Tag Archives: economics

what’s up with the U.S. dollar?

The U.S. dollar has declined sharply against the Euro, a basket of major currencies, and gold since mid-May. What does it mean? I don’t know, you should ask the experts! But I’ll try to figure it out.

First, the actual numbers. The dollar has declined sharply, but the actual exchange rate at the moment is around the middle of a band the dollar has traded in since 2014 or so, and it has declined sharply during that time only to recover. So the fluctuations could be random about some long-term mean, or in response to events, but followed by a reversion to the mean with random fluctuations thrown in.

Second, the textbook answer to whether a strong (or weak) dollar is good or bad. All other things being equal (which they are not), investors would trade other currencies for U.S. dollars if they could get a better interest rate on U.S. dollars than on their home currencies. This might be the case in recent years, as interest rates have been low around the world, and even negative in Europe, but slightly higher in the U.S. All other things (including interest rates) being equal, investors in other countries would trade their currencies for U.S. dollars if they thought this was a safe place to put their long-term savings. Most governments (maybe the Swiss) don’t actually keep enormous vaults full of gold bars hidden under mountain fortresses any more. This has been exactly the case since the 1997 financial crisis, with developing countries and China in particular buying and stashing enormous quantities of U.S. dollars. This might be changing for a few reasons. China may be gaining more confidence in its own currency. Europe has decided to pull together and start backing its currency with EU bonds rather than just bonds from individual countries. Countries also have the option of holding baskets of foreign currency rather than just the U.S. dollar, and also the option of forming sovereign wealth funds with more diversification and potentially much higher returns than currency reserves alone. Finally, the long-term health and stability of the U.S. financial and political systems look shakier than they have in a century or so.

Third, is it good? It’s good for exporters, bad for ordinary people paying higher prices for things that have to be imported, maybe good for home-grown industry which could be more competitive with pricier imports. It’s bad for Americans living and traveling abroad, as I found out from personal experience, but that is a small fraction. So on balance, the main risk domestically seems to be price inflation, and that seems somewhat unlikely in the midst of a historic recession. Exploding debt and low or no growth for an extended period of time could lead to a problem making interest payments down the road, but we need to get through the current crisis before there is a long term to worry about.

modern monetary theory

This might be the clearest explanation of modern monetary theory for the layman (like me) that I have seen so far. This is specifically in a developing country context.

Kaboub is an advocate of Modern Monetary Theory (MMT), an approach that views states as the source of money creation through the issuing of currency, and taxation as the destruction of that money supply. In this formulation, states do not use taxes to fund policies but rather create funding through issuing currencies, while taxation is used to curb inflation or disincentivize social practices that are seen as harmful, such as pollution or extreme inequality. MMT has grown increasingly popular among left-leaning politicians in North America and Western Europe, and is beginning to make its way into African political discourse as well.

Rosa Luxemburg Stiftung

Money is a store of value and a means of exchange, I learned in my one or two lectures on the subject in the 1990s. I’ve always wondered if you could separate the two by having one form of money that has an expiration date and one that does not. Of course you can – think of coupons or frequent flyer miles. If you need to stimulate the domestic economy, you can use the one with the expiration date. You would use the other in international trade, for retirement savings, etc. You would have to decide if you would let people pay taxes in the temporary currency. Businesses would have to decide if they are willing to accept the temporary currency, unless you forced them. An exchange rate would probably develop between the two forms of currency, unless you outlawed that. Prices and exchange rates could be volatile. New mutant forms of debt and derivatives would probably arise. Foreigners and corporations would speculate and manipulate unless you tried to stop them. Come to think of it, maybe there is a reason currency is the way it is and the status quo is hard to change.

revisiting the trophic theory of money

One of my most popular posts ever is a brief musing about the “trophic theory of money” I wrote back in 2014. Brian Czech, who developed or at least clarified and named the theory, has a new journal article about it here. He writes pretty well for a lay audience so I would encourage people to read the paper rather than rely on me to summarize, but nonetheless here are a few key points in my own words so people can start yelling at me:

  • Before humanity figured out how to produce an agricultural surplus, everybody was trying to scratch a living out of the dirt and there was no need for money to be invented. Once the agricultural surplus became significant, many people were freed up to do other things and this led to money. So money is essentially measuring the amount of activity happening outside of agriculture, and indirectly measuring the amount of agricultural surplus that allows this to happen.
  • Towards the end of the paper, Mr. Czech acknowledges that improvements in technology over time (usually driven by intentional investment in research and development) have been able to reduce environmental impact per unit of economic activity, even though total environmental impact has continued to grow. However, he believes this process has nearly reached its limit and will not continue much longer.
  • It is possible the economy could transition to a steady state where GDP (adjusted for inflation) is no longer growing. It is also possible our environmental impact will overshoot the planet’s carrying capacity enough and for long enough that a sharp contraction in GDP (and necessarily, the amount of agricultural surplus) will occur.

Where do I stand on this? I take the laws of thermodynamics, and the fact that humanity is a species existing within and not apart from nature, as a given. I think there is a lot of knowledge out there yet to be discovered, and if our society took the right steps we might be able to keep growing in a sustainable way for some time. I don’t think there is any evidence that our sociopolitical system even understands the problem let alone is likely to take those steps. I don’t think action on the necessary scale will take place unless and until we reach a crisis stage. About the most positive I can be is to hope for a relatively minor crisis rather than a civilization ending one.

the end of “shareholder primacy”

From Project Syndicate:

The Business Roundtable, an association of the most powerful chief executive officers in the United States, announced this month that the era of shareholder primacy is over.

Does this signal a new era where companies consider a broader range of values and stakeholders than just the latest stock value? Stakeholders could include employees, customers, and maybe even present and future generations of the public at large, for example. Let’s not get too crazy and include plants, animals, and rocks just yet. Not so fast – according to this article, this is just a reaction to the growing power of institutional investors such as pension funds. Rich and powerful managers and board members are trying to protect their own jobs and fortunes like they always do.

data-driven economics 101

This article in Vox is about an entirely data-driven approach to introductory economics. The idea of asking students to discover their own theories is an interesting one, but in most fields I do think there is an established body of theory and standard practice that students should learn before they are qualified to go off reinventing their own wheels. If a new generation doesn’t know what they don’t know, they have to reinvent everything and society doesn’t make progress.

Joseph Stiglitz’s Economic Platform

Joseph Stiglitz has a new book on what he thinks an evidence-based progressive economic platform should look like. I admit, I haven’t read the book, but I have read this Axios summary of the book. And here is my summary of that summary:

  • “the government should spend as much money as it takes to bring the economy to full employment.” Nicely put.
  • strong antitrust action, including against social media companies
  • a federal job guarantee, but no universal basic income or explicitly race-based reparations
  • the ability to opt in the Medicare
  • (optional) mortgages provided by the government (well, don’t we have something close to this already? I guess it’s just that private banks get their cut before they hand it over to an “implicitly” government-backed lender. I guess you could cut out the middleman.
  • Higher education funded by a progressive tax on post-graduation earnings: “Graduates earning more than $30,000 might pay 1% of their income toward repaying their student loans; those on seven-figure salaries might pay 4%. After 25 years, the loans are forgiven.” He doesn’t specify this has to be public schools only, although it seems to me this would blur the distinction. And if this federal program existed, is it possible states would reduce or end their funding for state schools and blur the distinction even more?

This all sounds good to me. Add some serious research spending and it just might work. The jobs guarantee might work, but would have to be coupled with a stronger disability, mental health and substance addiction safety net than we have now.

where academic economics is headed

Writing in Boston Review, Harvard Professor Dani Rodrik and others talk about how public opinion has turned against the economics profession to some extent over the last decade or so, and how academic economists are trying to engage with the issues of the day, including inequality, technological change and climate change.

  • economic history
  • behavioral economics
  • the study of culture (hmm, not sure if economists first thought of this one…)
  • wealth concentration
  • costs of climate change, and setting an appropriate carbon price
  • “concentration of important markets” (maybe this means concentration of a few firms within a given market?)
  • working class income stagnation
  • social mobility
  • empirical data analysis to test and confirm theory
  • analysis and study of institutions
  • appropriate allocation of property rights, including “intellectual property”
  • innovation, technological change, and their effects on growth and labor markets
  • money, power, and politics

They list a few “economic universals” which they think will never change: “market-based incentives, clear property rights, contract enforcement, macroeconomic stability, and prudential regulation”. Traditional topics that will probably always be studied include labor, credit, and insurance markets; tax, fiscal and monetary policy; international trade; recessions and financial crises; public goods and social insurance programs. I had to look up prudential regulation, which is basically capital requirements and limits on risk in the banking sector.

best books of 2018 (Project Syndicate)

Project Syndicate is one of my favorite sources of commentary on economics and geopolitics. In this post, their contributors each name some of their favorite books of 2018, which, perhaps not surprisingly, mostly cover economics and geopolitics. I would love to read almost everything on this list, but I’ll mention 10 just for brevity.

November 2018 in Review

Most frightening and/or depressing stories:

  • Coral reefs are expected to decline 70-90% by mid-century.
  • The U.S. stock market is overvalued by about 40% by historic measures, and some economists think a major recession may be looming.
  • About half a million people have been killed in Iraq, Afghanistan, and Pakistan since the U.S. invasions starting in 2001. This includes only people killed directly by violence, not disease, hunger, thirst, etc.

Most hopeful stories:

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

  • New tech roundup: People in Sweden are barely using cash at all, and some are paying with microchips embedded in their fingers. New technology may allow screening of multiple airport passengers from 25 feet away with minimal disruption. This is great for airline passengers who are already expecting to be screened intrusively, but of course raises some concerns about potential uses elsewhere in the public realm. Amazon is hiring about 100,000 seasonal workers this year, compared to about 120,000 in past years, and the difference may be explained by automation. There is a new ISO standard for toilets not connected to sewers systems (and not just your grandfather’s septic tank.)
  • A unidentified flying object has been spotted in our solar system, and serious scientists say there is at least a plausible, if very unlikely, chance that it is an alien spacecraft.
  • People are taking micro doses of LSD on a daily basis, believing it boosts creativity, and there is some evidence for this although the science is not rigorous.

could Marxism make a comeback?

Maybe, according to this Marxist professor writing on Truthout.org.

Within the broad Marxian tradition, some strands offer both analyses and policies that differ sharply from anything offered by either neoclassical or Keynesian economics. To take perhaps the clearest example, many Marxists focus on the undemocratic position of capitalists within enterprises (individual owners and corporate boards of directors). Their decisions on whether and how to invest net revenues determine the shape of the macroeconomy for all. A minority focused on enterprise profits as “the bottom line” makes decisions impacting the jobs, incomes, debts, etc. of a majority to which it is not democratically accountable. This minority’s expectations, desires and “animal spirits” (as Keynes put it) causes instability, in the Marxian view. The policy suggestion emerging from that view focuses on a program to “democratize the enterprise” as a solution to instability. Replacing hierarchical undemocratic capitalist enterprises with democratically organized worker cooperatives – where each enterprise member has one vote in deciding key matters, such as investment decisions – is a way forward that neither neoclassical nor Keynesian economists have yet allowed to be debated in public and academic forums. We will all be better off when the current narrowness of economics is opened up to include more basic proposals for change adequate to the depth and scope of capitalism’s current problems.

I’m not sure where I “stand”, except I’d like to see more empirical testing of economic theories and less ideology. Even if we figured out which of the major economics religions is actually “the right one”, we still couldn’t expect it to pick solutions for us. It could identify a range of reasonably economically efficient solutions to a problem (and reject a lot of clearly dumb ones), but we would still have to pick one to try moving ahead with that best represented our values. But maybe with all those dumb solutions tossed out and better information at our fingertips about the range of good solutions, our messy political system would have a better chance of making good choices.