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Economics

Economies of real things and monetary policy

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Does monetary policy actually create jobs? As usual, the answer is both yes and no.

For instance, does printing money fix the economy? If there an extra trillion dollars in circulation and not just hidden in bank vaults, what would happen? I always like asking myself, “Why would this work?” Classically, if the number of products available don’t increase correspondingly, the cost of each product would go up. So why didn’t we see any of this happening during the past 20 years when the Fed was printing money? Essentially, cheaper products came over from China to offset the money press.[i]. And we did have a tech bubble and a housing bubble. And because of the easy money, people spent money and jobs were easy to find. It’s easy to explain the past. Predictions about the future, however, are inherently unreliable.

So what can the government really do to fix the economy? Does printing money do anything? Well, technically, it does plenty. It allows the banks to have proper accounting, there is some lending potential there to increase real money circulation, and it makes people feel better. And feeling good is important for any economy. Unfortunately, when all you got is a hammer everything will look like a nail. Money is like water filling a bathtub. You need enough water in the bathtub to take a bath and if there’s not enough, you’re not going to get clean. But if the tap keeps running that bathtub is going to overflow. That’s the financial situation that we’re in with the money is flooding offshore.[ii]

That’s not the complete story though. Clearly, economies are in a rough spot around the world. The people are in a tough spot. There aren’t enough jobs and money flowing. The symptoms are there of a lack of money in circulation, but the cause has been misattributed, so the solutions are incorrect.

An initial solution is to bail banks and corporations out and print more money. That’s never going to work long-term, but it does prevent revolution, which I imagine I would find, rather annoying to deal with in day to day life. But if it does happen, as with the case of Iceland, things do move along rather nicely after the initial pain.[iii].

Another solution would be for the government to provide or create jobs. Now capitalism certainly underfunds innovation and for the most part lacks leadership in the attempt to maximize profit, but expecting the government to provide jobs and leadership is unreasonable. 1 billion dollars over 5 years to create 20,000 jobs?[iv] To be honest, the numbers sound good, but is the government going to employ 10 million people? At what efficiency and what work would get done? I don’t think anyone is smart enough to plan this out and I’m not sure if the economy would be the first priority of Skynet. Though removing most of the humans is certainly a solution to the problem, I certainly don’t condone it, so please don’t misinterpret me.

Another solution would be for the government to cut taxes. But for who and how much and why? Cutting taxes on the rich doesn’t make any sense as the trickle down effect doesn’t apply. Cutting taxes on the poor or having a negative income tax might actually work for the short-term. After all, to consume, you need to have money. And to have money, you need to work[v]. There is a marginal utility of money – the more you have, the less you need. The middle class and poor will actually spend the money and keep it in circulation because they have no choice. This will indeed work in the short-term. But there is a conundrum here with rewarding bad behaviour[vi] if taxation isn’t correctly thought out and a moral dilemma with either choosing the most efficient course of action or the most just. However, those decisions are beyond my pay grade, and I’m just going to ignore them.

So there is a short-term solution, but what is the long-term solution? We need to understand that we’ve made for ourselves a system based on consumption. Let’s assume for a moment, that we want to stay in this system. Currently, the solution is to get all the consumers into debt to allow them to continue to consume, export the debt, and have a net transfer of wealth from poor to rich in the process. I have a funny feeling that isn’t going to end well. Just saying.

Consequently, there’s an entire school of thought which wants to end the central banks which would prevent this debt-based approach. And, certainly, central banks do cause a myriad of problems. Competing currencies, alternate views of currency, and hard-backed money will indeed solve some of these issues. However, changing the currency will do nothing to alleviate the fact that machines and technology are qualitatively different than they were in the past hundred years.[vii] The crux of the problem is actually that there is not enough real work to do. Workers are consumers. Consumers are workers. In an affluent society, how does the poor going into debt to live make sense? Is wage slavery the end product of our civilization?

So it comes back down to work. And what is work that adds value? It’s a hard question to answer because of the variability of value. There’s the cost of production value, the in-use value, the labor theory of value, the market value, the marginal utility theory, and probably a few more that I’ve forgotten. Each of these definitions is useful in certain contexts. But it’s much easier to look at what work is not valuable.

As an example, it’s interesting to look at online economies because it’s been so recent with the “Internet bubble”. In the late 90’s, everyone thought you’d just throw something up online and make millions. That never made any sense as they never had any value other than existence. Now, online businesses either have to advertise or sell a product/service. And remember, if someone is giving something to you for free, they are selling you. For instance, Amazon provides real value by selling products cheaply and efficiently.[viii] Or Google provides real value by having a great deal of traffic which it then directs to other places which try to monetize it[ix]. And Facebook is selling you. The valuations of Facebook network worth don’t make sense considering how much a user is worth[x]. In making a new startup, either the business needs to have extremely low user acquisition costs or an ability to monetize a user over long periods of time, which is why Facebook may be valuable to acquire users in the future.

The same goes with banks. What does high-speed trading really do? If I hand money to you, you give it back to me, and I give it back to you in the space of a second, this is supposed to add value? Or is this simply gaming the system? Banks don’t create wealth. They store it and lend it out on occasion and should try very hard not to destroy it. Certainly, a very good reason why banks used to be a very boring and dreary profession.

Fundamentally, economies run on work that creates value. No amount of printing money, debt creation, or arbitrary financial instrument will change that fact. Changing the nature of our currency may help prevent certain issues, but certainly isn’t a silver bullet. Changing tax policies is a short-term fix for a systematic problem to help redistribute the wealth that has been concentrated over time. Government policies can certainly prevent jobs from being created. But the issue is that there isn’t enough work to do and there’s no easy fix for that.

tl;dr – most financial policies won’t be effective in ending unemployment and are only short-term measures, need to address the root cause of lack of work to be done which is systematic

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  1. http://www.census.gov/foreign-trade/balance/c5700.html []
  2. There are theories that any quantity of money will be satisfactory, but there’s also price stability, amount of money per capita for population growth, allowance for hoarding, inflation, deflation, intrinsic value of money to consider. Don’t worry, it just sounds complicated. []
  3. http://reason.com/archives/2012/09/07/iceland-provides-a-blueprint-for-survivi []
  4. http://www.huffingtonpost.com/stacy-bare/veterans-jobs-proposal_b_1251637.html []
  5. Unless, you’re rich []
  6. Though we’ve done just that with corporations and banks []
  7. Seriously, it’s not a Luddite fallacy. The rate of change of automation is too high. []
  8. The concentration of power and the destruction of brick and mortar stores and the overall effect on the economy not withstanding. []
  9. The concentration of power controlling the internet not withstanding []
  10. Like GroupOn – among others []
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