Our Next President?

[dcarrigg]

Re: Our Next President?

As always, there ain't no such thing as a free lunch. Sure, the federal government can cancel debts owed to it, student loan or otherwise. However, that means they have less revenue to pay for things. The MMT crowd will point out that they can simply print the extra money they need to pay for things. That's true, but what is the result? Inflation.

That doesn't necessarily mean that plan doesn't suit your political goals, but it's not true to say that there's no effect of the government cancelling debt. Some people might say that inflation is a good thing. For example, they might look favorably on a plan to send a $100,000 bill to every US citizen. Sure, it would cause massive inflation, but if someone had zero dollars before, they will now have $100,000. Of course it won't be worth as much in terms of purchasing power, but it's better than nothing, right?

It's worth keeping in mind that who gains or loses from inflation is not necessarily clear-cut. Jeff Bezos probably wouldn't suffer too much under inflation because his wealth is mostly stock in Amazon. The stock price would go up like other prices. The prices for goods sold on Amazon would go up. However, a billionaire whose wealth is mostly in bonds (debt) is probably going to take a big hit. What about the workers in Amazon's warehouses? They better hope they can get pay raises that track with inflation or their living standards are going to plummet. Someone living on some kind of pension/fixed income stream is screwed unless it adjusts for inflation.

My thinking about this stuff was much more like this a decade ago. I've since revised it. Why?

1. It assumes labor's share as a constant. Most econ did. Turns out, it's shrinking.
2. This has serious implications for the relationship between unemployment rates and labor markets. If you've ever scratched your head at how unemployment can be near historic lows without wage increases, you're assuming labor's share is constant. If it's shrinking, it makes perfect sense that unemployment could drop to 0%--there could even be a labor shortage--and still real wages can stay flat or even decrease.
3. This is a fundamentally different environment than in the 1970s when labor's share was a constant and wages pushed stagflation.

I haven't quite bought into the whole MMT model. But I don't have to in order to be more skeptical of inflationary concerns. That does not mean that interest payments on the debt cannot grow so large they chew up an uncomfortably large chunk of the annual discretionary budget. But I think it does mean there's much stronger headwinds against inflation than there were before labor's share began shrinking. And I think it explains why the simple supply and demand explanation of wages never seems to pan out with much real wage growth anymore.

It's not a super complicated thing to understand. For the last 20 years the real pie's growing, albeit slowly at about 2% per annum. But over that same time, labor's total share of that pie shrunk by about 14%. Most people earn most of their money from labor income. Seems to me that's how these seemingly counterintuitive macro things can happen. It's also why I'm less hawkish about inflation--within limits roughly bounded by labor's loss. So at this point, to put a figure on it, I'd say roughly $2T per year in the US on the fiscal side before you really overcome the headwinds and face real inflationary danger. We're at about half of that.

Think what you want about the Fed, but their model projections have been pretty good. The two spots where they have been persistently and predictably off in the same direction have been that inflation and wages have remained lower than expectations. To me, this is a reasonable answer as to why.

The folk wisdom and textbook econ people have learned does not treat labor's share as a long-term shifting variable. But it is.

[jk]

Re: Our Next President?

wages have been stagnant while the participation rate is declining. so total labor income doesn't go anywhere. i agree a lot of money could be pumped into the economy before we got inflation. debt levels are so high that a 2.5% fed rate slows the economy to the point that people start talking about recession. the total debt burden has to go down, or it has to be ignored [mmt time!]. those are the only 2 ways forward that i can see.

[dcarrigg]

Re: Our Next President?

Sort of par for the course, right? Labor's devalued compared to assets. So there's what, about 9.2T in mortgages? Less than at the bubble peak, but not by much. Another 1.5T in student loans and 1.3T in auto loans and 0.4T in credit cards rounds out that "normal person" credit picture. Meanwhile, there's another ~9T in corporate debt all in, iirc. So that's about equal to the public debt when you add it all up. Then you have about 14T in financial debt security liabilities, largely already counted elsewhere.

Looked at as a whole, a few things are obvious since the last big recession: 1) personal debt for most citizens is still down compared to then, 2) corporate debt is way, way up compared to then, 3) federal debt is way, way up compared to then. The student loan drag is heavier than it looks, since rates are higher and terms are shorter, so the cashflow hit is more significant. 10 years at 6.8% is pretty typical. $200k on a mortgage at 4% is going to be roughly $1k per month. About $85k on a student loan at 6.8% is going to be the same $1k per month. And it's very disproportionately held by younger generations. So even if it's at 15% of total mortgage debt, it's probably about as impactful on cash flow for lots of the under 40 set.

That's one of the interesting things about dropping the rates on them or forgiving some of the or whatever. You drop the rate to 2.5% like the federal funds rate (the rate the government loans money to banks vs. the rate at which they loan money to students), and suddenly you free up $200/mo cashflow for that person. You forgive it and obviously free up $1,000. Anything in between is obviously a potential option as well. If you want to crank up interest rates without crashing the housing market, I don't see how you do it without some sort of relief on the student loan side. As it stands, you're looking at folks who maybe can get their first 30 year mortgage at 40, which is cutting it pretty damned close in an era of declining life expectancy. The other thing with the demographic retirement glut is the potential for housing to take a beating. Half of boomers have no retirement savings, or something to that effect. Reverse mortgages are probably going to be a booming business. Aging people stuck in aging homes too big and expensive for them to care for and not leaving them to their kids is probably going to be the norm for most. Have a feeling most won't be FHA loan material by the end of it. Under 40 homeownership rate has dropped to about 40%. Maybe total mortgage debt falls considerably as future generations increasingly find they don't have the opportunity to become homeowners. But it hasn't been the driver of private debt growth for the last 12 or 13 years anyhow.

[DSpencer]

Re: Our Next President?

My thinking about this stuff was much more like this a decade ago. I've since revised it. Why?

1. It assumes labor's share as a constant. Most econ did. Turns out, it's shrinking.
2. This has serious implications for the relationship between unemployment rates and labor markets. If you've ever scratched your head at how unemployment can be near historic lows without wage increases, you're assuming labor's share is constant. If it's shrinking, it makes perfect sense that unemployment could drop to 0%--there could even be a labor shortage--and still real wages can stay flat or even decrease.
3. This is a fundamentally different environment than in the 1970s when labor's share was a constant and wages pushed stagflation.

I haven't quite bought into the whole MMT model. But I don't have to in order to be more skeptical of inflationary concerns. That does not mean that interest payments on the debt cannot grow so large they chew up an uncomfortably large chunk of the annual discretionary budget. But I think it does mean there's much stronger headwinds against inflation than there were before labor's share began shrinking. And I think it explains why the simple supply and demand explanation of wages never seems to pan out with much real wage growth anymore.

It's not a super complicated thing to understand. For the last 20 years the real pie's growing, albeit slowly at about 2% per annum. But over that same time, labor's total share of that pie shrunk by about 14%. Most people earn most of their money from labor income. Seems to me that's how these seemingly counterintuitive macro things can happen. It's also why I'm less hawkish about inflation--within limits roughly bounded by labor's loss. So at this point, to put a figure on it, I'd say roughly $2T per year in the US on the fiscal side before you really overcome the headwinds and face real inflationary danger. We're at about half of that.

Think what you want about the Fed, but their model projections have been pretty good. The two spots where they have been persistently and predictably off in the same direction have been that inflation and wages have remained lower than expectations. To me, this is a reasonable answer as to why.

The folk wisdom and textbook econ people have learned does not treat labor's share as a long-term shifting variable. But it is.

I think what you're saying is that for there to be actual inflation, the effect of debt cancellation/money printing would have to outweigh other factors. I guess my wording could have been more precise. What I meant to say is that the effect is an inflationary force. Whether that's balanced out by other opposing forces is another question.

I will admit that the Fed has exceeded my expectations in their ability to at least maintain the appearance of the economy being ok. I fear that they are simply setting us up for a bigger disaster in the long term, but hopefully not.

Honestly, what scares me more than anything aside from war at this point is this new belief that MMT is some kind of magic wand. The basic premises of MMT seem non-controversial to me. However, the conclusions that are drawn make no sense. This story has played out before. But apparently the lessons are difficult to learn. It's like the promise of 8 minute abs, chain emails about Bill Gates giving away money, MLM schemes, playing the lottery, etc. No amount of reason can outweigh the human desire to get something for nothing (or very little).

MMT: This one weird trick that politicians don't want you to know about can fund everything you ever wanted!

[jk]

Re: Our Next President?

I think what you're saying is that for there to be actual inflation, the effect of debt cancellation/money printing would have to outweigh other factors. I guess my wording could have been more precise. What I meant to say is that the effect is an inflationary force. Whether that's balanced out by other opposing forces is another question.

I will admit that the Fed has exceeded my expectations in their ability to at least maintain the appearance of the economy being ok. I fear that they are simply setting us up for a bigger disaster in the long term, but hopefully not.

Honestly, what scares me more than anything aside from war at this point is this new belief that MMT is some kind of magic wand. The basic premises of MMT seem non-controversial to me. However, the conclusions that are drawn make no sense. This story has played out before. But apparently the lessons are difficult to learn. It's like the promise of 8 minute abs, chain emails about Bill Gates giving away money, MLM schemes, playing the lottery, etc. No amount of reason can outweigh the human desire to get something for nothing (or very little).

MMT: This one weird trick that politicians don't want you to know about can fund everything you ever wanted!

let's set these conditions:
1. no cuts in entitlements
2. no cuts in defense
3. ongoing growth in interest expense as the deficit expands

the solution is simple: devalue the dollar. a cheaper dollar allows the gov't to meet all these conditions. mmt will be the mechanism by which a dollar devaluation will be achieved. foreign cb's stopped buying treasuries, net, in 2013-2014. instead they are buying gold.


just revalue the gold to, i don't know, $10-20k/oz. then the u.s. gold reserves are big enough to back all the outstanding debt. the u.s. balance sheet will show the huge amount of gov't debt on one side of the ledger, but an equally huge asset on the other side. [the europeans, by the way, mark their gold reserves to market- i forget if annually or more often.] the mmt-based spending will be flowing into the real economy instead of into banks' excess reserves. there will be inflation and that will be the one factor which limits how far mmt can go. but this inflation will really be controlled by fiscal policy, not monetary policy as the fed keeps raising nominal rates while keeping real rates negative. how's that for a scenario?

[dcarrigg]

Re: Our Next President?

I think what you're saying is that for there to be actual inflation, the effect of debt cancellation/money printing would have to outweigh other factors. I guess my wording could have been more precise. What I meant to say is that the effect is an inflationary force. Whether that's balanced out by other opposing forces is another question.

I will admit that the Fed has exceeded my expectations in their ability to at least maintain the appearance of the economy being ok. I fear that they are simply setting us up for a bigger disaster in the long term, but hopefully not.

Honestly, what scares me more than anything aside from war at this point is this new belief that MMT is some kind of magic wand. The basic premises of MMT seem non-controversial to me. However, the conclusions that are drawn make no sense. This story has played out before. But apparently the lessons are difficult to learn. It's like the promise of 8 minute abs, chain emails about Bill Gates giving away money, MLM schemes, playing the lottery, etc. No amount of reason can outweigh the human desire to get something for nothing (or very little).

MMT: This one weird trick that politicians don't want you to know about can fund everything you ever wanted!

You're on to one implication. But I presume the relationship is non linear. Maybe think of it as the last leg of a 20 knot wind. And a wind that's picking up.

If you think of it that way, 10 knota, a trillion fiscal either way, does one thing. 20 another. 30 something else still. Balancing the budget like in the 90s in 20 knot winds will probably be deflationary. Maybe moreso than you'd think. Conversely, debt funding universal health care at current prices without tax increase looks like $4T, which capsizes the ship. There are bounds, as you say, but they're neither linear nor obvious.

More than that, the quality of the wind matters. A brief 40 knot gust isn't the same as a sustained blow. Dropping student loan rates or even eliminating debt would mostly simply convert it to mortgage debt in my estimation. Asset prices inflate, but not most prices for real goods. Timing here is critical. Do it at a housing peak, and benefits are low. Do it at a nadir, and the opposite is true.

More than all of that? The game is on. Workers in aggregate are losing. So there's two ways that can go. Close down the hatches and flog the men more. Or promise to spread out the 2 and 20 the captain was promised.

Either way, we're nearing the point of no return. Either accommodate the crew or go down with the ship. The alternative is to better control the winds, and we've been trying to. But we refuse to accept that simple truth:

We suck at it. And moves we don't even realize will affect the winds, like changing property rules, do. Significantly. Eliminating bankruptcy for student loans in 2005 changed the winds.

If Keynes was right about one thing it's that monetary policy without fiscal policy is pushing on a string. It's putting up a big sail in still waters. You can raise the sails all you want and go nowhere. If you are worried about going too fast, the sail shouldn't be the first variable you're worried about. And the wind you can make blow from one direction might not be enough to move you the way you'd expect.

[jk]

Re: Our Next President?

Conversely, debt funding universal health care at current prices without tax increase looks like $4T, which capsizes the ship. .

2 comments on just this issue of funding universal health care.

1 first, if all the dollars currently spent on healthcare were funneled through a universal program, and providers were paid for ALL their services as the medicare rate, i don't think it would add the deficit at all. it might even make a profit.

2. second, the u.s. currently spends 17.8% of gdp on healthcare, while gdp is $19.3 trillion. if the gov't prints and spends the $3.4trillion implied by these 2 numbers, it means that people and companies suddenly have an extra $3.4 trillion in their pockets. That is one huge stimulus, and gov't revenues will rise substantially. i'm not going to say it will pay for itself, though given my first consideration, it could. nonetheless, the cost is much lower than it first appears.

=================
on another, related, topic: mmt and the usd

Is US media beginning to set the narrative for the implementation of MMT or MMT-like easy money policies?
“Who’s afraid of budget deficits?”: Foreign Affairs magazine - 1/27/19
https://www.foreignaffairs.com/artic...udget-deficits
White House adviser says Fed board nominees should support easy money policies: WSJ – 1/24/19
https://www.wsj.com/articles/white-h...es-11548375931
CBO unveils apocalyptic long term debt picture – 1/28/19
https://www.zerohedge.com/news/2019-...rillion-second
TBAC is suddenly worried about who funds $12T in US deficits in next 10 yrs (assuming no recessions) – 1/30/19
https://www.zerohedge.com/news/2019-...reserve-status


Luke Gromen: The US media began setting the narrative that “China is bad” in mid-2017. Fast-forward 18 months, and voila! China is now bad. It now appears that the narrative of “US deficits are a problem but don’t need to be if we just use easier money” has begun being established among “serious people” (see Foreign Affairs, WSJ articles above.) Our guess is this is not by accident, and speaks to an understanding at a high level that the end game of a much weaker USD is now coming into sight. Let’s watch.

[jk]

Re: Our Next President?

Conversely, debt funding universal health care at current prices without tax increase looks like $4T, which capsizes the ship. .

2 comments on just this issue of funding universal health care.

1 first, if all the dollars currently spent on healthcare were funneled through a universal program, and providers were paid for ALL their services as the medicare rate, i don't think it would add the deficit at all. it might even make a profit. [note, too, below that if current expenditures are 3.4trillion, a 4trillion program- if that indeed is what it cost- would have a net cost of ONLY 600billion.]

2. second, the u.s. currently spends 17.8% of gdp on healthcare, while gdp is $19.3 trillion. if the gov't prints and spends the $3.4trillion implied by these 2 numbers, it means that people and companies suddenly have an extra $3.4 trillion in their pockets. That is one huge stimulus, and gov't revenues will rise substantially. i'm not going to say it will pay for itself, though given my first consideration, it could. nonetheless, the cost is much lower than it first appears.

=================
on another, related, topic: mmt and the usd

Is US media beginning to set the narrative for the implementation of MMT or MMT-like easy money policies?
“Who’s afraid of budget deficits?”: Foreign Affairs magazine - 1/27/19
https://www.foreignaffairs.com/artic...udget-deficits
White House adviser says Fed board nominees should support easy money policies: WSJ – 1/24/19
https://www.wsj.com/articles/white-h...es-11548375931
CBO unveils apocalyptic long term debt picture – 1/28/19
https://www.zerohedge.com/news/2019-...rillion-second
TBAC is suddenly worried about who funds $12T in US deficits in next 10 yrs (assuming no recessions) – 1/30/19
https://www.zerohedge.com/news/2019-...reserve-status


Luke Gromen: The US media began setting the narrative that “China is bad” in mid-2017. Fast-forward 18 months, and voila! China is now bad. It now appears that the narrative of “US deficits are a problem but don’t need to be if we just use easier money” has begun being established among “serious people” (see Foreign Affairs, WSJ articles above.) Our guess is this is not by accident, and speaks to an understanding at a high level that the end game of a much weaker USD is now coming into sight. Let’s watch.

[dcarrigg]

Re: Our Next President?

2 comments on just this issue of funding universal health care.

1 first, if all the dollars currently spent on healthcare were funneled through a universal program, and providers were paid for ALL their services as the medicare rate, i don't think it would add the deficit at all. it might even make a profit. [note, too, below that if current expenditures are 3.4trillion, a 4trillion program- if that indeed is what it cost- would have a net cost of ONLY 600billion.]

2. second, the u.s. currently spends 17.8% of gdp on healthcare, while gdp is $19.3 trillion. if the gov't prints and spends the $3.4trillion implied by these 2 numbers, it means that people and companies suddenly have an extra $3.4 trillion in their pockets. That is one huge stimulus, and gov't revenues will rise substantially. i'm not going to say it will pay for itself, though given my first consideration, it could. nonetheless, the cost is much lower than it first appears.

=================
on another, related, topic: mmt and the usd

Is US media beginning to set the narrative for the implementation of MMT or MMT-like easy money policies?
“Who’s afraid of budget deficits?”: Foreign Affairs magazine - 1/27/19
https://www.foreignaffairs.com/artic...udget-deficits
White House adviser says Fed board nominees should support easy money policies: WSJ – 1/24/19
https://www.wsj.com/articles/white-h...es-11548375931
CBO unveils apocalyptic long term debt picture – 1/28/19
https://www.zerohedge.com/news/2019-...rillion-second
TBAC is suddenly worried about who funds $12T in US deficits in next 10 yrs (assuming no recessions) – 1/30/19
https://www.zerohedge.com/news/2019-...reserve-status


Luke Gromen: The US media began setting the narrative that “China is bad” in mid-2017. Fast-forward 18 months, and voila! China is now bad. It now appears that the narrative of “US deficits are a problem but don’t need to be if we just use easier money” has begun being established among “serious people” (see Foreign Affairs, WSJ articles above.) Our guess is this is not by accident, and speaks to an understanding at a high level that the end game of a much weaker USD is now coming into sight. Let’s watch.

jk, I totally agree with your points. It's part of why I say there's a lot of room for "downward pressure" (e.g. sector deflation) in healthcare. Even if you make those $2,000 MRIs cost $200, you're not really going to get people wanting to spend more time in the machine. Stuff's not super elastic. Maybe pills are. But just about everything else isn't. As far as the numbers go, I was using whole numbers for simplicity's sake to make the point. But iirc my CMS news, we crossed $3.5 trillion in healthcare spending back in 2017, and we're still chugging up.

[jk]

Re: Our Next President?

jk, I totally agree with your points. It's part of why I say there's a lot of room for "downward pressure" (e.g. sector deflation) in healthcare. Even if you make those $2,000 MRIs cost $200, you're not really going to get people wanting to spend more time in the machine. Stuff's not super elastic. Maybe pills are. But just about everything else isn't. As far as the numbers go, I was using whole numbers for simplicity's sake to make the point. But iirc my CMS news, we crossed $3.5 trillion in healthcare spending back in 2017, and we're still chugging up.

pills are definitely elastic. i've had many patients call me saying they couldn't afford the copay on their meds, could i switch them. sometimes there's an alternative [usually with more side effects], sometimes no alternative [they've already tried multiple alternatives without success]. i have a significant and growing number of patients ordering meds from canada.

even procedures may be elastic. a law school classmate of one of my kids fell down some subway steps and injured himself. it was late december and he was going to have new, better healthcare coverage on jan1, so he decided to delay going to an e.r. he had injured his spine and the swelling, untreated, led to sig damage to his spinal cord. he became paraplegic. it is now several years later and he is dead. i don't know if it was complication, something unrelated, or suicide.

[Chris Coles]

Re: Our Next President?

pills are definitely elastic. i've had many patients call me saying they couldn't afford the copay on their meds, could i switch them. sometimes there's an alternative [usually with more side effects], sometimes no alternative [they've already tried multiple alternatives without success]. i have a significant and growing number of patients ordering meds from canada.

even procedures may be elastic. a law school classmate of one of my kids fell down some subway steps and injured himself. it was late december and he was going to have new, better healthcare coverage on jan1, so he decided to delay going to an e.r. he had injured his spine and the swelling, untreated, led to sig damage to his spinal cord. he became paraplegic. it is now several years later and he is dead. i don't know if it was complication, something unrelated, or suicide.

Very sad, he should have caught a flight to the UK and walked into the nearest hospital out patients. yes, he would have, eventually, got a bill; but I bet it would not have cost as much as he would have had to pay in the US.

[dcarrigg]

Re: Our Next President?

France should build out a big hospital complex on St. Pierre and run weekly direct flights out of Boston and NYC. They could provide high quality care to Americans at a fraction of the cost. With the tourism it would bring in alone, it would probably pay for itself and still be considerably more affordable. Do dental work too. At 50 euros per filling vs $300, one would probably cover the flight. A root canal and crown would definitely be worth a week's vacation with money to spare. Canadians pay way too much for dental work too. I'm sure they'd come out. Make it the Los Algodones of the northeast. Run specials in the winter. Throw up a couple hotels and some nice French restaurants. If Al Capone could use it a hundred years ago to smuggle hundreds of thousands of cases of hootch in, I figure converting it to a medical tourism destination can't be too much more difficult. Easy potential for a multi-billion dollar arbitrage opportunity you could feel good about.

[Chris Coles]

Re: Our Next President?

France should build out a big hospital complex on St. Pierre and run weekly direct flights out of Boston and NYC. They could provide high quality care to Americans at a fraction of the cost. With the tourism it would bring in alone, it would probably pay for itself and still be considerably more affordable. Do dental work too. At 50 euros per filling vs $300, one would probably cover the flight. A root canal and crown would definitely be worth a week's vacation with money to spare. Canadians pay way too much for dental work too. I'm sure they'd come out. Make it the Los Algodones of the northeast. Run specials in the winter. Throw up a couple hotels and some nice French restaurants. If Al Capone could use it a hundred years ago to smuggle hundreds of thousands of cases of hootch in, I figure converting it to a medical tourism destination can't be too much more difficult. Easy potential for a multi-billion dollar arbitrage opportunity you could feel good about.

My understanding is the very best pace to go, high quality for moderate costs for surgical work is Thailand and for dental, Hungary.

[jk]

Re: Our Next President?

France should build out a big hospital complex on St. Pierre and run weekly direct flights out of Boston and NYC. They could provide high quality care to Americans at a fraction of the cost. With the tourism it would bring in alone, it would probably pay for itself and still be considerably more affordable. Do dental work too. At 50 euros per filling vs $300, one would probably cover the flight. A root canal and crown would definitely be worth a week's vacation with money to spare. Canadians pay way too much for dental work too. I'm sure they'd come out. Make it the Los Algodones of the northeast. Run specials in the winter. Throw up a couple hotels and some nice French restaurants. If Al Capone could use it a hundred years ago to smuggle hundreds of thousands of cases of hootch in, I figure converting it to a medical tourism destination can't be too much more difficult. Easy potential for a multi-billion dollar arbitrage opportunity you could feel good about.

put it in martinique or guadaloupe.

[vt]

Re: Our Next President?

More voters are seeing an independent party as a good idea:

https://www.nbcnews.com/politics/mee...didate-n966296