It’s not often that I debate. I usually don’t like the emotional fireballs associated with debating in person. On the internet it’s a different story. So I guess this post is to show you how stubborn people can be and to see what you guys make of it. So I saw a post on facebook about the debt ceiling and I decided to give a word. You can pretty much fill in the blank about what I said. I also proposed Bob Murphy’s idea of selling off federal assets. Here’s what my friend had to say:
…whatever cash we could obtain from selling the gold in fort knox is temporary, and would be quickly burned through at the rate we borrow money (125 billion a year). All your solution would do is postpone this debate for a little longer.
As to the psychological damage, investors, and in particular speculators tend to take cues from the actions of the government, treasury, and federal reserve when they decide if they should buy government bonds, invest in national assets, or speculate in favor of the national economy. And a fire sale of selling gold at fort knox would surely push them away from investing in our government, or speculating in a positive way.
He’s right about the first part. But I never said it would be a permanent solution. It will go however get us closer to 750 billion dollars. And I’m not even sure where the logic derives from in the second part.
The debate spurred from there to other things. Namely oil prices. I showed him a graph that demonstrated how the price of crude was inversely proportional to the dollar index and how the high price of oil is very much tied to the the federal reserves monetary policy. He rebutted by saying the price of international crude oil and us gas prices correlate to each other using this graph: http://na.oceana.org/sites/default/files/intl-crude-oil.jpg He used this as evidence that we are “at the mercy of international markets.”
Continuing with this infinitely circuitous debate, he started talking about tax policy and specifically how Clinton’s tax policies stimulated growth. I immediately accused him of demonstrating a post hoc, ergo propter hoc fallacy. I told him that the growth in the 90s should be remembered as the failure of Greenspan’s monetary policy and not the success of Clinton’s fiscal policy. He claims that unemployment rates declined throughout Clinton’s presidency and that his tax policy was a causal factor of this. This is totally ridiculous.
We then went to jobs. I noted the failure of the current stimulus. I told him that a job is not an isolated and random creation by the government; jobs use of factors of production that are useful in nature. Factors of production aren’t homogenous. You can again fill in the blanks where I told him why stimulus can’t effectively create jobs. Of course he rebutted by saying, well we just need more stimulus! He said we needed another WPA.
I then demonstrated why we need to let wages fall to market rates in order to bolster employment. Of course he said that we shouldn’t be paying people with such low rates. Since unemployment is so much better than being paid money.
I then told him why printing more money to cover a massive budget is bad. Again fill in the blanks. He used this story to rebut:
During the 1970s,the Sweenys were part of a baby-sitting cooperative (co-op) of young couples who worked for congress. It comprised of about 150 couples, all of whom were willing to babysit for one another. Because of its large size, there were plenty of potential baby-sitters, and plenty of potential babies to be watched.
In order to manage it’s large size, here is how the co-op worked. Couples were given coupons entitling them to one hour of baby sitting. When couples went out, they gave the appropriate number of coupons to the baby-sitters. Then, they could in turn use those coupons they get babysitting. This is very similar to the way cash flows (abet quite simplified). Think about it. Replace baby sitting coupons with money and you have the way cash flows throughout the economy. And because the system ensured that over time each couple would provide exactly as many hours of baby-sitting as it recieved, the system appeared shirkproof.
But it wasn’t that simple. Couples with several free nights in a row would try to accumulate reserve coupons for the future. And because there was a fixed number of coupons, this would result in a depletion of other couples’ reserves. And over time, each couple would, on the average probably want to hold enough coupons to go out several times between bouts of baby-sitting. As a result, people began to look to accumulate reserves, and fewer and fewer coupons were in circulation. (So when you said that Americans need to learn to save more money, here’s why this might not be the best idea).
A peculiar problem resulted. Couples who felt their coupon reserves were insufficient were anxious to baby-sit (get cash) and reluctant to go out (spend cash) as to save. But because less couples were going out, opportunities to baby sit became harder and harder to come by, making couples even more reluctant to use their coupons, making opportunities even scarcer.
So, the co-op went into a recession. Not because of “bad baby-sitting.” Not because the co-op couldn’t produce (hence why your argument, “We need to produce more, export more, and save more,” doesn’t hold up in the face of a recession. The recession was caused by a simple lack of effective demand. There was too little spending on goods (baby-sitting time) because people were trying to accumulate cash (baby-sitting coupons).
Now, how did they get out of this vicious cycle? It was simple. The co-op increased the amount of coupons in circulation. The result was magical. With larger reserves of coupons, couples became more willing to go out, making opportunities to baby-sit more frequent, and so on, creating a positive feedback cycle.
Of course you can already tell that I’ve tried to explain ABCT to him. He tried to argue against it with something almost verbatim to what Krugman said. Something silly about how it is mathematically impossible to have a “consumer goods boom” in a recession. Of course people shift spending towards consumer goods and away from others. I also told him how credit contraction could cause the investment boom to subside. Here’s where he demonstrates that he has a fundamental misunderstanding of the theory:
But if a monetary contraction can be the cause of disappearing investments and a weakened consumer market, then shouldn’t the natural solution be to have the central bank inject more money into circulation? It should, and often it is (again, see the co-op example). And here is where the contradiction arises. You admit monetary contraction can be a major factor in a recession, but you say that injecting money into circulation is a horrible idea.
I don’t even wish to comment on this.
I also cited Harding’s reaction to the 1920 crash as a template for the correct reactionary policy, or lack thereof, to a crash. Of course he says, FDR did it right. World War II got us out of the depression. Where should I even start on this?
Please help me put this guy in his place. This is becoming a very taxing task, however not a difficult one, just an extremely petulant one.
