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jmherbener
ParticipantKeynes advanced the view that the money supply and “liquidity preference” (i.e., money demand) determine the rate of interest, not the purchasing power of money. He advanced this idea in order to demonstrate that the interest rate is not determined by saving and investing. Saving, for Keynes, does not lead to productive investment spending. Instead, saving leaks out of the stream of aggregate demand. Keynesian, then, tend to stress the impact on interest rates of expansionary monetary policy and not its effect on prices.
Here is a piece reviewing a book that addresses Keynes’s errors:
Participant1. The price of anything is determined by demand and supply. Healthcare is expensive because governments increase demand and decrease supply. They increase demand through direct payments and through the tax incentives for third-party insurance. They decrease supply by regulations such as licensing doctors, nurses, etc. and limiting the output of medical schools.
https://mises.org/library/whats-really-wrong-healthcare-industry
https://mises.org/library/how-third-party-payers-drive-medical-costs
2. Here’s a primer on Obamacare.
https://mises.org/library/economics-obamacare
3. Here’s material on free-market healthcare.
4. Before the government began to take over medical services, health care was provided to the poor by charity, either that of doctors, nurses, etc. or by churches and voluntary associations. Take a look at the book by Marvin Olasky.
https://fee.org/articles/book-review-the-tragedy-of-american-compassion-by-marvin-olasky/
5. The links above discuss the single-payer problems.
Participant1. I think AOC is proposing a 70% rate for personal income taxes.
Whether corporate or personal, if USA rates are dramatically raised loopholes will be inserted into the tax code to allow rich to avoid paying the higher rates.
2. Here is the data on effective tax rates paid by the top 1% of income earners.
3. The claim of the Laffer Curve is theoretical. The claim is that there is an “optimal” income tax rate, one which maximizes government tax revenue. It doesn’t make an empirical prediction about what the “optimum” tax rate is and so, it can’t be tested by the empirical results of tax rate changes. It’s true that Laffer himself thought the 1980s income tax rates were above the “optimal” rate, but that was just his guess.
https://mises.org/library/ten-great-economic-myths
https://mises.org/library/president-coolidge-and-laffer-curve
ParticipantThe main point is that when its know that government will offer a bailout to banks, it generates moral hazard. Banks do not face the full consequences of profligate lending and therefore, engage in speculative mania.
Furthermore, bankruptcies have the salutary effect of transferring resources from failed entrepreneurs to successful entrepreneurs. Bailouts are counterproductive to the restoration of efficient resource use. They subsidize inefficient entrepreneurs.
Bank financing makes up less than 1/4 of all capital funding in the world economy. Even a collapse of banking would hardly dry up all capital funding.
ParticipantThe liquidity trap is the claim made by J.M. Keynes to explain why private investment cannot be relied upon to restore an economy in depression, even if the central bank lowers interest rates. Keynes asserted that interest rates can fall to a level at which all investors form the expectation that they will rise in the near future, in which case investors will hold cash and wait until rates rise to invest.
There are two main points against Keynes. First, the interest rate is not merely the rate on credit. Instead, the interest rate is the rate of return on all investments of any type. There’s no reason to think that if the central bank has pushed credit rates down that investment in production cannot still command a rate of return.
https://mises.org/library/liquidity-trap-myth
Second, the reason investors hold cash during depressions is the greater uncertainty about returns on production. Financial collapses can impair entrepreneurs’ confidence in their abilities to anticipate what will be and will not be profitable. Moreover, government policy behavior can induce “regime uncertainty” among entrepreneurs, a condition in which they hold money to wait and see what the political regime will be once the unpredictable policy behavior of the government subsides.
https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0
http://www.independent.org/publications/tir/article.asp?id=430
ParticipantWhen the Fed buys securities from banks, it pays the banks by putting the funds into checking accounts that banks have at the Fed. These checking account balances are reserves for banks. Banks are required to hold only a fraction of reserves against the checking account balances they issue to their customers. If banks sell $3 trillion of securities to the Fed, they can issue $30 trillion more in checking account balances of their customers (which they do by extending more loans to their customers). The Fed is worried about the inflationary potential of excess reserves of banks that it created by purchasing the securities from banks. By selling the securities back to banks, the banks’ reserves will be diminished and the inflationary potential reduced.
Moreover, roughly half of the Fed’s build-up in its balance sheet was the purchase of U.S. Treasuries and the other half was the purchase of mortgage backed securities. Currently, the Fed is holding $2.2 trillion in U.S. Treasuries and $1.6 trillion in MBS. The Fed can find willing buyers for either of these. For Treasuries, the market is deep and wide. For MBS, the Fed can sell if it offers at a low enough price. Banks will be willing to take MBS for steep discounts. Of course, doing this will not shrink the excess reserves of banks as much as selling Treasuries.
https://www.federalreserve.gov/releases/h41/current/
Finally, the Fed is raising its target federal funds rate. The problem here for the Fed is that the Fed pays banks interest on bank reserves. So, the more it raises rates the more its payments to banks rise. The Fed has adopted this policy of paying interest on bank reserves to control the extent to which banks create credit by lending into customer checking accounts and thereby, reducing their excess reserves.
ParticipantA wage is the market price for a unit of a particular labor service. All market prices are determined by demand for and supply of the item. It is a law of economics a greater demand for an item, ceteris paribus, results in a higher market-clearing price. The demanders of labor services are entrepreneurs. The factors that determine the demand entrepreneurs have for a particular labor service are its contribution to the production of output (marginal physical product), the price of output it helps to produce (which combined with MPP gives marginal revenue product), and the rate of interest (which combined with MRP gives DMRP). Entrepreneurs are willing to pay more for a labor service of greater productivity because it generates more output and therefore, more revenue for the entreprise. Because labor is relatively non-specific, the competitive bidding of other entrepreneurs prevents any one of them from paying less than its DMRP.
An elite NFL quarterback commands a higher wage than an average NFL quarterback because he helps produce more wins, more division titles, more championships all of which generate more revenue for the team owners. A team’s entrepreneurs cannot pay less than his quarterback’s DMRP as long as there is a market economy in which bidding for his services can occur.
ParticipantThe MRP depends on both the demand for the output (which determines the output’s price) and the physical productivity of the capital good. While the latter might decline over time without maintenance and repair (which is omitted from the example for simplicity), it might also increase with more productive complementary factors of production, such as a more skilled worker (which is also omitted for simplicity). Demand for the output might be expected to rise with a successful business and even more so in an economy with price inflation like ours.
As you suggest, rising MRP is a not a necessary feature of all production, but merely one logical possibility.
December 5, 2018 at 11:26 am in reply to: Lec 5 question: MUs same vs leisure having higher MU #18927ParticipantThe context of Lecture 5, slide 4 is a person has different consumer goods, of which the units of each can be put to different ends. The units of each good exhibit diminishing marginal utility as a person allocate them to the highest-valued ends first (logically) and then to progressively less-valuable ends. In choosing between using one of the goods, say X, rather than the other, say Y, the person will choose to act with the good that has the highest MU (for using the 1st unit), say X. But since using more of X lowers its MU (for using the 2nd unit, and so on), acting with Y would be chosen when its MU (for using its 1st unit) exceed the MU of X for the not yet chosen unit (say the 4th unit). The greatest utility in allocating the two goods, then, comes by using their units in such a way that their MUs do not differ significantly. Otherwise, the person could reallocate units away from the lower MU unit of one good and toward the higher MU unit of the other good.
Leisure is a good and therefore subject to the same analysis. So, yes we are always engaged in action as long as we have unmet ends. But the logical requisite of explaining what particular acts of consumption a person is engaged in is differences in the MU of the units of different goods. This is what the slide is referring to when it says, “action is renewed by changes in underlying factors that regenerate differences in MUs.” It’s not a reference to action per se, but to particular acts of consumption.
Of course, consumption is only one subcategory of action. Production and trade are other subcategories. So, a person would also be choosing across acts of consumption, acts of production, and acts of trade.
ParticipantWhat stopped the bank runs and failures was deposit insurance, not FDR’s bank holiday.
The Federal bank holiday lasted from March 6-13, 1933. On March 9, congress passed the Emergency Banking Act which, along with the Federal Reserve’s promise to provide liquidity to the banks, provided federal deposit insurance.
https://www.newyorkfed.org/medialibrary/media/research/epr/09v15n1/0907silb.pdf
Deposit insurance was formalized with the passage of the Banking Act in June 1933, which established the FDIC.
ParticipantSubjective value just means that the goods being valued are arrayed by a person in rank order. The highest-valued good ranked 1st, the second-highest valued good ranked 2nd, and so on.
Let’s say Crusoe has 1 quart of berries and Friday 2 coconuts and that Crusoe ranks Friday’s 2 coconuts above his own 1 quart of berries and that Friday ranks Crusoe’s 1 quart of berries above his own 2 coconuts. Because their ordinal rankings are in reserve order, they can mutually benefit from trade and they will trade at the objective exchange ratio of 2c/1b.
For an extended discussion, see Murray Rothbard’s book, Man, Economy, and State in Chapter 2.
https://mises.org/library/man-economy-and-state-power-and-market
Participant1. I’m not sure about the overall losses, but the volatility of cycles has not been lower under the Fed than before the Fed:
https://www.cato.org/policy-report/novemberdecember-2012/has-fed-been-failure
2. This seems unlikely because for bank runs to occur the banks must have extended fiduciary media. But extending fiduciary media through credit expansion is what causes the boom-bust cycle.
If banks were 100% reserve, then customers cashing out their checking deposits would affect neither the supply or money nor the supply of credit. It would be trading one form of the medium of exchange (checking deposits) dollar-for-dollar with another form (cash). Banks would only be intermediating credit, borrowing from savers in savings accounts and lending those funds to investors.
3. The Amsterdam banks of the 1600s were 100% reserve for over century. The problem with isolating the consequent Dutch production processes from credit expansion is the existence of world credit market which have fiduciary media.
https://wiki.mises.org/wiki/Full_reserve_banking
4. Like no. 2 above, this seems unlikely. There can be no credit expansion without fiduciary issue. Even if money proper increases (say the 1849 gold rush in California), without fiduciary issue there is no credit expansion and therefore, no inter-temporal malinvestments.
ParticipantFirst, the Fed only influences interest rates. It only determines the discount rate. And it’s influence is strongest on the federal funds rate. When the Fed buys securities from banks it pays by crediting the banks’ checking accounts which they have at the Fed. Since the balances in these accounts are bank reserves, the Fed increases bank reserves with expansionary monetary policy. The federal funds rate is the interest rate for banks when they borrow reserves over-night from other banks. The effect expansionary monetary policy has on other interest rates depends on what banks do with the greater reserves.
Here is the spread between 10 year T-bonds and 3 month T-bills:
https://fred.stlouisfed.org/series/T10Y3M
There are tendencies, but not a uniform effect on interest rates across the yield curve from a given expansionary policy of the Fed.
Second, entrepreneurs adapt as best they can to government intervention. They economize as fully as possible given the interference of Fed policy. Of course, entrepreneurs would economize more fully if there was no Fed, but they do the best they can in the face of the additional difficulties the Fed generates.
The Taylor rule proposes a feedback mechanism which requires assessing the rate of price inflation against an ideal rate and the rate of growth against an ideal rate in order to set the target fed funds rate.
ParticipantYes, I think it is fair to say that interest rates have not been left to the market since before the dot-com boom.
Here is the commercial paper rate:
https://fred.stlouisfed.org/series/CPN3M
Here is the corporate bond rate:
https://fred.stlouisfed.org/series/AAA
Fed monetary inflation and credit expansion makes interest rates lower than they otherwise would be. So even if interest rates are moving up, asset price inflation may be taking place. This is likely in our current situation where the Fed has suppressed interest rates for so long below the market rates.
Also, interest rates are rising mainly on the short end of the yield curve as the Fed reduces expansionary policy.
Here is the interest rate spread between long and short:
https://fred.stlouisfed.org/series/T10Y3M
I haven’t made a careful study of the impact of Trump’s policies. It’s likely that they are having their effects, but that these effects are intertwined in complex ways that are difficult to disentangle. For example, the impact of tax cuts and tariff increases on farm incomes and production.
On tariffs:
On taxes:
Details and Analysis of Donald Trump’s Tax Plan, September 2016
ParticipantMetrics for investment can be found here:
https://fred.stlouisfed.org/categories/112
The BLS link does not work for me. So here’s the unemployment data from another source:
https://fred.stlouisfed.org/series/UNRATE
The unemployment rate has fallen steadily from its peak in Oct. 2009 of 10% to current rate of 3.9%. The reason for this is that the Fed under Obama kept monetary inflation going straight through the bust and so the economy went into another boom without experiencing a significant period of normalcy (i.e., a genuine recovery). You can see that this has been the general pattern of Fed behavior since the collapse of Bretton-Woods in 1971. Before then, there were plateaus for the unemployment rates at normal levels after recessions. For example, after 1955 unemployment stays steady for several years at 4% and again in the late 1960s. But since 1971, there are no significant period of steady, normal unemployment rates. (The plateaus in the 1970s and 1980s are short and at historically high rates around 7%.) And since the mid-1980s, unemployment is either steadily rising or steadily sinking. The Fed is the cause of this pattern.
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