is sort of a scary question. Do we know enough about the economy that our attempts to adjust it are better than just fixing it to gold so we can't make matters worse? But despite some false starts, it seems like in general we DO do better, and there are a number of proto-depressions in the last 80 years that probably WOULD have happened if the government and central bank hadn't reacted with changes to the money supply.

I haven't read much economics, but I was interested to read "End this depression now". Published a couple of years ago, but sadly still equally relevant.

Krugman is a columnist, blogger, and author (and nobel prize winner) about economics, and left-wing by American standards.

The book sounded convincing to me, but I don't know enough to vouch for the validity, or the correctness of my summary. I hope someone can offer a more authoritative opinion, especially including people prone to agree and prone to disagree.

The current depression in UK/US and similar countries

As I understand it, the short version is, Krugman says not every depression is based on the same underlying causes as the great depression, but this one is. He wasn't originally convinced, but he saw how this depression happened, and it was just like Keynes described in the great depression.. And that the solution, like in the great depression, is simple even if not necessarily easy: for the government to spend a lot of money.

Government creating money

In the old days, government increased the money supply by literally printing money. Since WWII, the same effect has been achieved by changing the amount of money that the central bank will lend to large banks and the regulations on how much money they're allowed to lend out, and by adjusting the interest rate.

Some people are terrified of high inflation because too much causes hyperinflation, which causes Hitler. This is a serious risk (I think hyperinflation happened in Argentina, but they recovered surprisingly well), but only if the economy is otherwise collapsing and the government chooses to GO ON printing money. In fact, the policies of the last 80 years have been surprisingly successful at keeping inflation at a small but steady rate, and we are in no serious risk of hyperinflation -- in fact we probably need HIGHER inflation, but governments are too scared to push for it.

Usually the government and central bank balance unemployment and inflation by adjusting the money supply and interest rate. This is usually but not always the biggest factor in the economy.

However, we recently had the problem that the central bank lowered the interest rate to near zero, and the government increased the amount of loans available to the large banks, but it still wasn't enough. The money theoretically available to the banks wasn't used, because they were too scared of a repeat of the housing crash, and it didn't get loaned or invested, it just got sat on. This is called a "liquidity trap".

Krugman says that the answer is to go further: if banks won't put money into the economy, the government should do it directly. This will increase government debt, but assuming the economy grows, the effect will still be negligible.

Some people think that the solution is the opposite: that we've run out of money, or that people aren't trained for the jobs we need, and the answer is massive austerity measures. Krugman says this is wrong. Unemployment hit EVERYWHERE, in a manner consistent with "people not creating jobs" not "people having the wrong skills".

Who gets the money

This is the bit that arguably is ideological. In terms of economics, it doesn't matter who gets the money as long as they spend it or invest it, not just sit on it.

So Krugman (and I would agree) says an obvious place to start would be putting back the social safety net the government did cut back on. That would (a) be humane (b) restore a status quo (c) be good the economy for all the usual reasons I think a social safety net is good (d) work, because anyone drawing any sort of benefits (work-related or not) is almost certainly going to need them, and hence spend them, creating economic activity, not sit on them.

Giving the money to large institutions which will sit on them, or use them to reduce the cuts on executive pay or dividends, the proceeds of which are likely to be saved not invested, won't help, because the money will not be used.

However, the UK government has (apparently) been giving subsidies to random companies in the form of guaranteeing loans to them for specific infrastructure projects. I think the "subsidise random companies" model has good aspects on a small scale (because it helps small businesses grow) but is a bad idea as the basis for an economy (because it encourages companies to compete on "how much can we bribe politicians to subsidise us" rather than "how much can we actually do useful stuff). However, even if it's stupidly implemented, it's equally good from an "injecting into the economy" standpoint.

However, we need a lot more of it. From what I can tell, if Krugman is right, we need to reverse the austerity and invest even more money, and many people are still arguing for further cuts.