Should we have faith in the free market to deliver our common good?
This is perhaps the greatest economic debate of the past few centuries, and one of the more interesting things to talk about as an economist with non-economists, usually because they aren’t that interested in the nitty-gritty of economic discourse and instead prefer to dialogue about politics.
It is also interesting to me because there are Catholics on both sides of the fence: those who vehemently support the free market and those who vehemently attack it. I’ve already noted how CST approaches the battle between liberalism or capitalism and socialism or collectivism in this multipart series. The case they present both against and for the free market is compelling and good, but there are other ways to prove or disprove its effectiveness in achieving the good for society. This is my purpose for this multi-part series. I wish to explore the arguments used to justify or rebuke the free market and point then toward the conclusions I take from this exploration of which we can engage in a friendly debate.
Two great mistakes in this debate must be noted at the outset. The first is that many treat this as a black and white problem. Those who advocate for the free market tend to argue that any measure against it puts us on the road to serfdom, or on the road to soviet communism which clearly had disastrous consequences for humanity. Those who attack the free market are usually less black and white, but are also guilty of putting the blame on the free market as a whole. There is no gray area, there is no middle option, there are no alternatives to communism or capitalism. Pope Pius XI called these the twin rocks of shipwreck—extreme individualism and extreme collectivism. The great mistake here is failing to see alternatives to these twin wreckers of ships. Rejection of “the free market” does not necessarily mean support for total communism and vice versa. We must be able to envision degrees of free market-ness or collectivism and we must direct them always to our common good.
The other great mistake is (logically) prior to the first mistake. It is failing to recognize that there is no such thing as a truly free market. That is, no market system is completely free from government intervention. Free markets fundamentally require private property and enforceable contracts, which require an enforcer. Absent of government, ‘free’ markets are closer to black markets where the market actors provide their own governance, which is why, for example, illegal drug markets are particularly violent. Absent of government protection of property and contracts, they must enforce it themselves with power, weapons, and violence. So a truly free market system is closer to anarchy, and most free market proponents are well aware of this (some seem to forget it though). However, since the government is involved in protecting property and enforcing contracts they are necessarily involved with defining property and legality of contracts and so their ‘intervention’ into markets is more of a degree than of a kind. They DO intervene, the question is, how much? This lends itself well to the lesson learned from the first mistake—free market-ness is a degree, not a black and white situation.
The danger or trap that is so easy to fall into, is putting your faith in the free market, this institution that is supposed to bring about our overall good out of the self-interested actions of individuals. We put our faith and our trust in a direction-less institution that does not see persons and does not consider their good. If we are to rely on a higher degree of free market-ness to provide the common good, then we should do so with good reasoning, but we should not expect our selfish actions to result collectively in the common good. To me, nothing could be more anti-Christian. Christ’s teaching is all about the two commandments upon which all the rest sit: Love your God, who is love itself, and love your neighbor as you love yourself. Love is an authentic gift of self, not a devotion entirely to one’s self-interests.
(There are those who argue self-interest does not necessarily equal selfishness. This of itself requires a long response, but quickly, my reply is: why risk confusing the two? Those who do not properly understand the distinction will think it’s valid to act selfishly when you argue for self-interested action. And why put the emphasis on negative freedom? Authentic freedom does involve freedom from coercion, but must always be directed toward the good which might mean a restriction of complete negative freedom, or complete self-interested action. Christian defense of the free market should make no reference to self-interested action, but rather to Christian self-giving actions. In this case, it is quite reasonable for a Christian to argue that greater free market-ness will allow self-giving actions to collectively bring about the common good).
So the task set to us then, is to decide the appropriate degree of free market-ness for a good society, or from the Catholic Social Teaching perspective, for the common good, which necessarily includes justice, truth, and charity.
How much should the government intervene? In which situations should the government intervene more rather than less and less rather than more?
Economists of all persuasions have researched the impacts of policy on the economy and economic relationships and worked to develop models to support their case on these very questions. Some have started with the data to support their conclusions. Some have started with their conclusions and worked to find data to support them. Others have largely ignored data and have instead constructed great mathematical models based on certain assumptions about human behavior to support certain conclusions.
This last group has been the dominant group in Economics for over a century now and so most of this post addresses their arguments, but I will also present data to support certain conclusions as well. The importance of this is that many politicians and the public in general take the advice of economists on matters of ‘free market-ness’. So if you’re going to listen to us, then you should know exactly what we are saying, the strengths and weaknesses of our arguments and models, and what conclusions we can then draw from them.
Part 2 will take a closer look at the model most often used to defend the free market which also happens to be the model everyone learns in principles of economics courses.
A Ph.D. student's perspective on Catholic Social Teaching and economics.
Tuesday, March 26, 2013
Friday, March 1, 2013
Thank you Pope Benedict XVI
Thank you Pope Benedict XVI for your servant leadership! Here are some of my favorite quotes from your great encyclical Caritas in Veritate.
I eagerly await the next Pope's social encyclical(s)!
Charity in truth, to which Jesus Christ bore witness by his earthly life and especially by his death and resurrection, is the principal driving force behind the authentic development of every person and of all humanity.
Charity is at the heart of the Church's social doctrine.
Charity is love received and given.
Charity goes beyond justice, because to love is to give, to offer what is “mine” to the other; but it never lacks justice, which prompts us to give the other what is “his”, what is due to him by reason of his being or his acting. I cannot “give” what is mine to the other, without first giving him what pertains to him in justice. If we love others with charity, then first of all we are just towards them. Not only is justice not extraneous to charity, not only is it not an alternative or parallel path to charity: justice is inseparable from charity, and intrinsic to it.
To desire the common good and strive towards it is a requirement of justice and charity.
It is not a case of two typologies of social doctrine, one pre-conciliar and one post-conciliar, differing from one another: on the contrary, there is a single teaching, consistent and at the same time ever new. It is one thing to draw attention to the particular characteristics of one Encyclical or another, of the teaching of one Pope or another, but quite another to lose sight of the coherence of the overall doctrinal corpus.
The truth of development consists in its completeness: if it does not involve the whole man and every man, it is not true development.
Progress of a merely economic and technological kind is insufficient.
Openness to life is at the center of true development.
Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty.
In comparison with the casualties of industrial society in the past, unemployment today provokes new forms of economic marginalization, and the current crisis can only make this situation worse. Being out of work or dependent on public or private assistance for a prolonged period undermines the freedom and creativity of the person and his family and social relationships, causing great psychological and spiritual suffering. I would like to remind everyone, especially governments engaged in boosting the world's economic and social assets, that the primary capital to be safeguarded and valued is man, the human person in his or her integrity: “Man is the source, the focus and the aim of all economic and social life.
The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner, and that we continue to prioritize the goal of access to steady employment for everyone.
The human being is made for gift, which expresses and makes present his transcendent dimension. Sometimes modern man is wrongly convinced that he is the sole author of himself, his life and society.
In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well. Without internal forms of solidarity and mutual trust, the market cannot completely fulfill its proper economic function. And today it is this trust which has ceased to exist, and the loss of trust is a grave loss.
It is nevertheless erroneous to hold that the market economy has an inbuilt need for a quota of poverty and underdevelopment in order to function at its best.
Thus every economic decision has a moral consequence.
An overemphasis on rights leads to a disregard for duties. Duties set a limit on rights because they point to the anthropological and ethical framework of which rights are a part, in this way ensuring that they do not become license. Duties thereby reinforce rights and call for their defense and promotion as a task to be undertaken in the service of the common good. Otherwise, if the only basis of human rights is to be found in the deliberations of an assembly of citizens, those rights can be changed at any time, and so the duty to respect and pursue them fades from the common consciousness.
Denying the right to profess one's religion in public and the right to bring the truths of faith to bear upon public life has negative consequences for true development. The exclusion of religion from the public square — and, at the other extreme, religious fundamentalism — hinders an encounter between persons and their collaboration for the progress of humanity. Public life is sapped of its motivation and politics takes on a domineering and aggressive character. Human rights risk being ignored either because they are robbed of their transcendent foundation or because personal freedom is not acknowledged.
Secularism and fundamentalism exclude the possibility of fruitful dialogue and effective cooperation between reason and religious faith. Reason always stands in need of being purified by faith: this also holds true for political reason, which must not consider itself omnipotent. For its part, religion always needs to be purified by reason in order to show its authentically human face. Any breach in this dialogue comes only at an enormous price to human development.
The principle of subsidiarity must remain closely linked to the principle of solidarity and vice versa, since the former without the latter gives way to social privatism, while the latter without the former gives way to paternalist social assistance that is demeaning to those in need.
Technologically advanced societies must not confuse their own technological development with a presumed cultural superiority, but must rather rediscover within themselves the oft-forgotten virtues which made it possible for them to flourish throughout their history.
I eagerly await the next Pope's social encyclical(s)!
Sunday, February 24, 2013
Step 2: ???
Many years ago, when I was 10 or 11 I had a friend of mine sleepover. My parents had something going on that night, so we had a babysitter for a few hours. She was quite lenient on us, and being young boys, we took advantage of the situation. I'm not sure I've drank more pop over a span of a few hours than I did that night. We also convinced her to let us watch a banned cartoon that night.
I'm not sure why I remember that night so well, but every time I hear a politician or pundit talking about reducing the deficit I can't help but think of the episode I saw that night. You see, the episode I saw was about the "underpants gnomes" who'd go around at night stealing underpants.
They had quite the business model (I'd offer a link here, but I could not find a clip containing no vulgarity, so peruse at your own risk if you like):
Step 1: Collect underpants
Step 2: ???
Step 3: Profit!
For these politicians and pundits, it seems that their modified plan for the economy could be:
Step 1: Reduce deficit by cutting social programs and raising taxes
Step 2: ???
Step 3: Growth!
I have yet to hear a solid explanation of what reducing the deficit would do for the economy to help it grow. The best, or most feasible explanation offered is that businesses would be more confident and would start spending and investing to create jobs. Yet, this magical step two (what Krugman calls the confidence fairy) has some problems with it.
What about reducing the deficit increases business confidence? Reducing the deficit will reduce their sales, because the deficit measures the amount of money leaving and entering the economy over time. A deficit is money entering the economy, a surplus is money leaving. Lower sales do not boost confidence.
What about more stable policies? Sure! Stability in Washington is very important, but you can provide stability without reducing the deficit.
Business investment relies greatly on expectations of future sales. For that, businesses need stability and expected stability. They need to know roughly what wages, resources, healthcare, etc. will cost. They also need to have a rough idea of what they can sell at what prices to make their investment worthwhile. Banks also form their expectations when deciding whether to give out loans or not.
For this, we need Washington to stop kicking the can down the road, to stop passing temporary measures while they continue to disagree over how to reduce the deficit, and they really need to stop threatening to go "over the cliff" or fall into voluntary bankruptcy. This is what makes businesses uncertain, not the deficit. Constant fiddling by Washington must stop if the private sector is going to have any confidence in their bottom line.
The deficit should be reduced, but not directly. It will be reduced with a growing economy. To grow the economy you need to boost spending, which means a higher deficit now. A higher deficit now will equal a lower deficit later with economic growth.
The deficit should be directed toward those who need it most and who will be most likely to spend it. Not big business and not big banks. Not those who own big businesses and big banks. Give it to those who need it and they will spend it. This, in turn, will boost the sales of businesses, small and big alike. They will be more confident of future sales and will invest in more jobs.
Remember that the public sector deficit is the private sector surplus. If we reduce the public deficit, then we reduce the private sector surplus.
There is no magical step 2 to get us growth if step 1 is reducing the deficit.
I'm not sure why I remember that night so well, but every time I hear a politician or pundit talking about reducing the deficit I can't help but think of the episode I saw that night. You see, the episode I saw was about the "underpants gnomes" who'd go around at night stealing underpants.
They had quite the business model (I'd offer a link here, but I could not find a clip containing no vulgarity, so peruse at your own risk if you like):
Step 1: Collect underpants
Step 2: ???
Step 3: Profit!
For these politicians and pundits, it seems that their modified plan for the economy could be:
Step 1: Reduce deficit by cutting social programs and raising taxes
Step 2: ???
Step 3: Growth!
I have yet to hear a solid explanation of what reducing the deficit would do for the economy to help it grow. The best, or most feasible explanation offered is that businesses would be more confident and would start spending and investing to create jobs. Yet, this magical step two (what Krugman calls the confidence fairy) has some problems with it.
What about reducing the deficit increases business confidence? Reducing the deficit will reduce their sales, because the deficit measures the amount of money leaving and entering the economy over time. A deficit is money entering the economy, a surplus is money leaving. Lower sales do not boost confidence.
What about more stable policies? Sure! Stability in Washington is very important, but you can provide stability without reducing the deficit.
Business investment relies greatly on expectations of future sales. For that, businesses need stability and expected stability. They need to know roughly what wages, resources, healthcare, etc. will cost. They also need to have a rough idea of what they can sell at what prices to make their investment worthwhile. Banks also form their expectations when deciding whether to give out loans or not.
For this, we need Washington to stop kicking the can down the road, to stop passing temporary measures while they continue to disagree over how to reduce the deficit, and they really need to stop threatening to go "over the cliff" or fall into voluntary bankruptcy. This is what makes businesses uncertain, not the deficit. Constant fiddling by Washington must stop if the private sector is going to have any confidence in their bottom line.
The deficit should be reduced, but not directly. It will be reduced with a growing economy. To grow the economy you need to boost spending, which means a higher deficit now. A higher deficit now will equal a lower deficit later with economic growth.
The deficit should be directed toward those who need it most and who will be most likely to spend it. Not big business and not big banks. Not those who own big businesses and big banks. Give it to those who need it and they will spend it. This, in turn, will boost the sales of businesses, small and big alike. They will be more confident of future sales and will invest in more jobs.
Remember that the public sector deficit is the private sector surplus. If we reduce the public deficit, then we reduce the private sector surplus.
There is no magical step 2 to get us growth if step 1 is reducing the deficit.
Friday, January 11, 2013
Should we #MinttheCoin?
The trillion dollar platinum coin idea is making all the headlines these days.
Background on the Coin:
Co-Author of Platinum Coin Law Weighs In
What about money scares everyone so much?
Background on where the idea came from:
Trillion Dollar Coin Inventor
Origins of the TDPC
The Fiscal Cliff was averted at the last second, as I expected. The deal struck was horrible for pretty much everyone. Bush income tax cuts were kept intact for everyone under $400,000/yr, but the payroll tax cut was allowed to expire. So, in reality, pretty much everyone's taxes went up. Yay, us.
Now the new point of argument is back on the debt ceiling. Congress reached an agreement to avert the point they created to provide motivation to get a budget done (fiscal cliff), but now they have a new point they created to provide motivation to get a budget done (debt ceiling). Economically, the debt ceiling serves no useful purpose. Hitting it would be disastrous, far worse and more unknown than the fiscal cliff.
If we allow ourselves to hit the ceiling, we will in effect declare voluntary default. This is like telling the bank you have the money to pay off your loan, but don't want to pay it off, except that you are a currency user and could actually run out of money to pay your loan and the government as currency issuer can never run out of money.
What are some of the effects of voluntary default?
1) Faith in the dollar would be gone or shaken severely. The safest assets worldwide are U.S. Treasuries. Failing to make good on them would shake confidence in them and the entire dollar system. All of which amounts to Global Financial Crisis, part II which is much, much worse than part I.
2) Spending would drop precipitously. Increased uncertainty and decreased confidence in worldwide financial markets would mean people would hoard money out of fear of losing more. Spending = someone else's income. So when spending decreases, income decreases. This is the good ol' paradox of thrift. We need to increase spending, not decrease it.
3) Unemployment would go back up. Perhaps faster and way worse than in 2008-9.
4) That deficit we're trying to close would get much bigger. So those wanting to close it wouldn't win in this scenario either.
5) Probable deflation, which further hurts household's balance sheet positions.
6) Interest rates would probably go haywire.
7) Stock market collapse, again. Any gains made since '08 would likely be gone again. Retirement savings and pension funds would be hurt badly, if not completely wiped out.
Basically, we can't and won't hit the debt ceiling. So why are politicians threatening to do so?
Economically, the ceiling is useless, which is why we should just get rid of it, but politically it is a tool to try to limit government spending or the size of government. But note that the size of the debt isn't a measure of the size of government. It IS the measure of the savings in US dollars of all those who hold treasury securities, which includes US citizens. So setting a debt ceiling doesn't usefully limit the size of government either.
Hitting the ceiling just isn't an option. We shouldn't even have a ceiling. If we expect our economy to grow, then we should expect the debt to get bigger and bigger forever and ever and this isn't a bad thing and won't cause hyperinflation.
So if the choice is between minting the coin and hitting the ceiling, the choice is easy. Mint the coin.
The Treasury can mint the coin because of a loophole in the law, but that doesn't mean doing so is invalid or not a viable option. It is very valid, real, and viable. It demonstrates very well that the issuer of the currency does not need to issue debt to spend. It issues debt in part to drain reserves from the private sector to avoid inflation and to control interest rates. It also issues debt to provide safe assets to the private sector.
Spending without issuing debt does not automatically mean inflation. To get inflation, we must spend past capacity. We have lots of unused capacity in our economy, we aren't going to cause inflation with the trillion dollar coin.
Minting the coin would only prolong the malaise of our moderate deficit providing low growth overall. It wouldn't fix the economy by itself.
That said, I am not in favor of using the coin. I would much rather our politicians come together and make a budget suitable for good growth and a strong economy with full employment and a robust financial system. They don't seem to want to do that. It is terrible that one party would unilaterally exploit a loophole in the law to support its own ends, but it is also terrible that a party would hold hostage the economy with a needless debt ceiling because they can't find common ground in the budgeting process. To me, it doesn't matter which party is which. If they were reversed, I'd feel the same.
It is all extremely disappointing. It is disappointing that they don't understand their own monetary system and it is even more disappointing they can't work together.
In summary, 3>2>1.
1) Hit debt ceiling. Voluntarily default on promised payments. Economic disaster.
2) Mint the coin. Avoid economic catastrophe, but continue low growth malaise.
3) Repeal the debt ceiling. Cut payroll taxes. Spend more on infrastructure and less on defense and porkbelly spending. Don't worry about the deficit and debt. Focus on unemployment, inflation, GDP, and poverty instead.
Background on the Coin:
Co-Author of Platinum Coin Law Weighs In
What about money scares everyone so much?
Background on where the idea came from:
Trillion Dollar Coin Inventor
Origins of the TDPC
The Fiscal Cliff was averted at the last second, as I expected. The deal struck was horrible for pretty much everyone. Bush income tax cuts were kept intact for everyone under $400,000/yr, but the payroll tax cut was allowed to expire. So, in reality, pretty much everyone's taxes went up. Yay, us.
Now the new point of argument is back on the debt ceiling. Congress reached an agreement to avert the point they created to provide motivation to get a budget done (fiscal cliff), but now they have a new point they created to provide motivation to get a budget done (debt ceiling). Economically, the debt ceiling serves no useful purpose. Hitting it would be disastrous, far worse and more unknown than the fiscal cliff.
If we allow ourselves to hit the ceiling, we will in effect declare voluntary default. This is like telling the bank you have the money to pay off your loan, but don't want to pay it off, except that you are a currency user and could actually run out of money to pay your loan and the government as currency issuer can never run out of money.
What are some of the effects of voluntary default?
1) Faith in the dollar would be gone or shaken severely. The safest assets worldwide are U.S. Treasuries. Failing to make good on them would shake confidence in them and the entire dollar system. All of which amounts to Global Financial Crisis, part II which is much, much worse than part I.
2) Spending would drop precipitously. Increased uncertainty and decreased confidence in worldwide financial markets would mean people would hoard money out of fear of losing more. Spending = someone else's income. So when spending decreases, income decreases. This is the good ol' paradox of thrift. We need to increase spending, not decrease it.
3) Unemployment would go back up. Perhaps faster and way worse than in 2008-9.
4) That deficit we're trying to close would get much bigger. So those wanting to close it wouldn't win in this scenario either.
5) Probable deflation, which further hurts household's balance sheet positions.
6) Interest rates would probably go haywire.
7) Stock market collapse, again. Any gains made since '08 would likely be gone again. Retirement savings and pension funds would be hurt badly, if not completely wiped out.
Basically, we can't and won't hit the debt ceiling. So why are politicians threatening to do so?
Economically, the ceiling is useless, which is why we should just get rid of it, but politically it is a tool to try to limit government spending or the size of government. But note that the size of the debt isn't a measure of the size of government. It IS the measure of the savings in US dollars of all those who hold treasury securities, which includes US citizens. So setting a debt ceiling doesn't usefully limit the size of government either.
Hitting the ceiling just isn't an option. We shouldn't even have a ceiling. If we expect our economy to grow, then we should expect the debt to get bigger and bigger forever and ever and this isn't a bad thing and won't cause hyperinflation.
So if the choice is between minting the coin and hitting the ceiling, the choice is easy. Mint the coin.
The Treasury can mint the coin because of a loophole in the law, but that doesn't mean doing so is invalid or not a viable option. It is very valid, real, and viable. It demonstrates very well that the issuer of the currency does not need to issue debt to spend. It issues debt in part to drain reserves from the private sector to avoid inflation and to control interest rates. It also issues debt to provide safe assets to the private sector.
Spending without issuing debt does not automatically mean inflation. To get inflation, we must spend past capacity. We have lots of unused capacity in our economy, we aren't going to cause inflation with the trillion dollar coin.
Minting the coin would only prolong the malaise of our moderate deficit providing low growth overall. It wouldn't fix the economy by itself.
That said, I am not in favor of using the coin. I would much rather our politicians come together and make a budget suitable for good growth and a strong economy with full employment and a robust financial system. They don't seem to want to do that. It is terrible that one party would unilaterally exploit a loophole in the law to support its own ends, but it is also terrible that a party would hold hostage the economy with a needless debt ceiling because they can't find common ground in the budgeting process. To me, it doesn't matter which party is which. If they were reversed, I'd feel the same.
It is all extremely disappointing. It is disappointing that they don't understand their own monetary system and it is even more disappointing they can't work together.
In summary, 3>2>1.
1) Hit debt ceiling. Voluntarily default on promised payments. Economic disaster.
2) Mint the coin. Avoid economic catastrophe, but continue low growth malaise.
3) Repeal the debt ceiling. Cut payroll taxes. Spend more on infrastructure and less on defense and porkbelly spending. Don't worry about the deficit and debt. Focus on unemployment, inflation, GDP, and poverty instead.
Tuesday, December 18, 2012
Fiscal Cliff Notes
Some of my (somewhat well-educated) thoughts on the fiscal cliff:
1) The fiscal cliff is NOT the point at which the government runs out of money. Somehow this has become the widespread notion of what the Fiscal Cliff is, descriptively. Remember, the issuer of a currency cannot run out of that currency. The U.S. government, as issuer of the dollar cannot run out of dollars.
2) The fiscal cliff IS the point at which spending cuts kick in and tax cuts expire so that the deficit closes. That is, (G - T) becomes smaller. Every economist understands that this will hurt the economy because it contracts overall spending in the economy. GDP = C + I + G + (X-M). So if Taxes go up, our spending (Consumption and Investment) will go down and if government spending goes down, overall GDP will drop unless somehow we miraculously become a large net exporting nation.
3) Knowing this, we still think we have to shrink the deficit. I detailed this a couple of weeks ago, so I recommend reading that piece. IF we let the fiscal cliff happen, the economy will shrink quickly. If we reach a deal, the economy will sputter and will likely fall some if not a lot--it depends on the magnitude of the deal.
4) We need a larger deficit! This can be accomplished through spending increases or tax cuts, but the only way to actually shrink the deficit is to increase GDP. The private sector is still deleveraging, the foreign sector--our trading partners--is in poor shape, and so the only institution that can help is the government. Otherwise we're in for a long, slow deleveraging period--see The Great Depression. This is needless because the government has policy tools to prevent it, and it doesn't necessarily have to mean a concentration of government power.
5) What we spend money on matters! Some spending has a higher multiplier effect or employs more workers. Much spending is extremely wasteful and so wouldn't do much to help our society or our economy. All spending will benefit some more than others. Some spending is immoral. We need to make these decisions as a society in the political arena, but note these decisions have economic effects--see my most recent post on this.
6) We have a particular duty to look out for those left behind or trampled on by the system. We can do this personally and through institutions--including Churches, non-profit organizations, local governments, and the federal government. All have advantages and disadvantages, but all are needed according to the principle of subsidiarity, which is not a limiting principle (thinking of it solely as a principle that limits the size of government), but is rather a cooperative principle (thinking of it in terms of all institutions of all sizes working together to accomplish the common good).
1) The fiscal cliff is NOT the point at which the government runs out of money. Somehow this has become the widespread notion of what the Fiscal Cliff is, descriptively. Remember, the issuer of a currency cannot run out of that currency. The U.S. government, as issuer of the dollar cannot run out of dollars.
2) The fiscal cliff IS the point at which spending cuts kick in and tax cuts expire so that the deficit closes. That is, (G - T) becomes smaller. Every economist understands that this will hurt the economy because it contracts overall spending in the economy. GDP = C + I + G + (X-M). So if Taxes go up, our spending (Consumption and Investment) will go down and if government spending goes down, overall GDP will drop unless somehow we miraculously become a large net exporting nation.
3) Knowing this, we still think we have to shrink the deficit. I detailed this a couple of weeks ago, so I recommend reading that piece. IF we let the fiscal cliff happen, the economy will shrink quickly. If we reach a deal, the economy will sputter and will likely fall some if not a lot--it depends on the magnitude of the deal.
4) We need a larger deficit! This can be accomplished through spending increases or tax cuts, but the only way to actually shrink the deficit is to increase GDP. The private sector is still deleveraging, the foreign sector--our trading partners--is in poor shape, and so the only institution that can help is the government. Otherwise we're in for a long, slow deleveraging period--see The Great Depression. This is needless because the government has policy tools to prevent it, and it doesn't necessarily have to mean a concentration of government power.
5) What we spend money on matters! Some spending has a higher multiplier effect or employs more workers. Much spending is extremely wasteful and so wouldn't do much to help our society or our economy. All spending will benefit some more than others. Some spending is immoral. We need to make these decisions as a society in the political arena, but note these decisions have economic effects--see my most recent post on this.
6) We have a particular duty to look out for those left behind or trampled on by the system. We can do this personally and through institutions--including Churches, non-profit organizations, local governments, and the federal government. All have advantages and disadvantages, but all are needed according to the principle of subsidiarity, which is not a limiting principle (thinking of it solely as a principle that limits the size of government), but is rather a cooperative principle (thinking of it in terms of all institutions of all sizes working together to accomplish the common good).
Tuesday, December 11, 2012
Demand Signals
Economics, in some sense, is the study of choices. The study of how your choices and my choices affect economic variables and economic outcomes. This is, in part, why economics cannot be completely separated from other social science disciplines concerned with human behavior, such as history, psychology, sociology, political science, and anthropology.
One advantage of capitalist economies over other modes of production is the freedom it gives to its citizens to participate in economic life--to make choices mostly free from constraints. This freedom isn't without necessary prerequisites, qualifications, or undesirable results, however.
Instead of being organized around a central planner, our economy is organized around 'demand signals'. Production decisions aren't made by the state, but by producers usually thought of as capitalists but are really more likely small business owners, CEOs, Boards of governors, etc. They obtain funds, at least initially, from banks through loans or from the public through sales of stock. In order to obtain those funds, they must have some prospects for selling their proposed product. This puts production decisions largely in the hands of bankers, who estimate the expected rate of return on the proposed investment, or stockbrokers who do the same. For the former it means getting the loan paid back, the latter a rise in the share price.
Yet both are looking at expected rate of return, a hard to gauge variable that because it is based on uncertain expectations of the future depends more on current sales or current demand. This is where our choices come in, or our demand signals.
You see, we demand with our money and the purchase of a good or service sends a signal to the producer or to the bankers making lending decisions. That signal is usually to invest more in that product or service--to increase investment, or to raise the price of that good or service to obtain more profits with which they too use to purchase goods and services to send signals to their suppliers. It is this interconnected web of demand signals using paper money (or money from bank accounts) that organizes real output in our economy.
We don't have a central organizer or planner who has to guess how much to produce, or to guess how much we want or need of any one product or service. We send signals through 'the market' and 'it' organizes production along those signals.
There are many implication or conclusions to be drawn from this.
One advantage of capitalist economies over other modes of production is the freedom it gives to its citizens to participate in economic life--to make choices mostly free from constraints. This freedom isn't without necessary prerequisites, qualifications, or undesirable results, however.
Instead of being organized around a central planner, our economy is organized around 'demand signals'. Production decisions aren't made by the state, but by producers usually thought of as capitalists but are really more likely small business owners, CEOs, Boards of governors, etc. They obtain funds, at least initially, from banks through loans or from the public through sales of stock. In order to obtain those funds, they must have some prospects for selling their proposed product. This puts production decisions largely in the hands of bankers, who estimate the expected rate of return on the proposed investment, or stockbrokers who do the same. For the former it means getting the loan paid back, the latter a rise in the share price.
Yet both are looking at expected rate of return, a hard to gauge variable that because it is based on uncertain expectations of the future depends more on current sales or current demand. This is where our choices come in, or our demand signals.
You see, we demand with our money and the purchase of a good or service sends a signal to the producer or to the bankers making lending decisions. That signal is usually to invest more in that product or service--to increase investment, or to raise the price of that good or service to obtain more profits with which they too use to purchase goods and services to send signals to their suppliers. It is this interconnected web of demand signals using paper money (or money from bank accounts) that organizes real output in our economy.
We don't have a central organizer or planner who has to guess how much to produce, or to guess how much we want or need of any one product or service. We send signals through 'the market' and 'it' organizes production along those signals.
There are many implication or conclusions to be drawn from this.
Sunday, November 18, 2012
Fiscally Insane
The recent elections kept in place the gridlock we've seen in recent years in Washington. One issue they have continually kicked down the road was the issue of the growing government debt due to recent high deficits. The gridlock is no doubt a serious problem, but the insane part is the premise upon which both parties are acting: the need to reduce the deficit. I have written much about this, but I thought it seemed appropriate and pertinent to review why reducing the deficit now is insane.
Many people forget that government debt is someone else's asset. That is, every government bond or treasury security out there is the government's IOU, but the holder's asset. So increasing government debt is increasing the non-government sector's assets or net savings. The non-government sector can't net save on IOUs/assets held against each other, so it relies on the government's securities to net save.
This means that the $16 trillion+ government debt is the world's net savings in the U.S. dollar of account. Since savings are good and since we would expect the economy to continue to grow, we should expect that savings and thus the debt will go up forever. This means 17, 18, 19 trillion and counting and that's a good thing! Not something to be worried about! So why are people worried about it?
Here are the usual arguments:
1) Bankruptcy
We know this is false and is easy to prove or show. The government can simply print more money to pay any debts it has promised to anyone. Now in practice they don't print much money to pay their bills, they just change numbers in bank accounts, but the basic idea is the same. They are the monopoly issuer of the U.S. dollar and can thus pay any debts denominated in U.S. dollars. In this way we are not like Greece. Greece's debts are payable in the Euro. They are not the monopoly issuer of the Euro. They cannot pay debts without accruing Euros first through taxing or borrowing. They can go bankrupt. They, again, are a currency USER.
The U.S. does not face those same difficulties as the ISSUER of the currency. They do NOT need to tax or borrow in order to spend. The only reason they do so is to limit the private sector's purchasing power in order to prevent inflation. If they didn't tax or issue bonds to drain the private sector's purchasing power, and spent the way they did, then we would likely have the third thing everyone is concerned about (see below).
2) Interest rates
Many are worried that the bond markets will turn on U.S. bonds by refusing to buy the U.S.'s debt and so interest rates will go up, like they did in Greece or Spain. This is a more hairy explanation, but the simple answer is that as a currency ISSUER, the U.S. doesn't face that possibility, that Japan is a better comparison, who is also a currency ISSUER and has had very low interest rates for over a decade.
The U.S. has had record high deficit spending and record low interest rates. The theory that makes people worry is that high deficits cause high interest rates because fear will grow over whether or not the government will be able to make good on its debts. After #1, we know it can always make good on its debts, bankruptcy is not a concern. It is possible that fear would still grow anyway, despite this most basic fact, but it is wholly unlikely and still has not come to fruition despite repeated warnings it will for several years now. Those who spend their life trading in markets know that U.S. debt is a safe asset to hold so long as they don't threaten to voluntarily declare bankruptcy (or stop making payments on IOUs it has promised), which they are doing unfortunately.
So, in sum, this hasn't been an issue and won't be so long as the US doesn't voluntarily declare bankruptcy, something it does not have to do, or otherwise threaten to not make promised payments. Unfortunately, this might be a tool used by either side to get their way on the new budget deal. And again, Japan has paved the way:
Debt goes up, but interest rates go down in both.
The proof is in the pudding. Interest rates are not going to go up without the voluntary and unnecessary threat to not pay its debts.
Many people forget that government debt is someone else's asset. That is, every government bond or treasury security out there is the government's IOU, but the holder's asset. So increasing government debt is increasing the non-government sector's assets or net savings. The non-government sector can't net save on IOUs/assets held against each other, so it relies on the government's securities to net save.
This means that the $16 trillion+ government debt is the world's net savings in the U.S. dollar of account. Since savings are good and since we would expect the economy to continue to grow, we should expect that savings and thus the debt will go up forever. This means 17, 18, 19 trillion and counting and that's a good thing! Not something to be worried about! So why are people worried about it?
Here are the usual arguments:
1) Bankruptcy
We know this is false and is easy to prove or show. The government can simply print more money to pay any debts it has promised to anyone. Now in practice they don't print much money to pay their bills, they just change numbers in bank accounts, but the basic idea is the same. They are the monopoly issuer of the U.S. dollar and can thus pay any debts denominated in U.S. dollars. In this way we are not like Greece. Greece's debts are payable in the Euro. They are not the monopoly issuer of the Euro. They cannot pay debts without accruing Euros first through taxing or borrowing. They can go bankrupt. They, again, are a currency USER.
The U.S. does not face those same difficulties as the ISSUER of the currency. They do NOT need to tax or borrow in order to spend. The only reason they do so is to limit the private sector's purchasing power in order to prevent inflation. If they didn't tax or issue bonds to drain the private sector's purchasing power, and spent the way they did, then we would likely have the third thing everyone is concerned about (see below).
2) Interest rates
Many are worried that the bond markets will turn on U.S. bonds by refusing to buy the U.S.'s debt and so interest rates will go up, like they did in Greece or Spain. This is a more hairy explanation, but the simple answer is that as a currency ISSUER, the U.S. doesn't face that possibility, that Japan is a better comparison, who is also a currency ISSUER and has had very low interest rates for over a decade.
The U.S. has had record high deficit spending and record low interest rates. The theory that makes people worry is that high deficits cause high interest rates because fear will grow over whether or not the government will be able to make good on its debts. After #1, we know it can always make good on its debts, bankruptcy is not a concern. It is possible that fear would still grow anyway, despite this most basic fact, but it is wholly unlikely and still has not come to fruition despite repeated warnings it will for several years now. Those who spend their life trading in markets know that U.S. debt is a safe asset to hold so long as they don't threaten to voluntarily declare bankruptcy (or stop making payments on IOUs it has promised), which they are doing unfortunately.
So, in sum, this hasn't been an issue and won't be so long as the US doesn't voluntarily declare bankruptcy, something it does not have to do, or otherwise threaten to not make promised payments. Unfortunately, this might be a tool used by either side to get their way on the new budget deal. And again, Japan has paved the way:
Japan Debt-to-GDP
Japan Interest Rates
Debt goes up, but interest rates go down in both.
U.S. Debt-to-GDP
U.S. Interest Rates
The proof is in the pudding. Interest rates are not going to go up without the voluntary and unnecessary threat to not pay its debts.
Thursday, May 24, 2012
China has all our debt!
OH NO! But not really.
A lot of people are concerned with China owning so much of our country's debt. What if they make us pay it back all at once? Well they can't do that, and frankly, they don't want to. But there is reason to be concerned, or at least, to understand what it means that China owns so much of our debt.
First we must ask, how did they get that debt?
This is partially tied in with 'globalization' or cheaper labor costs in developing nations and relatively cheap transportation costs. China can manufacture goods more cheaply the United States can because China has been taking advantage of lower labor costs and labor standards to grow its economy, but it needs someone to sell it goods to. Domestic demand in China isn't enough to help it grow as much as it has, it needs a buyer abroad. That's where we come in. The U.S. has run a trade deficit (imports>exports) for a few decades now, and recently much of those exports have been coming from China.
When the U.S. gets goods from China, it sends its dollar to China. We get the goods we want, they get the dollars they want. Now they have excess dollars that they can either: A) convert to Renminbi (the Chinese currency), B) leave as US dollar cash, C) buy goods for sale in Dollars, or D) buy US bonds or other financial assets.
(A) causes appreciation of the Renminbi which China doesn't want, because it makes their goods more expensive relative to the rest of the world causing a decrease in their exports. They really want and need to be an exporting nation to grow fast enough to catch up to the US and Europe.
A lot of people are concerned with China owning so much of our country's debt. What if they make us pay it back all at once? Well they can't do that, and frankly, they don't want to. But there is reason to be concerned, or at least, to understand what it means that China owns so much of our debt.
First we must ask, how did they get that debt?
This is partially tied in with 'globalization' or cheaper labor costs in developing nations and relatively cheap transportation costs. China can manufacture goods more cheaply the United States can because China has been taking advantage of lower labor costs and labor standards to grow its economy, but it needs someone to sell it goods to. Domestic demand in China isn't enough to help it grow as much as it has, it needs a buyer abroad. That's where we come in. The U.S. has run a trade deficit (imports>exports) for a few decades now, and recently much of those exports have been coming from China.
When the U.S. gets goods from China, it sends its dollar to China. We get the goods we want, they get the dollars they want. Now they have excess dollars that they can either: A) convert to Renminbi (the Chinese currency), B) leave as US dollar cash, C) buy goods for sale in Dollars, or D) buy US bonds or other financial assets.
(A) causes appreciation of the Renminbi which China doesn't want, because it makes their goods more expensive relative to the rest of the world causing a decrease in their exports. They really want and need to be an exporting nation to grow fast enough to catch up to the US and Europe.
Wednesday, May 23, 2012
The Value of Money
A couple weeks ago I wrote a post addressing the question 'why does money matter?'. I hope I laid out a clear explanation of the role of money in our economy and how many mainstream economists misunderstand just what it is at its most fundamental level.
The basic insight is that money is credit or an IOU, and not a commodity nor a representation of a commodity (or commodities). So if money is credit, then what gives it value?
The metallists, those who believe money is like a commodity or a 'fiat' representation of commodities, believe money gets its value from that commodity or commodities. That is, they believe money gets its value from gold or in more modern times, from the bundles of goods a currency area produces.
I wondered about this question long ago, why is gold so valuable? I just didn't get why a mostly useless shiny metal would be so coveted by the Egyptians, Romans, or Europeans. Then I took a money and banking course in college that provided me with an explanation. Gold and other precious metals were used as money because they were easily molded into small, transportable coins. And because of its moldability, it could be divided into larger and smaller coins with varying values with markings to protect against counterfeiting. This mostly satisfied my curiosity. I though, 'oh, the people of Egypt (or wherever) were smart enough to figure out that this commodity, of all the commodities available to them, would serve best as money because of its inherent properties'.
Later in the course, however, I learned of an alternative approach to money that completely flips this view on its head. This is the Chartalist view that regards money as credit. To them, all money is an IOU or credit and anyone can then create money as long as someone is willing to accept it. Monies fall into a sort of hierarchy of acceptance with the most worthy creditors (or debtors) at the top and the worst at the bottom.
And it is here were we find the key to money's value. It isn't anything based on intrinsic worth of the commodity used to represent the IOU, it is rather the acceptability of the IOU. The most acceptable IOUs have more value!
The basic insight is that money is credit or an IOU, and not a commodity nor a representation of a commodity (or commodities). So if money is credit, then what gives it value?
The metallists, those who believe money is like a commodity or a 'fiat' representation of commodities, believe money gets its value from that commodity or commodities. That is, they believe money gets its value from gold or in more modern times, from the bundles of goods a currency area produces.
I wondered about this question long ago, why is gold so valuable? I just didn't get why a mostly useless shiny metal would be so coveted by the Egyptians, Romans, or Europeans. Then I took a money and banking course in college that provided me with an explanation. Gold and other precious metals were used as money because they were easily molded into small, transportable coins. And because of its moldability, it could be divided into larger and smaller coins with varying values with markings to protect against counterfeiting. This mostly satisfied my curiosity. I though, 'oh, the people of Egypt (or wherever) were smart enough to figure out that this commodity, of all the commodities available to them, would serve best as money because of its inherent properties'.
Later in the course, however, I learned of an alternative approach to money that completely flips this view on its head. This is the Chartalist view that regards money as credit. To them, all money is an IOU or credit and anyone can then create money as long as someone is willing to accept it. Monies fall into a sort of hierarchy of acceptance with the most worthy creditors (or debtors) at the top and the worst at the bottom.
And it is here were we find the key to money's value. It isn't anything based on intrinsic worth of the commodity used to represent the IOU, it is rather the acceptability of the IOU. The most acceptable IOUs have more value!
Thursday, May 17, 2012
Monopoly and Modern Money Theory
This is a brilliant post by J.D. Alt on how the economy is like the game of monopoly. It is kind of long, but really understands how the economy works, particularly from a MMT perspective.
Full Post: Playing Monopolis Monopoly
Highlights:
Full Post: Playing Monopolis Monopoly
Highlights:
Why does it seem like there isn’t enough money to pay for the things we really need? The headlines are filled with stories about our nation’s “debt problem” and dire warnings about our impending “bankruptcy.” As an architect who fills his waking hours thinking up all kinds of wonderful things we could be building, I’m alarmed by the idea there isn’t enough money to pay for any of them. Before wasting more time dreaming, I had to find out: Is it really true? Are we really too poor to put America back to work making and building the things we need to maintain a prosperous nation?
Searching for an answer, I discovered a small (but growing) group of economists (see here, here, here, here, here, here) who represent an emerging school of thought known as “modern monetary theory” (MMT). These men and women are valiantly trying to make us all understand a paradigm shift that occurred some forty years ago, when the world abandoned the gold standard. Their key insight shocked me: A sovereign government is never revenue constrained when it is the Monopoly issuer of its own pure fiat currency; it has all the money that’s needed to put its citizens to work building anything—and providing any service—that is desired by the public (provided the real resources are available). Even more remarkable, sovereign “deficits” in the fiat currency are just the accounting record of the surpluses that have been injected into the private economy. Eliminating the sovereign currency deficit by imposing austerity will not make the economy healthier; it will, in effect, bankrupt the citizens!
If this seems to defy logic, stay with me for just a few minutes. I’m going to propose a simple exercise that will help you “see” this reality for yourself. The exercise is simply that everyone join me in a familiar game of Monopoly. By the end of the game, I hope to convince you that MMT is correct
and that we could be doing better, much better – for ourselves and future generations—if we just understood and took ad vantage of our modern monetary system.
Let’s begin.
Playing Monopolis Monopoly
We’ll play by the normal rules (I’ll suggest some added features as we go along) except this time we’ll pay special attention to certain things that are happening. For example, you’ll recall that before the game can begin, one player has to agree to be the “banker” (a tedious task, but someonehas to do it.) But now choosing this person has a special importance: it must be done democratically, with the players voting to determine who will manage the game’s money. We’ll do this little exercise because we want to pay special attention to the fact that the Monopoly “bank” is an entity created by the players themselves for their mutual benefit. In fact, we won’t refer to it as the “bank” anymore, but instead will call it our “currency issuing government” (CIG). In a real sense, we all “own” CIG together, and taking a minute to democratically choose who will manage it heightens our awareness of this key fact.
To reinforce this awareness, the next thing we’ll think about, as we set up the Monopoly board, organize the Deed Cards, shuffle the Chance Cards and choose our tokens, is that what we are really doing is setting up, and getting ready to operate, a miniature nation-state. Let’s even give it a name: Monopolis. We, the players, are the new citizens of Monopolis. We have just established, through democratic consensus, our currency issuing government, and we are now getting ready to operate our economy. That’s what the game is about.
Issuing the Currency
As we get ready to play, we immediately discover an odd dilemma: CIG has all the money! We, the players, are ready to go but we can’t start the game until we have some of CIG’s money. This is an awkward moment, which is dispensed with so quickly in regular Monopoly we hardly notice it. (The “banker” is instructed to make initial cash distributions in the amount of $1500 to each player). If we pay attention, we can see that this moment raises some interesting and crucial questions.
Approaching the 'Fiscal Cliff'
My comments in red:
Congress May Toss the Economy over the Fiscal Cliff
Congress May Toss the Economy over the Fiscal Cliff
We are barreling towards the year end “fiscal cliff” Federal Reserve Board Chairman Ben Bernanke has warned about.
Unless lawmakers and the President can agree on a slew of confounding budget and tax issues before the end of the year, a double whammy of sharp tax increases and deep cuts in domestic and defense spending will jolt the struggling economy beginning in early January. That’s because two Bush era tax cuts and a raft of other tax relief measures are set to expire by the end of the year, and Congress must implement the first installment of $1.2 trillion of long-term deficit reduction that lawmakers and the White House agreed to last summer.
While an abrupt surge in tax revenues of about $500 billion, and a steep cut in government spending of about $110 billion early next year would certainly put a big dent in next year’s deficit, many budget experts fear it would also undercut the economic recovery in the short run. It would be extremely detrimental to the economy and would have no impact on solvency of the government budget.
Boehner said this week that Congress will be inviting a legislative “train wreck” if it leaves all these big- ticket fiscal issues to a lame duck session of Congress after the November presidential and congressional elections. He revealed plans to schedule a vote on the House floor before the fall election to extend the two Bush-era tax cuts that are very popular with his members. I'm not opposed to extending tax cuts, but I think extending the FICA tax cuts will be much more helpful to the economy and those who are in need then will extending cuts for those who are doing just fine.
Wednesday, May 9, 2012
Preferential Option for the Rich
Here is yet another great post from Catholic Moral Theology. Charles Camosy points out the apparently missing preferential option for the rich from Catholic Social Teaching which has in many places written about the preferential option for the poor. CST has, I think, danced around the 'preferential option for the rich' but certainly hasn't explicitly named any such principle as it has the preferential option for the poor. For example one can find this passage in Populorum Progressio:
We must repeat that the superfluous goods of wealthier nations ought to be placed at the disposal of poorer nations. The rule, by virtue of which in times past those nearest us were to be helped in time of need, applies today to all the needy throughout the world. And the prospering peoples will be the first to benefit from this. Continuing avarice on their part will arouse the judgment of God and the wrath of the poor, with consequences no one can foresee. If prosperous nations continue to be jealous of their own advantage alone, they will jeopardize their highest values, sacrificing the pursuit of excellence to the acquisition of possessions. We might well apply to them the parable of the rich man. His fields yielded an abundant harvest and he did not know where to store it: "But God said to him, 'Fool, this very night your soul will be demanded from you . . .' "I agree with Charles, that there should indeed be an explicit preferential option for the rich, particularly in our wealthy society. We should at once emphasize not only the need to help those who suffer from materially poverty, but all forms of poverty, including the poverty in virtue and faith that materialism or consumerism causes as Pope John Paul II makes clear in Centesimus Annus:
Today more than ever, the Church is aware that her social message will gain credibility more immediately from the witness of actions than as a result of its internal logic and consistency. This awareness is also a source of her preferential option for the poor, which is never exclusive or discriminatory towards other groups. This option is not limited to material poverty, since it is well known that there are many other forms of poverty, especially in modern society—not only economic but cultural and spiritual poverty as well. The Church's love for the poor, which is essential for her and a part of her constant tradition, impels her to give attention to a world in which poverty is threatening to assume massive proportions in spite of technological and economic progress.
Tuesday, May 8, 2012
Pope Quotes 5-8-12
Sorry for the interruption in my series on Pope Quotes. There are still so many great quotes from the CST encyclicals to share, so let's get to it!
The socialist, capitalist debate is always a fierce one and so I always find the many quotes on this topic to be a good read. This debate is still largely and understandably emotionally charged and unfortunately the Church's stance is widely misunderstood. Many seem to know the Church condemned socialism, but less seem to know exactly why or that it is nearly as critical of capitalism/liberalism. Many take the Popes's quotes out of context, (which I understand I also run the risk of doing with this series and is why I recommend a full reading of the encyclicals!), or even use them to support a position they hold. Much of the debate has centered over the issue of private property versus state socialization of property.
Today I chose this excerpt from Laborem Exercens, which was written by Pope John Paul II in 1981, marking the 90th anniversary of Rerum Novarum. It is an encyclical that addresses the question of 'work' and the issue of private property. I'd like to draw your attention to a few things:
1) CST is critical of both capitalism and socialism;
2) Though defending the right to private property, CST makes clear that the right to common use, also known as the universal destination of goods, supersedes this right;
3) Possession of goods, particularly capital goods, is only okay if it serves labor and is never okay simply for possession's sake;
4) Socialization of means of production is not excluded completely, there is some legitimation for it;
5) State socialization of means of production (capital goods) does not guarantee true socialization of those goods, that is, the state may use them for purposes opposed to the good of society;
6) Rigid capitalism needs revision, particularly with profit-sharing or joint ownership forms of cooperation so that workers may share in the produce and not be pitted against the owners of the capital goods;
7) Work is not only a means for material goods, but is more importantly a means for personal development and fulfillment and private or personal initiative is a key component of this developmental side of work;
Here is the excerpt from Laborem Exercens with highlights in bold/purple:
The socialist, capitalist debate is always a fierce one and so I always find the many quotes on this topic to be a good read. This debate is still largely and understandably emotionally charged and unfortunately the Church's stance is widely misunderstood. Many seem to know the Church condemned socialism, but less seem to know exactly why or that it is nearly as critical of capitalism/liberalism. Many take the Popes's quotes out of context, (which I understand I also run the risk of doing with this series and is why I recommend a full reading of the encyclicals!), or even use them to support a position they hold. Much of the debate has centered over the issue of private property versus state socialization of property.
Today I chose this excerpt from Laborem Exercens, which was written by Pope John Paul II in 1981, marking the 90th anniversary of Rerum Novarum. It is an encyclical that addresses the question of 'work' and the issue of private property. I'd like to draw your attention to a few things:
1) CST is critical of both capitalism and socialism;
2) Though defending the right to private property, CST makes clear that the right to common use, also known as the universal destination of goods, supersedes this right;
3) Possession of goods, particularly capital goods, is only okay if it serves labor and is never okay simply for possession's sake;
4) Socialization of means of production is not excluded completely, there is some legitimation for it;
5) State socialization of means of production (capital goods) does not guarantee true socialization of those goods, that is, the state may use them for purposes opposed to the good of society;
6) Rigid capitalism needs revision, particularly with profit-sharing or joint ownership forms of cooperation so that workers may share in the produce and not be pitted against the owners of the capital goods;
7) Work is not only a means for material goods, but is more importantly a means for personal development and fulfillment and private or personal initiative is a key component of this developmental side of work;
Here is the excerpt from Laborem Exercens with highlights in bold/purple:
The above principle [on private property], as it was then stated and as it is still taught by the Church, diverges radically from the programme of collectivism as proclaimed by Marxism and put into practice in various countries in the decades following the time of Leo XIII's Encyclical. At the same time it differs from the programme of capitalism practised by liberalism and by the political systems inspired by it.
Why Does Money Matter?
You may have noticed that I post a lot about money, particularly this "modern money" stuff and you may be wondering why I care so much about money. I have long been fascinated with money, particularly with what gives it its value. I remember way back in middle school wondering why green pieces of paper had value, or why gold was so valuable (a topic I wish to explore more in a follow up post). I never really got what I thought were adequate answers nor did I seek it further until my interest turned toward economics in college. Now after four years of undergrad and a couple years in grad school, I understand why money matters and I think you should too.
To be clear, I am not saying love of money (greed) is a good thing...it isn't, but rather understanding just what money is and how it affects our economy is crucial to achieving our economic, political, and social objectives.
So what is money? The most often told story is that money is a commodity that evolved out of a barter economy. For example, tradespeople in small villages started using seashells or gold or whatever to exchange for goods that each made so as to avoid the problem of barter economies. The butcher wants shoes, but the shoemaker doesn't want meat, so the butcher would have to trade meat to someone for something that the shoemaker wanted in order to obtain shoes. This problem is called the 'double coincidence of wants' and money is thought to have sprung up as a medium of exchange to eliminate this problem. All could exchange their goods for seashells or gold or whatever which could then be exchanged for any other commodity one wanted.
This story seemed plausible to me at first, it does seem logical, but as I learned more I quickly became unsatisfied with this explanation. This view hinges precariously on everyone accepting the commodity to be used as money. It also assumes barter economies existed and doesn't translate well to today's fiat money system because the commodity used as money is thought to be intrinsically valuable (gold) which also poses a problem for those who used seashells.
Another view believes that money is a social unit of account tracking credits and debts, just like an inch measures distance, or a gallon measures volume. One dollar is a unit of account, a measurement of credits/debts. Thus money is always a two-sided affair, it is an IOU, with a creditor and a debtor. Having money means that one has claims to another's goods/labor/cup of sugar/whatever that other gave in the IOU. From this view, one can see that anyone can create money, it is the matter of acceptance that is key. I can issue IOUs all I want, but in order for them to become 'money', someone must accept them. Which means they must accept that my word is good. If I don't my 'money' defaults.
To be clear, I am not saying love of money (greed) is a good thing...it isn't, but rather understanding just what money is and how it affects our economy is crucial to achieving our economic, political, and social objectives.
So what is money? The most often told story is that money is a commodity that evolved out of a barter economy. For example, tradespeople in small villages started using seashells or gold or whatever to exchange for goods that each made so as to avoid the problem of barter economies. The butcher wants shoes, but the shoemaker doesn't want meat, so the butcher would have to trade meat to someone for something that the shoemaker wanted in order to obtain shoes. This problem is called the 'double coincidence of wants' and money is thought to have sprung up as a medium of exchange to eliminate this problem. All could exchange their goods for seashells or gold or whatever which could then be exchanged for any other commodity one wanted.
This story seemed plausible to me at first, it does seem logical, but as I learned more I quickly became unsatisfied with this explanation. This view hinges precariously on everyone accepting the commodity to be used as money. It also assumes barter economies existed and doesn't translate well to today's fiat money system because the commodity used as money is thought to be intrinsically valuable (gold) which also poses a problem for those who used seashells.
Another view believes that money is a social unit of account tracking credits and debts, just like an inch measures distance, or a gallon measures volume. One dollar is a unit of account, a measurement of credits/debts. Thus money is always a two-sided affair, it is an IOU, with a creditor and a debtor. Having money means that one has claims to another's goods/labor/cup of sugar/whatever that other gave in the IOU. From this view, one can see that anyone can create money, it is the matter of acceptance that is key. I can issue IOUs all I want, but in order for them to become 'money', someone must accept them. Which means they must accept that my word is good. If I don't my 'money' defaults.
Thursday, May 3, 2012
Missing the Point on Poverty
Another great post by Meghan Clark from over at Catholic Moral Theology, which has become my favorite Catholic blog.
She has a very good understanding of the economy and of Catholic Social Teaching and I continually find myself in overall agreement with what she writes.
Full post here.
Highlights:
She has a very good understanding of the economy and of Catholic Social Teaching and I continually find myself in overall agreement with what she writes.
Full post here.
Highlights:
There has been a lot of discussion this week about the morality of the Ryan Budget. Since Paul Ryan’s statement on subsidiarity, the media and blogs have been full of posts either supporting or correcting Paul Ryan’s use of Catholic social teaching.
This week’s discussion heated up as the USCCB Committee on Domestic Justice and Human Development released 4 key statements/press releases pleading with Congress to “to draw a circle of protection around the programs that serve “the least among us.” when dealing with housing programs, SNAP/food stamps, agriculture and the Child Tax Credit.
There is a beautiful coherence and symmetry to the four statements – they all have one clear message – protect the poor and vulnerable. While they acknowledge (as do we all) that we live in difficult and complex economic times, we cannot in good conscience balance the budget or protect the economy through sacrificing the poor and vulnerable within our communities. In the Letter on Snap, Bishop Blaire reiterates the three key moral guidelines for evaluating the morality of a budget:
1. Every budget decision should be assessed by whether it protects or threatens human life and dignity.
2. A central moral measure of any budget proposal is how it affects “the least of these” (Matthew 25). The needs of those who are hungry and homeless, without work or in poverty should come first.
3. Government and other institutions have a shared responsibility to promote the common good of all, especially ordinary workers and families who struggle to live in dignity in difficult economic times.
Now the Bishop’s letters have gotten quite the response.
Sectoral Balances
Phew! After a tough April I am back in action! I hope to be blogging more regularly now, and I have a lot of ideas I am excited to share with all of you.
One area I will continue posting about is the still common misunderstandings surrounding government debt. At the heart of it is a misunderstanding of money. If we can understand money, then we can better understand government debt. I hope to make this more clear in the coming weeks, but for now I thought this video might prove to be helpful.
It was made by undergraduates at Lewis and Clark college in Portland, Oregon. The video explains sectoral balances using accounting identities and principles. It shows why the government cannot go bankrupt like a household or business can and subsequently that sound, responsible government finance means something different than sound, responsible household finance.
Enjoy!
One area I will continue posting about is the still common misunderstandings surrounding government debt. At the heart of it is a misunderstanding of money. If we can understand money, then we can better understand government debt. I hope to make this more clear in the coming weeks, but for now I thought this video might prove to be helpful.
It was made by undergraduates at Lewis and Clark college in Portland, Oregon. The video explains sectoral balances using accounting identities and principles. It shows why the government cannot go bankrupt like a household or business can and subsequently that sound, responsible government finance means something different than sound, responsible household finance.
Enjoy!
Tuesday, April 10, 2012
Healthcare Debate
I am not saying I agree with 'Morning's Minion' over at Vox Nova, but I think this post he wrote is something worth thinking about. CST does teach the universal right to healthcare and the duty of society to provide it. It is our role as the laity to come up with effective solutions to the problem of the uninsured members of society. I think Morning's Minion could open up to other possibilities other than the single payer system and regulated private provision, but doing nothing to help the uninsured receive healthcare is not acceptable in the eyes of CST.
We do need healthcare for everyone. We do need to debate what our options are. And so I think his post is something worth thinking about. Full post here.
Highlights:
We do need healthcare for everyone. We do need to debate what our options are. And so I think his post is something worth thinking about. Full post here.
Highlights:
Let me begin with a simple assertion: the Catholic Church views access to healthcare as a basic human right. To the extent possible, societies are obligated to provide healthcare for all people who live under their jurisdiction. This is a fundamental principle of justice. Consider some evidence for this:
Catechism: “Concern for the health of its citizens requires that society help in the attainment of living-conditions that allow them to grow and reach maturity: food and clothing, housing, health care, basic education, employment, and social assistance”.
John XXIII: “Man has the right to live. He has the right to bodily integrity and to the means necessary for the proper development of life, particularly food, clothing, shelter, medical care, rest, and, finally, the necessary social services. In consequence, he has the right to be looked after in the event of ill-health; disability stemming from his work; widowhood; old age; enforced unemployment; or whenever through no fault of his own he is deprived of the means of livelihood”.
Friday, March 16, 2012
Subsidiarity and Cooperation
Here is another post I really enjoyed from Catholic Moral Theology.
The principle of subsidiarity may be among the most controversial topics of the doctrine of Catholic Social Teaching because it is often used by both the left and the right to justify either small government or big government.
I prefer Meghan Clark's interpretation, that it is a two-sided coin. We need a system of governance that allows for the common good with multiple levels of institutions and associations working together for that common good. We cannot rely only on big government, nor can we rely only on small government. It is clear that there are proper functions belonging to each, but that most functions necessary for the common good require cooperation from all levels--individuals, families, local governments and private associations all the way to national government and international associations.
Here is Meghan's full article: Subsidiarity is a Two-sided Coin
Here are some highlights:
The principle of subsidiarity may be among the most controversial topics of the doctrine of Catholic Social Teaching because it is often used by both the left and the right to justify either small government or big government.
I prefer Meghan Clark's interpretation, that it is a two-sided coin. We need a system of governance that allows for the common good with multiple levels of institutions and associations working together for that common good. We cannot rely only on big government, nor can we rely only on small government. It is clear that there are proper functions belonging to each, but that most functions necessary for the common good require cooperation from all levels--individuals, families, local governments and private associations all the way to national government and international associations.
Here is Meghan's full article: Subsidiarity is a Two-sided Coin
Here are some highlights:
As a Catholic moral theologian, I must confess that the principle of subsidiarity is perhaps one of the most crucial and most misunderstood in Catholic social teaching. According to the principle of subsidiarity, decisions should be made at the lowest level possible and the highest level necessary. Subsidiarity is crucial because it has applications in just about every aspect of moral life. In medical ethics, subsidiarity helps guide decision-making. In social ethics, subsidiarity helps us prudentially judge not only decision-making but allocation of resources. Subsidiarity is an effort at balancing the many necessary levels of society – and at its best, the principle of subsidiarity navigates the allocation of resources by higher levels of society to support engagement and decision making by the lower levels. Despite how often it is stated – subsidiarity does NOT mean smaller is better.
Fishy Fridays
I came across this blogpost at Catholic Moral Theology today and thought it was worth sharing.
Full post by Jason King here: Fishy Fridays
Highlights:
Full post by Jason King here: Fishy Fridays
Highlights:
When I was in graduate school, I made the off hand comment to my roommate about how McDonald’s runs Filet-o-Fish specials every year during Lent. My roommate, a life long Methodist, was totally surprised by this revelation. He had never noticed it. (He recently used this tidbit to amaze his high school students by predicting an upcoming Filet-O-Fish special.)
This year I have noticed that even more places have taken to fish during Lent. My grocery store was the first place I noticed this phenomenon.
Tuesday, March 13, 2012
'Rule' for a Good Life
I have had the good fortune of a strong Benedictine influence in my life. I have a Benedictine education and spent a few summers at St. Meinrad Archabbey learning from and making friends with people who have dedicated themselves to live by St. Benedict's teaching.
The Rule of St. Benedict offers a great guide for a monastic way of life, but its applicability reaches far into our own lives. In particular the prologue and chapter 4 offer us teachings or 'tools for good works' to live Catholic Social Teaching in our everyday life.
Here are some of the teachings of St. Benedict that if we take to heart and practice frequently will make for a happier life not only for us but those we encounter on our journey:
The Rule of St. Benedict offers a great guide for a monastic way of life, but its applicability reaches far into our own lives. In particular the prologue and chapter 4 offer us teachings or 'tools for good works' to live Catholic Social Teaching in our everyday life.
Here are some of the teachings of St. Benedict that if we take to heart and practice frequently will make for a happier life not only for us but those we encounter on our journey:
P.4 - First of all, every time you begin a good work, you must pray to Him most earnestly to bring it to perfection.
P.17 - If you desire true and eternal life, keep your tongue free from vicious talk and your lips from all deceit; turn away from evil and do good; let peace be your quest and aim.
4.11-13 - Discipline you body, do not pamper yourself, but love fasting.
4.14-19 - You must relieve the lot of the poor, clothe the naked, visit the sick, and bury the dead. Go to help the troubled and console the sorrowing.
4.20-21 - Your way of acting should be different from the world's way; the love of Christ must come before all else;
4.22-26 - You are not to act in anger or nurse a grudge. Rid you heart of all deceit; Never give a hollow greeting of peace or turn away when someone needs your love.
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