Supply or Demand

Its taken a while to figure out what is worth posting about. My recent obsession with all things economics has left me with much to ruminate about, not being an economist, and not as much to talk about. Most economists have already thought about the things I roll around in my head and have models and equations to express them. . Stories and thought experiments/analogies are what has been the most informative to me in my explorations through the economics blogosphere. Things just have to make sense when you think about them and be consistent with how other systems in our universe work. I find supply side economics to be one of those things that doesnt ring true. Not that it has nothing useful to say or that looking at the supply side is not informative but to build an economic edifice around the supply side seems woefully incomplete.


Now, one could say the same thing about the demand side. Its only one side of the coin and doesnt explain everything. Agreed but my quest is not to find the economics equivalent of the physicists quest for the theory of everything, its simply to find what came first. My question is just about the "prime mover" in economics. This seems to me the ultimate question. Were we designed as demanders or suppliers? Some may say that this is a silly quest to be on because its not answerable. Perhaps. I have no illusions that supply siders will read this and go, "My gosh Ive been bamboozled all these years I must rethink my position". Mostly this is because many supply siders (I think) are simply extreme tax cutters in economist clothes. They hate the notion of a bureaucracy "stealing" their hard earned dollars. So they have used a lot of fancy math and models to show that letting citizens keep more (ALL) their money will lead to a more vibrant and growing economy. But its also because I myself dont think the demand side answers everything. Only a complete view, coherent with consideration of human tendencies, has a chance of being explanatory and embraced by more of a consensus than we have today. Today the number of "camps" is ridiculous and mostly they talk past each other, content to worship their "god" of Hayek, Keynes, Ricardo, Marx or Smith. I wish someone could just say "Stop it!.. Cant we just agree on THIS!!!!"


The large issues are employment, and how to stimulate it, the nature and utility of money and how to preserve something for later so not to just have a large fight today to see who can get "it" all now. On these large issues all the forementioned "gods" were in quite different places I would say. Some said money came about naturally in the form of gold, unemployment is simply someone expressing the will not to work and savers are the SAV-IORS of society. Others might say money is a man made object, more political than anything else, unemployment only happens when a person is required to chase currency via the route of a job and no job is available and savers while good are no more important than borrowers to a modern society they are two sides to the same coin. Just like an exporter needs an importer a saver needs a borrower. There is likely a mix and match of these views within schools of thought but it appears to me that most arguments seem to settle around these areas.


Okay, now to my main topic. Are we first demanders or suppliers? Are we A) primarily demanders and suppliers will arise to meet our wants or B) do we sit around and dream of things to supply and spend our time trying to convince everyone else they will be a better human for it? This is the "prime mover" question. The proximate cause for just how we became homoeconomicus. Most people are quite aware that while blood flow and tissue health are intimately related many dont understand the nature of supply and demand of blood flow in the body. The heart (the supplier) gets all the attention. We pay men hundreds of thousands of dollars a year to keep the pump going (good thing too) but the heart is an organ because the complexity of organisms got to the point where it DEMANDED a heart to keep it alive. The hearts purpose is to keep tissue alive and it gets its signals for what to supply from tissue demand. When tissue need more the heart supplies this. Now, we exist today in the middle of all that. We dont really care as long as someone understands the ins and outs. But we are only an organism when we have tissues demanding blood from a pump. Pump only...... no organism. There are organisms without pumps(not very complex ones) they respire in different ways, but there are no pumps without organisms. So if someone were to hear someone argue that "All we need to look at is cardiac output (Heart function), and remove all restrictions to cardiac output we will have a healthy body. Cardiac output is the determiner of health and any time we see the patient getting sick we are going to increase cardiac output" they would not be doctor you should go see. You need someone with a more complete view of how our body operates. Its not quite that simple.


How does this knowledge help us? I'd like to posit that our economy is much more naturally like our body. It has flows of money and works off of people wanting/desiring stuff and services, and that when it is healthy (if its ever been) we have a supply that is truly in tune to our wants. We can, I think, use the circuitous nature of life sustaining blood in our bodies to help understand the circuitous nature of life sustaining goods and services in our societies. Knowing the direction of flow is critical I think. In our economy its not quite as simple and consistent as the direction of flow in our bodies, but there is a direction or more accurately, there ARE directions. Things move from somewhere to somewhere else in a very definable direction in a lot of places in our economy and getting flows right is paramount in making proper interventions. For example, loan origination at banks, is primarily driven by a demand for loans from customers, not by a supply of money to be lent. On a system wide level it is demand which drives it. A particular bank might be in a bad financial spot and not give credit to someone they would have a few months previous but system wide it is the financial health of the consumers which drive loans not the financial health of the banks. The banks got sick because their consumers stopped paying, the consumer got sick first. Knowing this, one would never simply give more money to banks to help the credit markets. It will never work and it hasnt worked.



Today, the rut we are stuck in is calling out for more demand. Where does demand come from? Income. Where does income come from? Someone elses non saving. A person who is saving is depriving an income to someone else. We all thrive on someone else not saving. This isnt to say saving is bad but we must understand the consequences of our decisions. Austrians and others argue that it is the savings which result in future income for others through investment. If you look at the flows this doesnt quite bare out. The investment happens first and a residual savings is left. Yes the two equal out but the direction tells you why increasing saving first can only result in recession. Savings is viewed as a supply which will be met by the demand later, but investment is the supply properly RESPONDING TO the demand and leaving behind some savings. This can be explored here . Warren Mosler also does a nice thought experiment here:

Consider this extreme example to make the point:
Suppose everyone ordered a new pluggable hybrid car from our domestic auto industry. Because the industry can’t currently produce that many cars, they would hire us, and borrow to pay us to first build the new factories to meet the new demand.
That means we’d all be working on new plant and equipment - capital goods - and getting paid. But there would not yet be anything to buy, so we would necessarily be ‘saving’ our money to buy the new cars when they rolled off the new assembly lines. The decision to spend in this case resulted in less spending and more savings. And the production of capital goods, which constitute real investment, led to an equal amount of savings. I had this discussion with a Professor Basil Moore in 1996 at a conference in New Hampshire, and he asked if he could use that expression in a book he wanted to write. I’m pleased to report the book with that name has been published and I’ve heard it’s a good read.

Unfortunately, Congress, the media, and mainstream economists get this all wrong, and somehow conclude we need more savings so there will be funding for investment. What seems to make perfect sense at the micro level is again totally wrong at the macro level. Just as loans create deposits, investment creates savings.

What most people refer to as investment today simply is buying an already existing financial asset, stock or bond, and adding income for a broker. Not actually creating anything new at all. This is a fine, legal, ethical and sometimes fun and profitable activity, but it is often sold to us as something else. We need new investment now, to help put people back to work and start producing near capacity. Your 401k is not doing that. This is another flaw in the story that our savings is good and will (by magic) create the opportunity for those future new jobs. This story does not pass the smell test.


Some say we have a supply glut today and we should just let supply contract to meet demand and then we build from there. Well, we were demanding those things a few years ago and thats why the supply grew, now we just have a financial crisis and some people think we dont have money anymore. How could we not "have" the money now? Money is created when there is a demand for it. Money came along when we as a species demanded it. We didnt walk along the road one day and go "Look, there's some money, I think I'll go use this to buy me some wheat and a new tunic" It was our creation. We started out as demanders of money (and then the supply of it was hijacked by the Machiavellians of our societies). When we started out in nonmonetary societies we simply traded things we thought were mutually useful but the only things we took from someone else was something we wanted(demanded). The next time we met up with that tribe they likely had what we demanded the last time. Our forefathers, way way back forefathers not Ben and Thomas and the lot, simply consumed everything they needed from mother earth. They didnt supply anything. It was all supplied and in abundance (somewhere) they just needed to seek it. It was a while before we had any suppliers.


I hope Ive pointed to some of the inadequacies of supply side thinking which seems to dominate our discourse today, at least amongst those in power. Do you think it has anything to do with the fact that those in power are the suppliers?....... hmmm. It takes little effort to make gods in your image, the effort is in convincing others to worship those gods.

Walking Away

There has been much discussion around the blogosphere about the issue of homeowners walking away from badly underwater mortgages. Megan McCardle had an opinion (surprise surprise!) and Steve Randy Waldman at interfluidity had a response

There is no doubt that I agree with Mr Waldman and respectfully call BULLSHIT on Ms McCardle. Libertarians are the last group of people I will take any moralizing comments from since they tend to be the group of people who will defend their right to do as they please the most emphatically. Of course Ms McCardles concern is for "business" interests in this case or more probably the "engine" of capitalism. She couches her argument in "social contract" type language but is ultimately disgusted by people who "game" the system. This gaming of the system is exactly the type of behavior her "brand" of capitalism breeds. It cannot run without it. The amount of outside (government) intervention necessary to prevent this would probably make society unlivable in her view. Of course the legislation she referred to was decidedly one sided in limiting the consumer from exercising options at the discretion of businesses at any moment.

At this very moment there is case before our supreme court which is trying to decide if there should be any limits to how corporations can operate in the political sphere. Laws regarding donating to political causes has made some distinctions between people and corporations mainly because corporations have so much more financial weight at their disposal. It seems likely that THIS supreme court will side with corporations and rule that they have the same right as individuals regarding expressing their political desires with campaign funding. The question needs to be asked; If they have individual rights do they also have individual responsibilities? I doubt you will find corporations suddenly willing to subject them selves to moralizing about the "common good" and the "fabric of society" when their self serving actions are exposed.

The following post I found this morning sums it up pretty well for me. It was at Greed Greens and Grains

Mortgage walkaways, good or bad?
We economists are indoctrinated into thinking first in positive rather than normative terms. That is, how DO people and markets behave, not how SHOULD they behave.

So. Should you walk away from your underwater mortgage?

I don't know. All I know is that if you're a rational economic agent you WILL walk away from your mortgage if the benefits outweigh the costs.

Or maybe not...

You see, the mortgage business seems to be counting hard on the idea that maybe you won't walk away from your mortgage even if you're hundreds of thousands underwater and it is in your material self interest to walk away. Not walking away saves the investment banks tons of money if you valiantly pay you mortgage even though it serves their profits over your economic interest. These are the same banks (and mortgage-backed securities holders, including the Fed) that took huge risks in lending to you in the first place, and had assumed you would walk away if things got as ugly as they currently are. Oh, did I mention those guys are still making gazillions?

It's kinda funny how the financial business plays the morality card when it suits their pocketbooks, no?

Anyway. I think it is true that many people go on paying their mortgage even when it is not in their material self interest. People do this mainly because they feel it is morally correct to do so. It's a little like taxes: cheating on taxes would pay for many people but they don't, just because they think it's the wrong thing to do.

What I'm really wondering is whether this phenomenon of people sticking it out with an underwater mortgage is is a good thing or a bad thing for broader economic recovery. You see, I think many banks are reticent to workout mortgages for people who are underwater and struggling because they feel if they lower the principal for some it will weaken the moral suasion they currently have over underwater mortgage holders who can go on paying, but probably shouldn't. This general reticence then keeps lots of people underwater and, more importantly, stuck in homes that are suboptimal for their particular circumstances. And this helps to keep the economy generally stuck in a rut. People simply cannot move to the locations, living situations and jobs that align best with their current circumstances.

Without attaching any morality to the situation, it seems to me that the general situation where people are unwilling to walk away from mortgages is slowing general economic recovery. It is adding a lot of nominal rigidity that we really could do without.

Like always, if I'm wrong about this someone please tell me why I'm wrong

Businesses are feeding off our morality and profiting from it. Cynically they have bet that we will all be suckers and continue to do irrational things. Irrational from a business standpoint. If corporations want individuals and corporations to lack distinction they certainly should not protest when individuals act in kind.

I think this is a perfect demonstration of the modern day American "hypercapitalists" being completely ignorant of the consequences of their ideology. Running around and labeling as a communist or socialist everyone who wishes some sanity in our economy even if it results in some added costs (taxes) or restricted freedoms (legislation) has brought us where we are today. Since the Reagan revolution we have had to endure one liners like "Greed is good" or "The government cant do ANYTHING right". People mindlessly parrot this bullshit and never actually think what kinds of decisions have been historically made that brought us where we are today. I work with women making mid six figure salaries exactly equal to their male counterparts who parrot the right wing talking points while enjoying their guaranteed eight week paid time off when they get pregnant. Who do they think guaranteed this for them? The corporate titans? Do they think that these guys went to Washington and asked that they be made to pay their female workers on par with their male cohorts and also pay them for eight weeks and hold their position while they sat out with their new babies? The amount of "freedom" they enjoy at their jobs was ONLY guaranteed by a "big government". This why I "walk away" when any of these people open their mouths about politics, government and economics.

A Case for Purpose

Over at Greta Christinas blog I have gotten into a discussion with her about theism/atheism. She has written many articles at AlterNet and other places about her encounters with christians and her strong atheist views. I like her writing and feel she has something important to say. Her main "gripe" if you will (which is shared by many of the more prominent atheists) is that religion and religious believers hold their arguments to a completely different standard than they hold atheists arguments. They also act like atheists have no right to argue them or anyone else out of their positions. Well this idea is prevalent among theists, especially evangelical christians, and frankly it is absurd. They would take no other topic and declare it off limits for rational debate but their faith is not to be "offended". First off there is a difference between a person becoming offended by a comment and someone making an offensive comment. Too many evangelicals wear their outrage on their sleeves. They act as if every question about religion is a personal affront. Well honestly that is part of their tactical agenda, declare something too offensive to discuss in public and voila all atheists are just trying to offend people by putting up billboards or teaching their children evolutionary biology. So I really share her frustration with the way the public in this country treats subjects that can and should debated. Especially one like religion and some of its more tenuous claims which have the potential to change the way certain people are treated in this supposedly democratic country.

Anyway over at her site I got into a discussion with her regarding the idea that there may be hints of evidence that our universe has a purpose. Not to point to a particular god that "inspired" a particular text thousands of years ago but some sort of greater force that when we subjugate to it we can actually improve our existence and reach a higher realm of understanding, peace and happiness. I've been inspired by much of Robert Wrights writing. He is a big question guy like I am
(I generally tire quickly of small talk and want to find out deeper stuff about someone fairly soon) and he's a tireless researcher. You may read his books and disagree with some of his conclusions but you cant say he didn't do his homework. Further, you better be able to explain the evidence he uncovers or your claim that he's wrong doesn't hold any water.

Here is my response to her when she tells me to bring it on after I commented that I think there IS at least faint evidence of purpose in our universe.

It seems from studies of evolutionary theory that beyond individual selection pressures there are also group selection pressures. These emerge from the same biologic source (DNA) but do manifest themselves in different manners. Individual selection would best be characterized as zero sum in most cases. Group selection is more non-zero sum, we can all benefit or at least we can all not suffer a loss by working together. It is here that morality emerges it seems. Morality is completely contingent upon "others" being around. It seems that within our DNA there is a "predisposition" to carry out moral actions, group selection constraints if you will. So it looks like DNA as a natural replicator was under some sort of "pressure" to create an array of organisms, which in turn were under some sort of pressure to procreate and multiply, which in turn allows the moral behavior to emerge.

Again I dont believe there was a conscious choice by some omnipotent mind to "make" DNA this way, just that our cosmic environment is tuned so that first DNA emerges, then variety of life, then sentient beings who live in groups, then selection pressures within the groups to behave in ways which maximize the groups chance of survival not just the individuals. If this is true, why is the groups chance of survival an emergent property? Are we becoming all small parts of a larger organism which we will "discover" later? No answers there but certainly legitimate questions.

The discovery in physics that all we are is an existence in a very small corner of reality (4 of maybe 11 dimensions) lends some support to a small part of a greater organism idea. MY next question is, can we extrapolate at all from current conditions and possibly see what might emerge at the next level of understanding. Is the "greater organism" a greater good? Is it something we will find pleasing? Again if you look at what strategies seem to be programmed into our DNA I think we can be hopeful. Its a matter of trusting that the mechanism we've discovered, DNA replicating and producing larger and larger organisms (not individual size per se but collective size), will continue in its present manner. Small changes over billions of iterations make huge changes but each iteration results from a cooperative process.
DNA it self had to be created in much the same process at the molecular level. Each strand of DNA
is composed of thousands of genes which must sit in the correct spot and only pass their information at a very specific time. It too is a "cooperative" process at the smallest level. Cooperation seems to get 'it" done. Understanding that there are "others" whose needs supercede yours at the present time seems to be selected for. Taken to its logical conclusion with universal milieu-- DNA--individual organisms--multiple organisms-- groups of organisms-- groups of groups all operating under "pressure" to cooperate an subjugate individual needs at times, what in the end will/should this mega organism be subjugated to?

Why is cooperation seemingly selected for at so many levels of the universe? What factors at every level seem to influence the greater likelihood of cooperation? In humans certain emotions and mindsets are more conducive to cooperation? Do these appear as more prevalent within a population? I think they do.

These are more questions but I do think that there is a faint hint of something we are "subjugated" to and the best way, it seems, to achieve that is to forget self (a very buddhist notion), sacrifice your individual needs (a very christian notion) and look at our existence as a "spiritual" journey we are going on together( a new age church notion)

Part of the reason i started my blog was so that I would have a place where I could keep my ideas and possibly one day put them into book form. I dont know why anyone would want to read it really but I promise it would be more accurate than Sarah Palins book. Actually I think that is a great reason to like Sarah Palins book (not that I have or ever will read it) because her book sets a standard for what can be accepted as "Non Bullshit". If you ever want to publish something and the publisher says your manuscript is bullshit you can immediately argue that Sarah Palins book has more documented bullshit than any book ever written (except mabe the book titled " On Bullshit" by Harry Frankfurt.

My Very First Blog Post

This is so exciting! All these months of reading other peoples blogs and now its time for me to put up. What to say? There really are lots of things rattling around in this 50 yr old brain. I'm not an expert on anything worth blogging about (talking about the virtues of general versus regional anesthesia in a patient with ischemic cardiomyopathy doesnt make for much discussion in the blogosphere) but I'm interested in and have done quite a bit of reading about economics, theology, cosmology and randomness in the last two years. So, where shall I go with my first entry into the ether (an appropriate word choice for an anesthetist).

The thing that has been occupying most of my mental energy lately is MMT, Modern Monetary Theory also known as Chartalism. Far be it for me to act as the BCS of MMT economists, ranking the proponents of the theory on the basis of say, "How well they take down the Chicago school arguments" or maybe " The ease with which they take mundane subjects like trade deficits and make them understandable" but four names (well 3 names and an alias) have shown up time and time again when exploring this school of thought. Billy Mitchell , Warren Mosler , L Randall Wray and Winterspeak . Now I am not an economist nor did I ever take an economics course but my training in medicine did teach me to analyze and problem solve. I can look at two arguments and, given some standards for evaluation, decide which is a better argument. I am far from alone in this ability. I imagine most anyone who scored over 1000 on their SAT has the tools to do this but most of us dont think about economics as something which is amenable to that type of analysis. Regarding economics, most of us get all our info from TV talking heads and when the consensus is saying "Government deficits are bad' or "hyperinflation is a real danger around the corner, remember Weimar Germany" we really don't think to evaluate the veracity of those claims.

Now I wasn't looking to question those claims. There wasn't a voice in my head going "Ya know that just doesnt sound quite right to me" but I was following various econ blogs daily just to try to get a handle on this crisis. I did have a sense that this current crisis might be the most important event of my lifetime and I was a sponge for anything regarding it. Interfluidity is one of my regular stopping spots. Steve Randy Waldmann is a great writer and has such an interesting take on things I was really attracted to his site. He doesnt post daily so you find yourself looking forward to what he has to say.( As an aside, treasury officials invited some econ bloggers to Washington a week or so ago and Mr Waldmann was one of them so I think they read him too!) One of his posts linked me to Winterspeak and I read something that just blew me away;

The Federal Government does not need taxes in order to spend. At the Federal level, because the Fed is a currency issuer, the sole purpose of taxes is to extinguish money, reduce aggregate supply, and therefore limit inflation to a tolerable level.

What? We dont use taxes for spending? How can that be? Is this really true? Were we not behind on taxes for the entire Bush presidency? This idea was profoundly new to me. We had run deficits most of my life and I really thought they were deficits. That we owed something to someone else. That was the paradigm I was operating from. A zero sum, if you take from here you are depriving there, kind of model. Well as I soon found out......not true!! Whats even worse is that lots of people know this. Lots of people who talk about our national budget dont tell us that the deficit isnt a deficit at all! It is categorically NOT something we owe to anyone.

The deficit is simply an accounting operation that says how many credits (in our case in the US, dollars) the government has given to us. It says nothing about how they are distributed mind you, just how many are out there.

So MMT says; "deficits aren't bad, they just are". Now this started to have a ring of truth because I knew that all my life we had run deficits. If they really were bad how could we run them for all this time? In all fairness, MMT would more accurately say that deficits account for the current level of new financial credits in the private sector. That is a neutral statement but that does not mean that we can always let that deficit rise. It does have consequences. However it must be recognized that at times of low utilization of resources (like potential workers or factories at low capacity) a rising deficit will work towards increasing utilization of those idle resources. Certainly there are times when we need to lower the financial credits in the private sector to stave off inflation.......this is known as taxation. Now the circle was being completed for me.

Well that addressed the deficit talk for me but what about that hyperinflation? Is that a worry?

I was less convinced that we should be fretting about that after realizing all the misinformation about the deficit. I've found that people who screw up one concept badly are prone to screw up another related concept equally badly. Weimar Germany was certainly a terrible time to be a German citizen and all the talk regarding that era focused on the fact that they "kept trying to print their way out of trouble". Well I now knew there had to be more than that. Billy Mitchell gives a very thorough and concise analysis of the troubles facing Weimar Germany and modern day Zimbabwe in his article Zimbabwe for Hyperventilators 101 . After reading this I must say that the chances of any developed nation becoming a Weimar Germany today would take monumental errors on the parts of many people, not just the guys running the "money printers". I know I'll sleep better now.

Finding out about MMT has been like a new toy. I really think the principles of it should be and easily could be taught to 7th graders. Its important for us to understand the nature of our monetary system so we dont get scared by people with either an agenda or just too much ignorance for everyone elses own good (when your ignorance is only negatively affecting you thats acceptable, but dont infect my house with your ignorance). Take the time to learn this powerful paradigm. Thats what it is, its a new, complete way of viewing how our monetary system operates. We are still partially stuck in a gold standard paradigm and we are not in a gold standard world. Get with the program guys!

Well thats all for now.

Peath out brotha