Joseph Stiglitz - Mixed Economy and Money Supply
"Before the East Asia miracle there were two dominant paradigms for development, one focused on markets, the other on government and planning. The first had its intellectual roots in Adam Smith's "invisible hand" - markets lead to efficient outcomes. All that government needs to do to promote growth is get out of the way. The basic slogan is "get the prices right." With the right prices, everyone will have an incentive to make the right resource allocations. Undermining this particular religion was the disturbing observation that countries that seemed to get the prices right—to follow all the advice of the visiting preachers of the free market—too often failed to grow. To be sure, like medieval medicine, there was always the allegation that the patient had not followed the doctor's orders precisely, and it was this that accounted for the failure of the remedy.
At the opposite side were those who had little faith in the market and who looked to government to ensure through the planning process that resources were deployed in a way that promoted economic growth. The lack of success of those countries that followed this paradigm has led to the virtual extinction of this school of thought.
Ironically, almost none of the successful industrial countries followed either of these extreme strategies. They are mixed economies in which government plays an important role. The appropriate question to be asked is not whether government should play a role, but what role and how can it be performed most effectively." Stiglitz 1996 "Some Lessons from the East Asian Miracle"
Look at the homeless, the people in shelters, first they need to get a job, then save up for a few weeks to rent an apartment. But, homelessness keeps occurring! So are these folks voluntarily or involuntarily unemployed?
Some manufacturing jobs have left the US, there has also been a huge demand for service workers at all levels. The undocumented and many immigrants are willing to take the lowest service jobs: domestic servant and janitorial and food production jobs, although most legal immigrants are skilled or professionals. Most jobs available are service jobs - jobs related to marketing, not in production, because production requires skilled labor to be efficient which involves automated equipment, installation, operators and maintenance.
The issue of underemployment is relative since the issue is the relation between a worker and the employer and the coworkers and the clients/customers, not merely wages. Wages are low: one half of households - usually 2 workers - make less than 60k!
Increasing the minimum wage in several states means that entry level positions will be more likely to provide for basic subsistence: food, housing, clothing, transportation, etc. The US has on average a high school educated work force where those with higher education - some college, BA, graduate degree or PhD/MD/JD account for 30% of the adult population, and all of them are not necessarily working: voluntary unemployed, retired, etc. The employment rate in the US is 60% of the population. Getting a professional job is for the majority impossible.
The workforce is not “highly” educated because the university system is still too small. In PA, there are 400 colleges and Universities, 200 of which are 4 year programs. The population of PA is 13M. To accommodate this many people in colleges would require that most of them expand to over 30k student population. Not likely as most can only take around 1000/year.
Higher education is too small and extremely variable, diverse, from college to college, department to department, courses and curricula. 2/3’s do not go to college at all!
When the Fed floats a bond to cover govt payments for wages and contracts because they are not covered completely by revenue, it is called a deficit and adds to the total debt. Quantitative easing is a method of reducing the government debt which equals the outstanding bonds and interest, buying back the bonds before maturity saves the government the interest and reduces the debt.
When a bond is floated and bought by a private individual, money is created - there is a connexion between 'paper' and money. Some of the money can stay on the books, but some of it must be printed not because of a run on the bank but because some money will be withdrawn as cash. How much varies, but a shortage of actual cash will slow the rate of circulation of money, of exchanges, and slow the local economy down. So, either cash or credit cards are necessary for daily transactions and many people still live on a cash basis.
Population increases yearly, the number of workers increases, the number of people making financial/consumer transactions increases, so more cash money is needed.
When a loan is approved, the money supply increases by that amount, the total is printed in cash. The individual bank does not cover the loan amount, it approves the loan amount which is a part of an approval process totalized by the Fed. Each individual bank may make small temporary loans, business loans, but that is not how banks make money. Banks also invest their deposits in securities!
If I sell my house, I can immediately withdraw the money from the check of the sale. Where does this cash come from - it is printed on the basis of rules related to loans under approval as overseen by the Fed.
The money supply is related to the payments for all products, wages, resources, etc., to any activities related to the production of goods. This is called the transforming of money into capital. As money is needed, credit is generated and managed by the interest rate at several levels from the local banks up to the Fed and including - not bypassing - all of the financial organizations of states and corporations whose transactions are calculated by the Fed to ensure that all loans and checks are liquifiable! On the other side, all capital goods must be transformed on the other side into money; sales. If the production is not covered by consumption, Capital would become stagnant - product would not move!
So, the income from production requires that the population consumes it and the population must be employed to earn the money to purchase the capital. Thus, employment is the GDP and not just a spurious correlation.
The reason for the Great Depression was unsupervised banks that extended their credit AND over invested in securities as detailed by Milton Friedman in his History of the Depression!
A misconception occurs over the use of the term socialist which today refers to ‘welfare economies’ in which the government actively intervene. The term 'communist' is pejorative and not the same as socialism. The dominant ideology of the US is 'anticommunist.' Russian communism collapsed in 1989 and has been turning capitalist, China also has been turning capitalist.
To understand this difference requires knowing how communist nations operated before this turn to provide their populations with the necessary subsistence goods. They appointed commissars who calculated the population's needs and the productivity of the population, and then traded with the West to make up the difference. This calculation and the resulting distribution was always wrong as Mises and Hayek proved in their works. The closed, state controlled market interacted with the open market. Today, there is only an open market which states regulate and supervise, not only through customs, tariffs and protectionist taxes, but also through quality control: inspections, accounting, traffic control, etc.
Socialism also gets derogatory attention, as does democracy! Socialism refers to the receiving of free money or goods from the government: subsidies, housing, food stamps, unemployment comp, Medicaid, etc., a myriad of government services! The social democratic states of Northern EU afford their government services with very high taxes. However, socialist-welfare policies benefit the capitalists, owners and executives of corporations far more than the impoverished millions.
Democracy gives married folk a tax break, and parents a tax break. The government intervenes into families financially and legally. However, where the federal government gives a tax break to the married and those with children, local jurisdictions increase property taxes. There is really no tax break at all.
The basis of conservative values is DUTY: the requirement that everyone works, over-relies on their personal self-reliance!
These meanings are changing: communism is changing into the ecological meaning of concern for the common land, socialism is changing into a concern for solidarity and common values, and democracy is changing into a recognition of diversity and a universal requirement to work! That job discrimination against women and minorities is illegal! And so is class, religious and regional discrimination.
Society means 'social order' where order is the name of the game, not ideology, ignorance, or hysterical anti-state populism.
China is not economically socialist, it is obviously capitalist.
In the US, there is an obvious division between the social conservatives and the fiscal conservatives. Conservatism suffers and lacks any credibility therefore. The same has happened to communism where socialism is like social conservatives - a set of supposedly dignified values which however belies their having to be instilled by torture and imprisonment, e.g. mass incarceration. But, the nature of capitalism varies from nation to nation.
This variability in capitalism is seen on several levels: whether the government permits, taxes or prohibits international investment! Whether the government expands social services or limits them to police! Whether exports are the remainder after providing for the populations needs, or before the population has been provided.
This latter problem is obvious in the present cataclysm in Venezuela where the oil exports keep the rich and the police in power while the population starved!
So, government plays a very important role in the economy by directing investment, employment and development, ie housing, education, etc. The problem erupts when a nation is a client of other nations who invest in it and extract its products and profits!
US grew at over 4% in 2018 but at 1% in 2020. What exactly that means is in the shadows. To what extent does productivity, or unemployment, imply population control, incarceration, state terrorism?
Chinese GDP can grow, Chinese monetary controls can provide unlimited credit or low taxes or whatever, but the key issue is international investment.
As international capital investment - maquiladora and survival extraction - increases, the GDP increases also but at a very high risk. The stable economies around the world: South Korea, Germany, Norway, Iceland, etc., control, supervise and limit international capital investments, sometimes by taxation, by import duties even of intracorporate goods. Look at what just happened to Japan largest pension fund - caught between US-China trade war, it lost 1/4 of its international investments!
China is a nation within its borders, instead of an expanding corporate body of state-regulated corporations!
The real issue is the relation of productivity to population control.
When a govt floats a bond, they owe interest, not to mention the matured payout. Notwithstanding quantitative easing, who do you think collects the interest on these bonds?
The money supply is managed by the printing of money or the crediting of accounts on the basis of approved loans: credit. Improper procedures for regulating credit from the smallest bank to the hidden corporate financial services to the supervision of leverage in every bank leads to credit bottlenecks, loan rejections and the slowing of hiring thus the slowing of production and then the slowing of consumption. This business cycle is due to a government’s lackadaisical processing of the credit basis of the economy causing recession and stagnation, that is, the increase in unemployment.
There are many important works on this question from Schumpeter to Hayek to Keynes to Friedman. If during this year, 100B are generated in loan approvals, and those individuals with their loans withdraw even 10% in cash, the entire economy would then run out of actual cash and no one could get any more cash from the banks. It would be a total credit economy. If everyone could do this, no problem, but in the meantime, as loans are approved their cash basis must be realizable, the money supply must increase.
