He says private debt is 300% of GDP. How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too.
I am also surprised by 8:33. Roosevelt had the power and will to reject what financiers said? Roosevelt was very pro-finance! Have you read his biography written during his term - "County Squire in the White House"? It was written by a writer of The New Republic. It details several instances of Roosevelt defending finance from public and political wrath repeatedly. Financial institutions weren't Roosevelt's enemy; they were one of his main political backers.
PS: Please, please, pretty please, don't let anyone else hijack this comments section. This is a good interview to which you just linked. Let's discuss that, because it is quite interesting.
"How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too."
Where has Steve Keen ever said comparing a stock to a flow is invalid or illegimate? I don't think he has ever done this.
On a purely theoretical level, I find the idea ridiculous.
If your income (a flow) for one year is $100,000 and your debt (a stock) is $50,000, is it really conveying no valid/legitimate information to say your debt is 50% of annual income, and that servicing it may be a problem?
Of course, the private to public debt analogy is invalid, but criticising public debt to GDP ratios on that basis would be a different issue.
"Roosevelt had the power and will to reject what financiers said? Roosevelt was very pro-finance!"
I imagine Roosevelt liked to present himself differently to different people, like all polticians, with a degree of self-serving flexibility (or possibly dishonesty) and rhetoric.
Isn't it actions that matter? Roosevelt oversaw and approved sweeping financial sector reform, including the second Glass-Steagall (June 16, 1933):
And on an issue related to Keen's interview, you will note his scathing comment on Greg Mankiw. I endorse that. Mankiw's version of New Keynesianism is a joke and travesty, part of the garbage of revived neoclassical economics.
LK, even if you have no income in that year, your asset value could have risen. You could easily dispose of some your assets, like any securities you hold.
Certain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?
It means it is misleading, the stock vs. flow comparison.
"Certain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?"
Perfectly true.
Let's say you have only assets of $10,000, or less than $5,000, or no assets.
Is the stock versus flow comparison now valid for you?
"Certain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?"
Anyway, I am well aware of this point: on a different issue, the sale of financial or real assets is the crucial thing ignored by certain economic commentators who think that trade deficits are "living beyond your menas".
E.g., if you have a vast stock of real and financial assets, which is rising, which you can sell to foreigners, and foreign ownership of that stock merely fluctuates within some lower and upper limit, a perpetual trade deficit is perfectly sustainable.
Roosevelt's action do show some genuine pro-financier bent.
John Flynn's book details them.
From page 84 of County Squire in the White House:
"If he approved an act to regulate stock exchanges to please liberal and progressive groups, he appointed a Wall Street speculator Mr. Joseph Kennedy as its head of commission and literally paralyzed its functions to please conservative groups."
Page 78 also mentions that John Dickins, a Wall Street lawyer, wrote a large part of the National Recovery Act with Roosevelt's consent in a way to protect Wall Street interests.
This book is available freely online as public domain. Perhaps it was right, perhaps it was wrong for him to ensure Wall Street didn't get hurt in the reforms of the New Deal, but all the same, it was ensured. Roosevelt was not some Stuff The Financiers man. He was the exact opposite, perhaps even for the better.
In some ways, The New Deal had a strong support of big business in America, which wanted to show a government still somewhat controlling business bit by bit. This helped in outflanking radical socialists and fascists and also protecting the American capitalist system in its then current form. As the cliche goes, "win some and lose some".
"If he approved an act to regulate stock exchanges to please liberal and progressive groups, he appointed a Wall Street speculator Mr. Joseph Kennedy as its head of commission and literally paralyzed its functions to please conservative groups."
Regarding Joseph Kennedy as head of the SEC, he was only there until 1935 (only 2 years?), and the idea that he did "nothing" or "paralyzed its functions" doesn't seem to be true:
"Kennedy's first major involvement in a national political campaign was his support in 1932 for Franklin D. Roosevelt's bid for the Presidency. He donated, loaned, and raised a substantial amount of money for the campaign. Roosevelt rewarded him with an appointment as the inaugural Chairman of the U.S. Securities and Exchange Commission (SEC). Kennedy had hoped for a Cabinet post, such as Secretary of the Treasury. After Franklin Roosevelt called Joe to Washington, D.C. to clean up the securities industry, somebody asked FDR why he had tapped such a crook. "Takes one to catch one," replied Roosevelt. Kennedy's reforming work as SEC Chairman was widely praised on all sides, as investors realized the SEC was protecting their interests. His knowledge of the financial markets equipped him to identify areas requiring the attention of regulators. One of the crucial reforms was the requirement for companies to regularly file financial statements with the SEC, which broke what some saw as an information monopoly maintained by the Morgan banking family. He left the SEC in 1935 to take over the Maritime Commission, which built on his wartime experience in running a major shipyard."
"Page 78 also mentions that John Dickins, a Wall Street lawyer, wrote a large part of the National Recovery Act with Roosevelt's consent in a way to protect Wall Street interests."
Regarding John Dickinson, here is what the book says:
"John Dickinson, Wall Street lawyer, then assistant secretary of commerce and attorney for the Sugar Trust, had a series of proposals closely paralleling the Chamber of Commerce plans."
John Thomas Flynn, Country squire in the White House, p. 78.
So:
(1) Dickinson was a "Wall Street lawyer". This doesn't necessarily mean he was acting in the interests of the financial sector.
(2) it doesn't say he was protecting "Wall Street interests" at all.
(3) it says he had "proposals closely paralleling the Chamber of Commerce plans".
But the Chamber of Commerce wasn't really Wall Street. It represented diverse business interests, including manufacturing and medium sized non-financial businesses.
I wonder if you have read 'Economyths' by David Orrell. It has its flaws but it is very well written and interesting. Academic economists, of course, accuse him of straw manning and ignorance. I wonder if there is simply no hope for them and if they should be ignored.
probably not worth much - standard lines from the right about the stimulus not working, citing deficits as if they are the same as stimulus, standard Obama bashing, 'where does the money for stimulus come from', blah blah blah
Nothing wrong with comparing a stock to a flow. We do that whenever we want to know how long something can last. As in "I drink 2 bottles of lemonade per day and I only have 10 bottles. I will run out of lemonade in 5 days time if I don't buy any more!"
The problems arise when we confuse a stock with a flow, which is a rather different thing. As in "I drink 2 bottles of lemonade per day but you drink 4, so you have twice as many bottles as I do."
"citing deficits as if they are the same as stimulus"
Well, a stimulus doesn't work as well when it is done on a balanced budget. After all, balanced budgets have worsened recessions into depressions, with there being 10 balanced budgets in American history and 10 depressions in American history.
As I understand, a stimulus is supposed to be:
1) rise in spending with no rise in tax rates 2) fall in tax rates with no rise in spending 3) rise in spending and fall in tax rates
So it's implicit that a deficit budget is supposed to stimulate. If you are going to raise income tax rates and government expenditure, as Obama's jobs bill did, you are trying to pursue both fiscal expansion and fiscal contraction. (And if you are Republican, you raise payroll tax rates and indirect tax rates, but no raise spending, in order to have nothing but fiscal contraction!)
He says private debt is 300% of GDP. How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too.
You cannot compare a stock and a flow. What you CAN do is use the two to develop a ratio. If your stock of debt is 3x your annual flow of income, you can determine from this that your full product of three years is needed to clear it.
You can't compare, add or subtract the two, but you can multiply and divide them.
But nobody really talks about clearing debt, so much as being able to service debt.
Obviously, we do not consider having debt at all to be a problem in of itself. It allows a business to have more funds and ensure it doesn't run short of funds. To go ahead and repay all the debt in one go is to deny oneself that advantage. The problem is whether the business' annual earnings are not cut deeply by having to service debt.
It's more preferable to use the ratio of Annual Operating Cash Flows / [Annual Interest + Annual Principal Repayments]
Look at 8:05 point of the video.
ReplyDeleteHe says private debt is 300% of GDP. How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too.
I am also surprised by 8:33. Roosevelt had the power and will to reject what financiers said? Roosevelt was very pro-finance! Have you read his biography written during his term - "County Squire in the White House"? It was written by a writer of The New Republic. It details several instances of Roosevelt defending finance from public and political wrath repeatedly. Financial institutions weren't Roosevelt's enemy; they were one of his main political backers.
PS: Please, please, pretty please, don't let anyone else hijack this comments section. This is a good interview to which you just linked. Let's discuss that, because it is quite interesting.
"How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too."
ReplyDeleteWhere has Steve Keen ever said comparing a stock to a flow is invalid or illegimate? I don't think he has ever done this.
On a purely theoretical level, I find the idea ridiculous.
If your income (a flow) for one year is $100,000 and your debt (a stock) is $50,000, is it really conveying no valid/legitimate information to say your debt is 50% of annual income, and that servicing it may be a problem?
Of course, the private to public debt analogy is invalid, but criticising public debt to GDP ratios on that basis would be a different issue.
"Roosevelt had the power and will to reject what financiers said? Roosevelt was very pro-finance!"
ReplyDeleteI imagine Roosevelt liked to present himself differently to different people, like all polticians, with a degree of self-serving flexibility (or possibly dishonesty) and rhetoric.
Isn't it actions that matter? Roosevelt oversaw and approved sweeping financial sector reform, including the second Glass-Steagall (June 16, 1933):
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
Don't you think he should be judged on this rather than what he wrote in his memoirs?
And on an issue related to Keen's interview, you will note his scathing comment on Greg Mankiw. I endorse that. Mankiw's version of New Keynesianism is a joke and travesty, part of the garbage of revived neoclassical economics.
ReplyDeleteLK, even if you have no income in that year, your asset value could have risen. You could easily dispose of some your assets, like any securities you hold.
ReplyDeleteCertain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?
It means it is misleading, the stock vs. flow comparison.
"Certain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?"
ReplyDeletePerfectly true.
Let's say you have only assets of $10,000, or less than $5,000, or no assets.
Is the stock versus flow comparison now valid for you?
"Certain wealthy households that run sole proprietor businesses could be having a bad year where they earn only $30,000, but they could still have a $1 million house. So them having a $100,000 debt would obviously not be as much of a problem, right?"
ReplyDeleteAnyway, I am well aware of this point: on a different issue, the sale of financial or real assets is the crucial thing ignored by certain economic commentators who think that trade deficits are "living beyond your menas".
E.g., if you have a vast stock of real and financial assets, which is rising, which you can sell to foreigners, and foreign ownership of that stock merely fluctuates within some lower and upper limit, a perpetual trade deficit is perfectly sustainable.
Roosevelt's action do show some genuine pro-financier bent.
ReplyDeleteJohn Flynn's book details them.
From page 84 of County Squire in the White House:
"If he approved an act to regulate stock exchanges to please liberal and progressive groups, he appointed a Wall Street speculator Mr. Joseph Kennedy as its head of commission and literally paralyzed its functions to please conservative groups."
Page 78 also mentions that John Dickins, a Wall Street lawyer, wrote a large part of the National Recovery Act with Roosevelt's consent in a way to protect Wall Street interests.
This book is available freely online as public domain. Perhaps it was right, perhaps it was wrong for him to ensure Wall Street didn't get hurt in the reforms of the New Deal, but all the same, it was ensured. Roosevelt was not some Stuff The Financiers man. He was the exact opposite, perhaps even for the better.
In some ways, The New Deal had a strong support of big business in America, which wanted to show a government still somewhat controlling business bit by bit. This helped in outflanking radical socialists and fascists and also protecting the American capitalist system in its then current form. As the cliche goes, "win some and lose some".
"If he approved an act to regulate stock exchanges to please liberal and progressive groups, he appointed a Wall Street speculator Mr. Joseph Kennedy as its head of commission and literally paralyzed its functions to please conservative groups."
ReplyDeleteRegarding Joseph Kennedy as head of the SEC, he was only there until 1935 (only 2 years?), and the idea that he did "nothing" or "paralyzed its functions" doesn't seem to be true:
"Kennedy's first major involvement in a national political campaign was his support in 1932 for Franklin D. Roosevelt's bid for the Presidency. He donated, loaned, and raised a substantial amount of money for the campaign. Roosevelt rewarded him with an appointment as the inaugural Chairman of the U.S. Securities and Exchange Commission (SEC). Kennedy had hoped for a Cabinet post, such as Secretary of the Treasury. After Franklin Roosevelt called Joe to Washington, D.C. to clean up the securities industry, somebody asked FDR why he had tapped such a crook. "Takes one to catch one," replied Roosevelt. Kennedy's reforming work as SEC Chairman was widely praised on all sides, as investors realized the SEC was protecting their interests. His knowledge of the financial markets equipped him to identify areas requiring the attention of regulators. One of the crucial reforms was the requirement for companies to regularly file financial statements with the SEC, which broke what some saw as an information monopoly maintained by the Morgan banking family. He left the SEC in 1935 to take over the Maritime Commission, which built on his wartime experience in running a major shipyard."
http://en.wikipedia.org/wiki/Joseph_P._Kennedy,_Sr.#SEC_Chairman
"Page 78 also mentions that John Dickins, a Wall Street lawyer, wrote a large part of the National Recovery Act with Roosevelt's consent in a way to protect Wall Street interests."
ReplyDeleteRegarding John Dickinson, here is what the book says:
"John Dickinson, Wall Street lawyer, then assistant secretary of commerce and attorney for the Sugar Trust, had a series of proposals closely paralleling the Chamber of Commerce plans."
John Thomas Flynn, Country squire in the White House, p. 78.
So:
(1) Dickinson was a "Wall Street lawyer". This doesn't necessarily mean he was acting in the interests of the financial sector.
(2) it doesn't say he was protecting "Wall Street interests" at all.
(3) it says he had "proposals closely paralleling the Chamber of Commerce plans".
But the Chamber of Commerce wasn't really Wall Street. It represented diverse business interests, including manufacturing and medium sized non-financial businesses.
LK,
ReplyDeleteI wonder if you have read 'Economyths' by David Orrell. It has its flaws but it is very well written and interesting. Academic economists, of course, accuse him of straw manning and ignorance. I wonder if there is simply no hope for them and if they should be ignored.
I have not read David Orrell's Economyths, but a quick look at it suggests that it is indeed making some important points.
ReplyDeleteAlso, just in case you haven't seen this:
ReplyDeletehttp://economistsview.typepad.com/economistsview/2011/11/keynes-vs-hayek.html#comments
probably not worth much - standard lines from the right about the stimulus not working, citing deficits as if they are the same as stimulus, standard Obama bashing, 'where does the money for stimulus come from', blah blah blah
Nothing wrong with comparing a stock to a flow. We do that whenever we want to know how long something can last. As in "I drink 2 bottles of lemonade per day and I only have 10 bottles. I will run out of lemonade in 5 days time if I don't buy any more!"
ReplyDeleteThe problems arise when we confuse a stock with a flow, which is a rather different thing. As in "I drink 2 bottles of lemonade per day but you drink 4, so you have twice as many bottles as I do."
"citing deficits as if they are the same as stimulus"
ReplyDeleteWell, a stimulus doesn't work as well when it is done on a balanced budget. After all, balanced budgets have worsened recessions into depressions, with there being 10 balanced budgets in American history and 10 depressions in American history.
As I understand, a stimulus is supposed to be:
1) rise in spending with no rise in tax rates
2) fall in tax rates with no rise in spending
3) rise in spending and fall in tax rates
So it's implicit that a deficit budget is supposed to stimulate. If you are going to raise income tax rates and government expenditure, as Obama's jobs bill did, you are trying to pursue both fiscal expansion and fiscal contraction. (And if you are Republican, you raise payroll tax rates and indirect tax rates, but no raise spending, in order to have nothing but fiscal contraction!)
Prateek Sanjay said...
ReplyDeleteHe says private debt is 300% of GDP. How can you compare a stock figure to a flow figure? The last person to criticise such a comparison that I remember was....Steve Keen himself! Yes, I think he himself as pointed such things out too.
You cannot compare a stock and a flow. What you CAN do is use the two to develop a ratio. If your stock of debt is 3x your annual flow of income, you can determine from this that your full product of three years is needed to clear it.
You can't compare, add or subtract the two, but you can multiply and divide them.
You can find a simple writeup on the matter here:
http://en.wikipedia.org/wiki/Stock_and_flow#Comparing_stocks_and_flows
But nobody really talks about clearing debt, so much as being able to service debt.
ReplyDeleteObviously, we do not consider having debt at all to be a problem in of itself. It allows a business to have more funds and ensure it doesn't run short of funds. To go ahead and repay all the debt in one go is to deny oneself that advantage. The problem is whether the business' annual earnings are not cut deeply by having to service debt.
It's more preferable to use the ratio of Annual Operating Cash Flows / [Annual Interest + Annual Principal Repayments]