Jerrit

2011/11/02

Growth, money, and the group consciousness.

Adapted from an email conversation, originally 2010-07-13.

http://www.metroactive.com/features/post-technology-age-workforce.html

That article argues for a shorter work week as a way to improve the quality of our lives and curb resource consumption. I'm all for shorter work weeks, if for no other reason than wild primates spend their time lounging and socializing rather than working themselves to death and contracting stress-induced mental illnesses. This aim, greater social interaction and reduced stress, is achievable without needing to curb progress, which is not necessarily the same thing as growth. Regardless of the distinction for now, what we absolutely cannot allow is stagnation (especially not stagnation for the sake of a few profiting at the expense of the human race, which is wrong for all the same reasons PLUS morally reprehensible). The tradeoffs of protecting our environment so as not to saw off the branch we're sitting on versus not stopping our quest for knowledge and technological improvement make it harder for me to advocate for the simplicity I used to idolize.

"Growth is good," in our looking-glass world it is the opposite that
is actually true. According to the Global Footprint Network, we are
currently using 140 percent of the earth's capacity.


This is a point that I keep making in various ways, and I have trouble getting anyone to agree with me. Growth for its own sake is retarded (to me, more on this later). There's no plan. Not that there ever has been a conscious plan to biology, but in the same way that slight increases in predictive power seem to confer a survival advantage on individuals, it follows that using that power can protect our whole species from destroying the foundations of its survival. Burning up resources and piling up what we've arbitrarily decided to call "garbage" at a frantic pace without having a clue why we're doing it is the height of stupidity.

It's ok in my book to use resources classified as non-renewable to enable the jump to something else, something more stable. Think of it as a long-term loan. But that's not at all what we're doing. The lack of foresight suggests we've barely progressed from dumping our chamber pots out the window onto the street.

Back to exponential growth for its own sake, that's a problem that my economist friends seem to agree with me on in distant principle, but they agree among themselves that fixing the grossly mismanaged and misunderstood high level financial operations of countries has to come first because right now, governments and populations aren't aware of their abilities to set a direction for themselves and are at the mercy of forces they believe are outside their control. They've convinced themselves to be hostages of private finance. Under this system, banks finance sovereign nations as well as all the private enterprise that goes on in them, and they demand exponential growth because that's what makes them and their owners the most money possible. I guess I can see the point, that until governments understand and take back control of the issuance of currency, they're comparatively helpless to address pressing problems including environmentalism and reigning in growth. Putting people to work on useful tasks (which I call progress) instead of profitable self-destruction (that is, growth without appreciable progress) takes money and willpower, and right now most governments are convinced that they don't have and/or can't create the necessary money to drive progress (even if they knew what real progress meant, and there seems to be a lot of disagreement over that).

On the other hand, there's no reason we can't take on both problems at once, environmentalism and finance, since, as I see it, they're tightly connected. I haven't gotten much enthusiasm when I've suggested that. Maybe they're right, one thing at a time is more than enough work already.

The NEF argues that a shortened workweek is one of the absolute best
ways to move toward a less carbon-dependent culture. If people are
making less, they will buy less; if they buy less, pressure on the
earth's resources lets up.


And so, one wonders, when did buying tons of shit we don't need really enter the picture? The early 20th century, industrial output is booming, and some key factors come together. Factories are now capable of making enough basic, useful goods for everyone in the country without operating continuously, but both industrialists and their financial backers demand maximum profit, so the decision is made to OVER-produce with a focus shifting to less and less essential products, and then worry later how to sell this shit. Selling this shit is the impetus for advertising, but traditional advertising up to this point has usually been just a matter of trying to catch the attention of people who would have bought them anyways. This guy Edward Bernays, Freud's nephew, started making some profound insights in psychology and decided to apply them to advertising. He and Paul Mazur, of Lehman Brothers investment bank back in the day, pioneered the modern, subconsciously manipulative advertisements we're all so used to today. Together, these two Austrian-Americans used the era's emerging understanding of psychology and their study of European radio propaganda to work as advertising consultants. Convincing a generation of women to smoke cigarettes and buy packaged Betty Crocker cake mixes after carefully studying the psychology of their resistance to those products are among their claims to fame. Even the most cynical among us couldn't have come up with something Mazur said though (in 1927):

"We must shift America from a needs to a desires culture. People must be trained to desire, to want new things, even before the old have been entirely consumed. Man's desires must overshadow his needs."


They moved on to consulting for political campaigns, and I think you can guess at how that turned out. Bernays is also the reason why our water is fluoridated, which should raise some red flags. Forget the conspiracy theories, fluoridation was simply a way to turn a bothersome chemical waste that's dangerous when concentrated in piles outside of aluminum smelters and fertilizer factories into a salable asset. Turning shit into gold through the miracle of public relations. Who knows at this point whether it's good for us or slowly poisoning everyone? Any honest assessment is impossible because the propaganda has everyone afraid to question the status quo for fear of being called crazy. Powerful stuff.

The tie-in here is that everyone is used to "the engineering of consent" and not to actual group consciousness. We're used to taking silly, petty, immediate goals for granted as big and important ones. If we weren't so inundated with advertising and spin and propaganda, allowed to cool down and regain our senses, and then polled to find out what people's ideals would be for the future of humanity, I wonder what we'd find. Do we want to explore space like in sci fi, or what? It's crazy to think how much is actually possible given how much we manage to accomplish nowadays in spite of the crushing artificial restraints we've placed on ourselves.

2011/08/24

Software engineering best practices applied to lawmaking.

(Originally suggested to a few people over email and in private discussions, February 2011 and onwards. Edited for readability.)

This is US centric, but could apply elsewhere.

As far as I can tell, the process by which laws are created and changed is very clumsy. At least one congressperson has said during an interview that nobody reads the text of bills. A glance at C-SPAN on any given day shows a lot of empty seats and general inattentiveness. Most bills pass or fail with a lot of uncast votes. I don't know it for a fact, but I'm under the impression that the situation is similar at all levels of government.

In a related problem, the lawmaking process at all levels from local to county to state to federal is not transparent in a way that would meet the expectations of 21st century, internet-connected citizens. The direct involvement assumed by the founders is less feasible today than in years long past, in part because of the ever-increasing ratio of population to representation. Washington himself argued that one representative per 40,000 citizens was inadequate, but as of now the number is somewhere beyond 650,000! Simple population growth over 200+ years made keeping near-original levels of representation impossible.

(650,000 current / 30,000 Washington's proposed) * 435 current reps = 9,425 reps if we scaled his proposal up to our population size

How big a capitol building would it take to seat a congress of ten thousand? How would that many people coordinate to get anything done? It's not going to happen for these and other reasons. So since the brute force approach of throwing more representatives at the problem doesn't scale up and hasn't for a very long time, we should be thinking about how to achieve the desired result by other means.

There have been noteworthy attempts at transparency in lawmaking over the past few years. One that comes to mind is New Zealand's move to put bills online where they can be commented on. The lawmaking body isn't legally bound to take the comments into consideration, but presumably that happens at least some small percentage of the time. More recently, Iceland has decided to write a new constitution in part by "crowdsourcing" it, using twitter, facebook and other modern ways to connect with the citizens. These are good starts, but we can do better.

Version control and peer review are at the core of all good software projects, and any engineer at any good software company or open source project is fluent in best practices that make the lawmaking process seem stone age by comparison. But on closer inspection, the lawmaking process and that of making changes to a large codebase in a software project are strikingly similar and most of the best practices and even tools could be applied directly or with very little modification.

The peer review process and code ownership bears some vague resemblance to positions in government, but a group of programmers with a revision control system aren't a democracy, republic, dictatorship, or anything else I can think of. There's a hierarchy of people who have the power to approve or reject local changes up to broad, sweeping changes. Let's pretend we're working on a code base with a heirarchy that looks like this.


/california_state_code
/california_state_code/agriculture
/california_state_code/agriculture/irrigation
/california_state_code/transportation


If your day to day business is working on irrigation and you're declared to be its owner/maintainer/expert, you can make changes to it very easily. The only requirement is that a second pair of eyes, anyone's eyes, looked it over. The reviewer only needs to know about the state lawmaking process and have a conscience, not be an expert in your narrow area of expertise. If there turns out to be a problem with your change later, it will be obvious that you were responsible and you'll have to defend it when it's audited.

You can submit a change for review to anywhere in the tree, but will need to get the approval of its owner since presumably that person knows more about it than you. If you want to make a change to agriculture beneath the level of your domain (irrigation), you need to get approval from an agriculture owner before you can submit. That person is typically is an owner of the whole domain of agriculture, including irrigation, and can make changes to irrigation without necessarily needing to consult you (though they often would since you're the expert).

Similarly, if you want to make a change to some important, widely referenced law at the top level of the state code, or make an emergency change to a badly worded law in transportation that has dangerous consequences for irrigation when the usual owners of transportation have run off to play golf in Vegas or something, you'll need to contact an owner of the whole state code. Since nobody can possibly be an expert at every project in a big code base or article in a body of law, the root ownership is reserved for people who can be trusted to make rational decisions and important judgment calls when they don't always have as much background as they'd like. Basically, level-headed people who can spot bad ideas and offer better alternatives in a wide variety of contexts.

A lot of these concepts map roughly to positions in our government like house committees and sub-committees and their chairs, but the critical thing about the software development model is that people tend to operate in their domain of expertise yet are perfectly able when necessary to make changes to anything, anywhere, when necessary, just so long as the trusted authority gets a chance to read it first and sign off on it. Owners of any part of the code base aren't usually flooded with requests to change things because most of the time people just stick to their own stuff. It's brilliantly fluid and was developed out of necessity. When applied to congress, we would almost certainly begin with the current model of requiring a majority of members to approve changes rather than exactly duplicate the software development model, since that would be a very disruptive change. I anticipate we'd experiment with the formula someday though since it's much more efficient. Problem is you need to put a lot of trust in everyone for it to work, and until the benefits of transparency kicked in and lawmakers were forced to become more trustworthy over time, our current majority system is a safer bet.

The tools of the trade that make the above-described peer review and check-in process possible allow people to work from anywhere they have an internet connection, even if it's only sporadically available. Review tools exist that highlight (literally and metaphorically) the differences between the existing version of a piece of code (or law, in our case) and the proposed new version and allow comments to be made inline, in context. There's an audit trail of who changed what and who approved it, what the discussion was at every step, what had to be changed in the proposal between when it was first submitted for review and when it was deemed acceptable by the reviewers. Approvals are explicit and unmistakable. Changes found to be harmful can be rolled back in their entirety by means of an identical review and approval process.

Congresspeople could work from home, their offices in the home state or DC, from the floor of the house, wherever, and the physical presence loophole sometimes used to sneak bills in during periods of low attendance would be entirely removed. They could meet and conspire in smoke-filled rooms all they wanted, or discuss things off the record over a beer or two as much as needed, but in the end the actual change would still have to be approved by folks who may or may not have been present on a given day. As an added bonus, once physical presence is divorced from the process, the size of the group doesn't have to be kept as small if we ever felt like experimenting with it (and maybe we wouldn't have to). Would we be better served by a congress of 435 or 10,000 or something in between? Try a few things and see.

This all applies to all levels of government. The transparency comes in when the review process is opened to the public. It would unfortunately be impossible to allow all 300 million Americans to propose changes to laws or make comments during reviews; the noise would be unbearable. At least they would be able to watch the legislative process as it happened, which is a very important step.

I don't expect that every citizen would choose to be any more involved than they already are, but on average everything would probably be read by at least someone, which is a step in the right direction. Not everyone who uses open source software is involved in the development process, but the users all benefit from the added participation of even just a few volunteers.

Misunderstanding money is dangerous, part 4: what comes next?

In previous posts, I pointed out that we have time to think about how to improve our monetary system because there's no crisis except the manufactured one caused by a general lack of understanding. This time, I'll talk about those improvements.

Action one: Fix dysfunction on the dollar creation/issuance/distribution front.
First, repeal the debt ceiling. Kill it off and let's never speak of it again.

Second, amend the 1935 banking act to allow direct sales of bonds by the treasury to the fed, cutting out the primary dealers. Eventually (see below) we shouldn't need to sell treasury bonds at all, but that's a more invasive change.

Third, open the discount window to all banks and eliminate bank reserve requirements. Primary dealers get cut out again but cry me a river. They can go back to making money doing regular bank things. This income was all pork for them in the first place.

Action two: Fix dysfunction on the taxation/dollar destruction front.
Eliminate payroll taxes on the grounds that they're regressive (don't scale with income) and it'd cause people to take home more money each month immediately, like an instant stimulus. Not an original idea of mine, lots of people have suggested this. For that matter, eliminate all the itemized taxes and just adjust the single big one, federal income tax, up or down as needed to achieve the desired amount of money in circulation. It would almost certainly turn out that even after the other ones were done away with, we'd need to lower it significantly as well (until some day after years of growth, we actually have high inflation on top of full-employment).

Action three: Full employment, and funding for all the social programs you could want.
Full employment means nobody who wants a job to do should have trouble finding one. It doesn't mean finding any old BS for people to work on, it means if the private job market isn't hiring the whole workforce then we need to take stock of what things we'd like to have if only we had someone to build, make or do them, and then pay our jobless to work on that. Rinse and repeat forever.

Social programs include things like my previous post about auto liability protection, as well as more commonly discussed things like establishing a national health service, light rail in all cities and high speed rail between them, making higher education free and not wrecking social security.

Action four: Finish the transition from indirect to direct issuance of the public currency.
Thomas Edison famously said in 1921, "If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good." His idea was not original, and I rather doubt he even thought it was. The US has a long history of different monetary systems, including two periods of direct issuance, which is what he was suggesting.

During the revolutionary war, the government issued "continental scrip" which was non-convertible fiat currency. Alexander Hamilton came up with the idea, and then once the war was over did an about-face and set up the first national bank, which was a source of great contention at the time.

Lots of changes went on in the early decades, including Jackson's well-intentioned but misled battle with the second national bank of the US and retiring of the national debt of his day. After the bank's charter was not renewed, Jackson didn't go on to replace it with anything and a recession followed.

During the civil war, Lincoln took the good advice to issue the famous "greenbacks" or United States Notes.
http://en.wikipedia.org/wiki/United_States_Note

There's a lot of precedent for money directly issued by the treasury and it drastically simplifies operations, all the way back down to that summary that spending creates dollars, taxes destroy dollars. The remaining useful functions of a central bank could be performed electronically by the treasury itself.

Action five: phase out treasury bonds for good.
We've established that these are not the scary "debt" that everyone thinks they are, but perhaps just as bad they create a situation ripe for misunderstanding. Since their only remaining function after the switch to direct issuance is to act as a guide for lenders to reference when setting the interest rates on loans, which is hardly a critical function, the safest way to avoid future mass confusion is to get rid of them.

Action six: cement all these improvements in a constitutional amendment.
Virtually all of the mess we're addressing in this series could be prevented from ever happening again by amending the constitution to clarify that the US government:
- is the sole issuer of the nation's currency
- is forbidden to outsource this power to any other entity
- is forbidden to issue bonds, and must spend directly
- is forbidden to place any arbitrary or artificial caps on either spending or taxation, and must set the overall levels of each appropriately to prevent both deflation and excessive inflation. Exactly what it chooses to spend on, and who and what it chooses to tax, are decisions best made on an as-needed basis as these serve to encourage some activities and discourage others.

2011/08/22

Misunderstanding money is dangerous, part 3: MMT beyond the basics, our existing tool kit

MMT is all about dispelling the myths around how our monetary system operates. It's clear that our current monetary system is not broken, but it is being operated improperly, intentionally or not. The important part of this is that we have all the tools and processes in place to face the problems of our day, if only we would use them. Tragically, rather than using a solid understanding of the tools to fix real problems, we're using a misunderstanding of them to create artificial problems, all the while believing we're helping.

So much of this is ripe for misunderstanding though, it's forgivable.

I glossed over a lot of points in the last post with an asterix promising I'd get back to the details. In this post, I'll gradually expand from the elegant principle to gradually include more details of our rube goldberg-esque implementation.

Here's that design principle again. The government, which is to say the public, as issuer, spends money into existence. It may also tax it out of existence if and when required to tame inflation or slow irrational growth. The government is not a business, it is not a separate entity; it represents us, the public, and the nation's shared interest.

It will be obvious during our study of the details that there are many places where things could be improved or simplified, either slightly or drastically, but remember that what we've got works, and will continue to work, and we've got ample time to carefully design improvements in parallel with continuing current operations.

In every fiat currency-issuing nation in the world right now that I'm aware of, the government has the sole right to issue the public currency but in practice has outsourced the operation to a central bank. Central banks are private entities in some respects, but in the end remember that they are under government oversight; they work for us. In the US, our central bank is called the Federal Reserve. The fed dates back to 1913, the days of the gold standard, and its creation was made possible in part by a public and government tired of panics and banking runs. A chain of regional "reserve" banks owned in turn by large private banks was set up and congress outsourced to the fed its power to issue currency (actually, money in the US had already been a mix of private bank notes and government-issued notes up to this point). Under this system and all others like it, the government finances itself by selling interest-bearing bonds to the central bank in exchange for its own currency. In practice the only way to get the money to pay off the bonds, with interest, is to sell more bonds to the central bank. This is the national debt, that's why it grows constantly, and what it actually represents is the difference between the amount of currency that's been put into circulation and the amount that's been taken back out.

Sound convoluted enough? As it turns out, even that is a simplification. Roger Erickson puts it this way:
...congress outsourced to the quasi-private FED the responsibility for monitoring and managing an equitable supply of currency nationwide...

Under this system and all others like it, public governance accounts for public finances by creating currency & injecting it into a double-entry accounting system as a one-sided entry, and inventing ways to drain the inevitable "bank reserves" created as a consequence of double-entry bookkeeping - the Holy Grail of banking methodology. Such bank-reserve drains typically take the arbitrary form of pretending to "sell" Treasury Security bonds to the Central Bank to mitigate the consequence of injecting single entries into a double-entry system. As an arbitrary method of paying the salaries of the private CB staff doing the actual bookkeeping, an extra surcharge is added to the Treasury Securities, making the bonds, in effect, interest-bearing. The size of that surcharge has sometimes been fixed by Congress, and sometimes allowed to float at auctions where the FED would re-sell the bonds to it's private bank members instead of simply holding them in house. These comical arrangements led to instances where the surcharge earned by the FED grossly outraced public decency of their salaries, triggering the bizarre "solution" where net "profit" earned by the FED yearly is "returned" to the US Treasury currency issuer - untouched & unused by the public! To streamline this comical scenario, couldn't the CB accountants - who were once required but are themselves now replaced by spreadsheets - simply be salaried employees in a department of the Treasury Agency, and couldn't the pretend "bonds" required to satisfy double-entry accounting methods simply bear zero-interest? Bingo!

Why wasn't that simple scenario pursued from the start? Habit, lack of imagination, and of course the interest of an active banking lobby accustomed to higher-than public service salaries. By current, bizarre practice standards, the only way to acquire the currency surcharge to pay off the invented public bonds, with interest, is to sell extra public bonds to the central bank. This entirely explains the so-called national debt, and why that dimensionless number grows constantly. It is a semantic oddity arising entirely from archaic design. In short, a system bug. Debt is actually a completely incorrect name for it. What that number actually represents is the accumulating difference between the amount of currency that's been put into circulation and the amount that's been taken back out. It's not 'owed' to anyone, it's just the accumulating record of currency supply growth required by a population growing in both size and per capita transaction rate.

Astute readers could come up with endless, more elegant, methods for handling public accounting for public currency supplies, but that's a topic for others to explore.


See why I started with the simpler version?

There is massive confusion over the role of foreign buyers of treasury bonds, particularly China, in all this. China owns a lot of bonds, so people get the false impression that our government has borrowed from them. What actually happened is that China sold us an enormous amount of goods, representing incalculable inputs of real resources and human labor. We paid them in dollars, which is a pretty sweet deal for us in many ways. We sent them virtual numbers, they sent us real things. After years of trade imbalance, China had a lot of dollars accumulated, which can only be used to buy things that are denominated in dollars. Actually, a lot of things are sold in dollars the world over, like oil, but they have more dollars than they need to buy all those things for now. They could buy anything they wanted from the US at market value, but what can they buy from us they can't produce domestically for lower cost? Not much, at least in the context of how many dollars we're talking about. So they choose to park their dollars in treasury bonds for now as a hedge against inflation. They bought our treasury bonds using dollars we already sent them for real goods they worked hard to produce. When those bonds mature, they can always choose to have their dollars back and we still won't have sent them anything of real value. When viewed this way, all the fears over "borrowing from China" are ridiculous. They don't have the authority to issue our currency, only we do. There's no debt, we already paid them for their goods and services, which is where they got the dollars they used to buy the bonds in the first place. What we should be more worried about is that they'll cash out for dollars and buy artificially undervalued real assets in the US while our economy is in the toilet. That sounds weird given that we're still going through the bursting of bubbles in things like real estate where prices were artifically overvalued, but if the deficit-slashing continues, deflation sets in, and a depression takes hold, it's a possibility.

Remember above when I said that the treasury sells bonds to the fed (central bank) in exchange for dollars? That's how it worked until the Banking Act of 1935 prohibited the treasury from selling bonds to the fed directly, and required them to sell them to an "open market" which in practice means a bunch of big banks. The banks in turn sell the bonds to the fed. Why on earth bother? I wasn't there, so I can only assume a mix of greed on the part of some and well-intentioned cluelessness on the part of others. There are 20 "primary dealer" banks which are authorized to sell treasuries to the fed directly. They provide no particularly valuable service, and basically get exclusive right to be profit-skimming middlemen.

Another topic surrounded by confusion is fractional reserve banking. At different times in history under different monetary systems, bank reserves meant different things.

In the beginning, goldsmiths charged for a service where they'd lock up your gold in their safe and give you a paper receipt for it, becoming some of the first entities we'd recognize as banks. It became popular for people to do business using only the pieces of paper and people came to redeem the paper for metal infrequently, which gave the enterprising bankers the idea to start loaning out either the gold itself or eventually just the paper notes with interest. As long as they kept enough in the vault to satisfy the occasional customer who wanted to redeem his paper, they could go on using other depositors' collective wealth to become fantastically rich. When they miscalculated and then word got out that paper couldn't be redeemed, there would be a run on the bank, which probably rarely ended well back in those early days. Importantly, this questionable practice caused the amount of usable money in circulation to rise dramatically because they'd started with x amount of gold and effectively created new money equivalent to it in the minds of the people, out of nothing. It made these banks very willing to make loans since if a debtor couldn't pay the bank merely lost potential income, not an irreplaceable asset. This turned out to be so useful for funding real productive enterprise the likes of which stagnant, medieval Europe had never seen (like expeditions to bring back cloth and spices) that it was accepted and regulated. The origin of reserve requirements were royal decrees that banks must at all times hold at least some minimum fraction of the value of their outstanding paper as gold in the vault to lessen the risk of panics and runs. These very important discoveries about the circulation of currency and the availability of credit, made accidentally during an effort by shady goldsmiths to make easy money, foretold the next technological advance of non-convertible currency backed by a government, if you think about it.

In our current system, which is not based on gold but on the good faith of the US as a nation, "bank reserves" are issued only by the federal reserve, and simply record currency transactions that banks have reported. Bank reserves are created by bank loans, and drained by other bank deposits, are in effect only changed in net volume by those bank reserve notations affected by mismatches in public issuance of dollars and issuance of treasury bonds. Adding further to the special advantages of primary dealer banks, they are allowed access to what's called the "discount window", which is a basically unlimited line of credit where they may borrow dollars from the fed directly and at exclusively low interest rates. Smaller banks can't just grab virtually free money when they need it and so have to borrow from big ones and still worry about reserves. You can see how every step of the way these primary dealers get to sit back and rake in the arbitrage. Warren Mosler and others have argued that reserve requirements in the US could be dropped if all banks had equal access to that low-interest discount window, which is perfectly plausible since Canada eliminated their reserve requirements entirely. In our modern system where everything happens electronically, bank reserves are obsolete.

A final note on bonds: the interest rate the treasury sets on them serves as an indicator for banks to decide what interest rates they should set on loans, which doesn't seem like that important a function to me. I'll expand on this later.

There's not as much point in diving further into details, because there are tons of people who know much more about banking and finance than I do and they've written volumes on the subject. A from-scratch introduction preparing a reader for further materials and discussion was missing in my opinion, so that's all I'm going to attempt. If you want to keep going, check out the mandatory reading section at Warren's site:
http://moslereconomics.com/mandatory-readings/
Also, just search for MMT modern monetary theory and you'll find a wealth of blog posts, news articles and comments related to the subject. Here are some highly-referred links to get started with.
http://moslereconomics.com
http://rodgermmitchell.wordpress.com/
http://bilbo.economicoutlook.net/blog/
http://neweconomicperspectives.blogspot.com/
http://mikenormaneconomics.blogspot.com/
http://www.levyinstitute.org/publications/
http://pragcap.com/
http://www.columbia.edu/dlc/wp/econ/vickrey.html
http://johnsville.blogspot.com/2011/06/modern-monetary-theory-mmt-in-nutshell.html
http://tinyurl.com/y3dkda3
http://www.cfeps.org/ss2008/ss08r/fulwiller/Fullwiler%20Modern%20CB%20Operations.pdf

I can't stress enough that what we've got works and will keep working so long as we understand at least the fundamental concepts behind it and use that knowledge to avoid unwittingly doing anything outright stupid to ourselves. In the last and final installment, I'll move back to the familiar theme of saying what the eventual replacement would look like if I were asked to design it. Consider parts 1-3 as laying the foundation and stating my terms.

2011/08/21

Misunderstanding money is dangerous, part 2: when cruft isn't cleaned out, it comes back to haunt us.

In my last post I explained in brief why the debates over the deficit are completely misguided and introduced some of the basic ideas behind MMT. In this post, I'll deal with the debt ceiling specifically.

The now-infamous debt ceiling dates back to the United States' controversial entry into the first world war in 1917. This was in the days of the gold standard when the government was actually revenue constrained, so to finance the war the government needed to issue bonds (the famous Liberty Bonds). Since the war itself was controversial, and spending always so, a compromise was reached that included a debt ceiling which congress would have to vote on in order to raise. It was a token gesture that never appears to have done anything to rein in spending because it was raised again and again over the years without incident and nobody cared. This compromise was silly and purely a political face-saving move but at least had some plausible root in reality given how the monetary system of the day worked. Decades passed and the gold standard (and all the limitations associated with it) became history, rendering the debt ceiling utterly pointless. Raising it became just a legislative chore without purpose, whether or not each successive session of congress understood that. But all the while, it's been a wrench that someone either unscrupulous or well-intentioned-yet-moronic could easily toss into the gears, which is exactly what just happened.

I find it incredible that more people aren't asking questions about the debt ceiling "crisis". The debt ceiling has been raised more than once per year for decades.
74 times since 1962
10 times since 2001
http://money.cnn.com/2011/01/03/news/economy/debt_ceiling_faqs/index.htm

What makes right now, this instant, so important? No congressperson has tried to answer that as far as I can tell, it's like they're banking on the assumption that most of the public has never heard of this thing before and will just take their word for it that it's an emergency. It's just a pretense to cut social programs and now was the time they could get away with it.

Equally stunning is how little outrage there is that a couple of years ago there was a ten trillion dollar bailout of the financial sector, and now we're suddenly supposedly out of money to pay for services poor, old and sick people use. I'd say that this class warfare couldn't get any more blatant and open, but I fully expect to be proved wrong.

Interestingly, the top suggested search for "how many times" is "how many times has the debt ceiling been raised", so apparently a lot of people have been searching for this information recently. Unfortunately, a critical mass of people probably won't realize how fishy this was and demand answers before the next manufactured crisis
diverts attention away from this one.

The general theme here, and one that you'll recognize over and over during this series, is of relics from previous iterations of our monetary system that have lost relevance but nobody understands well enough to remove.

Misunderstanding money is dangerous, part 1: an introduction to MMT (Modern Monetary Theory)

Just recently, a last minute agreement was reached allowing the US debt ceiling to be raised after weeks of arguing and dire predictions about the future of the country. Representatives, senators, the president, the media and countless people on the internet were saying that the national debt is going to become unserviceable; deficit spending is immoral, irresponsible and unsustainable; that we're "broke" and/or "running out of money"; that we're "borrowing from China" and mortgaging the future of our grandchildren. These views went virtually uncontested, and the arguments all centered around how the inevitable and un-debatable austerity measures were to be metered out. The problem is that all of the logic behind the debate is based on a foundation of false assumptions and misunderstandings so great as to render the entire conversation pointless. It would be funny if it weren't so serious, and if our collective future didn't hang in the balance for such an avoidable reason.

Rather than jump into deconstructing the arguments one at a time, it makes more sense to start at the very beginning and build up to the point where all the absurdity is obvious. One of the best ways I've ever seen it put that breaks one out of stale thinking is this compact hypothetical exchange worded by Dustin Mineau:

What keeps the government from spending whatever it wants?
Well it has to tax or borrow that money.
Well why doesn't it just print it?
zOMG Inflation!
So you're saying the only thing that limits federal spending is inflation, not taxing or borrowing. Which is my whole point.
Um... yeah, never thought of it that way...



Interested? For the time being, please humor me and forget everything you know about the monetary system.

Currency is a token that allows an improved abstraction over barter whereby the two parties in a transaction can trade even if one side doesn't have a real resource the other is immediately interested in. Many physical manifestations have existed across different times and cultures, including seashells, metal coins (often gold or silver), and paper. Two of these are what is called resource-based and are limited in supply (paper money often got its start as a representation of something bulkier, but nowadays that's no longer the case). The important thing about all currency is that it has no inherent worth. You can't eat seashells, gold, paper bills or numbers in a database. It has only a few requirements: it has to be universally agreed upon as the denominator of transactions in order to be useful, and the amount of it in circulation needs to roughly match the number of transactions that need to be denominated.

The standardization of a currency begins with the authority of the entity that issued it, usually the state*. That line on the dollar bill that says "legal tender for all debts, public and private"? If you owe someone a debt, they must accept payment in this form or else they have no case against you in court. But more importantly, taxes to the state must be paid in the state's currency. You can't pay your property or income tax in the US with wheat, you have to sell it for dollars first and then use those to pay. This creates a situation where everyone wants and needs the state currency, making it much more likely that anyone and everyone you meet will be buying and selling in that rather than something else. This applies universally, not just to "fiat" currency. If a government accepted payment only in gold, whether in the form of gold coins or raw metal, then gold would quickly become that country's preferred way to denominate all transactions. Remember that there's nothing special about gold or silver; they're not inherently valuable, and only ever seemed like an obvious choice for money because we're still living down ancient fascinations with how pretty they are compounded by an even more ancient human psychological trait brilliantly summarized as "Ideally people would love exclusive ownership of something everybody wants."**

One of the key differences between a resource-based currency like seashells, gold coins and previous incarnations of the US Dollar or British Pound, and a "fiat" currency like the modern US Dollar or British Pound, is that in the first case the supply of currency is uncontrollable (or perhaps more correctly, controllable only through elaborate and incomprehensible processes which history proved to be unreliable) whereas in the second it is possible to add or remove currency from circulation as necessary. Fiat currency is a technological innovation that freed governments and economies from the artificial and totally ludicrous situation where they could not increase the supply of currency, denominate more transactions between more parties, and thereby grow the economy, without first digging up rocks out of the ground and burying them in a vault somewhere else. That is why all modern currencies around the world are fiat, and so I'll only be discussing that type from here on out. Specifically, US Dollars.

Expanding on the idea of intelligently and deliberately adjusting the supply of currency, an important attribute of dollars is that only one entity can issue them: the government*, the same entity that collects them as taxes. When the government runs a surplus, it means that they've taken more dollars out of circulation than they've spent back in, which means that they've shrunk the supply. When the budget is perfectly balanced (which is what many are clamoring for without understanding the implications), it means that the supply of currency is unchanged. When the government deficit spends, the supply of currency increases. This means that the only way the economy can grow (worded another way, the only way that more transactions can be denominated) is through deficit spending. You read that correctly, the US economy cannot grow if the budget is balanced because the US Dollar cannot come from anywhere else. The only time you would ever want to balance the budget is if you want to stop economic growth. Perhaps the most core tenant of MMT, this can be summarized as government spending creates money, taxes destroy it.

So, what, deficit spending forever? This idea usually trips people up because they're reasoning by analogy with their personal finances, which is understandable but 100% wrong. This is another core tenant of MMT: a monetarily sovereign government (meaning one that issues its own currency) is special and has enormous operational freedom. It's different from a household, a company, a city, a US state government, or European Union member nation's government. It does not get that currency from anywhere or anyone else. It does not borrow. It does not need to generate revenue. It just plain, straight-up creates it when it needs to, out of nothing*. Deficits aren't like an overdraft at your bank or racking up credit card debt. The US government doesn't owe that amount to anyone*, all it means is that they created more dollars than they destroyed that year. Greece can't create Euros, and so is operationally constrained in all these ways. This turned out to be a disastrous side effect the EMU for member nations. I like to summarize it this way: there is no sovereignty without monetary sovereignty. Various people in the know predicted back when the EMU was first being created that this eventual breakdown was inevitable. Their only choices as I see them are to default, leave the EMU and return to their own currencies, or to federalize and give up on being sovereign nations. For the sake of their people, I hope they all choose the first.

Ok, so deficit spending for as long as needed is possible, but isn't that inflationary? Not if done properly. Inflation is caused by introducing too much currency into circulation relative to the real resources and labor and actual need for currency, which describes post-WWI Germany (the textbook example of hyperinflation) since millions were dead or wounded and, more critically, they had to pay reparations to the victors of the war.

http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

the "London ultimatum" in May 1921 demanded reparations in gold or foreign currency to be paid in annual installments of 2,000,000,000 (2 billion) goldmarks plus 26 percent of the value of Germany's exports.

The total reparations demanded was 132,000,000,000 (132 billion) goldmarks which was far more than the total German gold and foreign exchange.

Beginning in August 1921, Germany began to buy foreign currency with Marks at any price, but that only increased the speed of breakdown in the value of the Mark.[17] The lower the mark sank in international markets, the greater the amount of marks were required to buy the foreign currency demanded by the Reparations Commission.


See what they did there? The hyperinflation wasn't caused by printing a sane number of marks to be injected into the German economy, it was caused by printing a certifiably insane number with which to buy foreign currency to satisfy the terms of a punishment metered out by still-bitter nations that had just narrowly defeated them in the bloodiest war in human history up to that point. That's a very special circumstance, all the way around. That does not describe our circa 2011 United States. If anything, we're potentially facing deflation.

The only time you would ever want to run a budget surplus is if you want to either cause negative growth or track it when it's outside of your control, such as if there's a decline in population, real resources or the number of transactions people want to carry out causing a decrease the amount of currency that needed to circulate.

Now is not one of those appropriate times to halt or reverse growth. Totally the opposite, we have near-unprecedented real resources gathering dust and countless workers who want a job to do but can't find one. Why? Because apparently nobody, people or businesses, have money to spend. Where it went is a valid question but in any case this is exactly the sort of time when the government's duty is to either spend money into circulation or reduce taxes or both in order to get money circulating again. Everyone who is calling for a balanced budget as the first step to recovering from a recession or depression either doesn't understand this, or has ulterior motives for wanting economic decline. The cynical among us believe that an upper "looting" class finds cyclical boom times and recessions to be the ultimate "pump and dump" scam, and austerity measures to be the best way to convert the middle class back into the poor and the poor back into serfs. I see naked class warfare where the intended victims have been tricked into demanding what will ruin them. If the people all knew how the system worked just well enough to realize what they've been asking for, they'd change their tune.

That's enough for a single post. Up next, returning from the basics back to the current non-crisis and political theater.

* But Federal Reserve! Treasury bonds! Hang on, we'll get back to that in depth eventually. This wouldn't be an introduction if it didn't gloss over some things.
** For the full, raw context of that quote (NSFW):
http://therawness.com/pimp-week-1-iceberg-slim-scene-1/
http://therawness.com/pimp-week-2-iceberg-slim-opening-scene-interpreted/
The psychology of desiring exclusive ownership of things everyone wants is all an outcome of the most basic human social programming dictating that we differentiate ourselves from and compete with our own sex and thereby impress the opposite sex. In the very beginning there were only the most obvious things to fight over, but the stakes were gradually raised by finding new ways to try to show the margin by which one out-competed one's adversaries, such as ornaments made of really rare rocks that most people didn't have. When you break it all the way down like this, our obsession with things like gold is stunningly primitive. It was jewelry first, money second and only because it could be made into jewelry. If you're smart and confident enough to explain your worth clearly, you don't need ornamentation.

Public services are not supposed to be an engine for enriching the few at the expense of the many.

I've been reading more about the ongoing legal battle over the "Obamacare" bill, and the controversial way it attempted to address universal health care. How did this thing ever manage to pass as written? It's basically forcing everyone to pay private, for-profit companies for insurance when it's not insurance that people need, it's the care itself. Insurance companies must have written this law themselves and just sent it over to their pals in government to be rubber stamped. To hell with that. Where's our NHS?

There's this thing called Control Fraud that comes to mind:
"Control fraud occurs when a trusted person in a high responsible position in a company, corporation or state uses their powers to subvert the company and to engage in extensive fraud for personal gain."

Put simply, "the best way to rob a bank is to own one". Bill Black has written extensively about this problem. If you're at all interested in it, you'll want to check out his articles and video interviews, which are all easy to find online for free. They mostly focus on banking and financial fraud and related crime, but once you understand how dysfunctional things can get it's easy to spot similar patterns elsewhere.

Laws like this and the various state laws requiring vehicle insurance are the worst possible way to go about achieving their supposed goals. The insurance industry has captured the lawmaking and regulatory process and used their influence to pervert programs designed for the public good (universal health care, protection against car accidents) into a way to force every US citizen to give them money whether they want to or not.

You could argue that anyone who really doesn't want to pay for car insurance can just opt not to own a car, but in the US it's damned near impossible outside of urban areas and that choice is an illusion. Believe me, I've tried: 10 months without a car in Mountain View, CA (SF bay) proved that I was only able to pull it off because I could still bum rides when I had to. I didn't even end up saving money in the end because I have a 2 mile commute, I already didn't drive many days, and the DMV in California finds ways to charge you money even if your cars are declared non-operational. It was a hollow victory for me and an imposition on my friends. Thankfully they were good sports about it.

So if everyone is required by law to have liability insurance when they drive a car, then why call it insurance? British Columbia, Canada has a state-run insurance company, but that's still a lack of imagination. Remember that it's not the insurance that people need, it's the service itself. Then throw out everything you take for granted about the way things currently work and think of a solution that addresses precisely that need.

If I were in charge, I'd just have the state pay the damages on everyone's accidents, tally up the costs at the end of the year, divide that net cost evenly by the number of licensed drivers, and assess a fee in that amount on every driver next time they want to renew. Identical cost of repairs minus the profits and operating costs of the insurance companies == lower cost per driver. Adjust the formula to account for the number of times the state has had to pay out for your accidents before in the past 3 years or whatever so that unsafe drivers have to pay a higher license renewal fee, and you have a textbook market solution to this problem. People will be safe for fear of being unable to afford to renew their license. Set a cap on the number of payouts before automatic revocation so that rich people can't just "afford" to be dangerous idiots on the road, and now it's regulated market capitalism. Allow people to buy private insurance policies on top of whatever the state provides so that if you have a special need and the money to pay for it, you can have all the coverage that an insurer is willing to sell you (Australia and others do this for socialized medicine; private insurance/care is still available to anyone who wants to pay extra to get it).

There's no more uninsured motorist problem. Now, it's collapsed into solely an unlicensed driver problem. It's a lot easier for the cops and the DMV to quickly identify unlicensed drivers and not have to keep track of who's uninsured, so their jobs are easier. The licensed driver has much less to keep track of personally: just one bill per year, no insurance company to deal with, less correspondence with the DMV.

Simplicity and elegance always pay dividends in quality of life, which is why socialized medicine and my proposal for socialized auto liability are so appealing. Even ignoring the cost in dollars, it's the cost in time, human time, that's critical. The fewer man-hours patients or drivers spend getting what they need out of the system, and the fewer man-hours required to administer that system from the other side, the more man-hours there are now available for anything and everything else. Anyone who cries that the insurance industry is a major employer, contributes to GDP, etc., is missing the point and not using their imagination. Digging roots and picking berries was an occupation that employed the whole human race at one time; later, making flint spearheads; later still, making horseshoes. These professions' passing into obsolescence is to be celebrated as progress, freeing humans from a task so that they can explore and invent.

Anyone who claims that we've reached the point where freeing humans from their toil automatically means rising unemployment from here until the system collapses is also not using their imagination, but I'll forgive that because the solutions are so hard to see and hear through the noise of people saying what's not possible. The next leap is to a favorite subject of mine called MMT, which I'll discuss at length in the next post.

2011/04/12

The love affair with poison.

Every so often, there are news stories about environmental damage done by unscrupulous use of some dangerous substance. For now let's just focus on substances that are DESIGNED to kill things. DDT is a famous example that everyone knows about. Agent orange too. But I still see news stories about antibiotic resistant bacteria, roundup-resistant "superweeds", bee hive die-offs, and so on, which proves beyond any argument that we learned virtually nothing from those especially famous disasters.

Banning DDT was a necessary step and the story resonated with a lot of people, but it's next to useless to ban the indiscriminate use of one poison at a time. Insecticides, fungicides, herbicides, and antibiotics targeted at mere bacteria have ALL proved to have far-reaching consequences for us despite being naively targeted at what were supposed to be vastly different life forms.

The moral of the story is people have to get as mad as they were about DDT for anything to be changed, and the thing that needs changed is the whole line of thinking that led us to where we are today. We can't just sterilize the earth, it doesn't work. Pretty much every attempt at this has backfired and/or done more collateral damage than it's done to the intended target. Bee colony collapse and MRSA and superweeds are not unrelated phenomenons in this sense.

Poisons are dangerous and need to be reserved for emergencies, if they're even used at all. If they're used rarely enough, there's no selective pressure among the intended targets to build up any defense to the substance, which keeps it effective. Hate to sound like a broken record, but once again Scandinavian countries "get it" and the US doesn't even want to hear about it.

2010/06/02

Californians don't understand energy efficiency

Traffic is infuriating. I have 14 traffic lights between home and work, in the space of only 3 miles. That's around 5
lights per mile. It's so wasteful, pure stop and go driving. Most of the roads are many lanes wide, which was a knee-jerk reaction to traffic that wastes vast amounts of space and in the end makes everything worse. As an added bonus, those giant roads become impassible to pedestrians and totally unpleasant for bicyclists. A three mile walk would be fine, a three mile bike ride should be a piece of cake, and a three mile drive would be nothing under normal circumstances, but not here. Here, all those options suck.

Then there's our public transportation. It's expensive, slow, and doesn't run often enough or late enough. The coverage isn't very good (except in San Francisco, but that's an exception). In order to get anywhere you usually have to make changes between multiple, totally unintegrated networks and pay for another ticket each time.

So under those circumstances, everybody has a car and drives. In recent years, people bought tons of hybrids, which are stupid in their own ways and don't help congestion at all. But with traffic being so bad, the big tech companies added shuttle service as a perk. Which is great for you if you have a great job working for one of them. If not, you don't get this. The shuttles are probably "greener" than those employees all driving their own cars to work, but the reality is that we've created multiple, redundant, overlapping, privatized transportation systems while letting public transportation languish.

If I were in charge, I'd:
- drop all surface streets back to one lane in each direction, no medians
- remove all traffic lights and stop signs, placing a roundabout at every intersection
- make public transportation 100% free with no passes or tickets
- invest hugely in new routes/stops and extend hours of operation for public transportation

So that's transportation. But the people here find other novel ways to squander energy resources. This is from an email conversation back in fall 2008:

"""
Last night was one of the first crisp, fall-like days of the season.
It felt good outside, a nice change of pace from the monotony. As I
walk past that main strip of Castro street, sure enough the sidewalk
heaters are out and people are outside under them.

It's dark and cool outside, so you use lights to make it bright and
gas to make it warm. So what's the point of being outside?
"""

People from the rest of the country are plenty
wasteful and produce lots of trash, but nowhere else have I ever seen
people systematically heat the outdoors, water the pavement, and wash
the sidewalks with a hose.

I'd ban those outdoor heaters as well.

Mountain View doesn't understand water

Every dry season when the reservoirs start to get low, Mountain View (and probably other area cities) send out glossy, professional-looking brochures about ways you can save water around the house. They're pitiful suggestions like taking shorter showers, watering the lawn at night, and not leaving the water running while brushing your teeth.

I find these mailings insulting because while I'm being reasonable and water conscious anyways, the city is completely covered with automated sprinkler systems. Also, the brochures probably took more water and energy to make and mail than their recipients can possibly make up in savings.

It's bad enough that we maintain a golf course and a ton of green lawns and even irrigate the grassy highway/road medians, but those sprinkler systems water as much concrete as they do grass. Their latest effort was to run a whole bunch of new plumbing for "recycled water" to use in those sprinklers, and put up signs in English and Spanish saying that it's not safe to drink. There's a lot wrong with that, obviously. Why has it not been treated well enough for it to be drinkable? If it's not fit for us, the water treatment plant is failing at their job. And if we've got that much wastewater available, why not use it for something better than watering grass?

I am a huge proponent of getting rid of green lawns and all
the waste that goes with them. This area is especially bad because we
went from being a major fruit producing region, to using the precious water we're bringing in from distant reservoirs to water lawns with automated
sprinklers, then mow them with gas powered equipment operated by
Mexicans*, then they gather up all the clippings and other biomass and
bury them in a landfill. It's inexcusable.

*I have nothing against Mexicans and their strong work ethic, but many of the people complaining about immigrants are paying them for landscaping.

If we're going to be using treated wastewater for irrigation, we may as well be irrigating food crops that we can then consume ourselves. People here are more likely to put solar panels on their roof than to
grow a garden, but I suspect that at the end of the day, the
importation of food costs more energy per household than those solar
cells could ever hope to offset.

One of the big problems is that even though the net area taken up by
green lawns is large, they're mostly tiny islands surrounded by
pavement, not well suited to any community agriculture projects. You'd
be hard pressed to find a contiguous half acre of dirt in Mountain
View, except in the public parks. Converting parks to gardens sounds
ok to me, but to really get meaningful local food production, we'd
have to do what [my father] suggests and replace one story houses with tall
apartment buildings surrounded by commons.

Funny thing is, we plowed under all the orchards to build a bunch of sprawl not that long ago.
California is the fruit and vegetable basket of the US, but you
wouldn't know it if you were visiting silicon valley. They used to grow
huge quantities of citrus here, mustard plants up in the
drier parts, strawberries on the west side of the Santa Cruz mountains
(they still do grow those, at least), etc. What they did to this place
in the 20th century is just criminal. Mountain View was home to a
giant garbage dump and a number of superfund sites
(we have the most concentrated superfund sites in any one area! go us!),
and the nasty stuff leaking out of
Moffet Field and the nearby Air Force base, and probably gasoline
loaded with MTBE (now outlawed) leaking from all the gas stations, and
all the horrible things that go with having such a crazy high density
of cars on the road, and topped off with countless miles of what can
only be called the textbook definition of sprawl.

I think that things here are actually near a turning point, or will be
soon, because we trashed the place about as much as we could while
still living here, and a large and growing number of people are
feeling at least SOME remorse. At the very least, the rate at which it
will be further trashed will probably slow down in the coming years. If interest in local food grows, we'll probably be hearing a lot more about the contaminated soil and people will all be blaming each other for that...


If I were in charge, I'd:
- Tear out all the publicly owned sprinkler systems. Let whatever can grow do so without the aid of irrigation.
- Either make the golf course grassless, or if that's not possible, just shut it down. Scotland can support golf because it rains a lot there. Mountain View (and Las Vegas, and Death Valley...) just shouldn't have these things.
- Encourage people to replace their inedible lawns with gardens.
- Provide huge subsidies for waterless urinals and composting toilets.
- Treat the wastewater so well that we can just put it back into the supply.