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Georgioz
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I completely agree with the post. I think this applies to all sciences - you don't have to know all the details or to be able to explain plethora of details for model to be good. If models with rational agents bring good results, then they are usable. The same is valid for physics. You observe the phenomena, you formulate a hypothesis and then test it. You don't need to know exactly if your model is perfect representation of how the phenomena works, you just need results from it. Let's take one example from quantum physics. They model quantum states of the particle by wave function and model it in a way that whenever this quantum state of the particle is observed its wave function collapses to a single quantum state. Now it is silly to ask where the particle stores its wave function, or how it senses the observer or how exactly does it computes the collapsed state. You just know that you have a model which describes a reality sufficiently enough to make valid predictions. And if it stops doing so, you then try to find another model which can be tested against evidence. And the same is valid for BE. Do we observe hyperbolic discounting? Then lets find what the factor is and how to model it. Are people also altruistic, not only profit maximizers? Let's study the conditions under which altruism has significant impact and adjust our model so that it captures it. I think that Samuel Bowles microeconomy takes huge steps towards this approach.
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Nick, thanks for your response. I generally trust that smart people like you, Paul or Scott already thought about things that various heterodox schools suggest and that you found it not convincing. But then someone may think that Lucas, Rajan and other very smart people thought about what you are saying and ... well, we are not going anywhere. But as you said, there may be a lot of good responses out there (e.g. I especially like your "Taxes and the value of paper money" article). Maybe all that is needed right now is to have someone gather all these critiques in easily accessible way. The last thing we need right now is another bunch of people telling us "we told you that this would happen, come to our church" next time there is a challenge to what we know about economics.
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I will post here, as I think that there is a lot of very intelligent people who may have answers. But prior to getting into the point, I would really appreciate if all those Nobel price winners would stop inventing primitive strawmen about what their oponents thinks such as ideas "for MMTers deficit never matter". This only makes those smart people look really dumb. Is there any solid critique of MMT from respected economist, maybe similar to this one by Brian Caplan against Austrians - http://econfaculty.gmu.edu/bcaplan/whyaust.htm If you do not have solid critique and rely on a professional feeling in your gut that there is something rotten in MMT but that you do not have time (yet) to find out what it is, then be honest and present it in such a way. And now to what Scott objects to MMTer (Fisher effect). I spent only like short time on the whole MMT issue, but even I know that they recognize that inflation is bad and that they have at least 3 ways how to handle the situation - most obvious ones are increasing taxes and cutting spending. But there still is a third oprion - pay interest on reserves. Was it not Krugman who on his blog presented the idea that long term interest rate is sum of expectations for short term interest over time? In this way bank reserves will basically turn into T-bills and there is no longer imperfect substitution between the two. You do not need any bonds as long as markets believe that unified government (Monetary and Fiscal authority) is serious about inflation. Now maybe there is some other reason why markets want government bonds with long maturity. Maybe as to balance the risk in their portfolios or whatever. But then start talking about them in such a way.
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acarraro: this is what Nick originally asked: "Put it another way. if a corporation has real assets, and uses a mix of debt and equity finance, the value of the shareholders' assets, net of the debt, should be rising even faster than inflation in nominal terms. We shouldn't just add the inflation rate to the earnings yield on stocks, if we want to compare it to bonds. We should add some multiple of the inflation rate. Like (60/40) x inflation." My point is, that this nominal increase should already be calculated into the price of stocks. So if for example analysts predict that asset value of a company will steadily rise during next 10 years (let's say the company owns a forrest that in 10 years will be ready to be harvested) and that during that time shareholders may expect 0 dividend, then such increase should be reflected in the price of stocks. So for example if you predict the forrest will have value of $1629 in 10 years and that company is fully financed by shares of current worth $1000 (no bonds) then you expect nominal yield of 5% a year. Or in other way, in order for a company to induce shareholders to buy its shares, it has to offer them such current price of shares as to be competitive with bonds.
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Himaginary and RSJ captured it. Shareholders may realize their profits by capital gains. These may come in form of re-valuation of the company assets. On some ocasions this may be relatively easy (e.g. owning mining rights for well known amount of mineral resources) or as complex as value of brand, intellectual property etc. I believe that these factors should be calculated in the price of a particular stock. So any yield index of S&P 500 yields that takes into account both dividends paid and growth in capitalization should capture this aspect of potential shareholder gain. Of course you may argue that evaluation of company assets by markets may not be precise - but then why do you think that they have bias towards undervaluation?
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I don't really see what is the problem here? In 60/40 corporation it is true that we have $0 profit after interest and rent, however those shareholders (not bondholders) would happen to be entitled to hold all increases in equity of the company realized by capital gains. So if the price of the land increased by 2% a year that would mean additional $20 of capital gains spread among $400 of shares - which is 5%. Let's have an example of corporation which calls it a year and sells everything to pay off its debt to bondholders and satisfy shareholders from what is left. After first year the total worth of the land company owns is $1020. It already paid interest to bondholders from rent, that means all capital gains will be divided only between shareholders, that is 420/400 = 5% nominal yield. Now let's change the scope to 10 years. After 10 years the company will hold 1000 acres of land worth of $1000 x 1,02^10 = $1219. Let's say that it only paid interest on bonds during the lifetime and only now it has to pay off the principal of $600. That means that original shareholders holding $400 in shares will divide remaining value of $619 among themselves which makes it $1,547 per dollar invested 10 years ago. That leaves them with yield of only 4,46% a year. What is wrong? We did not take into account increased payments from rents stemming from increased inflation. Total lifetime value of these increases would be worth additional $31.55 in end-of-decade dollars. That would bring shareholders exactly to 5% yield as bondholders have. But maybe I did not understand the article properly. Could you please reiterate what the issue actually is again?
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Nick: But then your argument can be used for any money. If people are not liquidity constrained and they may freely exchange all their assets into the most liquid one (money) at any time to purchase goods (or pay taxes), why should they ever hold any money be it private or government ones? If you ever find reason for people to hold private money, just imagine that government will require them to pay taxes at the moment of closing any contract. You may imagine it as a transaction tax, VAT or whatever. Then you have a system where people will want to hold government issued money as much as they want to hold whatever is used as currency in private exchange.
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Nick: But OK, I think I see your point? You are saying that it is the government's power to demand more in taxes than it spends that creates value of paper money? Even though it never need exercise that power in equilibrium. Like the threat of punishment is sufficient to deter crime, so nobody ever gets punished in equilibrium? This is basically how I see the position of MMT on subject (I'm no expert so take this with grain of salt). Let's assume for a moment that currency is used only for government purchases and paying taxes and that there is some other form of payment between private actors. Let's assume that government prints more money then it gathers in taxes. That ultimately means that economy as measured in government currency experiences inflation. If taking into account your water example, that also means that at some margin (spending exceeding the revenue) there is perfectly inelastic supply of money, meaning that government is actually unable to buy anything no matter how much it pays nominally(read hyperinflation). At this point there are only two ways how government can reverse this process - cut spending or increase taxes. Any of these actions necessary lead to fiscal surplus, which is the only way for government to destroy money, which directly translates into destruction of net private wealth as measured in government currency. If government can credibly promise such reaction then such threat itself could be enough to force people into hoarding the currency.
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I carefully read all post by Brian, Henderson and others. And I must say that you folks seem to be deliberately dense. Really. First, as Tyler himself explained several times, he thinks that the pace of growth sloved post '73, not that it stopped. The term "Great Stagnation" is a widely used name for the phenomenon and should not be overtly analysed. Or would you start to argue if somene used a term of "Japanese lost decade" that a decade, being a unit of time, could not be lost? Second, he explained several times that the difference between 1973 and 2010 is not that great as between 1937 and 1973. Actually it was not until 1936 and New Deal's Rural Electrification Act that electricity (and phone lines) were build so that the new technological wonders such as Refrigeration could be brought to millions of people living in the countryside. And in this regard the difference between 1900 and 1937 is that much more profound. I'm also wondering - what happened to the technological advances? Aren't we supposed to live in an era of "rapidly accelerating" scientific advances? Where is limitless (and supercheap) nuclear fusion electricity? Where are those space stations, space elevators, semi-inteligent household robots and other marvels which were supposed to be available in next decade for like 30 years?
Toggle Commented Apr 4, 2011 on Are We Better off Today? at Coordination Problem
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Apr 4, 2011