EconViz: New Tutorial: Why Central Banks Don’t Control the Money Supply…

Over at EconViz I've uploaded an unfinished tutorial I've been working on called, "Why Central Banks Don’t Control the Money Supply: A Visual Tour of the Macroeconomic Dynamics of Bank Loans, Reserve Requirements, Capital Requirements, and Cash Withdrawals."

For regular readers of technical Post-Keynesian and/or MMT material, it likely won't be anything new -- at this point it's mostly an intro to the relationship between bank reserves and broad money supply that shows why the mainstream "money multiplier" view is mistaken.

If you're interested in taking a look despite the incomplete state of it, I'll send you via the EconViz blog post since there is a mini poll up over there: New Tutorial: Why Central Banks Don’t Control the Money Supply…

Cutting Interest Rates to Boost the Economy: A Fallacy of Composition just like the False Notion of Cutting Wages to Create Jobs?

Does monetary policy work? Can the central bank meaningfully impact the economy and employment by altering interest rates? Or, as Warren Mosler sometimes suggests, are central bankers like the kid in the back seat turning the plastic steering wheel and thinking they are controlling the car?

Either way, most mainstream economists are firm believers in the power of monetary policy as a tool for steering the economy.

Let's first consider a different example of economy-wide price changes. Here is Paul Krugman (a prominent mainstream economist) on the fallacy of composition regarding wage cuts leading to greater overall employment (color emphasis mine):

"So let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

"Here’s how the fallacy works: if some subset of the work force accepts lower wages, it can gain jobs. If workers in the widget industry take a pay cut, this will lead to lower prices of widgets relative to other things, so people will buy more widgets, hence more employment.

"But if everyone takes a pay cut, that logic no longer applies. The only way a general cut in wages can increase employment is if it leads people to buy more across the board. And why should it do that?"

(To see an illustration of why wage cuts won't create jobs overall, try the EconViz pages on how spending equals income at the macroeconomic level and about price level changes aka inflation.)

Just for fun, let's change the word "wages" to "interest rates" for two sentences from the quote above, and inject one example ("houses"):

"...the belief that lower interest rates would raise overall employment rests on a fallacy of composition. In reality, reducing interest rates would at best do nothing for employment; more likely it would actually be contractionary... The only way a general cut in interest rates can increase employment is if it leads people to buy more [e.g., houses] across the board. And why should it do that?"

Word games do not a proof make, but let's work through how this fallacy of composition might apply in the case of interest rates as well as wages.

So, what is the transmission mechanism by which interest rate changes supposedly help steer the economy? Paul Krugman again (emphasis mine):

"Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.

"Now, what you learned back then was that the transmission mechanism worked largely through housing. Why? Because long-lived investments are very sensitive to interest rates, short-lived investments not so much. If a company is thinking about equipping its employees with smartphones that will be antiques in three years, the interest rate isn’t going to have much bearing on its decision; and a lot of business investment is like that, if not quite that extreme. But houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing."

So Krugman suggests that for the most part, corporate investment is not part of the transmission mechanism and that they key driver is housing. Here's Krugman again (emphasis mine):

"As I said then, there’s a definite change in the character of recessions after the mid-1980s. Before then, recessions were basically brought on by the Fed, which raised interest rates sharply to curb inflation, causing a slump in housing. When the Fed decided that we had suffered enough, it let rates fall again, and there was a surge from pent-up housing demand. Morning in America!

"Since then, however, inflation has been well under control, and booms have died of old age — or more precisely, they have died because of overbuilding and an excessive level of debt. The Fed is then in the position of trying to goose housing (which is the principal channel for monetary policy) even though housing may already be overbuilt (which was the point I was making, sarcastically, when I said long ago that the Fed has to create a housing bubble), and it is cutting rates from an initial level which isn’t that high. So the odds of running up against the zero lower bound are high, and recovery can be a long time in coming."

The quote above further emphasizes the housing channel, but acknowledges that after a housing bubble that has ended with excess inventory, the the Fed's policy efficacy may be reduced.

We'll revisit the housing channel in more detail soon, but first, what about the sometimes cited expectations channel? Here is blogger Winterspeak on Why the inflations expectation model is nonsense:

"Primarily, people save for things:
1. They cannot afford currently (and don't want to buy on credit)
2. Unexpected emergencies
3. Old age
4. Bequests for their kids

"2-4 cannot be moved forward and so are not inter temporal decisions the way the models treat them. Therefore, if savings are threatened, people will substitute into other stores of value such as fx or gold. They will not move consumption forward, as they cannot. This is not about consumption."

Additionally, if it turns out that there is no transmission mechanism from interest rates (the main policy lever of a central bank) to economic growth (and possible resultant inflation), then why should people alter their behavior based on the proclamation of Fed officials that they might "target" higher inflation? Target how?!?

Back to housing. We'll discuss a starting scenario (Scenario A) and four possible outcomes of monetary policy changes (Scenarios B, C, D, and E).

Scenario A (Starting Scenario) for Housing

Let's look closely at whether the housing channel EVER works (i.e., even when there has not been a recent housing bubble). Consider the diagram below of the relative quantities of different measures of housing: ownership (owned outright versus with a mortgage), vacancies (vacant versus occupied), and occupancy type (whether occupied homes are lived in by owners or renters). The diagram's format and example numbers were in part inspired by a graph featured at Calculated Risk, though I've chosen a slightly different way of showing things.



Scenario B for Housing

Now for scenario B, let's assume the central bank lowers interest rates in an attempt to stimulate the economy. The conventional wisdom is that lower interest rates motivate more people to borrow to buy houses. That's represented by the red arrow showing the size of the "Owner Has Mortgage" block expanding in the diagram below:



How do the other blocks react so that the first three columns always remain the same total height? In step 2 of this scenario, more new houses are built to keep up with this demand. But as step 3 shows us, the result is more vacant homes, since the central bank wasn't able to manufacture more people at the same time as it lowered interest rates!

What is the carrying cost of vacant homes? My cursory research suggests that in the US, property taxes range from 0.1% to 2% of a home's value (usually around 1%) and that annual maintenance costs fall in the range of 1%-4% of a home's value. Even if we very conservatively assume the average carrying cost of vacant housing were only 2% of the home's value per year, who exactly is supposed to shoulder that cost burden without putting their "excess" (not lived in or able to be rented) housing inventory on the market, thus competing with new home sales, and counteracting the effect shown in step 2?

Does this dynamic rely on highly inefficient markets, "irrrational" individuals, or sufficient time lags to induce a temporary spurt of economic growth? It seems plausible (to some degree) but not entirely convincing.

There is a situation in which it seems reasonable to assuming a growing supply of vacant homes -- during a housing bubble. The reason is that if home values are appreciating fast enough, home owners will overlook the annual carrying cost of the homes and assume that they are a profitable "investment" due to the unrealized capital gains. But housing bubbles are not the norm!

Is the inventory held tax free by home builders? Probably not -- on aggregate nationwide, they are unlikely to build excess homes if there aren't sufficient buyers in the pipeline.

Scenario C for Housing

Here's an alternate scenario to consider. In Scenario C (diagram below), steps 1 and 2 are the same as Scenario B (lower rates lead to more homes bought with mortgages), but in step 3 people are motivated by the lower mortgage rates to move out of shared multi-person housing and into newly purchased homes, reducing the average occupancy rate. So this is a scenario in which monetary policy could credibly have the intended effect on economic growth via the housing channel as more homes are built, creating more jobs and higher GDP. But how large is this dynamic? How many households have gainfully employed individuals (who would qualify for a mortgage) just waiting to move out of their friend's house or parents' basement when rates get low enough?



Scenario D for Housing

Let's consider a third scenario. After the central bank lowers interest rates, more people buy homes by taking out mortgages. But on average, owners who had no mortgage are net sellers (perhaps there is a relative portfolio shift by this demographic, on average, to other choices of assets). So in Scenario D, all that occurs is a shift in overall ownership mix between owners with mortgages and those without! There is no impact on economic growth or job creation!



Scenario E for Housing

Lastly, let's consider the possibility that lower interest rates have the effect of raising housing prices above what they otherwise would have been, since buyers obtaining mortgages would potentially qualify for a larger loan amount, allowing them to bid more for houses. To the extent that this occurs, lower interest rates wouldn't have as large an effect in lowering housing affordability (monthly payment) as the interest rate changes alone would suggest, and this scenario's diagram would look just like the original -- Scenario A... unchanged, with no meaningful effect on GDP.

In reality interest rate changes almost certainly aren't completely offset by housing price changes in this way, but there could be a partial effect along these lines!

Other Economic Impacts of Interest Rate Changes

Changes in interest rates might have impacts on other prices in the economy. For example, asset prices could change, driving changes in behavior due to portfolio and wealth effects. Savings rates might change -- for example when rates are lowered people need to save more to achieve savings goals such as for retirement, thus hurting GDP growth. Since the government is a net payer of interest (on government debt), lower rates reduce income payments to the private sector, also hurting growth. But interest rates paid between borrowers and lenders (both in the private sector) can also be impacted, causing distributional shifts. The point is that interest rate changes can have effects, but monetary policy is what MMT economists call a blunt instrument, and the overall effects are very difficult to determine.

Conclusion

Which scenario, B, C, D, or E is the most likely outcome of changes in interest rates with respect to the housing market? Are there other reasonable scenarios not covered in this post? Why do mainstream economists such as Paul Krugman recognize the fallacy of composition when it comes to whether lower wages will create jobs, but believe that lower interest rates have so much power over economic growth?

I would guess that in reality a mix of all four scenarios (B, C, D, & E) occurs. Given the limited macroeconomic impacts of each scenario, the bottom line is that the power of interest rates to affect economic growth and jobs appears very small. Could it really be true that the tool most readily used to manage the economy is a policy lever whose success depends as much as anything on bribing a few employed young adults to move out of their parents' basements, while at the same time exerting other contractionary effects on the economy that the mainstream fails to discuss?!?

UPDATE (same day): Moved an incongruous paragraph and assigned it to a new Scenario E, with minor rewriting. Also added one sentence within "Other Economic Impacts."

EconViz: Want to Design a Fun Educational Experience about Economics?

An excerpt from the latest post at EconViz Blog (my other economics blog):

Are you a good storyteller? Do you like the idea of creating a fun educational experience so compelling that people can’t help but learn new things about the economy and in turn share the experience with their friends?

If so, let’s talk about collaboration possibilities! Think of the technologies within EconViz’s tutorials as a sort of “palette” that can be reused in new contexts, mixed in with new content and functionality. The palette includes components such as a dynamic circular flow diagram (or any flow animation), programmable balance sheets, and potentially much more.

...

If this interests you, here's a link to the full post: Want to Design a Fun Educational Experience about Economics?

The Job Guarantee is a Description of a Prescription, like Much of Macroeconomics

While recognizing that most of this blogosphere discussion has passed me by months ago, I thought I'd share my perspective, redundant though it might be.

"Can you have MMT without a Job Guarantee?" The question phrased this way is a bit too ambiguous for my taste... I view the job guarantee as a description of a policy prescription. I agree with those who consider the job guarantee description to be integral to MMT, but I believe actual policy recommendations (prescriptions) can always differ by individual.

MMT describes the current economic system as it is and the policy space available to national governments. Any attempt at a full description of macroeconomics as viewed through the lens of MMT that lacks a description of employed versus unemployed buffer stocks would in my opinion be incomplete, as shown by the gaping black hole in this [partial] table of policy examples:


A full description of the economy (as you might find in a good macroeconomics textbook) should discuss both the agreed upon and the controversial pros and cons of each policy choice. For example, even mainstream macroeconomics textbooks discuss their own versions of the difference between being on a gold standard and not, the choices for social safety net implementations (such as unemployment insurance), etc. Yet there are plenty of advocates for going back to a gold standard and/or completely removing the safety net -- so there is no universally agreed upon policy choice in any of the above examples.

In a sense, to not describe all the relevant policy choices in the context of discussing a particular policy-related topic would be to advocate for the remaining choice(s). Thus, while I have some [small?] reservations and concerns about the job guarantee myself (despite my giving it the benefit of the doubt overall), I'm doing my best to communicate the pros and cons of each choice (including points of controversy) as I build content on EconViz.org.

To address a possible objection -- yes there are policy choices not on the above list that don't warrant description of each policy choice (e.g., "should government provide puppies for everyone?"). But MMT has shown all the above examples (and others) to be highly relevant to the goals of national governments.

Educational resources that represent fields of knowledge such as MMT or mainstream macroeconomics generally distill the most important descriptions from both the history of that discipline and the work of the current professionals within that discipline...

It's my understanding that all current MMT-affiliated professional economists consider the employed buffer stock to be a superior policy choice to the unemployed buffer stock, thus it's no surprise that they highlight the JG the way they do in the econoblogophere (a much more informal medium than academic papers). I think they have every right to express opinions along the lines of "you'd be crazy to know about this policy option [JG] now available to most monetarily sovereign nations and not to advocate using it" in the same way that mainstream economists express individual opinions about the gold standard, minimum wage laws, etc. And I think it's perfectly valid for any individual who discusses the economy in the light of MMT to judge that the "cons" of the JG concept outweigh the "pros" -- as long as that person is explicitly acknowledging both buffer stock options and describing the detailed reasoning behind his or her conclusions.

In case I haven't been clear enough, this is my personal perspective. I make no claims that this post is consistent with the way MMT professionals view this topic.

The Zero Waste Jobs Program Revisited: Can We Recycle Over 80% of Trash Instead of Under 35% While Ending Involuntary Unemployment?

I recently outlined an unconventional idea for a specialized jobs program implementation. If you are interested in the topic but have not read the post, please do so: The Ultimate Job Guarantee Implementation: Can we Achieve Zero Wasted Labor AND Zero Material Waste Simultaneously?!? Two excerpts:

"What if the role of job guarantee work was to "intercept" the not-currently-recycled part of the waste stream with the goal of reclaiming recyclable, reusable, and organic (compostable or biofuel-ready) materials to the maximum extent possible?"

"To repeat, the high level aspiration outlined here is to "kill two birds with one stone" by matching the goal of reducing human labor waste (involuntary unemployment) with the goal of reducing other external costs currently borne by society. This post focused on the "other external costs" related to materials flow and associated environmental sustainability, but are there other large-scale external costs a JG could potentially address?"

An interview summary at NPR reminded me that I spent some time researching the practicality of this after that last post (but didn't follow up). Some quotes from Edward Humes (via NPR), author of a book called Garbology:

"Americans generate more trash than anyone else on the planet: more than 7 pounds per person each day. About 69 percent of that trash goes immediately into landfills. And most landfill trash is made up of containers and packaging — almost all of which should be recycled, says Pulitzer Prize-winning journalist Edward Humes,"

"In a difficult economic environment, it's just crazy to take all this material and just bury it in the ground."

"The real solution is just to stop putting so much stuff in giant burial mounds, but that's a really tough nut to crack."

In January after the last post I researched a number of documentaries about the trash and recycling industries. One was particularly interesting: Garbage Dreams, a film about an unusual community:

"On the outskirts of Cairo lies the world's largest garbage village. A labyrinth of narrow roadways camouflaged by trash, the village is home to 60,000 Zaballeen — Arabic for "garbage people." The Zaballeen have survived for centuries by recycling Cairo's waste. Members of Egypt's minority Coptic Christian community, these entrepreneurial garbage workers recycle nearly all the trash they collect, maintaining what could be the world’s most efficient waste disposal system.

With a population of 18 million, Cairo — the largest city in the Middle East and Africa — has no sanitation service. For generations, the city’s residents have paid the Zaballeen a minimal amount to collect and recycle their garbage. Each day, the Zaballeen collect more than 4,000 tons of garbage and bring it for processing in their village, where plastic granulators, cloth-grinders, and paper and cardboard compactors hum constantly. As the world's capacity to generate trash skyrockets, Western cities boast of 30 percent recycling rates — admirable, until you compare it with the 80 percent recycling rate the Zaballeen can claim.

In 2003, following the international trend to privatize services, Cairo sold multimillion dollar contracts to three corporations to pick up the city's garbage. Shimmering waste trucks now line the streets, but these multinational waste disposal corporations are only contractually obligated to recycle 20 percent of what they collect, leaving the rest to rot in giant landfills. As these foreign companies came in with waste trucks and begin carting garbage to nearby landfills, the Zaballeen watched their way of life disappearing."

"... Unfortunately, the ability of the Zaballeen to both acquire and process Cairo’s garbage has become harder in the last few years. Cairo’s Zaballeen are still locked out of the trash trade by the multinational companies that arrived on the scene several years ago as part of the Egyptian government’s failed attempt to overhaul the municipal waste management system."

I don't want to downplay the potential problems with labor-intensive attempts to minimize the waste stream. For example, from the wikipedia entry on the Zabbaleen:

"The Zabbaleen community is characterized by both low health and high rates of disease, especially those related to their garbage collecting activities."

I haven't watched Garbage Dreams or read Garbology. But, here are some observations on the broader topic:

1. The assumption that more labor can enable more recycling appears accurate -- the Zaballeen were recycling 80-85% of Cairo's waste stream, versus as little as 20% for the corporations that replaced them.
2. The incentives and guidelines in place for these multinational waste disposal corporations (profit for shareholders plus whatever basic rules and regulations they have to meet) probably are NOT well aligned with the well being of the planet. Based on my admittedly superficial consideration to date, this certainly seems like an area that governments should be more actively involved in (in some countries, I believe they are, but I have not researched the details). Might not a specialized job guarantee be one feasible means of achieving public purpose here? (Note: I'm not arguing that the only way a Job Guarantee program could be beneficial is by focusing on reducing external costs in this way).
   
3. Surely a modern first world country such as the US has the resources to equip Zero Waste Jobs Program workers with adequate tools and safety equipment to minimize health risks? The Zaballeen's only sources of income were very low fees charged to residents, plus the waste material itself (selling it or products made from it) -- yet they achieved a lot with very little.
   

I'd be glad to hear comments, though you might first scan the previous post's detailed list of pros and cons related to this idea (it includes recognizing the merits of source separation and of consumers reducing their own waste streams, the merits of automation when possible, social stigma concerns, etc). It would also be interesting to hear if anyone has more detailed knowledge on this topic -- such as on the economics of the waste industry or on practices outside the US that demonstrate potentially preferable alternatives to tackling these problems.

UPDATE: Minor edits for clarity plus added one sentence at the end.

New Flow Visualizer and Minor Observations on Macroeconomics

In case you missed it, yesterday I introduced a preview of the Macroeconomic Circular Flow Visualizer via a post on EconViz (read the linked post to see more on possible future features and such).

Since I don't always get around to writing the longer ThoughtOfferings posts that linger on my "to do" list, I've been thinking of posting a (still infrequent) mix of bite-sized observations on macroeconomic dynamics. (Hey, the blog is called thought offerings!) Some of them may be inspired by the EconViz visualizers. They are unlikely to be novel, and apologies if I state the obvious too often. But, if there's an occasional observation I can't remember having seen discussed explicitly elsewhere and that I find interesting, then perhaps others will find it interesting too. And if you think I draw incorrect conclusions at any time, please speak up!

Here's one for today on the full autonomy of macroeconomic flow injections. The circular flow visualizer shows in green the three injections -- government spending, investment, and exports.

• A Post Keynesian revelation is that the injection of business investment has no dependency on the past leakage flow to saving (i.e., on the current quantity of savings). The mainstream believes you need savings to fund investment and also that central bank policy levers play a big role here.
• A MMT revelation is that the injection of government spending has no dependency on the past leakage flow to taxes (or on the whims of bond markets).
• Exports are "funded" thanks to foreign countries' circular flows of income, so combining the previous two revelations, the injection of export spending has no dependency on the past leakage to imports. (At least with floating currencies, governments sovereign in their own currencies, etc...) A question I don't know the answer to -- does the mainstream macroeconomics profession in countries with persistent trade surpluses worry about foreigners running out of funds to buy their exports??? (Since they'd believe those foreign economies' other two injections have constraints).
  

EconViz: New Tutorial: How Loans Create Money

Reposting from EconViz Blog:

Here is the first part of a new narrated visual tutorial:

How Bank Loans Create Money — Explained Visually in 3 Minutes

This part covers the very basics, so you're not likely to learn anything if you've followed this topic recently in the blogosphere or used the Macroeconomic Balance Sheet Visualizer... but I hope it might be helpful to those less familiar with the topic. The format also introduces a little more interactivity -- the last page lets you create and repay loans, pay interest, and default on loans. I believe the non-video format has more potential than I've used it for so far -- for example, it could include built in gamification and quizzes.

Part 2 will show the central bank's involvement -- including how reserve requirements, capital ratios, and cash withdrawals do not limit economy-wide lending -- and other related topics that distinguish the Post-Keynesian understanding from the mainstream.

Since the How the Economy Works tutorial turned into a bit of a monster (at half an hour of narrated content plus lots of text-only additional details) I'm going to try making new tutorials as short as I possibly can... 2-5 minutes per tutorial seems to me a good upper limit to attempt, but I am happy to have feedback on this (or anything EconViz related!)

Banks Dominate Euro Area Lending because of the Low Ratio of Short Maturity Government Debt?

The full mechanics of money supply endogeneity seem to be one of the remaining mysteries of macroeconomics. As I have explored for a couple years now (see for example the most recent two posts, A Visual Guide to Endogenous Money and the Failure of QE and Kaldor on Money Supply Endogeneity) there appears to be a truly remarkable layer of money supply dynamism that even most modern Post Keynesians fail to discuss. (And the mainstream of course remains hopelessly unaware, stuck on inapplicable theories like IS/LM that treat financial assets like commodities!)

Consider this chart showing the ratio of Bank versus Non-Bank Lending in the Euro Area versus the United States * (source: ECB Monthly Bulletin via Alea):



I've seen this difference referred to on occasion over the years, but I've never seen anyone attempt to ask or answer, "why the difference?"

I believe the reason is that the US government issues a much greater proportion of its debt as short duration (less than one year) as compared to the Euro Area governments, who rely much more heavily on longer duration debt:

Percentage of Euro Area Debt Maturing within One Year, by Nation, 2010 (Source: Eurostat)


Percentage of US Treasury Debt Maturing within One Year (source: The Economist):


Based on the charts above, the Euro Area countries seemed to average roughly 10% short duration debt (maturing within one year) and 90% long duration debt in 2009. The US government on the other hand has issued short duration debt much more heavily -- ranging from around 30% to around 45% of total treasury debt outstanding in the years leading up to 2009. (Unfortunately I couldn't find charts with dates or date ranges that exactly matched between the US and Euro Area).

As I explained in earlier posts on money supply endogeneity, banks seem to operate as a "lender of last resort" within the private sector. If there is a temporary "excess" of people who hold short duration assets (such as bank deposits -- i.e., money -- and short duration government debt which acts a lot like "money"), then these people will be more eager to lend (aka "invest", likely through an intermediary), thus transforming those short duration assets into long duration assets (debt assets). However, without that temporary "excess" of short duration assets, banks can always step in as the "lender of last resort", since bank loans create money. Thus any temporary "shortage" of desired short duration assets within aggregated private sector portfolios will disappear as the bank loans increase the money supply! These mechanics are covered in more detail at the previous posts linked to in the first paragraph.

(You can use this visualizer to compare bank lending, bond issuance, etc).

Bottom line: the private sector has to accept the maturity profile of the assets supplied to it by government (government debt satisfies savings desires), and builds upon that "starting point" to get to an aggregate desired portfolio maturity profile. In the Euro Area, it appears that this starting point includes "not enough" short duration assets, so to satisfy borrowing needs (note: borrowing needs are an independent dynamic from portfolio preferences), the private sector relies heavily on bank loans. But in the US, the "starting point" given by government already includes a larger proportion of short duration assets, so borrowing needs are filled using a larger ratio of non-bank lending, since non-bank lending changes the portfolio mix in a way that doesn't increase the percentage of short duration assets outstanding.

And as I've suggested before, if the US government embarked on a truly massive shock and awe style QE (many trillions of dollars of additional asset purchases) as proposed by Paul Krugman and perhaps others, it might inadvertently "kill" a lot of the US banking system, or at least kill off much of banking's traditional on-balance-sheet lending function. (Banks might still earn fees from originating loans before selling them to non-banks, and non-banks could also originate lending as they do now). And along similar lines, when MMTers sometimes suggest that the US government should not issue bonds at all, I wonder whether they are aware of the possible impacts on the banking system. Just to be clear, I'm not expressing an opinion on whether such a change would be good or bad, I am just pointing out that the system might be different in large and unpredicted ways.

* DISCLAIMER: The first chart only shows "External Financing for Non-Financial Corporations," so a chart that also included household borrowing might tell a very different story that could contradict the analysis in this post. It seems improbable to me that there is a massive reliance by European households on non-bank lending that would be large enough to offset the corporate reliance on bank lending, but I'd be glad to hear if I'm wrong.

UPDATE 2:21pm:
First, I realize I failed to discuss how the propensity of US households toward bank borrowing versus non-bank borrowing (of unknown amount) could change the premise I introduced with the first chart by making the Euro Area and US look more alike when considering the entire private sector's borrowing rather than just corporate borrowing.
Second, the title read as more definitive than I originally intended, so I added a question mark -- this blog post's content (statements often prefixed by "I believe...") is still largely speculative, though there seems to be supporting evidence in the Circuitist literature (as I interpret it).

Tutorial Seeking the Right Audience

Reposting from EconViz Blog:

How the Economy Works — a Visual Tutorial seeks the right audience of would-be learners. This seems most likely to be:

1. People who would like to learn more about the nuts and bolts of how the economy works and some of the things wrong with conventional wisdom, but don't have the time or patience for the econoblogosphere, academic papers, or textbooks.
2. Newcomers to MMT interested in a "quick start" overview before delving deeper into the core MMT material available at Mosler Economics, Billy Blog, Economics Perspective from Kansas City, etc.

The feedback a few months ago when I put the first draft online was positive and responses suggested the material worthy of recommending to others. (And I have been attempting improvements ever since, though the core set of topics/pages covered has not changed, so you probably won't see much that's new if you've already gone through it).

So lest it just gather dust, please consider passing the link on to interested friends / family / etc if you believe doing so could be beneficial. I hope at least a few will use the variety of available mechanisms to give feedback on which parts are easy to understand and which parts still need more clarity... and optimizing the content as I get feedback will be an ongoing project for me.

http://econviz.org/how-the-economy-works-visual-tutorial/

Some people requested more breadth and depth of content. I still hope to cover many more topics (an aspirational roadmap is here) using current and new visualization mechanisms, but given the time involved in producing multimedia content like this, I don’t want to get too far ahead of having an audience for the content. The good news is with the content platform improving by the month as I tweak it, future content will be less time consuming to create.

Of course I know I have to do some work to promote this content too, and do have a few ideas on where to start. But I’d be glad to hear suggestions.

The Ultimate Job Guarantee Implementation: Can we Achieve Zero Wasted Labor AND Zero Material Waste Simultaneously?!?

Discussion in the MMT blogosphere has focused recently on the "Job Guarantee" (also known as "Employer of Last Resort", "Transition Job", or to some, "Workfare".) The concept is that everyone should have the option of a federally funded but locally administered minimum wage job. The economic motivations include (1) achieving loose "full employment" even when there is insufficient aggregate demand (spending) to create private sector jobs for everyone who wants one, and (2) enhancing macroeconomic price stability (low and stable inflation), and (3) raising the long term productivity of the economy. Job Guarantee (JG) proponents are among those who consider mass involuntary unemployment to be an enormous waste of willing human labor, resulting in many direct and indirect costs to society. And even Ben Bernanke has said:

"Long-term unemployment imposes severe economic hardships on the unemployed and their families, and, by leading to an erosion of skills of those without work, it both impairs their lifetime employment prospects and reduces the productive potential of our economy as a whole."

One of the recurring topics of JG debate is "what would all these people do?" Some commenters have a variety of constructive answers to this question, while others suggest than any job tasks chosen by the government (even local government, as opposed to Congress) would be a "boondoggle." I am not familiar enough with the academic research and modeling to weigh in with strongly held opinions for or against the JG concept in general (though I lean strongly toward giving it the benefit of the doubt), but this post will outline a concrete JG idea I have not seen described elsewhere. There are aspects of the idea I find highly compelling, but I expect some people may hate it.

First, some brief context. Modern economies have major problems with their environmental sustainability. One of these problems is that they have evolved to treat natural resources as an "input" to human activity and accepted a large waste stream as an "output", as though the economy were the center of reality. There have always been some observers warning that economies exist WITHIN the natural environment, not APART from it, and economies must adapt to function in a sustainable closed-loop way just like natural ecosystems -- where the output of every system of production and consumption is ultimately an input to another such system. Here is a diagram from zerowaste.org reflecting the current economic system's material flows:

Here is a diagram reflecting the conceptually ideal zero-waste closed loop system:

Three of the major problems with the current system as shown in the first diagram are external costs, that is, costs borne by society at large:

1. Land fills consume finite land (for which available locations are diminishing), and can be unpleasant and costly to administer.
2. Garbage incineration contributes to air pollution that adversely effects health, and consumes many materials that might have had better forms of reuse.
3. The economy's raw material input requirements are larger than would be necessary if we reused more of our waste stream. In addition, the methods we use to extract new raw materials typically have large external costs as well (e.g., habitat destruction and pollution from mining). These external costs go down when we reuse more materials.

What if the role of job guarantee work was to "intercept" the not-currently-recycled part of the waste stream with the goal of reclaiming recyclable, reusable, and organic (compostable or biofuel-ready) materials to the maximum extent possible? Source separation (such as separate curbside bins) should certainly still be encouraged wherever possible to create pre-separated streams of recyclables, organic waste (yard and food scraps), and general trash, however many localities don't do any separation at all, and even general trash streams will inevitably contain recoverable waste. So a JG zero-waste program would focus specifically on reducing the waste streams that are currently going to landfills or incinerators.

The pie chart below shows the composition of the 250 million ton annual waste stream in the US, of which only 34% is currently recycled! (Source: EPA). That 66% currently going to landfills and incinerators contains extraordinary amounts of valuable material! Separating it further would be labor intensive work, and would probably not be profitable for individual companies extracting only the materials they could sell for more than the cost of labor. But, the job guarantee concept isn't intended to be "profitable" in such a narrowly focused sense!

An underlying presumption in this idea is that the more human labor is available for sorting, separation, and dis-assembly of complex items, the higher would be the percentage of the waste stream that can be reclaimed for new uses. There would likely be diminishing returns in adding new labor as separation of reusable materials approaches 100% of the waste stream -- since some portion of the waste stream may be too complex or contaminated for separation -- but this also means a potentially huge number of JG workers could be usefully employed, so the JG program could be exclusively focused on this goal! Here is a purely speculative graph of this labor vs output relationship (I have no detailed knowledge of the waste industry, so this could be inaccurate!):



Of course, automation should be used in waste stream separation to the maximum extent possible, and we shouldn't abuse "cheap" labor if there are reasonable automation options available! Single-stream recycling facilities already have impressive technology for separation of material types, and technologies for processing "dirty" trash streams appear to be advancing too! But based on my limited knowledge, even these advanced "dirty" processing facilities still require some human labor in the sorting process, and may also be too expensive for many municipalities. We are probably still decades away (I'm guessing!) from sophisticated enough computer vision and robotic dexterity to achieve everything a human can in this type of process.

I expect this to be a controversial suggestion, in part because of the "trash" association and concerns about human dignity (perhaps this is an inherently bad idea!) but I'll run through some of the pros and cons I can think of. Here are some advantages:

• Job guarantee workers would be providing an obvious-to-all public service with broadly shared benefits, because the waste stream is produced by just about everyone, and the negative externalities being reduced would otherwise be suffered widely also. With other JG roles sometimes suggested by commenters (reading to the elderly, planting trees in parks, removing graffiti, etc) there might be concerns by voters about jobs benefiting some demographics more than others, or about potentially poor choices of projects in general. But everyone benefits from a zero material waste economy!
  
• If a program of this type intercepted the part of the waste stream not already being reclaimed, it would not compete with the private sector or charities (or perhaps very minimally). Presumably this work is too labor intensive to be cost effective for private industry, but cost effectiveness (with the typical narrow definition of a single entity's cash flow) is not the goal of the job guarantee.
• It is inherently local (which is one of the MMT design choices for implementing a JG), because waste streams are produced everywhere people live and work!
• The financial costs of waste handling are often already paid for by municipalities (source).
  
• The savings in materials-flow-related external costs alone (pollution, landfill space, and raw material inputs to the economy) could significantly offset the program's "costs" in terms of wages paid to JG workers (not that a JG program should be required to be provably "profitable" to be considered a success).
• After also accounting for the benefits to society of reduced involuntary unemployment (e.g., reductions in mental illness, crime, family breakdown, soup kitchen spending, safety net transfer payments, etc) such a program would look even more cost effective!
• It would scale easily with the ever-changing size of the JG's buffer pool of workers. If the economy booms and the JG pool shrinks and there is no fiscal adjustment made by federal government to increase the pool (potentially needed if inflation were accelerating), then more of the waste stream will simply end up in the landfill or incinerator as is the practice today. Thus "zero" waste would be an exaggeration, but the waste reduction might still be large. Conversely, if the economy contracted and the JG pool of workers grew large, perhaps the sorting process could focus on reclaiming a much larger percentage of the waste stream, possibly even with extra time to break down and disassemble complex waste into component parts. What would the "typical" size of the JG pool of workers be? At least one MMT economist has suggested it might average around 3% of the work force.
  
• Waste sorting and separation jobs would be easily filled by unskilled labor, consistent with the "hiring off the bottom" goal of the JG.
• A job guarantee is widely recognized as setting a floor on economy-wide wages. However, it might also set a floor on conditions. Some commenters have expressed concern that having too many jobs viewed as "easy" in a JG (reading, tutoring, etc?) could be a problematic competitive force attracting workers from private sector jobs to the JG. An assumption in this thinking is that society relies on some industries in which the work can't be made "fun" and "easy" and while there should certainly be safe and humanitarian working conditions enforced, those industries' attempts to pay enough to retain workers might result in problematically large shifts in private sector wage structures, potentially raising the general price level by enough to force the nominal JG wage too far below a "living wage" to be politically acceptable. Thus, for better or worse, waste stream handling as a choice of JG program would be likely be seen by voters as not setting an overly "cushy" floor for work conditions.
• Waste handling is a large enough problem that it might (?) be able to absorb ALL JG workers (even if that represents 3% or more of the work force).
• Waste handling is a national and global problem so best practices could be shared widely across implementations.
  
• Such a program might be able to piggy-back on some existing infrastructure.
  
• Such a program might not be seen by voters as "make work" (see CETA-related quote here), and thus have higher political feasibility than some JG suggestions?
  

Here are some potential drawbacks:

• There could be a large social stigma for JG workers handling society's waste in this way. But would it be worse than the social stigma of unemployment? And might society's notions of dignity be able to evolve? After all, one of nature's waste handlers, the scarab (a type of dung beetle), was considered sacred in Ancient Egypt...
  
• Concerns may arise about the moral hazard for households and businesses in knowing that someone will "clean up after them." But with a national emphasis on good practices in sustainability, hopefully there could be ways to minimize this. And certainly manufacturers and such whose waste output is already regulated should continue to bear a higher responsibility (enforced by regulation) for minimizing their waste streams. (Often this process turns out to be profitable for them anyway.)
  
• Such a program might not be "transitional" enough -- does it adequately prepare workers for transition to the private sector when a job becomes available? I don't know, and I'm not sure how favorably it would compare in this respect to other job types suggested for unskilled labor in JG programs.
• Could the potential for unsanitary organic waste (dirty diapers!), sharp metal or glass, hazardous chemicals, etc make it too dangerous? Are there standards for hazmat suits and assistive tools and technology that would suffice? Even assuming so, there would need to be some sort of externally administered inspection process to ensure safe working conditions.
• Could such work inherently lead to repetitive stress injuries? I'm not sure how highly repetitive such sorting tasks would be given the nature of a mixed waste stream -- it could include some interesting dis-assembly of a big variety of items (toys, electronics, furniture, etc) into their component pieces. Perhaps every certain number of hours would involve a shift in the "creative project" room designing and building the [mini-]pyramids for the 21st century and other art out of the waste not useable for other applications!
• Separability of materials might be too difficult if organic waste can cause too much contamination... but this might be addressed with larger source separation initiatives (curbside food and garden waste containers) along with a willingness to send unrecoverable bags or clumps of trash to the landfill-bound conveyer.
• Energy use for sorting, transportation, and reuse might be more of a limiting factor than the needed human labor. If getting the separated materials back into the industrial production stream in a useable form required too much energy, such a project might not be popular (at least until further strides are made in renewable energy). Of course, the organic waste stream may itself be an energy source given ongoing innovations in waste-to-energy technology.
• Some new infrastructure (facilities and equipment) might be required. This could actually be beneficial to the economy if there was enough spare economic capacity to build and produce what was required within putting undesirable upward pressure on prices.
  

Aside from the drawbacks above and whatever else I've overlooked or gotten wrong, this almost seems too good to be true! What do you think?

To repeat, the high level aspiration outlined here is to "kill two birds with one stone" by matching the goal of reducing human labor waste (involuntary unemployment) with the goal of reducing other external costs currently borne by society. This post focused on the "other external costs" related to materials flow and associated environmental sustainability, but are there other large-scale external costs a JG could potentially address?

What are the lessons of CETA? (a 1973 US jobs program)

Last May I ran into a reference to a jobs program started in 1973 called CETA (Comprehensive Employment and Training Act) that at its peak employed more than 700,000 people. At the time I searched the major MMT blogs as well as the papers I could find on Job Guarantee / Employer of Last Resort policy and implementations, and I didn't find any discussion of it. I posted comments asking about it on a couple major MMT blogs, but no one weighed in at the time. It occurred to me given the recent JG discussions to ask again, and a search in my feed reader hasn't uncovered any new references to it. (Disclaimer: my lack of results could be entirely my failure to search thoroughly enough.)

Overview from wikipedia: “a United States federal law enacted in 1973 to train workers and provide them with jobs in the public service… The program offered work to those with low incomes and the long term unemployed… The intent was to impart a marketable skill that would allow participants to move to an unsubsidized job. It was an extension of the Works Progress Administration program from the 1930s. The Act was intended to decentralize control of federally controlled job training programs, giving more power to the individual state governments.”

An opinion writer at politicsdaily that had came up in my quick search results said: “That was the crux of the policy dilemma: The voters did not want make-work and the unions did not want real work.” And, “CETA employees did perform useful work — from asbestos removal to assisting in libraries and senior citizen centers.” And, “Following the questionable gospel that state and local governments always know best, CETA programs were decentralized.” And, “But the problem with CETA was not that it embodied Big Government, but that it was not big enough.”

The program sounds like it shares a number of characteristics with the Job Guarantee as proposed by primary MMT authors, and it's more recent than the Great Depression work programs that people often mention in comments. So, what did it do right? What did it do wrong? What are the lessons learned? Why is it not being used as an example in these discussions, or mentioned by primary MMT authors? (Perhaps it has been and I've just missed it). Was it successful for its size (despite not being an unlimited offer of work positions at the policy wage, as proposed under a JG) but just not big enough to matter? Were there major unintended consequences that weren't addressed? Was it ultimately sabotaged on ideological grounds by free market fundamentalists? Did the voters and the unions reject it on the grounds quoted above? Anyone know or have useful links that I've overlooked?

UPDATE 1/15/2012: Corrected the first paragraph. It had falsely referenced Jimmy Carter as associated with the start of this program (either I mangled the notes I took a year ago or the original source I found was wrong -- I should have caught that presidential year mistake -- oops!)

Kaldor on Money Supply Endogeneity

Some of my posts starting in October 2010 (the most recent one is here, with some conceptual graphics) have focused on the endogeneity of the money supply independent from the broad Post-Keynesian observation that loans create deposits. That is, the dynamism of the economy (largely courtesy of the financial sector) seemingly allows households and businesses on aggregate to self-determine their portfolio composition -- i.e., how much "money" they hold -- independent of both government policy and private debt levels.

Whether due to lack of familiarity or considered relative unimportance, there seems to be very little attention to this dynamic in the MMT-oriented econoblogosphere, even among the "primary" MMT bloggers when they discuss QE. If money supply endogeneity were only about loans creating deposits, then one should still expect to see QE changing broad money supply from whatever trend(s) it was already on, since QE isn't generally assumed to change people's propensity to borrow or their rate of deleveraging. Here are two updated charts of the MZM (Money Zero Maturity) measure of broad money supply:





Money supply did not grow as much as the QE operations alone would suggest. The actual trends are very volatile (probably having to do with uncertainty and liquidity preference during recession and expanding financial assets in line with a growing economy during economic growth) and so it's difficult to say anything conclusive other than that QE did not provide a 1-to-1 increase or obviously "shift" the trend lines while active.

Ramanan recently posted two great quotes from Nicholas Kaldor's The Scourge Of Monetarism (Oxford University Press, 1982). First, via Ramanan (emphasis mine):

"As it is, a highly developed banking system already provides such facilities on an ample scale, since it is prepared to accommodate the public’s changing demand between different types or financial assets by altering the composition of the banks’ assets or liabilities in a reverse direction. If the non-banking public wishes to switch its holding of gilts for interest-bearing bank deposits, the banks are ready to supply such deposits at the minimum of inconvenience, and at the same time to place their surplus funds into the gilts which were previously held by the public. Similarly the banks provide easy facilities to their customers for switching balances on current accounts into interest-bearing deposit accounts, or vice versa. Hence, while the annual increment in the total holding of financial assets of the private sector (considered as a whole) is nothing more than the mirror-image of the borrowing requirement of the public sector (in a closed economy at any rate), neither the Government nor the banks can determine how much of this increment will be held in the form of cash (meaning notes and current deposits) and how much in the near-equivalents to cash (such as interest-bearing demand deposits) or in various forms of public sector debt. Thus neither the Government nor the central bank can control how much or the total financial assets the public prefers to hold in the form of ‘money’ on one particular definition or another."

Kaldor certainly appears to have these concepts mastered (including financial sectoral balances) and this was 1982! It's amazing to me that virtually none of this could "rub off" onto the economics mainstream over a period of three decades! Ramanan quotes more interesting details from Kaldor in a second post (follow the link to read it).

This seems to me largely consistent with dynamics I've postulated. A copy and paste from my last post's summary of mechanisms:

Overview of Ways the Private Sector Can Reduce "Unwanted" Broad Money Supply:

1. Replace loans (which create money) with non-bank borrowing (which does not create money) independent of total debt levels. Examples of non-bank debt include corporate bonds, peer to peer loans, securitized loan pools, housing agency debt, etc. Most of this post focused on this mechanism.
   
2. Induce less bank lending by changing aggregated propensities to borrow. For example, many reports indicate a record number of cash buyers have been supporting the housing market. Logically, if there is an "excess" of deposits in the economy, then investors who would rather own other assets may outbid other potential buyers of those same assets who would have bought using debt. Thus, while QE's added money supply in this case doesn't eliminate existing bank loans, it serves to reduce the number of houses bought using bank loans, while at the same time other loans are continually being paid down. The net effect is that bank lending moves to a lower level than it would have been at had QE not occurred. Those who lost the bid for houses (who would otherwise have bought with a bank loan) might rent from the investors instead, so this point does not imply that QE will cause some to have no place to live.
   
3. Banks can sell assets (treasuries, loans, etc) to the rest of the private sector. A net decrease in assets in this way causes a net decrease in broad money supply. To see how this works, visit the Macroeconomic Balance Sheet Visualizer, and choose the operation "Bank Loan" followed by "Bank Loan is Securitized" (which is one way banks sell assets to the non-bank sector).
4. Banks can fund themselves with a higher portion of non-deposit liabilities (e.g., bonds) instead of deposit liabilities. This results in less broad money supply. As I understand it, this was part of the dynamic that RSJ described in this post.

I'm not sure whether I'm odd to find this stuff fascinating or whether my descriptions are not clear and/or don't seem credible (and I admit I still may have some things wrong!). It may just be that this is clearly less important than topics on "fixing" the economy's current primary problems. But I've considered putting together a mini step-by-step visualization on EconViz on this topic (when I can get to it) -- if anyone would find this beneficial in clarifying these interactions, please say so.

The US Becoming Japan... not in the way you may think!

It has become common in recent years to suggest that the US is headed the way of Japan, with the implication being that Japan has been an economic failure in recent decades. (I starting expecting in the early 2000s that the US would follow Japan, also, but for some right and some wrong reasons). Last year and again today I've highlighted the huge degree to which Japan's economic performance is a story about demographics and the confusion about nominal versus real in the context of periodic mild deflation.

However, by failing to adequately support US economic growth (that is, incomes and employment) in the wake of the "Great Recession", policy makers may yet find a way to send us down Japan's path:

"A sharp decline in fertility rates in the United States that started in 2008 is closely linked to the souring of the economy that began about the same time, according to a new analysis of multiple economic and demographic data sources by the Pew Research Center." -- In a Down Economy, Fewer Births

and

U.S. population grows at slowest rate since 1940s

So, poor economic growth could become a self-fulfilling prophecy via the demographic channel itself!

Of course I'm exaggerating for effect. The drop off in US fertility rate (about a 7% fall from 2007 to 2010) is not yet anywhere near large enough to give the US a demographic outlook like Japan's... plus there are long lags in demographic effects, and other factors such as immigration rate. And according to Eamonn Fingleton the reasons for Japan's demographics are quite different:

"The story begins in the terrible winter of 1945-6, when, newly bereft of their empire, the Japanese nearly starved to death. With overseas expansion no longer an option, Japanese leaders determined as a top priority to cut the birthrate. Thereafter a culture of small families set in that has continued to the present day."

"Japan’s motivation is clear: food security. With only about one-third as much arable land per capita as China, Japan has long been the world’s largest net food importer. While the birth control policy is the primary cause of Japan’s aging demographics, the phenomenon also reflects improved health care and an increase of more than 20 years in life expectancy since 1950."

Nevertheless, if US policy makers were to sabotage the US economy further by actively imposing austerity, we might yet follow in Japan's economic path (or worse) but in a different way than typically suggested!

I should also note that I'm not suggesting that higher population growth rates are inherently better, just that they contribute to economic growth (for better or worse). I recognize the planet's finite resources are being strained, but I am also a mild optimistic regarding our ability to accelerate "radical resource productivity" with the right fixes to the political system and the current massive problems of externalized costs.

Myths about Japan's Stagnation Revisited

Almost a year ago I posted two graphs and some comments on Real GDP Per Capita and Myths about Japan's Stagnation. I had realized that demographic factors and mild deflation played a different role than the conventional wisdom which held that they are each merely a factor in Japan's supposed "malaise". It turned out that demographics and the difference in real versus nominal growth entirely account for the illusion that Japan has suffered two lost decades. That is, real GDP per capita growth for the US and Japan since 1980 are remarkably similar, with one [longish] period of meaningful divergence. Here are the same graphs repeated from my post last year:

Annual Growth of Real GDP Per Capita in the US and Japan (1980-2009)



Annual Level (Indexed) of Real GDP Per Capita in the US and Japan (1980-2009)



Recently there has been some discussion among higher profile bloggers on this topic:

• The Myth of Japan’s Failure by Eamonn Fingleton
• Japan, Reconsidered by Paul Krugman
• Japan's Lost Decade: All Too Real by Matthew Yglesias
• Japan had one lost decade, but not two by Noahpinion
• More On Japan (Wonkish) by Paul Krugman
• The Japan Story by CEPR

Noahpinion may have read my previous post because he or she used my first graph above without changing the file name I had chosen.

I won't discuss all these posts in detail and there are points in each I disagree with.

However, Paul Krugman's second post contains a graph of Japan's Log Real GDP per working-age resident. I had myself been interested in the per-working-age-resident data as compared to the per-capita data, since changes in the participation rate (partly due to demographics) could cause the two to differ, but hadn't gone to the trouble of getting the data. Unfortunately Paul Krugman starts at 1990 rather than 1980 and so I'm not sure his conclusion tells the full story:

"This picture suggests that the Japanese economy was indeed depressed for about 16 years, and deeply so after the slump of the late 1990s. But it may have returned to more or less potential output on the eve of the current crisis."

Look at my second graph (above) and you can see the extraordinary growth in the late 1980s in Japan. Was this growth "above potential"? Was Japan somehow borrowing from the future in the 1980s, and are the Austrians correct that slower growth in the 1990s to undo the "excesses" and get back to the trend line must be an inevitable outcome? (I do think the answer is closer to "no" than "yes", but don't have all the answers for how/why).

Is the correct framing Krugman's, i.e., that Japan stagnated from 1990 onward and didn't return to the potential growth trend line for a decade and a half? Or is the more accurate framing that Japan's growth accelerated above trend line in the 1980s and took a decade to revert to the trend line? (In a mostly smooth fashion, excepting the unfortunate 1997-ish austerity, rather than a crash and depression!)

I believe MMT shows how the "hangover" theory of economic growth is wrong (as opposed to asset prices, which MMTers generally agree must be allowed to adjust after bubbles pop). This is because it is always possible for the flow of national income to be sustained by government deficits or net exports even if the leakage to private sector savings increases. Perhaps there was a massive inventory effect from overbuilding of real estate in the 1980s, requiring less building in the 1990s. Should that or other dynamics have pushed unemployment so low as to cause accelerating inflation? Glancing at some graphs it appears Japan's late 1980s unemployment got down to around 2%, with inflation rising to around 4%. What would have happened if the economy hadn't slowed after 1990? Would inflation have accelerated upwards uncontrollably? It doesn't seem obvious that it would, but I don't know the answers.

If not an "overbuilding" dynamic or a labor force participation dynamic (not yet investigated), then perhaps the majority of the late 1980s surge can be explained by a huge above-trend rise in productivity. If so, is there any implication that productivity will inevitably grow below trend after such a surge? It doesn't seem like such a reversion should be inevitable, but perhaps there are dynamics specific to the types of productivity improvements in Japan in that time frame that would provide more answers.

Comments and insight are welcome.

I'll split a few more observations on demographics into a separate post to keep this from getting too long.