The least desirable way to handle this situation is to play ‘let’s make a deal’ with the rental agency once you’re at your destination ‘ you’d be at a total disadvantage and there may be no acceptably safe cars in the lot anyway. If your machine doesn’t have a 12V DC input jack, then you can still use a battery, but you’ll have to use an inverter. Later on, people feel great when they see their pictures

April 25, 2014 § Leave a comment


Piketty wants to provide a theory relevant to growth, which requires physical capital as its input. And yet he deploys an empirical measure that is unrelated to productive physical capital and whose dollar value depends, in part, on the return on capital. Where does the rate of return come from? Piketty never says. He merely asserts that the return on capital has usually averaged a certain value, say 5 percent on land in the nineteenth century, and higher in the twentieth.

The basic neoclassical theory holds that the rate of return on capital depends on its (marginal) productivity. In that case, we must be thinking of physical capital—and this (again) appears to be Piketty’s view. But the effort to build a theory of physical capital with a technological rate-of-return collapsed long ago, under a withering challenge from critics based in Cambridge, England in the 1950s and 1960s, notably Joan Robinson, Piero Sraffa, and Luigi Pasinetti.

Piketty devotes just three pages to the “Cambridge-Cambridge” controversies, but they are important because they are wildly misleading. He writes:

Controversy continued… between economists based primarily in Cambridge, Massachusetts (including [Robert] Solow and [Paul] Samuelson) . . . and economists working in Cambridge, England . . . who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations. It was not until the 1970s that Solow’s so-called neoclassical growth model definitively carried the day.

But the argument of the critics was not about Keynes, or fluctuations. It was about the concept of physical capital and whether profit can be derived from a production function. In desperate summary, the case was three-fold. First: one cannot add up the values of capital objects to get a common quantity without a prior rate of interest, which (since it is prior) must come from the financial and not the physical world. Second, if the actual interest rate is a financial variable, varying for financial reasons, the physical interpretation of a dollar-valued capital stock is meaningless. Third, a more subtle point: as the rate of interest falls, there is no systematic tendency to adopt a more “capital-intensive” technology, as the neoclassical model supposed.

In short, the Cambridge critique made meaningless the claim that richer countries got that way by using “more” capital. In fact, richer countries often use less apparent capital; they have a larger share of services in their output and of labor in their exports—the “Leontief paradox.” Instead, these countries became rich—as Pasinetti later argued—by learning, by improving technique, by installing infrastructure, with education, and—as I have argued—by implementing thoroughgoing regulation and social insurance. None of this has any necessary relation to Solow’s physical concept of capital, and still less to a measure of the capitalization of wealth in financial markets.

There is no reason to think that financial capitalization bears any close relationship to economic development. Most of the Asian countries, including Korea, Japan, and China, did very well for decades without financialization; so did continental Europe in the postwar years, and for that matter so did the United States before 1970…

To summarize so far, Thomas Piketty’s book about capital is neither about capital in the sense used by Marx nor about the physical capital that serves as a factor of production in the neoclassical model of economic growth. It is a book mainly about the valuation placed on tangible and financial assets, the distribution of those assets through time, and the inheritance of wealth from one generation to the next.

Why is this interesting? Adam Smith wrote the definitive one-sentence treatment: “Wealth, as Mr. Hobbes says, is power.” Private financial valuation measures power, including political power, even if the holder plays no active economic role. Absentee landlords and the Koch brothers have power of this type. Piketty calls it “patrimonial capitalism”—in other words, not the real thing.

Thanks to the French Revolution, registry of wealth and inheritance has been good in Piketty’s homeland for a long time. This allows Piketty to show how the simple determinants of the concentration of wealth are the rate of return on assets and the rates of economic and population growth. If the rate of return exceeds the growth rate, then the rich and the elderly gain in relation to everyone else. Meanwhile, inheritances depend on the extent to which the elderly accumulate—which is greater the longer they live—and on the rate at which they die. These two forces yield a flow of inheritances that Piketty estimates to be about 15 percent of annual income presently in France—astonishingly high for a factor that gets no attention at all in newspapers or textbooks.  read more

PHOTOGRAPH: Mie Prefecture Fisheries Research Institute


A subject and a verb walk into a bar. They have a disagreement. They walks out

November 8, 2013 § Leave a comment


To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors–public deficits or private loans–has to be in action.

For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.

And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over–a house or factory or company–that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.

All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters–led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous “bipartisan” enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget–have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a “super subprime” “Ponzi scheme,” which it is not.

We also hear, from the same people, about the impending “bankruptcy” of Social Security, Medicare–even the United States itself. Or of the burden that public debts will “impose on our grandchildren.” Or about “unfunded liabilities” supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time.

The misinformation is rooted in what many consider to be plain common sense. It may seem like homely wisdom, especially, to say that “just like the family, the government can’t live beyond its means.” But it’s not. In these matters the public and private sectors differ on a very basic point. Your family needs income in order to pay its debts. Your government does not.

Private borrowers can and do default. They go bankrupt (a protection civilized societies afford them instead of debtors’ prisons). Or if they have a mortgage, in most states they can simply walk away from their house if they can no longer continue to make payments on it.

With government, the risk of nonpayment does not exist. Government spends money (and pays interest) simply by typing numbers into a computer. Unlike private debtors, government does not need to have cash on hand. As the inspired amateur economist Warren Mosler likes to say, the person who writes Social Security checks at the Treasury does not have the phone number of the tax collector at the IRS. If you choose to pay taxes in cash, the government will give you a receipt–and shred the bills. Since it is the source of money, government can’t run out.

It’s true that government can spend imprudently. Too much spending, net of taxes, may lead to inflation, often via currency depreciation–though with the world in recession, that’s not an immediate risk. Wasteful spending–on unnecessary military adventures, say–burns real resources. But no government can ever be forced to default on debts in a currency it controls. Public defaults happen only when governments don’t control the currency in which they owe debts–as Argentina owed dollars or as Greece now (it hasn’t defaulted yet) owes euros. But for true sovereigns, bankruptcy is an irrelevant concept. When Obama says, even offhand, that the United States is “out of money,” he’s talking nonsense–dangerous nonsense. One wonders if he believes it.

Nor is public debt a burden on future generations. It does not have to be repaid, and in practice it will never be repaid. Personal debts are generally settled during the lifetime of the debtor or at death, because one person cannot easily encumber another. But public debt does not ever have to be repaid. Governments do not die–except in war or revolution, and when that happens, their debts are generally moot anyway.

So the public debt simply increases from one year to the next. In the entire history of the United States it has done so, with budget deficits and increased public debt on all but about six very short occasions–with each surplus followed by a recession.  read more

PHOTOGRAPH: Michael Wolf

I’ve been round the world several times and now only banality still interests me

January 11, 2013 § Leave a comment


The war in Iraq was not fought principally for economic reasons, but it raised the growth rate by a point or so in 2003. And then in 2004, they actually quite deliberately increased public spending as much as possible—they understood that they didn’t have enough public spending to keep the economy going. And basically the President said to the Congress, “I’ll sign any appropriations bill you send me. Spend away.” And they did. And they squeaked through that election. Behind all of this was the deregulation of the real estate sector, de-supervision, which was designed to put money through the economy on whatever terms possible. That is a real wrecking of the future. It gives you growth in the short term, but everything is set to melt down in a few years. They tried, of course, to push the meltdown past the passage of power to the next administration, and they almost succeeded.

With the Obama administration there was a vast failure to look at the crisis in a realistic way—to assess what it actually was. When you look at the period of, and immediately following, the crisis, the new administration bought into the view that this was a temporary event, and that there would be—at some point—a return to the normal growth path. They didn’t assess the possibility that this wasn’t true—that we’d reached a turning point and we were not going back to that path. And therefore, they created expectations that they could not meet. What they did was vastly too small, and they treated the financial sector as though it were going to behave in the future the way it had behaved in the past—namely, making loans that support economic expansion. But in the environment that we were in—which was basically a debt-deflationary environment—the financial sector makes money not by promoting growth, but by promoting contraction: by shorting things, driving down prices, selling off assets, liquidating, and foreclosing.

So by keeping the financial sector alive, the administration basically kept alive a panoply of institutions which had at one point been constructive but were now purely destructive. And as a result, the notion that the government was going to be the saving force lost steam. It lost credibility because they didn’t take the full spectrum of measures that were required. And because they hadn’t made clear to people from the beginning what they were actually facing, they opened up the window to every quack in the business who had a magical solution—and that includes the Grover Norquists and it includes the Paul Ryans. Plus, you’re faced with large budget deficits—which people attribute more importance to than they actually have—that can easily be turned into an argument supporting cutting government.

The reality is that most operating businesses, if they could rely more on Social Security and less on their own contributions to retirement, more on public health insurance and less on employer contributions, they’d be much better off. For most of basic American business, the more you have insurance schemes handled by the public sector, the better off you are. But there are parts of the plutocracy that have always regarded this as a threat in principle to private insurance companies. It’s the threat of a good example. The government runs an insurance company—it’s basically an office building full of bureaucrats and computers. They don’t have fancy salaries or fancy perks. They’re doing this pretty well on a civil servant’s income, and without lots and lots of people to try and separate the healthy from the sick. They just enroll everybody. And guess what? It’s a very functional system. But there are some parts of the plutocracy that just don’t care what happens to the broader population, and for whom, as I say, the fact that the government runs very efficient, comprehensive insurance programs is politically offensive.  read more

PHOTOGRAPH: Yato Tamotsu

Where Am I?

You are currently browsing entries tagged with james galbraith at my nerves are bad to-night.