Brad DeLong's Semi-Daily Journal (2004)

"that's why their borrowers"

You mean:

"that's why they're borrowers"

change it before the wingnuts make any "Why is Brad DeLong so Stupid" jokes...

Nugent definition of national savings = private savings makes sense ONLY IF no one will ask the government to honor its debt. His ignoring the fact that the Germans have sold us the car for an IOU makes sense if they intend to shred the dollar receipts after we drive off with the Mercedes. I guess the NRO has implicitly accepted the inevitably that Bush's fiscal fiasco will wreck U.S. finances. But then would not the Germans just sell their Mercedes to the French?

Is this anything like calling government redistribution of taxpayer money "investments?"

They describe the debts represented by treasuries as "obligations" rather than as obligations, without quotes. They think we don't have to pay because our creditors will simply leave the money owed in a non-interest bearing account, or something.

Borrowers are really lenders.

It must follow that defecits are really surpluses.

Right wing economics just keeps getting more and more entertaining.

war is peace. hate is love. borrowing is lending.

Thanks for bringing up the quote. I am going to use it as the basis for a macro exam question (Anyone who misses that one flunks the course).

Should:

"In the English language, the entity that lends the money is the one that does the saving--the funding--holds the asset."

really read

"In the English language, the entity that lends the money AND is the one that does the saving--the funding--holds the asset.?"

"When the consumer borrows to buy the car.." somehow becomes a funding source for savings. How does this pass even the most elemental laugh test? I guess by this logic, if I run up the Visa card to its limit, I'm actually somehow contributing to my retirement fund because I'm "saving".
National Review must have language in its writers contracts that anyone who's been there more than 2 weeks is not to be subjected to any editorial interventions whatsoever.

This is as dumb as the claim that outsourcing jobs from the US is good for US employment. BTW, I still would like a reference to a model which would lead one to the conclusion that outsourcing is good for the US economy and employment rate.

Eli, look up any undergraduate micro or international econ. textbook, where they talk about international trade. Take the standard Ricardian model with one factor of production (labor) and two outputs. There you just have shifts in the allocation of labor between activities depending on their relative prices, but no change in total employment.

This is perfectly in line with the experience of the last three hundred years, with unemployment roughly constant (or maybe decreasing, since these days there aren't that many people on the streets who are so destitute that they can't even work--thank you, Bob Fogel) over the very long run. Otherwise openness to trade would be correlated positively with unemployment internationally; anecdotally this doesn't make much sense at all. Anyone who thinks that Chile or Hong Kong has a higher unemployment rate than Paraguay or even China has had a little too much yerba mate.

This extends to multiple factors of production too, even if they're mobile, so this isn't as stupid as it sounds. But it's easiest to understand with just one factor. So economists are not being dogmatic here; why risk being unpopular if you don't have a good reason to do so?

Chris, thank you for the post. IMHO, if this is the model you are following it obviously fails in current conditions because it is linear.
http://elsa.berkeley.edu/~webfac/harrison/e181_f02/181lect2nts.pdf
(Rather amusing example, given the quality issues involved which falsify the conclusions)

That is, it is obviously true for small changes in any component, or even large changes in small components but certainly false if there are large changes (ie in manufacturing and increasingly in services). The magnitudes of changes in the past were limited by the costs and time needed for transportation and communications. Since these have fallen to zero it is time, as it were, to reboot and confront the issue of where LARGE number of jobs for displaced workers are to come from, and how their induced penury affects society. This is not an issue in the Riccardian model, because the number of displaced is small compared to the total number of workers, and the net effect of their displacement on income distribution is negligible.

I could make further criticisms of the model, for example, the issue of whether one can usefully assume an equilibrium but first things first.

(I would still appreciate a reference to a journal article with something more formal than a textbook)

The NRO version of Polonius:

"Both a borrower and a lender be"

Several of the comments have hit it right on about one of the serious problems with media coverage of economics and finance, credit creates wealth.

Eli, what are you seriously arguing? That the number of workers being displaced by outsourcing right now is even close to the number of workers who were displaced by the mechanization of agriculture? Or that the number of American workers we need to find new jobs for is even close to the number of women who entered the workforce since the 1970s (with no concomitant rise in unemployment)? Or close to the number of immigrants who came to America between 1870 and 1920 (the vast majority of whom found work)? Unless you can explain to me how a job lost to mechanization is different (that is, easier to replace) than a job that has been outsourced, or how a worker whose job has been outsourced and is looking for new employment is different from a middle-aged woman entering the workforce for the first time, then I think your argument that everything is different now and that we have a unique problem in coming up with jobs for "LARGE numbers of workers" simply falls apart.

These were all massive changes in the conditions of labor

Nugent has either achieved a sort of Zen state of enlightenment, in which he sees the falsehood of the usual dichotomies of lending and borrowing, saving and investing, etc, and sees the fundamental one-ness of the economy, or he's gone totally mad, and lives in a twisted, distorted private world of non-Euclidian, horrifying economics, beyond good and evil, or borrowing and lending.

Either way, it's tough to figure out what he's talking about.

The article is kind of obtuse and illogical isn't it? However the oldman has heard many times that the trade deficit is "okay" because foreigners are buying US stocks and treasuries to cover the difference.

This strikes the oldman as a doubtful proposition. If in life you were spending more on stuff than you were making from selling stuff, and then borrowing the difference from the people you were buying stuff from, then this doesn't strike the oldman as a healthy proposition. The oldman doesn't see exactly how it's possible to get ahead on such a deal. However, he has been assured many times by economists and economic commentators that this is a way to get rich.

This also doesn't strike the oldman as being particularly healthy.

Hey buddy, can I lend you a dime?

Your attack is specious (Is this a joke?). You can always trace a dollar back and around again; it's circular. Nobody "funds" anything by your analysis, or every entity funds every other entity "indirectly" (except people who don't buy anything and don't keep money in banks, I suppose). I don't recall the definition of "fund" to mean paying somebody money that you created out of thin air. Where did the German car company get the dollars? From a consumer. Where'd the consumer get the money? The bank (or his job). Where'd the bank get the money, the German car company? Right. If the consumer takes no action (from the company's perspective [and the article's] it makes no difference whether the consumer borrowed or not, consumer debt is not what is being discussed), the German car company's deposits are not increased (except for bank interest). Sounds like funding to me.

You can't pin this one on the National Review; it's the same confusing use of language that people have been moaning at Warren Mosler for for years. Under a very complicated version of endogenous money post-Keynesianism, "funded deposits" is a particular technical term and being used here more or less correctly. Quite why anyone thought that the average National Review reader would be familiar with "Understanding Modern Money" and the neo-chartalist debate is anyone's guess but there you go.

Dsquared - you may be right. I've seen some other writings by Mosler that were equally as stupid. So maybe Nugent was suckered here. But then Nugent choose to allow his name to appear with Mosler's.

I personally don't think Mosler is stupid; I don't think I agree with him on anything, but he is actually quite good at what he does. On the other hand, he is absolutely obsessed with using common English words like "deposit" and "funded" and "saving" in non-standard ways.

- Is this anything like calling government redistribution of taxpayer money "investments?"

You print money yourself? No wonder your ip address is alcatraz.prison.gov.

- Is this anything like calling government redistribution of taxpayer money "investments?"

You print money yourself? No wonder your ip address is alcatraz.prison.gov.

I think Mr. Messina's comment is evidence that economics courses should be taught every year in High School beginning in the ninth grade.

Here is a hint: any time interest is paid money is created. Hint #2: the funder is the one who gets the interest.

Also regarding the excange between Eli, Chris, and Steve this is great exchange. I think in the long run Chris and Steve are correct but Eli has a point regarding factor mobility that neither Chris or Steve have addressed. There is another point about contemporary tolerance for social disruption that should be raised as well.

To exemplify this if we were to have a magnitude change on the order of the mechanization of agriculture with the speed, bredth and depth of say the computerization of data processing the combination could have some unexpected nasty effects. I think it makes sence to allow the trade but to redistribute some of the benefits when necessary to absorb some of the shocks.

On the outsourcing issue and references to Ricardo-

Always keep in mind that in the classic Ricardian example of comparative advantage, it is always assumed that the two countries trading are at roughly the same level of economic development (which back then all countries were). Thus when workers are displaced as a result of free trade, it is always industry specific (wine workers, cheese workers, or whatever) and always under circumstances in which other industries are expanding as a correlative phenomenon (cheese workers, wine workers). For this reason trade has no tendency to depress real wage levels for the country as a whole (which Ricardo wasn't concerned about anyway, because he assumed that they were as low as starvation would allow).

But when comparative advantage is a matter of relative factor endowments (ie capital-population ratios) as occurs with trade between the United States and China, for example, then there is downward pressure on real wage rates all across the board, not just in certain sectors.

This is what we are faced with today, and the outsourcing phenomenon is merely one aspect of the process.

BTW, Brad's plain English parsing of NR's economic position is exceedingly good, and not nearly as easy to do as it looks; it's the sort of thing, in my opinion, economists ought to be trained to do,instead of fiddling with a lot of fancy mathematical equations that have no utility. Plain thinking about real problems on which the happiness of millions depends -- that ought to be the motto of the economics profession of the future.

"I think Mr. Messina's comment is evidence that economics courses should be taught every year in High School beginning in the ninth grade."

Mr. Carroll: I agree. But I hope those courses aren't the same ones you took/teach. Actually, you can have interest in a fixed money situation. Lending money that you don't cover 1-1 with cash (or gold, or whatever) is what creates money (in addition to ramping up the mint). So hint #1 is not really true (unless it is the government paying the interest). Hint #2 is pretty funny. Who's the "funder" if the investment is made on margin?

Whether or not the consumer takes on debt to pay for the car is irrelevant to what the article is discussing. Completely irrelevant. Consumer debt is between the consumer and his creditors, whoever they may be. The point of the article is how trade deficit leads to foreign debt and why this isn't the problem everyone makes it out to be.

The article isn't complete of course. It doesn't talk about the market between the Euro and the Dollar and its effects. That may make it seem like this is flim-flammery. But it isn't

Luka Lee writes
"Always keep in mind that in the classic Ricardian example of comparative advantage, it is always assumed that the two countries trading are at roughly the same level of economic development "

No it's not. One country's production possibilities curve can lie entirely
above another country's production possibilities curve and comparative adantage can still create gains from trade. Again, classic confusion between comperative and absolute advantage.

"But when comparative advantage is a matter of relative factor endowments (ie capital-population ratios) as occurs with trade between the United States and China, for example, then there is downward pressure on real wage rates all across the board, not just in certain sectors."

Now you're screwing up the Hecksher-Ohlin model
- where the basis for trade is difference in relative factor endowments. But the
conclusion of that model IS NOT "that there is downward pressure on real wage rates all across the board, not just in certain sectors". The HO
theorem states: a country will export the good which uses its abundant factor intensively. The, related, Stolper Samuelson theorem states: an increase in the price of a good will benefit the factor which is intensive in the production of that good. Translation into simpler terms: some lose, some gain in each country. But there's still gains from trade.

If you really want to talk about outsourcing though I'm thinking the Jones Specific Factors model would be most appropriate - two sectors;
manufacturing and services, capital being specific to manufacturing and skilled labor being specific to services and unskilled labor mobile between the two sectors. Still - the idea of aggregate gains from trade applies.

Eli writes
"IMHO, if this is the model you are following it obviously fails in current conditions because it is linear. "

I'm not sure exactly what this means (the link is to a very simple explanation of the Ricardian model - not a "nonlinear" version as I expected).
If you mean the fact that the PPF's are linear then that really has no effect on the conclusions of the model (same thing works when PPFs are concave).
Or perhaps you're saying something about increasing returns to scale? It's really hard to understand your point.

If you're just saying that trade has bigger effects today, or that volume of trade is bigger today then in the past because transport costs are zero well, first, empirically you're more
or less wrong and second, it would only imply that potential gains from trade are larger.

As far as references - the reason most people will give you textbooks as references is because this stuff is old - i.e., well established. If you want a more technical - graduate level textbook these would be something like Obstfeld and Rogoff (though stress is on macro - balance of payments issues rather than trade theory) or Robert Feenstra's (I'm not sure if it has been published yet) book on trade or even Paul Krugman's book (though I think that's more at upper undergrad level). For articles, I'd suggest just taking a trip to the library, finding the Journal of International Economics and going to town.
There are classic surveys of intl trade theory by Bhagwati in the Economic Journal and by Chipman in Econometria - both from the 60's!
If you want to go to the source then find the classic books/articles by Ohlin, Samuelson, Viner - I could look up the references but I really don't feel like doing your research for you.

"Understanding that government deficits add to savings and that U.S. consumers fund the desires of foreigners to save is a good way to start seeing through the media's economic mythology."

Sheesh! I've seen the money illusion in action before, but this is ridiculous.

Maybe it was really TED Nugent who wrote that piece ...

I borrowed $20 from an acquaintance several years ago and skipped town.

Now I bet he wishes I had borrowed $40 ... he'd really be rolling in my funding then ...

Mr. Messina,

My comments may not deal with the NR article but, dealing with yours, First,I did assume we were talking about people and banks here, right? Unless the bank is going out of business or is just plain corrupt, everytime the bank collects interest on its loans money is then going to be created.

1) A bank collects money in the form of deposits.
2) I borrow from the bank
3) The bank counts my loan as an asset
4) depostors count the banks assets and FDIC as a guarantees of the value of their deposits

WHEN

5) I pay interest to the bank

THEN

6) A portion of that is added to the value of deposits, etc. and the M2 money supply is enlarged.

I think Brads point is that in this case when interest is paid all the way up the line the M2 money supply is enlarged in the car exporting country. I'm not sure why this is such a mystery.

Even if we are talking about loans without one to one cover, WHEN I pay interest the depositors get paid and money is created.

I should mention that I am making the wild assumption that people aren't going around robbing banks to make their interest payments.

Steve says:
************************************
Eli, what are you seriously arguing? That the number of workers being displaced by outsourcing right now is even close to the number of workers who were displaced by the mechanization of agriculture? Or that the number of American workers we need to find new jobs for is even close to the number of women who entered the workforce since the 1970s
*************************************
As I recall mechanization of agriculture produced a whole lot of serious poverty for a whole lot of people. In the long run a lot of them were dead before the benefits arrived. Moreover, the jobs produced by the mechanization (building tractors/trucks/etc were available to many of the people who were displaced from the fields).

As to women entering the workforce, while many middle class guys like Bill O'Reilly's dad were able to support a family in good style in the 50s, today, two people have to work to reach the same standard, so I don't exactly see where women entering the workforce has advanced the economic well being of the median middle class family. Among the poor the women and men always worked.

Mr. Carroll:

When you pay interest to the bank for a loan, money is not created. The money you had in your hand is simply transferred to the bank. Debit for you and credit for them in a 1-1 correspondence. Money is created when the Fed buys treasuries and when reserve levels are less than 100% through a multiplier effect.

Professor Delong's point, which I thought was very weak, was basically to treat the car company as if it were the sole lender to the bank and then claim that the car company is funding the borrowing consumer (he puts in "indirectly" to cover himself, I suppose). The NRO article statements had nothing to do with whether or not the consumer borrowed money to get the car. The borrowing is between the consumer and the bank, whether or not the car company leaves its money as deposits. I don't know how else to put it. One more shot: The consumer, by virtue of funds in their pocket or their willingness to borrow money from a banking institution, increases the number of dollars in the car company's account. What would you call that?

Mr. Mosler has written a response to the Professor at www.mosler.org

Mr. Messina,

I suppose we shouldn't argue because I think we are living on different planets. Here on Earth, banks use the interest they obtain from payments on loans to pay their bills, make investments and to pay interest to their depositors. A portion of their payments to depositors is "fictitious" because it does not represent actual liquidity. That is why bank runs are bad and why we have deposit insurance.

In any case when this "fictitious" money is added to deposits it is counted as part of the M2 money supply. Yes, Money is thereby created. I guess they don't have an M2 money supply on your world. Before you respond please look up: ‘M2 money supply.’

Furthermore Mr Messina,

I probably should let this go but I have a few minutes so I'll elaborate.

>

Reserve levels are ALWAYS less than 100 percent in modern economies. On savings accounts (part of M2, to beat a dead horse) reserve requirements are zero, nada, zilch. Does that mean the interest paid on you savings is NOT money? Of course it is! When the bank pays you interest it doesn't have to go begging the fed to change the reserve requirement or sell some of its assets to meet any requirement. It simply says you have more money. The bank decides how to cover that 'new' money and part of that cover is the interest it collects on its loans.

Interest on loans coming in means interest on savings going out means money is created.

Maybe this will things up.

http://www.ny.frb.org/aboutthefed/fedpoint/fed49.html

Mr. Carroll:

I believe we are on the same planet. I do acknowledge the existence of M2 (when I said that money is created when banks don't have to have 100% reserves I thought this is what I was talking about, although I didn't use the term). I misread your combined posts to state that money was created by YOU when you pay interest, and not the bank when IT pays its depositors.

I have certainly misread your statements, but I don't understand what is wrong with mine, certainly not enough to place me on Mars or make me go back to high school (shudder). If the bank is required to have reserves at 100%, how can there be an expansion of money at the bank level (i.e. without Fed action)? In other words, how can there be any "fictitious" money paid to depositors? If there can't, then my misreading of your posts was at "Even if we are talking about loans without one to one cover" and perhaps you can see why I thought what I thought you were saying. If there can, then you're right and I'm wrong. It's happened before.

(Note I didn't see your 8:40pm post before posting this)

Uh, or rather, I wanted to post what I just wrote and then look at the post. Sigh....

Mr. Carroll:

Actually, now I can see where I made a mistake. When I said "Lending money that you don't cover 1-1", I meant it as a paraphrase of not having 100% reserve requirement (which I did use elsewhere). I meant that when banks loan out deposit money they create new deposits (well, usually) and don't cover the deposits with "real" money, and thus create money. I'm sorry for wasting your time. I'm really not as ignorant as you think.

New bank loans result in new bank
deposits- get over it!

wow is all i can say. and you're an econ professor? maybe an accounting course is in order.

Nugent & Mosler's response (NRO March 9, 2004) looks spot on and well-founded. It might be helpful to have Professor DeLong take a closer look. Nugent & Mosler are doing a great service by highlighting common misperceptions which have skewed the public policy debate. Time to "reboot" and start using the correct paradigm.