This is dlr.myopenid.com's Typepad Profile.
Join Typepad and start following dlr.myopenid.com's activity
Join Now!
Already a member? Sign In
dlr.myopenid.com
Recent Activity
Nick, I think your intuition is in part right about clearing up this confusion. Namely, that Winterspeakian Savings is more akin to conventional Demand for Money to a monetary disequilibrium theorist than the more common definition of Savings. In fact, someone could come on this board with very plain-vanilla ideas about monetary disequilibrium as encapsulated by your simple model and use the same kind of accounting-based logic to argue that Savings should be defined as "saving in money" as opposed to S=I. For that person, you would have fully closed the gap, but I don't think you have here. Because my sense is that Winterspeak cares about demand for money plus government liabilities as opposed to merely demand for money. This is why I think his definition of "Savings" would more helpfully described as the Net External Investment Position of the private sector with respect to the public sector, to borrow an idea from international trade accounting. Of course, the difference between the demand for money and the demand for "net external investments" becomes blurred in a liquidity trap even to traditional monetary disequilibrium folks, so there will inevitably be common ground. By I think there will be more uncommon ground, and I think it will be hard to draw out unless you talk about a model with a fiat currency and government deficit spending – though I also think it is possible for you to get there (maybe slightly more circuitously) by adding investment to your model as you suggested.
1 reply
W -- anon is not going to agree with you because he is not stripping real assets out of household net worth and retained earnings and you are. I find the distinction between consumption and non-consumption to be something you only know in hindsight. Your $200K house -- was it consumption, or investment? Suppose there is a housing collapse (I know, impossible to imagine) and the house is now worth just $100K. How do you classify the $100K you've lost? Or suppose you bought a lottery ticket and got lucky -- did that act of consumption suddenly become a shrewd investment? I don't like housing as an investment example because it's a mixed-use good, and thus often causes confusion. To make it simpler, let's say I am building a house purely to rent out that I can never live in because of odd zoning laws. So the house itself is no more consumption to me than it would be for Toll Brothers. On day one, I have made a meaningful choice to postpone present consumption (the party) for future consumption (rent from the house or income from the house if I sell it down the line). Normally I would call this choice both savings and investment, but here I am calling it non-consumption. You point out that this attempted non-consumption might fail. The house might fall into a sinkhole or just generate lower than expected rents. What would I call that? I would call it a loss of wealth or a supply shock. There’s nothing stopping me from calling it “ex post consumption,” but I would find this very unhelpful because it misses key behavioral distinctions. We know for sure that someone who builds a house versus having a party or going on vacation is choosing the future over the present, and that is an important economic choice. Say your neighbor was worried that might lose his job in the next couple of years and wouldn’t be able to meet his rapidly rising medical bills. He had just received an inheritance , and has only two choices. He could throw a big party or he could build a rental house . Surely you wouldn’t say that the choices were indistinguishable because both might turn out to look like consumption if the house lost value. One choice clearly equals a very high probability of trading current consumption for future consumption at some ratio, while the other choice equals no probability of such a trade. The riskiness of his future consumption choice is also an interesting issue, which certainly isn’t ignored by economists, but doesn’t render his present versus future decision uninteresting. Similarly, if I bought a lottery ticket (let’s say it paid out in one year to satisfy my only criteria for non-consumption: the expectation of future rather than present consumption), I am making a similar choice. Let’s say I bought *every* lottery ticket and had every number covered with no duplicate numbers permitted. It costs me $10 million to buy every number and the lump sum options pays me $10.5m million (ignore taxes) in one year for the winning number (yes, a lottery with fair odds, just for simplicity). So I have essentially bought a one year bond from the issuing government. Now let’s say I change my mind and buy every number except one. Suddenly there’s a chance that my “non-consumption” turns into your “ex post consumption” if I hit the wrong number. This possibility doesn’t take away the very interesting information that I am still choosing to postpone present consumption in return for an probability of future consumption, and thus shouldn’t be used to ignore the economic importance of that choice by removing it from the dictionary. I am simply taking slightly more risk of loss in addition to my time trade off. Time preference is one element in savings, but not the only one. Balance sheet considerations matter too. They may even matter more. At a sector level that is almost certainly true. I assume we are using your “savings” here. Then I agree. Time preference is not the only element in the demand to hold money, nor is it the only element in what you care most about – the demand to hold money or government debt. But those demands are not the only important economic behaviors worth caring about.
1 reply
Winterspeak, However you want to define the letters s-a-v-i-n-g, I wonder if you still agree that the behavior you exclude from conventional savings in your definition (i.e. investment) can still be economically interesting. So, if I decide to forgo my annual $200K birthday party and instead hire some people to build a house (maybe to rent out, maybe to live in sometime in the future), I have not engaged in your "savings" but I have nonetheless furthered my preference for future consumption over current consumption. And even though my behavior results in income to someone else (workers and supppliers), it also still has interesting sector-wide effects. In world A, I throw my party and provide income to others, with the resources disappearing into entropy. In world B, I build my house with the same income to others, but almost certainly end up with more resources for myself and the private sector as a whole. You focus on the fact that the private sector's additional resources don't reflect additional net financial assets. They also don't represent more money. Nor do they represent more government debt. But they do represent something, and that something is related to the time preference expressed by people choosing to consume or not-consume. You apparently find that distinction between consuming and not-consuming uninteresting (since you leave it out of your dictionary), whereas other people find it much more interesting. Or, if you do find it interesting, do you have a name for "not-consuming," i.e. in your language, investment plus savings? Instead of caring about consuming versus not-consuming, you focus on either consuming or investing versus not consuming or investing. Other people care about this, too. Instead of calling it "savings" they call it "demand for money" and they talk about it a lot (though they still have a use for conventional definitions of savings). But I can guess that this doesn't work for you, because you believe it is more useful to group money together with government debt when the government issues a fiat currency. So when you talk about savings, you aren't primarily talking about time preferences, nor are you even talking about the acquisition of financial assets (because the "net" and the sectors are so important to your perspective). You are really just talking about an expanded version of the demand for money: Demand for money or government debt. My guess is that this issue -- whether we should talk about demand and supply of money or money plus government debt when we talk about shocks like the one we've just had - is where you'd be having your most interesting discussions with traditional monetary disequilibrium people if the conversation didn't get bogged down in savings semantics. If I have this right, I can't help but think you've chosen a clunky way to express your perspective. It almost seems like you had a big revelation based on changing your terminology, and assume that this is the only way that other people will be able to see your point. In my experience, when one person has some kind of epiphany based on changing their vocabulary, one of the hardest ways explain that epiphany to most people is to start by redefining terms.
1 reply
Hi Nick, There is a lot here I don't agree with, but I think hopping to the theory might miss a potentially important point about this specific case. I have a lot of trouble believing you that Carleton has a negative net worth, even as mismeasured by historical cost accounting. This is a strange thing to say given that I know nothing about Carleton and you are on the Board. But it seems very unlikely, even if the accounting is fully accruing future benefits liabilities and includes a big fake liability for deferred capital contributions. Remember that an accumulated deficit is not the same as negative net worth. This is especially true for a university where its net worth is not expected to be built up by generating operating surpluses. A small accumulated deficit only means that over time expenses have exceeded revenue; capital of course can come from other sources besides (and before) flowing through revenue. My guess is the stated goal you mention doesn't mean positive net worth, but instead a positive (or zero) accumulated deficit to make up for past "losses." That, of course, can't possibly be a theoretical economic goal so it must be a political goal (or maybe an arbitrary goal). In any case, targeting an accounting construct of course is just a measurement problem and is separate from the theoretical capital structure question you are asking. Apologies if I'm wrong about all that; I admit to pure speculation. As to the theoretical goal, I agree it is a hard question. But I don't agree that taking a donor-agent approach implies holding zero net worth. Firms take a shareholder-agent approach but don't conclude that zero net worth is optimal. They try to minimize the cost of capital. Clearly, cost of capital is dark matter when it comes to donations. But universities do have real frictions associated with insolvency or near-insolvency emergencies, and presumably donors wouldn't want them to take those risks unnecessarily, whatever their "required return." Financing 100% of assets with liabilities seems certain to create a cost of capital that is higher than necessary. And of course liabilities aren't even income-tax deductible for non-profits. So a pure liability theory of non-profit cap structure seems like a non-starter to me, including under a pure donor-agent approach.
1 reply
Okay, thank you. I thought you were introducing some kind of price level constraint. My answers is yes, there could be clearing for all other n-2 goods. Excess rent demanders would give up and demand something else, and that something else would include an exchange of money (1) and n-x good or service. They wouldn't have the option of merely reducing spending to procure more rental space, as in the case of money. Although there would be a permanent excess supply of everything else in relation to rental space, prices would otherwise adjust and there would not be an excess supply of everything else in relation to the medium of exchange or unit of account. This doesn't answer whether there would be a recession, but there should not be a monetary recession caused by a fall in nominal spending amid imperfect price flexibility. There could be a recession (decline in real GDP) for other reasons, such as if price controls and rental shelter were together important enough to constitute a meaningful productive capacity shock, but that's not what you're getting at. I haven't figured out how you're going to spring the unit of account versus medium of exchange distinction into this.
1 reply
Sorry -- I posted that prematurely. Maybe I'm missing something simple, but I don't understand what money is fixed "to" in your hypothetical. You say it is fixed to one; one what?
1 reply
Aside: "suppose money is both the medium of exchange and medium of account" seems like a strange thing to say.
1 reply