{"id":9956,"date":"2010-05-28T16:41:05","date_gmt":"2010-05-28T05:41:05","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=9956"},"modified":"2010-05-28T16:41:05","modified_gmt":"2010-05-28T05:41:05","slug":"on-writing-fiction","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=9956","title":{"rendered":"On writing fiction"},"content":{"rendered":"

\t\t\t\tI have been writing a fiction novel lately in my spare time (which is when I don’t sleep)! It is about the usual themes – individual struggle, tragedy and perhaps realisation. I haven’t yet conceived how it is going to end yet but it will either be very grim or full of splendour. Black and White I am! The interesting part of the exercise is trying to define one’s style separately from one’s academic style. I read a biography of Jack Kerouac recently and it talked about how he obsessed about trying to develop a unique style but kept falling back to be like one or another of the great authors of the day. It was only once he typed a lot that he started to find his own distinct identity as a writer. For me, the blog helps develop alternative ways of writing outside the terse cloistered world of technical economics. Anyway, I didn’t write much fiction today (yet) but I sure did read a lot of it.
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\nThe New York Times carried an Op-Ed article – Easy Money, Hard Truths<\/a> – on May 26, 2010 written by a hedge fund president, one David Einhorn.<\/p>\n

It was not just the poor economics that was on display but also a mis-use of statistics to try to reinforce the poor economics that was notable.<\/p>\n

Einhorn asks his fellow US citizens – “(a)re you worried that we are passing our debt on to future generations?” Answer: “Well, you need not worry.” Why? Because the:<\/p>\n

\n… the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences.\n<\/p><\/blockquote>\n

He claims (that the Bank for International Settlements) has estimated “the United States’ structural deficit – the amount of our deficit adjusted for the economic cycle – has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010”.<\/p>\n

I have written cautionary blogs about structural deficit measurement before – for example, Structural deficits – the great con job!<\/a>. Also in the context of today’s blog – this one is helpful – Another economics department to close<\/a>.<\/p>\n

The basic point is that, given the way they are constructed, the measure of full capacity is always biased towards higher rates of labour underutilisation than would be consistent with full employment.<\/p>\n

As a consequence, if the structural deficit was estimated to be zero (that is, a balanced structural budget outcome), then in fact, the non-cyclical or discretionary component of fiscal policy (that is, the structural deficit) would be contractionary by some percent – perhaps even up to 3 to 4 per cent of GDP). The common way of producing these estimates always suggests the budget outcome is more expansionary than it actually is.<\/p>\n

And of-course, this is very convenient if you want to run the neo-liberal line against fiscal activism. The bigger the deficit the easier the case is for the deficit terrorists to ring the alarm bells and cause unease among an ill-informed public.<\/p>\n

First, the actual ratio doesn’t matter much at all because a sovereign government like that in the US is never revenue constrained because it is the monopoly issuer of the currency. The ratio just reflects the state of private spending and decisions taken by government to support private saving and maintain output levels. In general, if unemployment is high, the deficit ratio is too low. So whatever the ratio is you should only consider it in relation to the state of the real economy, particularly the labour market.<\/p>\n

Will any citizens actually feel the difference between a deficit ratio of 3.1 per cent or 9.2 per cent? Not if they keep their jobs. Some will also enjoy expanded income flow as a result of the increased wealth (public debt and other financial assets) that they have accumulated courtesy of the income flows supported by the expanding deficits.<\/p>\n

Which reminded me of this national debt counter (picture that follows) that is on the front page of the Peter G. Peterson Foundation WWW site. Would some reader living in Washington D.C. ring the PGPF up and tell them that the title the title of their counter is wrong. Someone must have made a typographical error when compiling the graphic. What they are showing is the real wealth in the form of public bonds held by non-government sector although I am sure not every American holds in excess of $200,000 in public bonds wealth.<\/p>\n

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Second, if you are going to quote these sorts of ratios then it is better not to select dated estimates or estimates that are obviously higher than other publicly available estimates (unless you can argue why the higher estimates are superior). Remember structural deficit estimates are typically already biased. Higher deficit estimates usually are more biased.<\/p>\n

The BIS actually doesn’t publish decompositions of budget outcomes. But the research he is referring to is the March 2010 paper written by some BIS researchers – The future of public debt: prospects and implications<\/> – which I discussed in this blog – Another economics department to close<\/a>. In that blog I made the recommendation to the BIS that they would serve humanity better by closing this (non)-research department within their organisation down.<\/p>\n

Einhorn also selectively quotes the BIS paper’s estimates (from their Table 1) leaving out the fact that by 2011 the ratio has dropped to 8.2 per cent. The BIS paper which Einhorn uses relies on IMF and OECD estimates. They are notoriously more biased than other biased methodologies. And just on Einhorn’s doorstep is the US Congressional Budget Office<\/a>, which produces monthly estimates of the structural and cyclical US deficits. These are much more timely than anything the OECD or the IMF has published and are more modest. That is, the bias is lower.<\/p>\n

Moreover, the CBO express the budget deficit in terms of potential GDP rather than actual GDP. So the denominator has much of the cycle strippped out of it and the measure better shows what is happening to fiscal policy. They say “(p)otential GDP is the quantity of output that corresponds to a high rate of use of labor and capital.” High rate of use does not equal full employment and that is where the bias creeps in.<\/p>\n

In the latest CBO publication for May – The Effects of Automatic Stabilizers on the Federal Budget<\/a>, the CBO show that the deficit ratio was 1.2 per cent in 2007, rose to 7.5 per cent in 2009, and is predicted to drop to 6.5 per cent for 2010. By 2012, they estimate it will back to 1.9 per cent. It was last below 2 per cent in 2002.<\/p>\n

The following graph is taken from their Figure 1. I am sure if I was to provide a comparison to the ill-informed public of the CBO estimates and the Einhorm representation of the data, the former would console them while the latter would agitate them. So even within the flawed logic of the whole exercise Einhorn chooses extremes to sensationalise.<\/p>\n

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Einhorn then says:<\/p>\n

\nThis does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble.\n<\/p><\/blockquote>\n

This is another furphy. I don’t particularly support socialising private sector losses and allowing the private managers to keep their “private sector” salaries and bonuses and control of the assets. I think the US government should have turned all the institutions they offered bailouts to into public enterprises and refocused their strategic plans to advancing public purpose. Although it is hard to see anything remotely productive that Goldman Sachs, who were saved by a bailout, could do.<\/p>\n

But in the spirit of the fact that governments do socialise private losses, here is a little scenario to get our thoughts focused. It is actually a preferred solution to say the housing crash.<\/p>\n

Imagine that there is a housing estate comprising perhaps 1000 houses, each with a nice garden and lots of trees. Parents and their children live in this community and the usual rhythms of life occur. All the houses are being purchased by their owners on mortgage contracts from their local privately-owned bank. At some point, a major economic downturn hits and many people in the estate lose their jobs and find they can no longer meet their mortgage payments and are forced to default.<\/p>\n

The bank is now faced with a massive loss which goes well beyond its capital. It is thus insolvent and on the brink of collapse. The government fears that if the bank crashes, it will lead to runs on other banks as depositors fear they will lose their cash. Accordingly, the government takes over all the bad mortgage debts by transferring the accounts from the private bank to the public accounts. Some keyboard operator makes the book entries to accomplish the transaction and lawyers do the contract work.<\/p>\n

The government then, as a matter of social purpose, decides it is not productive for the houses to lie idle and that families should remain in their homes. They offer the families are new deal. The families can pay market rents to the government for five years and stay in the houses they were buying. Some families will receive rental subsidies in the meantime while they are unemployed.<\/p>\n

After five years, the government will offer the occupant (former owner) first right to purchase the house at the current market rates. If they choose to do that all rental payments in the five year period will be retrospectively counted against the purchase price. If the family decides to move on and not take up the right to buy the house at market rates, the government will sell the property at market rates. It will then write off any “book losses” that might have occurred in the meantime.<\/p>\n

Some keyboard operator will do the calculations and click some keys to accomplish the required transactions.<\/p>\n

Questions:<\/p>\n