Likewise the overconsumption theory of recessions makes no sense. On a slightly different matter a frequent commenter writes
I’d rather have economists in charge of the financial system than politicians, if for no other reason than I hate most politicians far more than I hate most economists. But the argument that most of the good times in the past decades were due to economists’ strong hand at the tiller is unpersuasive: anybody can live well for quite some time on credit cards, whether they just run up bills with abandon or do it in a logical and academically justified way.
If I am reading the commenter’s intention right then imbedded in his words is a common misperception. This is a response is to that general misperception not the specific commenter.
I think people are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc.
However, this is not how we measure the cyclical wealth of nations. We measure it by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff.
For example, we say that Germany’s economy seems to be recovering. However, consumption in Germany is not rising. Consumption is flat. Working is rising. Employment is rising. That is what it means to be doing well. It means that more people are doing more work.
This is why it makes no sense to say that a recession is inevitable because we overconsumed. Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought.
Some people might say that the “something” is structural readjustment. We have to move towards an investment based economy and there are frictions. However, that story also works in reverse. A country could be consuming too little and then has to suddenly switch away from an investment based economy and will face frictions. Recessions in that story are not a punishment for overconsumption, they are a result of suddenly realizing that you have to shift paths. There are still problems here but they are on a deeper level about more subtle things.
The overconsumption theory by contrast says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance.
Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then – that morality play is completely F-ed up. That morality play says that we should sit on the couch and rest our backs because that way we’ll learn not to drink so much. You bought too much so now you have to work less. How does that balance anything?
On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.
If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation then there would be no recession. There is a recession because fewer factories are being built. There is a recession because less work is being done.
Let me be very clear about this. I am not saying that it might seem as if the world works according to common sense but when you study hard and look at lots of equations then you will see that in some abstract way it is wrong.
No, not at all.
I am saying the overconsumption view is completely at odds with what is in front of our faces. It doesn’t even make basic logical sense. The morality play is one without any morals.
I don’t know if Andrew Sullivan still reads my posts but I want to cajole him into responding because I sense that he is sympathetic to the overconsumption view and I know he understands that “To see what is in front of one’s nose needs a constant struggle”
The overconsumption view is an example of just that. If we consumed too much then shouldn’t we need to work extra hard? Why is society working less? What about spending too much money implies that the natural reaction is that people should go home and sit on the couch?
Even Casey Mulligan – who subscribes to a completely different view of the macroeconomy – is trying to tell a story involving the minimum wage and mortgage modifications that answers this key question:
WHY ARE PEOPLE WORKING LESS?
Update: This post is attracting more attention than I expected. Perhaps, I should venture non-technical rants more often. However, for those kind enough to read this far I’d like to give you the upshot. Once we accept that the recession can’t be as simple as “we overspent our credit cards and are now feeling the pain” we can better analyze solutions without prejudice. We can consider the possibilities of stimulus spending or monetary expansion without the off the cuff reaction that you can’t cure overspending with more spending. Something deeper is at work here and perhaps there is a role for stimulus or monetary expansion.
There are still arguments to be had and the cases of structural frictions and the type of negative incentives that Casey Mulligan bring up. However,
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Tuesday ~ November 30th, 2010 at 12:23 pm
sardonic_sob
First, let me say that I am quite flattered that you responded to my comment in such an extended fashion, although I quite understand that as you say, you weren’t responding to me personally or even specifically to what I said. But they also serve who generate inspiration via inane comments.
Second, let me also say that in general, I completely agree with you. The real health of an economy is measured in working and doing and building. The response to a recession should be, “Let’s do this,” not “Well, can’t do anything, might’s well hit the couch. Pass me the remote.”
Third, let me say what when I talk about “living on credit cards,” I don’t mean literally. I do not think that the unfolding financial crisis was caused by consumer overconsumption. (To me that is a symptom, not a cause.) It was in reference to governments deficit-spending and malinvestment-encouraging economies into boom times, and was meant to be a different interpretation of your comment about how when economists run central banks we get better results than when politicians do. That may be the case, but it’s not anything to do with the fact that they’re economists, because their general approach seems to be identical to that of politicians: namely, spread money around with a big shovel. They do tend to be more restrained, but by and large they do the same thing that politicians would usually do, they just dress it up with more equations. The fact that I can point to statistics in the Surgeon General’s report that show that pipe-smokers tend to outlive people who don’t smoke at all* does not indicate that the ACA should be amended to make meerschaums and Three-Star Blue part of the health-care mandate.
I understand completely, and furthermore agree completely, with the idea that if we wiped out all the bad debt etc tomorrow but everybody just got up and went to work and nobody panicked we would have no problem making enough food and housing and cars and big-screen TV’s and so forth for everybody. The problem is that we will not DO that. We will continue to issue massive amounts of real or implied debt to try to keep anybody from losing and the net result is that the malinvestments will not be purged until they grow so large that they just can’t keep the plates spinning anymore. Then everybody WILL panic and nobody will get up and go to work because that’s just how human beings are.
And lurking ahead is the spectre of Peak Commodities, which nobody is worried about because we can just tweak our economy like a big machine, and if prices get too high we can just pull on the pullem and push on the pushem and fix it, right? However, our system requires massive amounts of low-cost energy and materials to fuel growth. (Without growth debt service becomes impossible and see prior paragraph.) You can’t print oil, coal, rare earths, or potassium. Don’t get me wrong: while I find the Olduvai Theory eerily compelling I firmly believe that we have the technical capability to get ourselves out of this mess. But we aren’t using it because we are devoting so much energy to keeping everything the way it is. This will work until it doesn’t, and we don’t have a Plan B. (That last sentence is pretty much my entire objection to economic manipulation in a nutshell.)
*It’s really in there. Pipe-smoking has a net positive correlation with life expectancy.
Tuesday ~ November 30th, 2010 at 9:22 pm
Meta Finance
That’s a great comment, sardonic_sob, and one that I agree with far more than I do the original post.
Tuesday ~ November 30th, 2010 at 12:39 pm
Anon
We invested for future consumption driven by a pace of income gains that that, it now appears, will not materialize. Given that over-investment, real returns to new investment are low. Some of us sit on the couch because the economy can’t find projects with sufficient returns to employ us. These absent “projects” have the character of “new firm creation”, which accounted for most of the growth in employment in the service sector.
We didn’t “over-consume”, we invested too much in projects that relied on future income gains that, it turns out, were unrealistic.
Tuesday ~ November 30th, 2010 at 12:58 pm
Wonks Anonymous
I don’t think I’ve ever heard an explanation as good as this on the problem. My only quibble is that you have previously put great emphasis on sales, or aggregate demand, as the main cause of the currently sluggish economy. The people who buy into the criticized narrative think it makes sense that since we bought so much then, we should buy less now. This would lead to questions like why Austrian “hangover” theory should predict high unemployment for “busts” but not “booms”, which Arnold Kling has attempted to answer.
Tuesday ~ November 30th, 2010 at 1:18 pm
Dan Daoust
I suspect what people mean is:
(1) if GDP = consumption + government spending + gross investment + net exports, and
(2) if past overconsumption leads to present frugality, and
(3) that means that the first and largest of the four factors determining GDP will decline, and
(4) that means that GDP will likely decline, then
(5) “the economy is doing less well.”
Tuesday ~ November 30th, 2010 at 4:31 pm
Yglesias » Hangover Theory
[...] Smith explains what’s wrong with the view that today’s recession is punishment for yesterday’s overindulgence: [W]e say that Germany’s economy seems to be recovering. However, consumption in Germany is not [...]
Tuesday ~ November 30th, 2010 at 4:31 pm
Yglesias » Hangover Theory
[...] Smith explains what’s wrong with the view that today’s recession is punishment for yesterday’s overindulgence: [W]e say that Germany’s economy seems to be recovering. However, consumption in Germany is not [...]
Tuesday ~ November 30th, 2010 at 6:09 pm
Apex
“Likewise the overconsumption theory of recessions makes no sense.”
REALLY?
circa 2000….
1. The dot com bubble bursts and interest is lowered to 1% for an extended time.
2. Cheap interest helps fuel and already rapidly appreciating housing market.
3. This creates many jobs in the construction, mortgage, and real estate businesses. These jobs help fuel a robust economy.
4. More and more people buy houses with more and more credit. This continues into the area of loans with great LTV than 100% and reverse amortization mortgages. Clearly a stage of consuming beyond ones ability to pay.
5. People begin buying houses (2,3,4 extra houses) sitting on them, not even renting them out, and flipping them in 6 months for 50k profits. This fuels even more building of houses and more jobs in the housing sector, fueling GDP even more.
6. People begin buying apartments and converting them into for ownership condos, which people turn around and buy often as investments only to flip as indicated above. This too creates even more jobs in renovations and construction, fueling even more GDP.
7. Renters who never previously qualified for mortgages, move out of apartments and purchase houses and condos with no money down and very cheap interest rates and far more luxurious accommodations than they were used to. This creates even more demand for housing which causes more housing to be built and creates more jobs and more GDP. In turn it leaves many apartments sitting empty with rental rates falling making inflation look tame due to owner equivalent rent calculations.
8. All of this is funded through complex financial instruments that are sold to naive or deceived investors who are unaware of how financially unstable the products are.
… And then the contagion hits and the truth is slowly revealed. The truth that we consumed housing at far beyond our collective ability to pay for it. We over consumed which drove over production of assets that we do not have current need or current productive use for in the economy. Wasted production. Inefficient production. Financially unsupportable production.
1. Financial institutions that are leveraged to these products collapse. Jobs are lost.
2. Housing construction begins to grind to a halt. Jobs in construction, mortgages and real estate agents are lost in the million or more range.
3. Housing values experience the largest drop in value in a century, decimating people’s net worth’s, their balance sheet, and putting many otherwise reasonable buyers in an upside down equity position.
4. This stops the housing ATM that was being used to supplement the economic growth that was already fueled by over production of an assets that there was not nearly enough demand to actually need even though it was being consumed for purely speculative purposes.
4. the impact on the consumer, the financial system, the economy and the markets are immense and results in the largest recession in 80 years.
5. Millions upon millions (estimates of 5-10 million) of those unnecessary oversupplied housing assets now sit empty.
And this is not related to over-consumption of unproductive, unnecessary and financially unsupportable assets in the previous decade?
My explanation:
1. You need water to survive, don’t drink enough water and you will die. Parallel, don’t consume enough and the economy will go into recession.
2. However your body can only consume water at a rate that is in line with its ability to process that water (or efficiently consume it). Drink far too much water too fast and you will get very sick and perhaps die. Parallel, you can only consume at the economy’s ability to financially support that consumption (or efficiently consume it). Consume too much too fast you will also go into recession when the consumption has to be drastically curtailed because the artificial means that sustained it have come to an end. And like drinking too much water the affect on the economy has the ability to be much more destructive that a recession caused by a cyclical reduction in consumption rather than one of a binge that is finally and forcefully cut-off.
This is an honest request for a explanation of why this storyline is not evidence contrary to your opening quotation about over-consumption not being able to cause a recession and what part of my explanation you believe to be in error?
Tuesday ~ November 30th, 2010 at 6:24 pm
Apex
As a follow up to be clear. I want to draw a distinction between what you are saying which seems to be a what should we do now statement versus what I am saying which is a how did we get here statement.
Of course we need to work more to get out of this. My statement is about the dislocations caused by the over-consumption which caused the economy to contract as it adjusts. People who were building houses do not just start doing something else like building factories to make iPods. So the economy became over dependent upon producing a good we were over consuming at a rate we could not support. When the economy was finally forced to face that fact, the dislocations were proportional to the amount that the economy had become adjust to support its over consumption. That dislocations takes time to resolve and that is why we are sitting on the couch now.
Not because we think its the way. But because that’s what the dislocation forced to occur.
Debates can be had about the best way to speed up the healing process and getting people back to work building factories and products for consumption that we can support. But how we got here seems clear to me. Over consumption of an assets we could not financially support.
Even though you seem to be focusing on what we are doing now, it seems to me that your point is based in how we got here. If I am correct that you are also stating that over consumption cannot bring about a recession, I would truly enjoy hearing where you believe I am in error.
Tuesday ~ November 30th, 2010 at 6:32 pm
jazzbumpa
It’s not about overconsumption, it’s about debt. Surely you know this.
The private sector is deleveraging in the population segment (perforce in many cases) and hoarding in the business segment. Meanwhile, the current account balance has been negative for a looong time.
Since people can’t spend, and businesses won’t, and the government won’t either, and for some reason there is a thrust to keep the dollar strong, we’re doomed to impoverishment by the old accounting identity.
http://www.angrybearblog.com/2010/11/impoverished-and-impoverishing-debate.html
We’re screwed!
JzB
Tuesday ~ November 30th, 2010 at 6:59 pm
Apex
Very true, and what causes debt but over consumption of an asset or assets that we collectively cannot support financially.
That is the thrust of my disagreement concerning over consumption.
Tuesday ~ November 30th, 2010 at 7:04 pm
Jacob Hedegaard
Dear Karl Smith,
I find it rather odd, that you even spend your time attacking such a simplified version of what Krugman labelled ‘the Hangover Theory’.
It not just that overspending + a want to normalize –> underspending –> momentary doom. The ‘Structural adjustment you mention actually comes closer to the true story of which you are allegedly criticizing – something that also resembles Kling’s PSST story.
I believe some of the mistake you are making is partly the same as Krugman did in his 1998 criticism, and I will therefore allow myself to quote myself on something I wrote on Krugman’s rebuttal attempt:
” One of the most well-known critiques of Austrian Economics is Paul Krugman’s 1998 Slate article about ‘The Hanover Theory’. Krugman asserts that a recession, in the Austrian sense, simply means that demand is transferred from investment to consumption, and thus a recession should
resemble a boom, for which the opposite is true, in terms of unemployment – a mere shift from one sector to another which should be equally troublesome or easy. Or, as Krugman remarks, the Austrians cannot “explain why bad investments in the past require the unemployment of good workers in the present”. Krugman’s critique seems to omit the fact that Austrians perceive money as non-neutral and that capital is heterogeneous. Had this not been the case, Krugman would certainly be right. However, assuming non-neutral money and heterogeneous capital, it is clear that Austrians might have a stronger point than Krugman admits. During a boom, although based on malinvestments, employment will rise, because the inflation allows consumption to continue at the same rate alongside rising investments, thus not revealing the forthcoming bust. During the bust, factors of production can become obsolete, when it is revealed that there will be no demand for the goods they produce. The Krugman critique is, then, not based within the Austrian framework itself and thus does not suffice to curtail the explanatory power of the Austrian
business cycle theory.”
Tuesday ~ November 30th, 2010 at 7:15 pm
Apex
Your reply is certainly more wonkish than mine but I think it makes the same point. Yours also has the elegance of lacking my verbosity.
Tuesday ~ November 30th, 2010 at 9:12 pm
teageegeepea
You should link to the actual piece of yours being quoted.
Tuesday ~ November 30th, 2010 at 8:19 pm
Andy Harless
I second Wonks Anonymous that this is the best explanation I’ve heard of why the overconsumption explanation doesn’t make sense.
Of course, if people insist on talking about macroeconomics in terms of silly metaphors, they will say that, if you drink too much, you end up having to sit on the couch the next day because you’re too sick to go to work. (I guess that’s where Paul Krugman gets the phrase “hangover theory.”)
Tuesday ~ November 30th, 2010 at 10:41 pm
Apex
As opposed to sophisticated metaphors such as:
“You Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore”
Those that want to argue the over consumption argument makes no sense and there is no reason overconsumption should lead to a reduction in employment at a future date have one annoying little problem. The real world where it has done exactly that. But I guess if you state that it should not be so, then it is not.
Wednesday ~ December 1st, 2010 at 10:46 am
Andy Harless
I take the metaphor in the title as being more a parody than a serious analogy. The point is to show the absurdity that is the logical conclusion of the metaphors used in the conventional overconsumption view.
“There is no reason overconsumption should lead to a reduction in employment at a future date” but “it has done exactly that.” How is that a contradiction? Things do not always work out as they should. The fact that policies have allowed overconsumption to result in reduced employment is a failure of those policies, not an unavoidable outcome. As I read this post, Karl is making a normative argument, saying that policy should be arranged such that overconsumption would (if anything) be followed by more, rather than less, production.
Wednesday ~ December 1st, 2010 at 11:02 am
sardonic_sob
Andy Harless: “Things do not always work out as they should. ”
Bing-freaking-o. The problem is that you have confused your version of how things should work out with how the Universe thinks they should work out. The Universe will always win, and furthermore it is quite perverse and is happy to let you think that you version is the right version until it isn’t. See last sentence of my reply above.
Wednesday ~ December 1st, 2010 at 11:57 am
Apex
“As I read this post, Karl is making a normative argument, saying that policy should be arranged such that overconsumption would (if anything) be followed by more, rather than less, production.”
Ok, that’s a fair point.
So I laid out the various dislocations that I believe caused the last recession and that set up an inevitable drop in employment. I asked for an explanation of why the inefficient and mis-allocation of labor resources as well as over-supply of an asset that could not be financially supported by the collective consumers would not result in the exact outcome we got. There is no response to that. Only general statements about consuming too much should mean working more to pay for it.
I dispute the very notion that there is any relationship that causes an over-consumption in the past to need to be paid for in the future. Certainly it must to get out of the recession by why consuming should drive labor has not been demonstrated especially when that consumer was over-consumption and fueled by debt that people can relatively easily walk away from (which they are doing by the millions).
In addition, if policy can prevent this what would that policy look like? Confiscate the money of those who didn’t engage in over-consumption and give it to those that did to eliminate the debt? This is not a pejorative. What does it look like?
There are plenty of examples of the boom bust cycle. Plenty of examples of over-consumption leading to recessions. Plenty of examples of the greater the over-consumption the greater the recession (1930, 2007 to name a couple big ones). So where is the example of the instance of clear over-consumption followed by government policy that prevented the recession and actually led to a greater boom, more employment, more production, and no recession? And if this policy works then shouldn’t it work in perpetuity?
Is your position that a properly managed economy would not experience recessions unless impacted by an unforeseen outside event such as war or 911 type events?
Tuesday ~ November 30th, 2010 at 8:53 pm
wrigglefreeabc
one thing i wondered early on was something like “why would existing houses getting cheaper make us poorer”? because in real terms it seemed that it should make us richer, because we can afford more houses. it seems that any and all answers to this are complicated.
Tuesday ~ November 30th, 2010 at 9:05 pm
Andy Harless
I don’t see how these Austrian “malinvestment” explanations apply to the issue at hand. It appears that there was overinvestment in housing, but that is a separate issue from overconsumption.
There was, by most accounts, overconsumption in the US, and it was financed not by somehow stretching the economy’s productive capacity but by borrowing from abroad. If you buy an analysis based on overconsumption, the conclusion should be that we now need to work harder to pay back the Chinese and the Germans for what we have overconsumed.
Of course the problem is that China and Germany are refusing to accept payment and offering instead to sell us even more opium on credit. (Revenge for the Opium War?) From that point of view, the morality play makes sense: Americans are trying to get clean and sober, but those evil foreigners (who, in this sense, really are behaving in an evil way, not just being portrayed that way out of jingoism) are taking advantage of our weakness and pushing more dope on us. QE is part of our 12-step program, and of course the pushers don’t like it.
Tuesday ~ November 30th, 2010 at 9:13 pm
sardonic_sob
Incidentally, when I said we hadn’t seen (price) inflation yet, I meant here in the US. As many people have pointed out, one of the places our monetary inflation has caused price inflation is India and China. Their inflation rates are quite high, especially when you consider that their productivity is skyrocketing, which is allegedly one of the things that kept us from experiencing price inflation during the Greenspan Gladhanding era.
Wednesday ~ December 1st, 2010 at 4:39 am
Gregor
As other people in their comments have pointed out, you are missing the aspect how comsumption was financed. This makes the crucial difference between morality and sustainability.
The problem is not consumption per se. You are correct as long consumption is payed for by regular cash flow. In this case you can consume as much as you want without harming your ability to pay tomorrow. In this case “overconsumption” is used a moral judgment (Example: “Compared to poor people in Africa, you are over-consuming! You are depleting natural resources …”).
If you finance consumption by CREDIT, you get a totally different picture. Remember that I = S. You can only invest what you saved/ earned. Debt means you invest today to save tomorrow. In terms of credit financed consumption you get your economy to produce/import and sell lots of goods. That’s great to stimulate the economy.
But at some point consumers HAVE to cut back spending to repay their debts. In this case “overconsumption” is an economic receipt for disaster. By spending more than you can repay WITHOUT the extra debt stimulus, you are creating jobs that are not sustainable, because consumers are forced to cut back spending in the future. Good-bye jobs. Good-by production.
Overconsumption financed by excessive credit is not a morality play. It is a great way to start a boom/ bust cycle. You enjoyed the boom, you have to endure the bust. Not because of “morality” but by economic necessity.
You hate the bust? Learn to control the boom in time. Sounds like morality? It is called economics,
Wednesday ~ December 1st, 2010 at 12:07 pm
Apex
Now this is the best comment I have seen explaining succinctly the point about over-consumption. When I say over-consumption, it is by defintion, debt financed. Otherwise its just consumption, not over-consumption. Over-consumption is not consuming more than you need, it’s consuming more than you can financially support. See my “silly” analogy above about consuming too much water. A monetary economic system cannot support consumption that is beyond what people can pay for indefinitely. People who provide the goods eventually expect to be paid. People who borrow the money eventually expect to receive their payments back. Although oddly enough, the over-consumption can continue a long time when the borrower only wants to receive their interest payments back and is willing to let the principle ride nearly indefinitely. That happen this time with all the strange mortgage products and the credit card minimum payments. But when it started to get to the point that even the minimum payments and the interest could not be paid, then they started wanting their money back and that’s when it all fell apart.
Those who supply the means to over-consume expect to be continually compensated for doing so. When the over-consumption exceeds the ability of the consumer to compensate those providing the means of the over-consumption, it will end.
Things that cannot continue will stop. Over-consumption cannot continue indefinitely.
Wednesday ~ December 1st, 2010 at 12:39 pm
Jim Baird
You are missing the whole point he is making. Of course, the problems we are having can be traced to finance. But that is just numbers in a spreadsheet. To say that real people must sit on their couches and real factories must be idled because some entries in the spreadsheet are wrong is to fall prey to the money illusion. So the debts got too big, and now there is a desire on the part of the private sector to net save? Deficit spend in order to provide the savings. Change the spreadsheet. It’s not brain surgery.
But to the original post: this gets at a common belief both among professional economists and laypeople that I think is destructive: what is an economy for? Is “work” the end goal, or is it the product of that work? You say that we say the Germany is “doing well” because it is working; would you say that a neighbor who is working 80 hours a week for minimum wage, living in a hovel and driving a Pinto is “doing well”? That doesn’t even begin to make sense – but that’s what the “export led growth” cheerleaders want us to believe. Keep your wages low, keep down consumption, all to build up floating exchange foreign reserves that don’t even guarantee you will be able to buy anything in the future!
The real solution is to follow internal policies (chiefly running deficits adequate to provide for savings demands in the currency of issue) that allow for full employment at home, no matter how much or your currency foolish foreigners want to accumulate.
Wednesday ~ December 1st, 2010 at 1:52 pm
Apex
“To say that real people must sit on their couches and real factories must be idled because some entries in the spreadsheet are wrong is to fall prey to the money illusion.”
Not that people should, or deserve to but the dislocations caused by their previous unbalanced misallocation makes it such that it is inevitable. Deficit spending might help but it will not get them off the couch immediately nor even prevent them from going there. You don’t turn construction workers into iPod factory workers by deficit spending.
It’s shocking that this idea of structural dislocation causing lag is a debatable idea. Construction workers can become iPod factory workers but not overnight and simply doing deficit spending doesn’t mean it will happen.
Wednesday ~ December 1st, 2010 at 4:28 pm
Gregor
Jim,
“To say that real people must sit on their couches and real factories must be idled because some entries in the spreadsheet are wrong is to fall prey to the money illusion.”
If the price of any good is just a meaningless spreadsheet entry, why isn’t everybody driving a Lexus/ Mercedes/ Ferrari? Since it only matters to keep people working, there is no incentive to produce a cheaper car. Actually the word cheaper doesn’t even exist in a world where money is just a spreadsheet entry. If money has no value, every price is just an illusion.
Which is either good good or bad news for workers, because it makes no difference, how much money they get for their work. It could be a dollar a day or a million dollar per hour. Just type anything you want into the spreadsheet. All they need to do is work. In exchange they can buy anything they want, because someone is adjusting the spreadsheet to pay the bill.
There is actually some value in work? Some work has a greater value add? Then, how is it possible that the result of their work doesn’t produce goods of different value? How do you express the difference in value, if the medium of exchange has no value at all?
“The real solution is to follow internal policies (chiefly running deficits adequate to provide for savings demands in the currency of issue) that allow for full employment at home, no matter how much or your currency foolish foreigners want to accumulate.”
This model exists. It is call “Juche”: “Juche literally means “main body” or “subject”; it has also been translated as “independent stand” and the “spirit of self-reliance”.
http://en.wikipedia.org/wiki/Juche
Wednesday ~ December 1st, 2010 at 10:07 am
Daily Digest for December 1 » New Deal 2.0
[...] Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore (Modeled Behavior) Karl Smith challenges the theory that our current economic downturn is the byproduct of consuming [...]
Wednesday ~ December 1st, 2010 at 12:16 pm
Axel
2 remarks if I may: 1) the main topic debated in this post is purely on morality and the way people should interpret/make a judgmeent on economics. Not much on economy itself.
2) Phelps golden rule, which is a basic extension of the Solow model (which is very basics macroeconomics) is exactly about how frontloaded overconsumption being credit funded leads to backloaded underconsumption. The over/under is qualified relatively to the optimal consumption path of the economy. In this model defined by just the right level of saving rates (real interest rates being equal to LT GDP growth). There is nothing moral about this….
3) may be the first step for economists to be more well received and understood would be to accept common sense as a good yardstick to test ideas, equations or posturing.
Wednesday ~ December 1st, 2010 at 1:48 pm
Apex
This is a great response Axel. I too felt there was far too much focus on the morality play line of thinking. I am not interested in that. And I would prefer by far that we not sit idle to “balance” the over-consumption, or to “pay for our sins” as it were. My argument has nothing to do with what we should do or what we must do or what we deserve to do. It has to do with what happens. And it happens because the dislocations are not easily and quickly remedied. Thus my comment about the housing worker not easily converted to an iPod factory worker.
Over-consumption creates an unbalanced economy where too many people get skills, experience, and networking capital in an area of the economy that will be declining in the future. To suggest that you just do some stimulus or QE and “change the spreadsheet” and that solves the real structural dislocations is pretty facile thinking.
Your comment about common sense to test equations and theoretical ideas is spot on. An economy is not a spreadsheet. You can’t just move numbers around and change the balance. It doesn’t get the unemployed construction worker off the couch.
Wednesday ~ December 1st, 2010 at 2:05 pm
Apex
It’s becoming clear to me from this exchange that too many economist want to use formulas in the economic equivalent of the “friction free environment” Newtonian physics formulas work great on the non-quantum level for good approximations of how things work most of the time. But they aren’t quite right in their simplified forms and on scales of greater speed they start to get off by quite a bit because in the real world there is friction and competing forces such as other sources of gravity etc, that alter the expected behavior.
Those arguing that over-consumption does not lead to under-employment are ignoring the structural imbalances that the over-consumption caused and are ignoring the lag (friction) that it takes to redeploy those resources in a productive capacity. They are also ignoring the psychological impact the dislocation causes on consumers, investors, and business owners (friction). All of these become more conservative until it appears that the coast is clear. Flooding the economy with excess cash does not make either of these frictions go away. It might help grease the wheels so to speak but greased wheels still have friction.
Furthermore, unemployment benefits actually increase friction for redeploying resources. I am not arguing against unemployment benefits nor am I arguing that people on unemployment wouldn’t sooner have a job. But the fact that they get paid some money even if they don’t work does not make it as urgent for them to seek to get off the couch, especially if they are already demoralized and believe that prospects for employment are low.
Wednesday ~ December 1st, 2010 at 3:21 pm
Lord
Why is there unemployment? Austrians would say they were producing what are now unaffordable or unwanted products and now must find something wanted to produce. They need to reduce their demands to find work, accept what is available, or remain unemployed. Others would say the employed are now being overpaid for their services, and inflation will allow real wages to fall and employment to rise. They would also say real output will rise as well. What do the employed owe the unemployed? What is the moral position, and what will leave us better off?
Wednesday ~ December 1st, 2010 at 4:30 pm
Hangover theory and morality plays : Invest My Money
[...] “hangover theory” was overhasty. What goes around comes around. Karl Smith offers a new dismissal of “overconsumption theory”, which Matt Yglesias echoes. Smith, like Krugman, is [...]
Wednesday ~ December 1st, 2010 at 7:21 pm
Economics as a Morality Play: Fighting Fire with Fire | The Traders Crucible
[...] on this idea by Karl Smith, who makes a great analogy: The punishment for spending too much money shouldn’t be to sit [...]
Friday ~ December 3rd, 2010 at 12:35 am
Zarathustra
I am sure it’s not just overconsumption. It’s about debt that people have to pay off. And it is not very much about working harder either. Why people aren’t working harder? Why people aren’t investing in building stuff and starting factories? We have to see that there are good investment opportunities in the first place before we would invest in a new factory so that there are more work that people can be done. If there isn’t any, I doubt if more work can be done. Yes at a personal level, everyone of course do more work, but is there any work for them to do?
just a little thought.
Also sprach Analyst
Friday ~ December 3rd, 2010 at 10:19 am
Discovery Friday #4: Modeled Behavior | Comments from Left Field
[...] As you likely know by now, every Friday at Comments from Left Field we’ve taken to sharing with you something we’ve discovered during the past week in a feature we call Discovery Friday! With all the talk this week about the deficit, the economy, unemployment and taxes this Discovery Friday feature is blog whose focus is on economics, Modeled Behavior. I stumbled across this site when the following post caught my eye: You Can’t Overwork Yourself By Smoking Joints and Watching Too Many Episodes of Jersey Shore [...]
Tuesday ~ December 7th, 2010 at 10:28 pm
Links « GT2211's Blog
[...] You Can’t Overwork Yourself By Smoking Too Many Joints and Watching Too Many Episodes of Jerse… [...]
Tuesday ~ May 7th, 2013 at 4:08 am
Natinkel
Insane Clown Posse hails from Detroit, which is not one of these pieces.
Music play a notable part in meeting up people with unlike ethnicity.