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This is either the loanable funds fallacy or the automatic full employment presumption. I'll assume the latter.

The traditional marginalist approach to arguing this is to build an automatic tendency to full employment into the assumptions of the model, so that the economy is always assumed to either be on its production possibility frontier, moving toward its production possibility after a shock, or held away from its production possibility frontier by government introduced inefficiency.

Because if the economy is not on and is not tending toward its production possibility frontier, as the US has not been for the entirety of the Bush "recovery", there is no need to "save more" in order to consume more when there are is an unemployed complement of resources that can be put to use to create the goods or services to be consumed.

You are using the end result of the current account deficit, the low domestic savings rate that is implies by the current account deficit, to argue that the US cannot take action to move toward a structural reduction in the current account deficit. So because the US has in the past not taken action to get our current account deficit under control ... and with our trade and energy policies of the last three decades, rather the reverse ... it is not permitted to take dramatic steps now.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Sep 17th, 2008 at 10:21:54 PM EST
[ Parent ]
Interesting. For the edification of the masses (or just me), can you assume the former in another comment?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Thu Sep 18th, 2008 at 01:36:25 AM EST
[ Parent ]
BruceMcF:
an unemployed complement of resources that can be put to use to create the goods or services to be consumed.

This assumes that production capacity can be magicked into place where it doesn't exist with little cost (or private sector investment), and also that raw materials are local and don't need to be imported. Or if they do need to be imported, currency devaluation won't ravage the pricing.

So the true production possibility frontier isn't necessarily where the unemployment statistics suggest it might be.

The two problems here are that the current crash is a political, not an economic problem. As usual with this bunch of clowns, it's not clear if they're evil or stupid. But either way, they can be relied on to do the wrong thing as long as they're anywhere near power, even in opposition.

The other problem is that old economic models may not apply. Consumption is part of the problem, not part of the solution. In a consumption economy you run the economy as a machine with no concept of social value, except as an afterthough.

A sustainable energy economy would be better than a war economy, but an economy based on explicit notions of social value, including education and culture, is more sustainable and easier to get to from here than classical widgets-as-usual.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Sep 18th, 2008 at 03:51:37 AM EST
[ Parent ]
What, are you proposing that we actually pay artists and teachers?  What are you, mad?
by Zwackus on Thu Sep 18th, 2008 at 05:14:28 AM EST
[ Parent ]
... assumes that the external accounts are kept in shape, because in the core economies, productive capacity can be produced given material, labor, and the existing productive capacity to produce productive capacity, and for the peripheral and semi-peripheral economies, productive capacity can be purchased given the external accounts in reasonable shape.

If you go through the list of items in the programme, some items will require substantial capacity build-up, and other items have ample spare capacity right now. This kind of programme would press the items requiring capacity build up to their current capacity limits and ensure an ongoing market to encourage the capacity build up, and put the existing capacity to work.

Obviously, that assurance of demand for the capacity build-up combined with the shift of the dollar under the policy toward an Exporter's exchange rate also functions as an infant industry development policy.

The external accounts is the "Sometimes opportunity knocks once" section in the diary. The door on the US abusing the central position of the US dollar in the international economy is going to close if the US remains addicted to oil and enters a downward spiral of economic decline in a series of oil price shocks. We engineered an external accounts imbalance in excess of our average growth rate under Clinton, and then with the reckless military adventure in Iraq it has been reliably more than a percent higher than our average GDP growth rate. And that was for consumption.

The programme above is, in part, a structural readjustment of our external accounts to, on the one hand, close a major import bill with substantial risk exposure in terms of energy commodity price inflation, on the other hand, open up a new export sector, and on the gripping hand, swing to an Exporter's exchange rate, pushing for a discounted rather than overpriced dollar.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Sep 18th, 2008 at 07:21:56 AM EST
[ Parent ]
I´d suspect that at least in the first 1-2 years, you probably couldn´t spend $800 billion per year on energy infrastructure (private and public). You´d probably face a shortage of equipment and trained workers.
So that program might start at a lower money level which might make it easier to finance in the beginning.

Do you want to give tax credits, direct subventions, guaranteed prices for wind energy (for example) to private citizens and public companies?
As in get better insulation, windows, new heater and we´ll give you x dollars in a direct subvention and/or a 0% interest loan to pay for the rest of it?
Same for wind power companies. I seem to remember that one problem of the USA is the unpredictability of the laws. Does the company get the same guaranteed price and/or tax exemption next year and so on?

Which leads to Congress. You probably need a change in attitude. Once that program starts investors and private citizens must be able to trust that program. They need to know that if it´s announced as a 5 or 10 year program, Congress won´t cut money in year 3 or 4. How do you guarantee that?
Especially given the battle cry of the Republican party? Tax cuts and disregard for renewable energy.

Money.
As I see it you have five options.
a) Raise money by selling treasuries. $700 billion per year means a doubling or tripling of treasuries sold per year to finance the federal budget deficit. It might work but I would at least expect higher interest rates. It is a large addition after all!
b) Print more money. Inflationary risks included.
c) Use the MEFO "system". Might work for a few years. Until the bills come due. Not sure if it would even work in todays global financial system.
d) Actually raise some taxes. :)
e) Combination of a), b) and d).

by Detlef (Detlef1961_at_yahoo_dot_de) on Thu Sep 18th, 2008 at 01:59:49 PM EST
[ Parent ]
An interesting move would be to work with the Chinese and try to get them on board with a similar program. Their windmills may suck, but there are likely to be possible relationships in manufacturing and finance which could benefit both sides, cut fossil fuel dependence, and create an interdependence which would make conflict less likely.

I realise the idea of nation states cooperating strategically is going to make many Republican heads explode, but at this point we really shouldn't be taking any notice of what they're likely to think or say.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Sep 18th, 2008 at 03:43:54 PM EST
[ Parent ]
I hadn't come across MEFO before. I guess Nazi Germany remains unfashionable.

My "Energy Pool" proposal will work in the real world, I think...but there's only one way of finding out....

The key to it is that instead of using debt we create a new form of  "equity" using redeemable "Units".

Firstly, an "Energy Pool" fund is created (using a UK Limited Liability Partnership as a framework) with an initial "windfall" levy on energy companies, and a continuing "Carbon levy" on non-renewable energy.

Imagine an Energy Pool fund of £100 million initially. With a 10 Kilo Watt Hour "Unit" and a market price of 50p per Unit we have a "Pool" of 200 million Units.

Secondly, we invest the fund in renewable energy projects and energy efficiency projects.

The deal is that the user of the finance gets an interest free loan in sterling terms, but has a negative balance of Redeemable "Energy Units".

ie he "sells forward" part of his production, or his savings, to the Pool.

So he will either exchange renewable energy he produces against Units, or buy back Units at the market price of energy out of the energy savings he has made.

We then distribute the 200 million redeemable "Carbon Pound" Units in the Energy Pool equitably, as determined by government/ community, both to businesses and maybe to address fuel povert as an "Energy Dividend".

The effect is - literally - to "monetise" energy into Redeemable Units, which have intrinsic value, rather than monetising CO2, or Debt, which have none.

These "Carbon Pounds", which remain constant in energy terms at 10 Kilo Watt Hours, will of course vary in sterling terms with the market price of energy expressed in sterling.

The beauty of monetising renewable energy and energy savings in this way is that you are monetising something of value that will cost nothing to produce.

And anyone could start doing this tomorrow.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Sep 18th, 2008 at 06:55:18 PM EST
[ Parent ]
Chris,
your comment always leave me unsure as to wheter or not I have understood you.

I recently came across O2, a swedish wind-coop. They offer a membership share for 6200 SEK (~650 euro) which entitles you to use 1000 kWh/year for the production cost of 0,13 SEK/kWh (~0,015 euro/kWh) which translates to 10% of retail price. If you use less the rest can be sold. If you leave you can sell back your share.

You cut out the middle man in the investment-chain and invest in what you are going to consume. That way you decrease uncertainty for both seller and consumer/investor.

Is this basically what you are proposing but on a national scale? (If so, I understood correctly.)

Oh, and a link to o2 Energi.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Sep 19th, 2008 at 11:02:33 AM EST
[ Parent ]
Interesting.

...and pretty close to what I have in mind, the only difference being the legal framework within which it takes place...

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sat Sep 20th, 2008 at 12:09:25 PM EST
[ Parent ]

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