The equivalence between national debt and transferable monopoly rights

I got this idea from reading a Matt Rognlie comment on a previous post. (But Matt may or may not agree with what I say here).

A. Suppose the government sells bonds, and finances those bonds by imposing a 10% sales tax on (say) milk.

B. Suppose the government sells transferable milk quotas, and sells just enough milk quotas that milk prices rise 10% above marginal costs.

C. Suppose the government sells transferable local monopoly rights to sell milk, and those local monopoly rights cause milk prices to rise 10% above marginal costs.

A, B, and C are basically [weasel word] all the same. For any tariff there's an equivalent quota, and quotas are just one way for a cartel to implement monopoly pricing. In all three cases the government is creating a marketable asset financed by a wedge between price and marginal cost. [Sure, it makes a difference if the demand for milk is uncertain, so one of those assets might be riskier than the others.]

That's basic micro. Now let's do some macro.

Some macroeconomists recommend using fiscal policy to help stabilise Aggregate Demand. In a recession the government should sell bonds, and use the proceeds to finance increased transfer payments (tax cuts) or increased government spending.

At its simplest, expansionary fiscal policy is the government dropping newly-printed bonds out of a helicopter, so anyone lucky enough to pick up a bond gets the transfer payment automatically.

Why not just drop transferable monopoly rights out of the helicopter instead? It should have the same effect.

In a infinitely-lived representative-agent model, neither helicopter bonds nor helicopter monopolies would have any macro effect (except for the supply-side effects of distortionary taxes/monopoly). Ricardian Equivalence says they wouldn't.

In an OverLapping Generations model, both helicopter bonds and helicopter monopolies would have the same macro effect. Both impose a "tax" on future generations and a transfer to the lucky current generation underneath the helicopter. This intergenerational transfer raises the natural rate of interest in an OLG model, which is just what the Keynesian (strictly, fiscalist) doctor recommends to cure a recession. The current generation feels wealthier, and is wealthier, so increases demand for goods at a given real interest rate.

The only argument I can think of for preferring helicopter bonds to helicopter monopolies is this microeconomic one: it is relatively easy to increase future taxes by the same percentage across all goods. It would be very hard, in practice, to increase the degree of monopoly power (as measured by percentage markup of price over marginal cost) by the same amount across all goods. So relative prices might be distorted more in the second case. (But don't microeconomists tell us that taxes should be higher on goods with relatively inelastic demand?)

Lengthening patent and copyright protection would be an expansionary fiscal policy, so might be a good idea if you wanted to increase output and employment in a recession.

[OK, as a practical policy recommendation, my tongue is very firmly in my cheek. And I admit I'm trolling lefty keynesians just a little. But as a teacher of macroeconomics (which is my job) I'm very serious. If you think you understand how fiscal policy works, in a Keynesian or New Keynesian model, you should be able to see the equivalence. Though macroeconomists who believe it is nominal wages rather than nominal prices that are sticky, and think that the AD curve slopes down (e.g. Scott Sumner) [Update: Scott says that's not exactly right], will object that increased monopoly power raises P, which moves us the wrong way along the AD curve in a recession.]

Comments

[Andy Harless]

Interesting. If Ricardian equivalence fails because of liquidity constraints, then lengthening copyrights would increase the collateral value of copyrights and thereby ease the owners' liquidity constraints, presumably without affecting their consumers' liquidity, so it would be a stimulus. Of course, as a practical matter, I doubt the liquidity constraints on copyright owners have much macroeconomic significance: I doubt many of them have yet exhausted the collateral value of their copyrights in the first place. But it's an interesting point.

And as usual the underlying argument relies of the government's having a binding budget constraint, but I suppose it won't be very enlightening to get into the whole g > r question here.

[Andy Harless]

Actually, Matt's linked comment has me wondering. Maybe monopoly power really is good, from a macroeconomic point of view, at a time when the zero bound on interest rates (and the potential instability arising from low interest rates even when the zero constraint is not quite binding) comes into play. Monopolies are like land and have a similar ability to absorb excess savings. (More precisely, land itself is a special case of a monopoly and has this property for the same reason that other monopolies do.) I tend to advocate increasing intergenerational transfers so as to alleviate the shortage of assets (by issuing government bonds), but what if, instead of calling the system "Social Security" or something like that, we were to call it "Apple" or "Disney" and call the assets stock certificates instead of government bonds?

[Nick Rowe]

Andy: good point on the r > < g question. I had forgotten that. Yep, if r < g you can helicopter bonds without raising future taxes, which you can't do with monopoly rights.

But hang on! If r < g, suppose you had the monopoly rights to a tiny fraction of GDP forever. The PV would be infinite. So it immediately cause r to jump to g. Yep, just like land for solving the Samuelsonian problem. But land exists.

We've been down this road before on this blog. Yep, let's not go there.

[Frank Restly]

Andy,

"...then lengthening copyrights would increase the collateral value of copyrights."

Correct. The same thing could be said for government bonds. Increasing the duration of government bonds that are sold to the public should have a wealth effect, except...when the central bank turns around and buys those bonds up.

Suppose instead that the government sold something (like equity?) that the central bank could never buy. Sumner is right that increasing monopoly power would could raise P driving us the wrong way on the AD curve during a recession. So instead of selling monopoly rights (driving P upwards), government sells equity used to offset the private cost of borrowing and pushing P downwards in the correct direction. Presuming that private individuals set prices in response to the after tax cost of borrowing, a negative after tax cost of private borrowing should result in declining prices.

"I tend to advocate increasing intergenerational transfers so as to alleviate the shortage of assets (by issuing government bonds), but what if, instead of calling the system Social Security or something like that, we were to call it "Apple" or "Disney" and call the assets stock certificates instead of government bonds?"

Better, instead of the government selling bonds (and watch as their actions are contravened by the central bank), they sell equity claims against future tax revenue.

[Andy Harless]

Actually, I'm going to walk back my second comment a little. The problem with land (and also with other monopoly rights) is that it's risky: you want something that will pay off in a reliable way in terms of your anticipated consumption basket, and government bonds fit the bill much better than land (or other monopoly rights) do. Monopoly stock is not a close substitute for government bonds. My intuition says it probably still helps (i.e. it's still good that Apple or Disney can create a sort of artificial land, especially since it is different from ordinary land and therefore helps to diversify your land portfolio), but I think it might depend on the parameters, the relative importance of time preference vs. risk preference in brining about the ZLB situation. In any case government bonds are clearly better if risk preference is a big issue, as it does appear to be.

[Market Fiscalist]

"At its simplest, expansionary fiscal policy is the government dropping newly-printed bonds out of a helicopter, so anyone lucky enough to pick up a bond gets the transfer payment automatically."

Unless people could swap their bond for money with the CB why would this be expansionary (even without Ricardian Equivalence) ? I suppose people would feel a bit richer with the extra bonds , but if base money stayed the same I'm not seeing that effect as very great.

[Nick Rowe]

Andy: yep, monopoly rights are risky, but government bonds aren't 100% safe either, especially in real terms. In the olden days, IIRC (from reading history, not from being around then!) governments would sell monopolies rather than bonds. Why? Maybe seen as safer, given governments' limited taxation powers?

MF: that's the bog standard keynesian story. Helicopter bonds make you richer, so you increase consumption, which has a multiplier effect (unless offset by monetary policy).

[Andy Harless]

" that's the bog standard keynesian story"

I think the unstated assumption in the pre-PIH Keynesian story is that people use current income as an estimate of their permanent income -- which seems plausible in a lot of policy experiments but not with literal helicopter bonds, since these would be an obvious windfall (a literal windfall, maybe, depending on how they're distributed). The marginal propensity to consume out of helicopter bonds would be quite low (though not zero). But for New Keynesians, it's typical to argue that tax cuts are effective because of liquidity constraints, and in that case helicopter bonds would work just fine, because liquidity-constrained people could sell their bonds to non-liquidity-constrained people and consume the proceeds.

Anyhow, on the other question, I'm pretty sure that most people today in large, developed, sovereign currency countries consider government bonds to be a lot safer than monopoly rights. Not perfectly safe (but nothing could be, really, because you can't even be sure of your own future consumption basket) but safer.

[Nick Rowe]

Andy: I think I agree.

[dlr]

Well, even with infinitely lived agents and Ricardian Equivalence helicopter bonds are not necessarily macro neutral. That's only true if you assume there is never any government default risk or that the price level wouldn't incorporate risk of government default because it would assume money would be an unscathed senior liability. It seems easy to agree that if the US dropped 100 trillion in helicopter bonds the price level would increase in a hurry, anticipating inflationary default. From a FTPL perspective, the PV of future tax surpluses per unit of liability declines slightly with every nominal liability issued.

From a Wallace Neutrality perspective, it shouldn't matter if the bonds are helicopter bonds or bonds issued for real consideration. What matters is only the total government liabilities outstanding and the total taxable asset base, which provides the cushion that determines the default risk premium on government bonds. In that case it takes a lot of bond issuance for a country like the US or Canada to increase the marginal discount rate appreciably and increase the price level. But if we depart from perfect Wallace neutrality, helicopter bonds seem more potent. Assume political frictions of taxation and now the allocations of the balance sheets between the government and private sectors matters, too. For this reason, I think helicopter bonds would be an extremely potent proof of intent if issued in conjunction with language about nominal objectives. The problem is it might be too potent.

[jonathan]

Apologies in advance: I may be confused here, and this comment may be tangential to your main point.

I *think* that in the standard New Keynesian model, a helicopter drop of bonds isn't what we mean by fiscal policy. You actually need an increase in government spending (consumption of real goods).

This is because Ricardian Equivalence holds, so if you give everyone bonds (or monopoly rights, or whatever), they will just hold them rather than selling them, to pay expected higher taxes in the future. There will be no change in the interest rate.

Conversely, if the government *sells* bonds to finance government *consumption*, then this will succeed in raising the natural rate of interest. And this occurs even though Ricardian Equivalence holds. So these two cases are quite distinct, and we shouldn't take the "bond drop" as some sort of benchmark fiscal expansion. It works through a mechanism quite distinct from standard fiscal policy in a NK model.

Of course, as you indicate in your post, if Ricardian Equivalence fails, then this bond drop may raise the natural rate of interest. For instance, if some households are liquidity-constrained, they will sell their permits and spend more rather than saving them. Or if some future generation will pay back the taxes, people perceive an increase in permanent wealth.

I also agree that (monopoly distortions aside) it doesn't matter what sort of assets the government drops from the helicopter. Although neglecting monopoly distortions seems like avoiding the main reason people intuitively reject the analogy. (I also assume we're talking about monopoly rights in a *future* period?)

[Chris Herbert]

I'm ignorant, so excuse me for this observation. What is it with this obsession over bonds/money? Why not just hire millions of people building assets that make future generations richer than today? And not issue any bonds doing so. It seems to me that issuing bonds just further enriches whoever can afford to save even more than they've already saved. And it increases the cost at the same time. I've read that half of all infrastructure spending goes to interest payments and fees. To Hell with them. Just put people to work building assets. Keynes has a passage in his General Theory that, as near as I can figure out, recommends employment as the only metric to weigh policy against in a recession. He prefaced this passage by saying it was possibly the most important observation in the entire book! Anyway. I'm confused.

[jonathan]

On further reflection, my point above seems obvious and trivial.

Nevertheless, the fundamental distinction between changes in G and Ricardian effects is very important to keep in mind. I certainly wouldn't regard a pure Ricardian case as the benchmark for fiscal expansion (more like one polar extreme).

[Nick Rowe]

dlr: agreed, that if helicopter bonds increases the risk of future monetisation of deficits, Ricardian Equivalence would not apply. And that risk might be different in the case of helicopter monopolies.

" For this reason, I think helicopter bonds would be an extremely potent proof of intent if issued in conjunction with language about nominal objectives."

Wouldn't helicopter money be even more potent proof of intent to monetise?

Jonathan: yes, there are two types if fiscal policy: bond-financed increases in G; bond-financed cuts in T. And yes, the first might (or might not, it depends on whether G is a substitute for private spending) even under Ricardian Equivalence. And I'm only looking at the second here.

Chris: " What is it with this obsession over bonds/money? Why not just hire millions of people building assets that make future generations richer than today? And not issue any bonds doing so."

If the government does not issue bonds, how will it pay them? Raise taxes (which has a partly offsetting effect on AD)? Even forced labour is a tax-in-kind.

[djb]

"Lengthening patent and copyright protection would be an expansionary fiscal policy, "

in your model these patent and copyright protections would have to be bought from the government and the price of the item sold would end up having to be the same as a competitive market price plus 10%

it would be the price they paid for the copyright and patent that the government would use to create the fiscal expansion

in reality, one would assume that the business buying the monopoly would increase the price to whatever they could get, not hold it at 10% increase, which in and of itself would counteract the fiscal expansion

so I don't think that choice is equivalent to the other choices

[Chris Herbert]

"If the government does not issue bonds, how will it pay them?" Just like any bank that makes a loan, the bank credits the appropriate checking account. Taxpayers will pay back the loan, just as they pay interest on bonds, and eventually retire the bonds entirely. The difference is not issuing bonds is far less expensive. Why should taxpayers produce almost risk free bonds for anyone? They don't have to and can certainly save huge expense by not doing so. Private investors, in my opinion, should be investing their savings into the private economy--something they are not doing at all well right now. Giving them a risk free alternative is not going to help. Anyway, I can see that my comment was not on point, although I believe my observation was germane. I think like a banker. A loan makes an asset. The more good loans, the more good assets, the richer the bank. Banks don't drop money out into the atmosphere. Nor should they, in my opinion.

[Nick Rowe]

djb: suppose current patent protection is x years. Lengthening it by 1 year is like issuing an x+1 year zero-coupon bond, paid for by higher taxes in year x+1, and giving it to the patentholders.

[ThomasH]

This misses the essence of "fiscal policy" in a recession. Even with full equivalence, fiscal policy is income increasing when it invests in activities with present costs (and in a recession many marginal costs will be below market prices) and future benefits whose present value when discounted at the borrowing rate (and in a recession borrowing rated will typically have fallen, perhaps to near zero) is positive. This will lead to a Keynesian-looking increase in deficit-financed expenditures. Perhaps there is some kind of Rowe-ian equivalence (handing out rights to invest in and collect the net benefits of projects financed at the government's borrowing rate?) but I doubt it.

[Nick Rowe]

Thomas: I don't think there's anything specifically "Keynesian" about advocating the government invest whenever NPV > 0. "Classical" economists say that too. Think about Keynes' example of burying old banknotes in old coal mines. That was different.

[ThomasH]

Nick,

I mean it would "look" Keynesian, be attacked politically as "Keynesian" because it would lead to an increase in deficit-financed expenditure. It would be the opposite of "austerity." [In principle there is some kind of tax cut or rebate that would incentivize firms to undertake similar investments.]

Do you mean that for an expenditure to count as truly "Keynesian" the NPV has to be negative?

[Kaleberg]

If tax increases are expansionary, why not raise taxes on the wealthy (or alternately sell transferable rights to collect taxes at a marginal 90% rate on the wealthy or at a 50% rate on large corporations) and let the market do its magic? This might explain a lot about our stagnant economy over the last three or four decades. Taxes on the wealthy and corporations have been too low.

You aren't ragging the Keynesians. You are providing them with ammunition.

[Min]

Is there a fallacy of composition lurking here? If everybody has monopoly rights, how is that different from nobody having monopoly rights? If the price of everything, including labor, increases by 10%, how does that differ from the price of everything remaining the same? (Yes, existing contracts matter, but they could be rewritten, even by the gov't.)

[Redwood Rhiadra]

@Chris:

The government and the central bank in most countries are two different entities - this is why central banks are considered independent - and each therefore has different powers. The central bank's power is to issue (or destroy) money, which it does by crediting bank accounts (specifically those of the various banks that have reserves at the central bank).

Because this is the central bank's power, the government is NOT PERMITTED to simply credit accounts. The government is NOT A BANK and, in order to spend money (buy labor or goods), must either raise revenue (increase taxes) or issue debt (bonds).

If the government starts simply crediting accounts like a bank, then the country no longer has an independent central bank, but a captive one. And this has serious consequences - like foreign businesses insisting on getting paid in their currency instead of yours (and having loans to your citizens denominated in their currency, etc.)

(In the days before independent central banks, foreign businesses usually insisted on being paid in gold - which is why France tried to acquire a massive gold reserve so it could buy weapons/food/etc in the event of a second Great War, which arguably caused the Great Depression...)

[Nick Edmonds]

As a somewhat lefty Keynesian, I have no problem seeing the equivalence.

But I want to pick up on this:

"In an OverLapping Generations model, both helicopter bonds and helicopter monopolies would have the same macro effect. Both impose a "tax" on future generations and a transfer to the lucky current generation underneath the helicopter."

It's important to recognise that this transfer is a result of the decisions of private agents, not of how the fiscal authority responds. If, in such a model, there is a change in time preference causing private agents to want to hold relatively higher levels of assets, then demand will fall. If the fiscal authority does not respond to this, then you get deflation, which increases the real value of private holdings of public debt. Ultimately you get to a position where the (real) tax on future generations is the same as it would have been under expansionary fiscal policy.

So it is not correct to say that the effect of fiscal policy is to impose a transfer - it's changes in private sector preference that does that. The effect of fiscal policy is to avoid having to get there through deflation.

[jonathan]

Min: Suppose that in period t the government issues tradable permits granting monopoly power in period t+1.

This effectively constitutes a transfer of funds from everyone in the economy (in period t+1) to the owner's of the monopoly rights. Nick's point is that, neglecting monopoly distortions, this is just the same as if the government had given people bonds in period t, and then taxed everyone in period t+1 to repay those bonds.

The Ricardian solution is for everyone to hold bonds / monopoly rights equal to what they will pay in taxes / markups. Then all period t+1 income nets out and no decisions change.

This result can change if we relax the Ricardian assumptions somehow, so that the asset issuance provided liquidity or constituted transfers between agents.

Note that if the government sold the monopoly rights in period t, and then used that money to fund government spending, this would be just like financing that spending through new borrowing. In each case, the net effect on households' period t+1 income is 0 (either because they all pay each other markups, or the government levies a tax to repay the bond).

[Matt Rognlie]

Sorry for coming so late — I’m deep into the job market paper and dissertation writing stage, and this means that my blog-reading is spotty at best.

It goes without saying that I’m a big fan of this post and the discussion in comments.

Andy and Nick, I think that this broad equivalence between markups, taxes, and land is a very useful conceptual tool. A higher markup, a higher labor tax, and a higher land share are all very similar in the sense of backing more transferable claims that add to the aggregate supply of assets. (Caveats: a higher land share is a little different in that it is a change in fundamentals rather than a distortion per se. Also, on average most taxes are not used to back real payments on government debt, partly because the limited supply of debt means that often r<g for the rate ‘r’ on government bonds, and net real payments aren’t even necessary.)

I think that discussion of long-run real interest rates sometimes misses the influence of these forces. In particular: if you want to know how low long-run ’r’ can plausibly go, one important question is how elastic the supply of net assets is relative to ‘r’.

Traditionally we talk about this in terms of capital demand (and therefore the elasticity of substitution), but an underrated aspect is the response of claims on profits, land, and taxes. In a simple model where we hold the profit and land shares of output constant, a decline in long-run ‘r-g’ (with ‘r’ including risk premia) increases the value of shares and land in inverse proportion. As ‘r-g’ shrinks and these values increase, the impact of any given change in ‘r’ becomes larger and larger.

This effect can be quite dramatic. Let’s say that (after-tax) profits and land income are constant at 12% of GDP. Initially, maybe we have r=7% and g=2%, so that the value of shares and land is 240% of GDP. Starting from here, the derivative of value/GDP with respect to ‘r’ is 48, so that the marginal decline of 1 percentage point in ‘r’ increases the supply of assets as a fraction of GDP by 48 percentage points.

But now suppose that we get down to r=5% and g=2% (maybe the risk-free rate declines by 2 percentage points and the risk premium stays constant). Now the value of shares and land is 400% of GDP. And starting from here, the derivative of value/GDP with respect to ‘r’ is now 133. At the margin, any decline in ‘r’ floods the market with more and more assets. This is for two reasons: first of all, we’re starting from a larger stock of assets; and second, since ‘r’ is closer to ‘g’, each additional decline in ‘r’ is decreasing ‘r-g’ by proportionally more.

(Or more directly: the derivative of 0.12/(r-g) with respect to r is -0.12/(r-g)^2, so the effect of ‘r’ grows quadratically as ‘r-g’ shrinks.)

Effectively, in their contribution to aggregate asset supply, shares and land are acting like reproducible capital that has a (net) elasticity of r/(r-g), which is above 1. So even if one thinks that capital and labor aren’t very substitutable, and that a decline in ‘r’ won’t elicit much more in the way of houses and machines, shares and land will quickly start picking up the slack. To me, this most likely puts a pretty firm bound on the extent to which long-run equilibrium ‘r’ can fall relative to ‘g’. (Of course, in a world where ‘g’ is falling, this means that ‘r’ can still fall quite a bit.)

The supply of government bonds is a more complicated story, not perfectly analogous to shares and land - it’s not like the government keeps bonds precisely in line with the PDV of some designated portion of taxes. Yet as ‘r-g’ falls (and since this is the ‘r’ on government bonds, it’s much lower to begin with), it seems pretty likely that governments will view higher debt loads relative to GDP as sustainable, and that we’ll get a similar effect. (As Andy and Nick discuss, in principle anything is sustainable when r<g indefinitely; government debt is then just a bubble.)

The one caveat in all this discussion, if we’re seeking to apply it to secular stagnation and the equilibrium risk-free ‘r’, is the extent to which “aggregate asset supply” is really what matters. Does supplying more shares and land automatically push down the equilibrium risk-free ‘r’, or do these “risky” streams not make much of a difference? My guess is that it’s the former, for many reasons. For one thing, you can issue bonds or mortgages backed by future capital or land income just like you can issue equities, and if we assume that leverage stays constant, then an increase in the value of capital and land will push up the supply of low-risk bonds too.

Still, I’m not sure, and the deep-rooted problem here is that we don’t have any convincing model of the equity premium - so we don’t really know how the risk-free rate would be affected relative to others as we change the supply of assets.

[Matt Rognlie]

A few additional notes:

(1) As mentioned above, if profit and land income are a fixed fraction of total income, then in adding to aggregate asset supply they act like reproducible capital with a net elasticity of substitution of r/(r-g).

This observation makes me feel fairly confident in rejecting both the Piketty and Summers extremes when it comes to long-term returns on capital. Piketty’s story about falling ‘r’ leading to a huge rise in the net income share from reproducible capital is unlikely, because most evidence suggests that the net elasticity of substitution is nowhere near that big. But Summers’ story about various forces leading to a large fall in equilibrium ‘r’, pushing us into secular stagnation, is also questionable - because profits and land make it such that the “effective” net elasticity of substitution, as far as asset supply is concerned, can’t get *that* low.

(If you pressed me, though, I’d say that Summers has a higher chance of being right. First of all, there’s some built-in decline in likely equilibrium ‘r’ just from the fall in trend ‘g’, and since we started at fairly low levels of risk-free real interest rates already, we are uncomfortably close to the ZLB in the long run. Second, as discussed above, there are lots of tough implicit questions here about return premia that I don’t think anyone can answer with much certainty.)

(2) It can be important to distinguish between the short-run and long-run effects of government transfers. Suppose that we’re in a recession and the government borrows to fund a lump-sum payment to households, engineering a rise in total debt that it doesn’t intend to reverse anytime soon. Some of these households will be very impatient - with very high MPCs - and bring themselves back down to normal asset levels in a year or two. This can have *very* large effects on spending and the short-term natural rate.

In the longer run, most of the increase in asset supply from the rise in debt will find its way into the hands of more patient, high-net-worth individuals. This still will raise the natural rate, but this long-run effect will be *much* smaller than the short-run effect that arises from nearly hand-to-mouth households.

[Matt Rognlie]

(3) I should also correct a blooper of mine that I realized when re-reading my comment from last week. When talking about long-run equilibrium in the supply and demand for assets, I talked about the demand for assets (i.e. savings) as generically taking the form of a curve relating the return ‘r’ to the ratio ‘W/Y’ or wealth to aggregate income.

This isn’t quite right. Most reasonable models that one can write, assuming they don’t have a infinitely elastic savings like the representative agent model, will produce a relationship between ‘r’ and the ratio ‘W/wL’ of wealth W aggregate *labor* income wL. This is true of simple OLG models and Bewley-Huggett-Aiyagari heterogenous agent models.

If this is what asset demand looks like, then the comparison I did in last week’s comment was moot: a rise in markups doesn’t affect substitution between capital and labor as inputs, and therefore it doesn’t affect the ratio of capital to labor income conditional on ‘r’. Instead, it unambiguously pushes up equilibrium ‘r’ from the effect of more tradable claims on profits relative to labor income. We don’t even need to run the numbers.

(Caveat: this is only true, of course, if we assume that rights to profits are transferable. Indeed, if not, and if profits are accrue to individuals that can’t easily trade or diversify out of them, then there isn’t really much difference between profits and labor as far as this analysis is concerned. In this case, Nick’s original effect would be the only one. What I’m realizing here is that the contrast between the transferable and nontransferable cases is even starker than I originally understood.)

By the way, I find this topic — long-run equilibrium in the supply and demand for assets, and its consequences for the natural rate, etc. — to be endlessly fascinating. A coauthor and I are coming out in a month or two with a paper that has a number of innovations on this front, particularly in relation to secular stagnation and long-run aggregate demand, and I’m hoping that it will be pretty cool.

[Jan Milch]

Lars P. Syll | Professor, Malmo University- "The Nobel prize in economics is a disgrace. Dump it!"
https://larspsyll.wordpress.com/2015/10/11/the-nobel-prize-in-economics-is-a-disgrace-dump-it/

"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, usually — incorrectly — referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics. The Prize in Economics was established and endowed by Sweden’s central bank Sveriges Riksbank in 1968 on the occasion of the bank’s 300th anniversary.The first award was given in 1969. The award this year is presented in Stockholm at a ceremony tomorrow.

Out of the 75 laureates that have been awarded “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel,” 28 have been affiliated to The University of Chicago — that is 37 %. Of all laureates, 80% have been from the US (by birth or by naturalisation). Only 7% of the laureates have come from outside North America or Western Europe. Only 1 woman has got the prize. The world is really a small place when it comes to economics …"

[Nick Rowe]

ThomasH: To count as "Keynesian" it would have to be something done to increase Aggregate Demand in a recession.

Kaleberg: "If tax increases are expansionary,..."

It is *current* transfers, financed by *future* taxes, that are expansionary Keynesian fiscal policy. A monopoly that only lasts for "one period" wouldn't work.

Min: Good thinking, but I've considered that. Real wages W/P (and real rents) would fall by 10%. It's just like a 10% income tax, which reduces incentives to work, invest, etc.

Nick E: I would only disagree to the extent that I would argue it's an increased demand for the Medium of Exchange that causes the recession, not for assets in general.

Matt: thanks! I haven't had coffee yet, so can't properly digest your comments.

[Nick Rowe]

Matt: "As ‘r-g’ shrinks and these values increase, the impact of any given change in ‘r’ becomes larger and larger.

This effect can be quite dramatic."

Yep. And it's so dramatic, that people start talking about "bubbles". (Which leads us towards thinking that the collapse in US house prices was not so much a bursting bubble, but a sudden panicked collapse below fundamental values).

"This observation makes me feel fairly confident in rejecting both the Piketty and Summers extremes when it comes to long-term returns on capital."

That sounds right to me.

"If this is what asset demand looks like, then the comparison I did in last week’s comment was moot: a rise in markups doesn’t affect substitution between capital and labor as inputs, and therefore it doesn’t affect the ratio of capital to labor income conditional on ‘r’. Instead, it unambiguously pushes up equilibrium ‘r’ from the effect of more tradable claims on profits relative to labor income. We don’t even need to run the numbers."

Hmmm. I'm still thinking that one through. In an OLG model, it seems to me that what is important is tradeable rights to the labour income (or endowment income) *of the unborn*.

[rsj]

Digging for bottles with cash *has* NPV > 0 as long as the money spent digging is less than the money found in the bottle, right? Neither Keynesians or Classical Economists argue for doing anything with NPV <0. The difference is that classical economists are fine with people digging for gold, but not paper money, because paper money is created by Government whereas gold is created by Nature.

[Nick Rowe]

rsj: Keynes' argument was that *social* NPV was > 0. It's obvious that *private* NPV > 0, otherwise they wouldn't dig.

"The difference is that classical economists are fine with people digging for gold..."

Not so, see Adam Smith IIRC (or was it Hume?) on the advantages of paper (though Smith's/Hume's argument was in the context of a small open economy, where the gold can be exported).

[rsj]

Well, calculating the social NPV is very difficult to calculate. It requires deep knowledge of how everyone in the economy will react.

For the bottles, it may well have a social NPV > 0 in a pump priming economy, right? Keynesians don't advocate anything with negative social NPV. There is just disagreement as to what the social NPV happens to be.

[Jussi]

Isn't giving everyone a right to markup their prices the same as hiking up all prices? Is that different than seeking higher NGDP growth? What's wrong with that?

[Nick Rowe]

Jussi: it depends on whether it's prices or wages that are sticky. If wages are sticky, so P rises, we move the wrong way along the AD curve. But does the AD curve also shift right?

[Jussi]

Wages cannot be assumed sticky as people got their monopoly rights to "markup" their wages?

[Nick Rowe]

Jussi: there are two ways for W/P to fall (and P/W to rise). Numerator and denominator.

[Jussi]

Nick: Yes, the point is both P and W are prices? Isn't the post's (macro) point both move in tandem?

[Jussi]

I try to elaborate the above a bit:

There is a relationship with P and W, because firms will markup prices over their costs which are a function of W. In the end they need to move in some sort of tandem. So this is about short term. Short term means we need to know what is flexible and what is fixed before we can say how AD behaves.

Like if money aggregate is sticky (gold standard) and we hike W more than P then consumption is relatively high and profits are low. Inflation will probably ensue (short term comparing to the counterfactual) - P will catch up. Or firms cut W to restore P/W and their markup and thus profits. But these IMO doesn't say a much about AD. If we hike relative W, investments are "stickier" than consumption and workers have relatively high propensity to consume, then I think AD will be improved?

But I still wonder is it really bad to give everyone a monopoly right. Is this fallacy of composition - what is economics of monopoly everyone's got? Is it just a wash?

Btw. Does the post associate markup with hiking (more) P than W and fiscal tax break with hiking W relatively to P?

[Nick Rowe]

Jussi: But I still wonder is it really bad to give everyone a monopoly right. Is this fallacy of composition - what is economics of monopoly everyone's got? Is it just a wash?"

Long run. No. Not unless the labour supply curve is perfectly inelastic (everybody works 8 hours a day regardless of W/P). See the second diagram in this old blogpost. If all the firms suddenly became perfectly competitive, the MR curve would shift up to coincide with the D curve, and Y would increase from Y* to Y^.

Short run: The AD ***curve*** (AD is a curve, dammit, not a number) shifts right (assuming the keynesians are right about fiscal policy). The LRAS curve shifts left. The SRAS curve may or may not shift up/left, depending on whether W (yes) or P (no) is sticky.

[Jussi]

Nick: Sorry, I wasn't clear. I was again thinking about the case where the right was given to every agent in the economy - then W/P doesn't change (given value of rights have the same relative value, e.g. 10 %).

Interpreting your comments I would say your A, B and C have different effect on W (wage price) and P (markup price). Given that A, B and C will very likely have different macro outcomes.

[Nick Rowe]

Jussi: imagine a world of n yeoman farmers. Each farmer uses his own labour to grow fruit, which they trade with each other. Initially the economy is perfectly competitive, so each farmer produces at the point where P(i)/P = Marginal Rate of Substitution between Consumption and Leisure/Marginal Product of labour.

Now each farmer gets a monopoly over one type of fruit. Each cuts back production to raise his P(i)/P, but in the new equilibrium P(i)/P = 1 again, because all cut back production by the same percentage. The new equilibrium is where:

{1/(1-1/e)]P(i)/P = Marginal Rate of Substitution between Consumption and Leisure/Marginal Product of labour

where e is elasticity of demand. They all consume less fruit and more leisure.

[Jussi]

Nick: I appreciate your patience. I need to take the time to check the logic behind your words/math to comprehence it thoroughly. But my gut intuition, which I doubt is not right here you taking the opposite view, is that demand as an aggregate cannot fall.

Take even a simpler (simplest) two farmer example with a set of utilities/preferencies for two types of fruits, leisure and labor. Now given monopoly rights to produce the fruits (both get one) I cannot figure out why they cannot anymore hit the max utility for their little society. Why more rights, wider set of possibilites, make them worse off? I guess in other words elasticity of demand, e, needs to be one if the agents are rational. This transforms to monopoly rights, given to everyone, are worthless, a wash, which is IMO a logical result.

If both agents are highly irrational, maybe they indeed cut they production/labor. But don't we assume here rationality? Assuming rationality I think 2-agents can be expanded by induction to n-agents without problems.

[Nick Rowe]

Jussi: starting in the monopolistic equilibrium, all n farmers would be better off if they all increased output to the competitive equilibrium. But they are stuck in Prisoners' Dilemma, because each would be worse off if he increased production alone, since each would see the relative price of his output fall.

[Jussi]

Ah, ok, I got it, interesting dilemma indeed! I didn't see that. Thanks Nick!

As a side note: I think economy is more like iterated version of the Dilemma - IMO in practice it wouldn't be out of realm that competitive equilibrium couldn't be kept / restored.

[Nick Rowe]

Jussi: Good! It's not an easy point to get. It took me ages to figure out macro with *all* firms having monopoly power, when I was young. Now it's the standard New Keynesian model.

If n is large, it's hard to escape PD even if iterated. You need all n people to get together. Interestingly though, two-way barter deals could help them escape this particular PD. Start in symmetric monopoly equilibrium. Now consider this deal: "I will buy 10 more of your overpriced apples if you buy 10 more of my overpriced bananas in return". But this won't work if they trade in a circle, so the apple producer doesn't like bananas, so you would need an n-person barter deal to escape.

[Jussi]

Nick: Thanks, I only got the general idea but I feel enlightened! I assume: Blanchard, O.; Kiyotaki, N. (1987). "Monopolistic Competition and the Effects of Aggregate Demand"?

[Nick Rowe]

Jussi: yep. Or Nicholas Rowe "A simple macro model with monopolistic firms" (a much clunkier model, but I did beat B&K by a whole coupla months!! Yeah me!)