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Musings Report 2020-42 10-17-20 The Fatal Flaws in Modern Economics
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The Fatal Flaws in Modern Economics
There are actually a number of fatal flaws in modern economics, two of which are well described in these articles.
The first explains that creating trillions of dollars out of thin air actually lowers the value of what the money can buy, impoverishing everyone forced to use the money. Hyperinflation Is Here.
This is fatal because creating trillions out of thin air is the status quo's only plan going forward.
The second article explains that the policies of the past 50 years designed to minimize the "pain" of recessions only guarantees massive, system-destroying depressions, as lowering interest rates to zero and flooding the system with new money just brings "demand forward" while burdening the economy with higher debt servicing costs. Recessions Are A Good Thing, Let Them Happen.
My colleague Gordon Long has described a third flaw as the confusion between liquidity and solvency: giving a failing company "free money" (liquidity) allows it to exist as a zombie for a few more months, but that liquidity doesn't make the enterprise solvent, i.e. profitable with a positive balance sheet.
I want to describe a fourth fatal flaw which few even seem aware of: there is no connection between creating new money and paid work.
It's widely accepted that infusing the economy with new money will lead to more jobs (paid work). The exact mechanism is not examined very deeply.
The general idea is that giving people new money will cause higher consumption which will naturally lead to expanding production and the hiring of more workers.
Giving businesses new money will cause the business to invest in expanding production which will naturally require more workers.
But the connection between new money being created and more jobs being created is not causal; the presumed connection is more myth or magic than reality.
It's important to start with these basics:
1. The majority of consumption (spending) is derived from paid work--labor. Very few households live entirely off investment income (i.e. income from capital). Even high-income households typically earn the majority of their income from labor.
The point is that paid work is the foundation of all consumption. If paid work declines, consumption declines. Yes, the government/central bank can print money out of thin air and distribute it, but as Fatal Flaw #1 explains, this eventually impoverishes everyone through high inflation.
Flooding the economy with "free money" is only a temporary "fix," not a permanent one. By destroying the value of the currency, it destroys consumption and enterprise alike.
2. Who gets the free money matters. In the present system, the vast majority of new money flows to the top of the wealth-power pyramid: to banks, financiers and corporations.
3. The most profitable way to use capital is speculation, not production of real-world goods. Nobody's minting billions making toilet paper or growing wheat. Those minting billions are speculating with the new money in high-flying monopolies selling data and "attention."
These high-flyers produce big profits but no actual goods. The speculators don't need more employees to reap billions; the work is mostly automated.
If we put this together, distributing new money to the financier class doesn't create any jobs. Producing real stuff simply isn't profitable enough compared to the huge gains available to leveraged speculation.
The individual hedge fund managers are already immensely wealthy and they already have all the staff and services they can possibly use. Giving someone with $30 million a line of credit for another $30 million isn't going to create a single new job. That new money will just be folded into whatever leveraged speculative bet is being made at the moment.
4. Giving households "free money" doesn't boost production as much as expected.
OK, so giving wealthy people free money doesn't create jobs, but what if we give free money to households who will spend every dime?
This assumption that more spending will create more jobs makes common sense, as more customers means the restaurant will hire another employee to handle the increasing business, and the truck manufacturer will add employees to produce more trucks, etc.
But this mechanism doesn't work any more for some very basic reasons.
Most people don't realize how expensive it is to formally create a job/hire someone. To pay someone $20/hour, I need to pay (depending on the insurance costs of healthcare and workers compensation) about $20/hour for direct labor overhead costs. Since general overhead expenses are divvied up across the workforce, I need to assign another $10/hour to the new employee as that position's share of general overhead (rent, phones, fees, etc.)
So it costs the employer $50/hour to pay the employee $20/hour. (This is why businesses game the system to evade the high costs of offering benefits.)
Given the high cost of labor overhead (and the liability of having employees who might sue you), the smart investment is automation and anything else that reduces the labor component of production.
So if demand for toilet paper, wheat or pickup trucks increases, the producers will do anything to avoid hiring more employees: add robots, increase overtime, buy another tractor, etc.
One of the most unrealistic fantasies of MMT/UBI "free money for everyone" is that this modest stipend will unleash a massive wave of new entrepreneurs who will start producing new goods and services.
This is unrealistic for several reasons. One, starting and operating a business in a high-cost, super-complex/bureaucratic economy requires specialized knowledge and experience. As soon as you hire a single employee, you must wear all these hats: psychologist, counselor, attorney, manager, accountant and strategist.
Two, it takes an enormous appetite for risk to start even a small enterprise in this environment, and $1,000 a month (or whatever the UBI sum ends up being) is not enough to fund even a small startup.
Three, MMT/UBI might encourage cottage businesses (baking cookies at home and selling them at the farmer's market, etc.), but these cottage enterprises rarely expand to the point where the profits are substantial enough that the business can pay commercial rent and hire employees. They remain small for good reasons: it's extremely difficult to make enough profit to justify paying the high costs of labor/hiring an employee.
These informal cottage enterprises generate a bit of extra income but don't increase the production of essentials such as minerals, grains, energy, etc. These large-scale operations are simply too capital-intensive to establish and too low-profit to attract capital. (Capital is only interested in high-profit monopolies or speculation.)
All the creation of new money in the current system will accomplish is high inflation. Few jobs will be created for the reasons outlined above.
The only way to create more paid work is to create the money when the useful work is performed, which is exactly what the CLIME system accomplishes.
In other words, rather than create the new money at the top and hope some "trickles down" to more paid work, CLIME first generates the goods and services needed in the community and then creates the money to pay wages to those who generated the goods and services.
New money is created at the bottom of the pyramid rather than at the top, and it isn't created for speculation but for useful, valuable labor in service to the community needs.
This is a direct causal link between creating new money and paid work. Anything less will simply be doing more of what's failed spectacularly.
For more about CLIME:
Free excerpts of my latest book A Hacker's Teleology
The website for my book A Radically Beneficial World
Highlights of the Blog
Podcasts:
If you're not familiar with Ben Hunt's work, I highly recommend this podcast:
AxisOfEasy Salon #26: Ben Hunt vs The Industrially Necessary Narratives
posts:
The "Titanic" Analogy You Haven't Heard: Passively Accepting Oblivion 10/16/20
Why We're Doomed: Our Delusional Faith in Incremental Change 10/14/20
Our Simulacrum Economy 10/13/20
How We Institutionalized Incompetence 10/12/20
Best Thing That Happened To Me This Week
Finally make a long-planned trek to a walk-in only beach and discovered we had the entire beach/bay to ourselves, offering an amazingly rare experience. The collapse of tourism has its benefits.
From Left Field
Flurry of coronavirus reinfections leaves scientists puzzled (via Cheryl A.)
Together we can do it: Every single contribution protects health, society and the economy (from Germany) (via Cheryl A.)
Saving Uighur Culture From Genocide (via Maoxian)
The Hustle Economy: Today, inequality--especially racial inequality--is not only produced through the job market but through people’s ability to hustle.
This Overlooked Variable Is the Key to the Pandemic
UMD Department Chair Fights COVID-19—and Not Just in the Lab (via Cheryl A.)
In 2029, the Internet Will Make Us Act Like Medieval Peasants: What if we aren’t being accelerated into a cyberpunk future so much as thrown into some fantastical premodern past?
Rosenberg: We Are In A Depression
How the American Higher Education System Became a Factory for BS Jobs
"Cover Your Ass": The Guiding Principle Of Our Time
Sweden's gamble: The country's pandemic policies came at a high price—and created painful rifts in its scientific community.
How Car Colors Have Gotten More Boring Over the Years
"When a system is far from equilibrium, small islands of coherence have the capacity to shift the entire system." Ilya Prigogine
Thanks for reading--
charles |
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