Don't blame lack of cool new stuff for the slow recovery

I look in my garage and admire the lovely lines of my MX6. But it's a 21 year old car that I'm using for my daily driver, and I really should get a new car. But what sort of new car? Sometimes I look at the new MX5 and the Toyobaru twins, but........no. Both are close, but neither is quite right for me.

Suppose they came out with some really cool new stuff that everybody just had to buy. So everybody went out and bought it. Production and employment would increase to meet the increased demand for that cool new stuff. Aha! Maybe that's why the recovery from the global recession was so slow. They simply didn't come up with enough stuff that was cool enough and new enough that people really wanted to buy it!  Bingo!

I know exactly what some of you are thinking: "But Nick, if everyone went out and bought an extra $1,000 worth of cool new stuff we would all be living beyond our means and going even deeper into debt!" And you would be thinking wrong. You are forgetting national income accounting 101. You are committing a fallacy of composition. Because at the aggregate level income and expenditure are the same thing. If aggregate expenditure rises by $1,000, then aggregate income rises by $1,000.

And I can guess what some of the rest of you are thinking: "But Nick, there really has been lots of cool new stuff coming out over the last few years!". And you would cite a list of examples. And others would say that your list of examples weren't really that cool or new. And maybe the more diligent would try to construct an index of cool new stuff coming out each year. And then there would be an argument over whether that index had been higher or lower than normal over the last few years compared to previous years. And did that index have the predicted inverse correlation with recessions? And if it did, which way did causation run? Maybe it was recessions that caused a slowdown in cool new stuff coming out? Or maybe both recessions and lack of cool new stuff were both caused by some third thing. It could be a lovely argument that would keep going for decades. And think of the possible policy implications! Could we use R&D tax credits for countercyclical policy, or would the lags be too long and variable?

But I simply can't be bothered. I don't care what your index of cool new stuff shows or doesn't show.

And I have exactly the same reaction to the debate about whether political uncertainty is to blame for the slow recovery.

Because stuff changes all the time. And one of the things that changes is the amount of change itself. And another thing that changes is the amount of uncertainty over the changes. And it's the job of the central bank to conduct monetary policy in such a way that, despite those changes, the economy does not fall into recession. "You had one job....and you didn't do it."

If there were no change, the gold standard would be an excellent monetary policy. The apple standard would be an equally excellent monetary policy. The k% rule with k=0 would be an equally excellent monetary policy. They would all be exactly the same damn policy. Any idiot could do it.

Comments

[bill woolsey]

Isn't the "no cool stuff" argument about how if they came out with some new cool stuff you would work extra hours. Employment and output would increase.

When no cool new stuff comes out, people choose to work less and take a vacation for now, waiting to work when the cool new stuff comes out.

Earning now and saving when there is not much cool new stuff coming out right now results in sufficiently low real interest rates that people choose not to work.

And we crazy market monetarists don't want to allow spending on output to vary with this change in the amount people want to work. The result would be higher inflation of both wages and prices when little cool new stuff comes out.

What happens to real wages? I am not sure, but at first pass I would guess that they rise in terms of the boring old stuff.

(I realize that there are people who explain low aggregate demand due to "too much saving."

[Nick Rowe]

Bill: I did read something just yesterday (can't remember where) that applied the cool new stuff argument to explain the increase in labour supply during (was it the 18th or 19th century?) England. To explain why hours worked did not fall, and real wages did not increase much, when productivity and incomes rose. The labour supply curve shifted right because you could now buy fancy watches as well, and a lot of people did work the extra hours to buy a fancy watch. Sounds plausible to me. If the only things you could buy were more bread meat and veg I think people would mostly buy more leisure instead.

[Nick Rowe]

Bill: I'm seeing a 2D diagram with a consumption leisure PPF and Indifference curve tangency. And then a third dimension appears when a new consumption good gets invented. I'm pretty sure leisure would fall, but I think that real wages in terms of the old good could go either way.

[Nick Rowe]

Bill: yep. I think it depends on whether the new good is more or less labour intensive than the old good, and whether the new good is a closer substitute for the old good or for leisure. With symmetry I think real wages (in terms of the old good) stay the same when a new good is invented.

[Roger Sparks]

"Lack of cool stuff" (to work-for and buy) must be part of the economic equation. For example, think of the macro-economic change initiated by the invention of the automobile (or maybe even more important, the internal combustion engine). Some of the "cool stuff" engenders such profound changes that the measurement of the resulting changes occurs over many time periods.

We might look to the "...... central bank to conduct monetary policy in such a way that, despite those changes, the economy does not fall into recession." but I think that the "cool stuff" motivation would mightily challenge monetary policy. Fiscal policy adaptation would be necessary to accommodate change as profound as those resulting from the invention of the internal combustion engine.

When we look for the cause of recessions, I think we should look more directly to borrowing (of both government and private entities) as a stop-start mechanism. The spending of loaned funds is a obvious economic starter. Once started, any stoppage (or even slowing) would be an economic depressant.

Should any long term trend of "cool stuff" evolution be in the mature stage (which would be a natural slowing effect), monetary policy (by itself) would have a very difficult time reversing the effect. The degree of the maturity and the social effects, combined with fiscal changes, would become an economic driver.

We may have an under-appreciated maturing effect driving the economy as we write. The carbon dioxide problem is obvious to some people and non-existent to others. Will the automobile "cool stuff" story of the last hundred years be similar to the predicted story of the NEXT hundred years? I strongly doubt much similarity.

So what should be the goals of government and central bank policy?

[Nick Rowe]

Roger: "... but I think that the "cool stuff" motivation would mightily challenge monetary policy. Fiscal policy adaptation would be necessary to accommodate change as profound as those resulting from the invention of the internal combustion engine."

You have not given me any reason *why* you think that.

"The spending of loaned funds is a obvious economic starter."

You sure you get the national income accounting identity?

Almost any change will affect the amount of money a central bank will need to print or destroy to prevent monetary disequilibrium. So what?

The only "profound" changes would be something like Bitcoin taking over the monetary system.

[Roger Sparks]

"The spending of loaned funds is a obvious economic starter."

You sure you get the national income accounting identity?

Almost any change will affect the amount of money a central bank will need to print or destroy to prevent monetary disequilibrium. So what?"

I think you agree that loaned money is an economic starter. But, do you think that the central bank prints all new money, thus controlling all increase in economic activity?

My substitution for central bank control is individual control. I think that it is very possible to put earnings "under the pillow", thus pulling money from the economic stream. Money pulled from the economic stream does not disappear. Instead, it continues in existence, awaiting future movement.

The national accounting identity is a balance of transactions. It does not measure money waiting to be moved. A loan becomes important because it is the precursor of money movement (which is a decision to transact).

"Roger: "... but I think that the "cool stuff" motivation would mightily challenge monetary policy. Fiscal policy adaptation would be necessary to accommodate change as profound as those resulting from the invention of the internal combustion engine."

You have not given me any reason *why* you think that."

Once money is created, money will exist until destroyed. It is important to realize that it does not just exist in the central bank; it (more-importantly) exists in the accounts of individual decision-makers. The decisions of these account holders will either validate or counter the decisions of the central bank planners. "cool stuff" will explain many of the spending decisions of these account holders.

[Nick Rowe]

Roger: if a stock of money already exists, you don't need loans as a starter. People just spend it, and it circulates more quickly, and keeps on coming back into their pockets. And the central bank can create money, if more money is needed as a starter. That's their job.

[Roger Sparks]

"Roger: if a stock of money already exists, you don't need loans as a starter. People just spend it, and it circulates more quickly, and keeps on coming back into their pockets. And the central bank can create money, if more money is needed as a starter. That's their job."

Nick: I agree.

I think more attention needs to be given to what is happening while money awaits spending, sitting in the accounts of decision makers. Decision makers with money in their accounts all feel able to spend at any time. Whether they do spend may depend upon the availability of "cool stuff" or the ability to create "more cool stuff"

Like you, I observe that the central bank has the ability to create money. The economic effect is the same as a decision by the account holders to spend their money. While the economic effect may be the same, the decision of what to spend on can only be very different.

[Majromax]

Forgive me if I'm missing something obvious, but can't we infer that 'new cool stuff' is a non-factor from existing work preferences?

Given the universe of 'existing cool stuff,' we don't see a decrease in desired work-hours between income cohorts. Assuming that hourly earnings are independent of one's utility function, that suggests that the basic "consumption/leisure" utility function looks much like a Cobb-Douglas utility function.

However, for an individual agent moving between low and high incomes looks like 'new cool stuff' has been invented, since more is now affordable.

[Nick Rowe]

Majro: I don't know whether you are right or wrong about that.

[Tel]

And it's the job of the central bank to conduct monetary policy in such a way that, despite those changes, the economy does not fall into recession. "You had one job....and you didn't do it."

Hmmmm, let me quote from an historical talk about banking in the USA:

Credit furnishes a vital element in all healthy economic life. Credit is based upon confidence ; and confidence in a monetary system rests upon belief in the strength, stability, and efficiency of financial institutions. To secure an organization of capital and credit by which confidence can be firmly established, and credit maintained under all circumstances and conditions, is the task committed to the National Monetary Commission.

The immediate occasion which led to the appointment of the commission was the financial crisis of 1907, whose disastrous results can never be measured, and whose destructive influences were felt throughout the world. The shrinkage in the value of property and securities which then took place, together with losses arising from a paralysis or suspension of business, amounted to thousands of millions of dollars. The country escaped by the narrowest possible margin from a total collapse of all credit and a wholesale destruction of all values.

To the great majority of the people of the country the blow came without a warning. Most of our banking institutions were in excellent condition, business of every kind was prosperous, labor was fully employed at satisfactory wages, industries of every kind were flourishing. Our people were full of hope and confidence for the future. Suddenly the banks of the country suspended payment, and acknowledged their inability to meet their current obligations on demand. The results of this suspension were felt at once; it became impossible in many cases to secure funds or credit to move crops or to carry on ordinary business operations; a complete disruption of domestic exchanges took place ; disorganization and financial embarrassment affected seriously every industry ; thousands of men were thrown out of employment, and the wages of the employed were reduced. The men engaged in legitimate business and the management of industrial enterprises and the wage-earners throughout the country, who were in no sense responsible for the crisis, were the greatest sufferers.

As an indication of its effect upon the business of the country I will refer to the falling off in the production of pig iron, it being understood by economists and students
that in a certain sense the production of iron and steel is a barometer of general business conditions. The production of pig iron in 1907 was, in round numbers, 25,000,000 tons, and in 1908 it was 15,000,000 tons, or a reduction of 40 per cent.

Possibly a corresponding reduction did not occur in all industries and in all kinds of business, but the blight which this crisis created was felt in nearly every household. The farmer, with his crops unsold and for the time unsalable, the men employed in all industries, alike felt its injurious effects.

SENATOR NELSON W. ALDRICH, BEFORE THE ECONOMIC CLUB OF NEW YORK, NOVEMBER 29, 1909

What the Senator is describing, clearly is a failure of the transaction system itself... and he emphasized the importance of confidence, and ensuring that credit does not collapse. This is not a description of people who just aren't sufficiently interested in consumerism.

Sometime later, Aldrich and the bankers got together and produced:

An act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.

Admittedly, the act itself is long and technical without any clear and concise summary of what it is trying to achieve, but the title at least gives you a clue. Certainly nothing in there to suggest it is the job of the central bank to punish savings and to force people to spend. Nothing about stimulating growth. The presumption at the time was (quite reasonably) that given a working system of banking and credit, the economic growth would just happen because that's what had already been happening.

I just don't accept that the job of the central bank is to make purchasing decisions for consumers. Not even a little bit.

[rsj]

I just don't accept that the job of the central bank is to make purchasing decisions for consumers. Not even a little bit.

I'm going to rant.

I don't think it matters what you accept, the issue is that your position is logically inconsistent. *If* there is to be an elastic money supply, then *someone* needs to set a rate at which they are willing to discount bills. That rate will affect consumer choices. If you want the market to set the discount rate, then by definition you don't allow for a lender of last resort that is willing to discount all comers at some backstop rate. If you set a lender of last resort role, then for obvious reasons the market isn't going to discount at a higher rate than that, so you've put a ceiling on discount rates. Arbitrage puts in a floor. Now you have an administered rate. That rate should be responsive to changes in demand for savings an investment, as can be seen by changes in the economy because it is the economy that is telling you whether that rate is too low or too high. So when you complain that the Central bank shouldn't respond to the economy, you are saying that it should set the rate arbitrarily, which is very dangerous.

The problem here is the disconnect between the return you get on investment and the overall state of the economy. God help me some savers believe that they are not engaging in an economic exchange set by market forces but in some purification ritual in which angels should dictate their return. The refusal to believe that there should be some connection between economic growth, consumer demands, and interest rates is really amazing.

There is no reason why a saver should get a positive return on their savings. If you build a building it deteriorates over time. If you bury food it spoils. If you plant seeds you have to spend resources on harvesting and tending to the crop. There is no guarantee that after feeding the workers to tend to and harvest the crop, the amount of corn you get after the planting season is more than what you put in. The natural state of affairs is for you to pay a cost to transport consumption across time.

It is only in the context of an exponentially growing economy and healthy demands for increasing investment that you can reasonable expect a positive return. That return is not a "reward", it is just the equilibrium return. It has no moral aspect to it.

If you can buy some land and because population is growing and incomes are growing you can sell the land for more than what you paid. If incomes are falling and the population is shrinking you have a negative return.

In the absence of a certain general level of growth and demand for investment, you cannot expect to get a positive return on any investment, including money. Why do savers believe they have a right to be subsidized and are being "punished" when the central bank discounts at a lower level than savers would prefer? This is truly an odd combination of self-entitlement as well as pedantic moralizing on the part of those people who refuse to accept that they are no different than a buyer of commodities who is then faced with a drop in the commodity price. Farmers don't complain about the Federal reserve "punishing farming", but investors bitch and cry with every rate cut.

[Nick Rowe]

rsj: "Farmers don't complain about the Federal reserve "punishing farming"...."

Well, maybe, sometimes.

[rsj]

Yes, I think in Volcker's era there were complaints. But savers seem to feel that they have a special right for positive returns irrespective of investment demand, whereas farmers have grown accustomed to being screwed by changes in demand for their product.

[Majromax]

@rsj:

> God help me some savers believe that they are not engaging in an economic exchange set by market forces but in some purification ritual in which angels should dictate their return.

I'd like to applaud your brilliant language here.

> Farmers don't complain about the Federal reserve "punishing farming", but investors bitch and cry with every rate cut.

I think it's Fischer confusion. Investors see the rate cut and think that the rate cut is causing rather than reflecting a low natural real rate. It strikes me as the same psychology as that which supported 'hard money' activism during other economically strained times.

[Patrick]

I would agree with the OP, but I am not so sure the CB can do anything about it. I think the lousy recovery is due to demographics. Sure, big financial crises take a while to shake off, but 8+ years? That just seems like a stretch.

Oldsters just aren't going to spend like families with young kids, regardless of what the central bank does. Even if they do manage to convince some - likely the wealthiest - to part with some of their brass, a few extra 7 series BMWs and S class Merc sales just isn't going to make up for lots of new households filled with new little people needing loads of new stuff.

[Tel]

If you want the market to set the discount rate, then by definition you don't allow for a lender of last resort that is willing to discount all comers at some backstop rate.

I've always used the words "last resort" to mean something that you don't normally use, but it's available for an emergency only. I notice that Central Bank enthusiasts seem to have their own language, not entirely in keeping with the common tongue.

If you could buy the same item from three places: a cheap flea market only open on Saturday, a general store open 9-5 on weekdays, or a 24 hour convenience store open all the time; then probably that convenience store would have the highest price and the sensible thing to do would be try to buy the item from one of the other suppliers and only go to that high priced convenience store as a "last resort".

Therefore the central should only need to get involved at all during those unusual times where there is some sort of liquidity crisis. At all other times, the market can find a rate, and in this case it would indeed be a "natural rate", and by observing this rate the central bank sets it's emergency "last resort" rate a significant notch higher than that. Thus, we get to the Walter Bagehot dictum:

* Lend freely.

* At a high rate of interest.

* On good banking securities.

If the Central Bank followed this advice, and took care to only get itself involved at most once every 12 months, or even less frequently, then we would have a nice workable system.

But sadly, that's not what happens. In practice the Central Bank injects new money almost every week. Check the balance sheet (e.g. "All Federal Reserve Banks - Total Assets, Eliminations from Consolidation") what you see is that it goes up, and although there might be momentary fluctuations, it never unwinds. On top of that, money also gets steadily remitted to government (essentially coming from nowhere) which forms another path of injection. It's easy to see this, because M1 and M2 just keep going up. There's nothing even remotely "last resort" about this... it's constant money injection activity.

God help me some savers believe that they are not engaging in an economic exchange set by market forces but in some purification ritual in which angels should dictate their return.

Load of rubbish. Put away the amateur theatrics. Savers want sufficient return to make it worth saving, else they just don't bother saving at all. Sometimes they bid up the price of assets in an attempt to indirectly save, but going directly to assets is basically proof that the financial intermediaries are broken (much like seeing a rise in barter proves that the settlement and exchange system is broken).

Government schemes have well understood that their policies would normally discourage savings, so they have attempted to force it with 401k plans, Social Security, and in other countries compulsory Superannuation. All of this would not be necessary if we just had a normal operating market in interest rates. There's a bunch of reasons why these forced savings systems cause a bunch of problems... anything so good it has to be mandatory is going to have problems.

Farmers don't complain about the Federal reserve "punishing farming", but investors bitch and cry with every rate cut.

Oh did you hear the one about the farmer where the Feds came around every year and scooped out a little bit of his farm and took it away? He started with 100 acres 50 years ago in 1965 and today they have scooped him right down to a mere 13 acres. You never heard about that? Probably because it never happens, because scooping away someone's farm would be ridiculous, right?

But scooping away someone's money, where the person with 100 units of fiat currency in 1965 now only has equivalent purchasing power of 13 units of currency today... no problem. That's a perfectly reasonable thing to do. How did it happen? Continuous money injection, not by "last resort" on a highly occasional basis, but all the time money injection.

[Melissa Belvadi]

Is national income accounting, rather than global income accounting, still the relevant model? I am a consumer, and recently purchased, well, not $1000 but $100, in "new cool stuff" in the form of new led safety products for my dog - products that didn't exist 12 months ago. I purchased them on Amazon.ca from a company that shipped them directly from China to me. I suspect that very little of the $100 I spent was added to the aggregate national income of Canada, but rather most of it was added to the aggregate national income of China, even as the entire $100 was part of the aggregate national expenditure of Canada.
I'm not an economist, however, so please explain where I've misunderstood the principle.

[Colin Percival]

"If aggregate expenditure rises by $1,000, then aggregate income rises by $1,000."

If aggregate *cash* expenditure rises by $1,000, then aggregate *cash* income rises by $1,000. But if this change involves consumption increasing by $1,000 but production does not change, then as a society we have collectively become poorer to the tune of $1,000 of stockpiled goods.

If we all go out and spend $1,000 more, we wouldn't all be going into debt, but (assuming no increase in production resulted) we would indeed be living beyond our means.