http://cda.morris.umn.edu/~kildegac/Courses/M&B/Sweeney%...

It's an awesome paper.

For example, unlike Krugman, the original paper doesn't state that the co-op is mostly lawmakers and lawyers (only that lawyers drafted the bylaws); unlike your post and Krugman's article, the paper also doesn't talk about legislation.

More importantly, the paper's thesis isn't Krugman's thesis, or yours. The paper seems to be making the point that the implicit economies that develop from social interactions are often destined to flail because people don't recognize them as economies, and insist on applying moral reasoning to technical problems.

But your thesis --- and Krugman's --- is different. Obviously, we recognize The Economy as an economy. So what Krugman is saying is that this story illustrates something about how to resolve a depression.

Which it very well might. It's not like I'm going to question Krugman on it.

(You did cite Krugman's anthology book, which I haven't read but might contain this article).

Pretty sure it does. The story seems familiar.

Bailing out companies and fiscal stimulus of one sort or another won't save you from the basic and indeniable problem: You're broke.

There's only one way out of that: Spend less and work more.

The free market dampener is people refinancing at slightly lower rates, but this this hits a wall. Negative interest rates never happens, because why lend money when you can just keep it. And even mild deflation is hard to deal with because loans have risk so you can't lower loans below the rate of risk.

Can someone explain how such an action would help the economy?

It would be nice if these people did something useful, but Keynes' point was that this is an optional feature which should not be allowed to detract from the main goal.

But why should that be a main goal? Why have money changing hands for the sake of changing hands? Isn't money just a medium of exchange -- a go-between, a currency -- used to convert one type of good into another? We don't just want money to circulate, we want money to circulate purposefully -- in transactions on the free market.

I still don't see how burying money and having miners dig it up helps anything. It doesn't create value. Those miners could do other, more productive things instead.

I'm tempted to answer "no". Money has properties -- the very ones that prompted its design -- that make an exchange of money quite different from an exchange of goods or services.

The important property for this discussion is: an exchange of services doesn't offer you a reliable medium of savings. If I offer to shingle your house in exchange for you shoveling my snow, but it's January and I can't shingle the house until May, we're stuck. You can shovel the snow first and have me owe you the shingling, but what if I flee the state, or injure myself? Or what if May comes around and you have decided that you'd rather have the lawn redone than the shingles replaced? I don't know lawns! I only do shingles!

But money solves this problem because you can put it in the bank (or a piggy bank, for that matter) and decide later what to trade it for and with whom.

Which leads directly to the problem we're worried about: deflation. Right now is a very bad time to hire someone to reshingle my house for $75 an hour, because in six months another 3-5 million people will be out of work and there will be a lot more unemployed people with building skills, some of whom might be willing to reshingle my house for $50 an hour. But, of course, at that point I might be out of work myself, and $50 might seem like a lot of money, but no problem, because if I wait another six months the price might be down to $25 an hour...

In a depression people hoard their money, because there isn't a lot coming in and because it's worth more the longer you wait. That's the phenomenon which Keynesian stimulus seeks to prevent. You have to offer folks $50 an hour (or whatever) to do anything -- twiddle their thumbs, if necessary -- to keep money flowing into and through the system and to fight the universal tendency toward deflationary deadlock: The situation where everyone sits on their cash and their labor, waiting.

(Since the 1930s, we've prevented our economy from falling into this terrible state by using monetary policy. But you can't use monetary policy to maintain equilibrium once the real interest rate is zero. Which it apparently now is.)

Unfortunately, a depression is one of those nonlinear, non-equilibrium, black-swan situations that relatively few living Americans have experienced, and we're seeing the very real danger that people will refuse to recognize the possibility this time until it's too late. You have to anticipate these things, because economies have a lot of momentum.

As for deflation: Isn't there a cost to not reshingling your house? You don't have a reshingled house, something you presumably want. You shouldn't just look at the price of labor, you also have to look at the value of what the labor does: the house, reshingled. Compare that to the cost of reshingling the house. (Opportunity cost, in so many words).

I still fail to see the point of offering folks money to do something pointless, nor how it helps stop deflationary deadlock. If there's a deadlock then they'll just sit on that money as before, no?

I'm not sure I understand the deflationary deadlock -- you posit a situation where everyone sits on their cash and their labor, waiting -- waiting for what? Eventually someone is going to stop waiting and start working, eventually the gap between desired state and existing state will loom larger than the value of sitting on that money. In the house-shingling example, eventually you will value someone shingling your house for $X/hr today more than you will value having a not-reshingled house until the price drops to $Y/hr in Z days. When that point comes, you'll stop sitting on your money and hire someone to reshingle your house. Wouldn't a series of such events unlock the deflationary deadlock as the market reaches the new price point?

http://www.economictheories.org/2008/11/keynes-theory-of-sav... gives a little more context.

I agree with printing money to halt the deflation. But this should not be done through government projects. If the money is spent via government projects, then you still get massive frictional unemployment as businesses shut down and and everyone has to find new jobs working for the government. Second, government spending has a ratchet effect. Government programs never die. Finally, I believe individuals know how to spend their money the best. Should money be spent on a high speed train from Boston to Washington, or should it be spent on healthcare? Just print money and give it to individuals and let each person decide.

1) Must be able to start very soon

2) Must have a clear horizon (i.e. a project with a final deadline, so that it doesn't keep costing money forever)

3) Must be useful

One example it gave of the best way to spend that money would be actually to repair existing roads. That's usually very easy to do right away, provides immediate short term benefits, and reduces your long term costs (unlike building roads, which increases them, as you then have to maintain all these new roads).

http://www.amconmag.com/article/2009/jan/12/00031/

Actually economists, not moralists, are against this; because excessive pumping of money in they system in this way will cause hyper-inflation. Classical (and rather extreme) example of why printing money should be kept under check: Zimbabwe.

"We stand today at a crossroads: One path leads to despair and utter hopelessness. The other leads to total extinction. Let us hope we have the wisdom to make the right choice." —Woody Allen

http://research.stlouisfed.org/fred2/fredgraph?chart_type=li...

A negative interest rate, therefore, would be a bit like a formalized "helicopter drop". If the interest rate of a loan were tied to the nominal interest rate in some way, you wouldn't have millions borrowing as much as possible because the rates could well shift back in the other direction before long.

http://blogs.ft.com/wolfforum/2008/11/the-case-for-negative-...

I have wondered lately if this is why we are keeping our car companies alive: Massive inflation could make them cheaper than foreign cars.

Also, how could money "be withdrawn quickly enough"? Who would withdraw it and how?

The money would be withdrawn in the way that central banks usually withdraw money in their day-to-day operations: by selling bonds or allowing them to mature.

It's a damn shame that the Bush Administration didn't follow the second half of this advice for the past eight years, but that's no reason to ignore the first half now.

> We’re not being punished for our exuberance

We're being "punished" for massive malinvestment. Wealth was poured into assets and ventures that could never achieve positive returns. A recession/depression is the process of liquidating malinvestments and redeploying wealth and labor to economically profitable ventures.

The malinvestment happens partly from mass psychology and mostly because of artificially manipulated interest rates. The natural market interest rate reflects the amount of wealth available for investment (capital). When people have saved a lot and there's a lot of wealth stored up, interest rates are low. When interest rates are artificially held low, investors and business people get the mistaken impression there's much more stored wealth in the society than there actually is. Then eventually many business plans come to tears at roughly the same time, as it becomes apparent there isn't the wealth to drive demand for the ventures. This is a recession.

If what you say were true, then we wouldn't be suffering from unemployment. We'd suffer from massive writedowns in our wealth (as we realize our malinvestments) but labor would be redeployed to new ventures. Effectively, we'd be working our assess off harder than before, but receiving a lower quality of life in return.

In reality, however, the economy is not at full employment. If we malinvested before (effectively did useless work), that should be a sunk cost. We wouldn't receive the future benefits we expected from that work, but that wouldn't preclude us from continuing to work. Malinvestment is not a reason for unemployment.

No, we're in a liquidity trap. Option A is monetary policy. That has been tried and exhausted. Option B is fiscal policy. Bring out the helicopters!

Labor won't be deployed to new ventures when all of the companies that were involved in the malinvestment aren't allowed to fail.

If the person I originally replied to is implying that the current bailouts create too much of a moral hazard, then that's a possibility, but that one sentence that was given doesn't do the issue justice.

Those poor investments will wipe out equity owners (and bond holders in many cases) when they are honestly documented on the balance sheet.

No rational person will make a new investment until after such honesty develops.

Suppose a consortium of Arab investors decided to believe Citi's current published balance sheet, and bought $500M of newly-issued Citi common stock at US$2.00/share, a nice discount from its $3.40/share market price. They would most likely lose every penny of that investment when Citi fesses up to the true losses.

Of course the big money investors are no longer that foolish, having been burned several times by U.S. bank "recapitalization investments" in 2007/2008. Everybody is waiting on the sidelines for honesty to develop. This flight of capital has been billed as a liquidity crisis by the Wall Street hucksters, and used to justify mammoth bailouts, but in reality it is a solvency crisis and there is an ocean of hot money itching to be spent on honest companies.

Yes, but redeployment takes time -- especially when everyone looks around and sees all their assumptions about what profits different activities will return are wrong, and need to be recalibrated. That research -- which happens tentatively, experimentally at first -- means some capital/labor sits on the sidelines while the necessary information is collected or created.

Redeploying labor immediately at the first things you can think of might keep people busy but can worsen the wealth destruction, if those activities wind up being of net zero or negative benefit. (By tying up workers on make-work, they could also slow the rediscovery and restaffing of valuable projects.)

Those who have lost their jobs don't necessarily have the right skills for the more economically productive jobs that hopefully get created. Also, they don't necessarily live in the right places.

Practically, politics means fiscal intervention arrives late, stays too long, and is targeted to reward favored groups and centralize power.

There's no separating the two without a magic wand to implement benevolent stimulus without a political process.

Uh, why not? I don't get it. Of course business liquidations and a decline in capital investments produces unemployment.

But look at the bigger picture. We have productive economic resources (labor), why should they ever be sitting idle? It's not like we don't have problems to solve. We have to pay off our debt to the Chinese. We have to figure out what to do when the oil runs out. We have to make sure we don't destroy the planet sometime during the next century. We need to figure out how to take care of all the baby boomers once they retire. There's LOTS of work we need to be doing, but we're sitting around twiddling our thumbs. That makes no sense.

The original source of our financial crisis is the collapse of subprime mortgages. People are getting kicked out of their homes, which has several effects:

- There are now a lot of houses on the market, driving prices down and reducing demand for more construction. Construction companies suffer, as do all of their labour and material suppliers (lumber companies, contract labour companies, etc)

- Banks have reacted to the defaults by attempting to protect themselves from further risk, meaning that it's harder than ever to get a mortgage. The effect is a similar drop in housing demand, with similar results as above.

- As the true scope of the problem unfolded, people began bailing on bank investments, driving prices down, and eliminating wealth that normal people have stored up in the form of mutual funds and such. This loss of wealth amongst "average people" has driven down consumer demand, and thus basically every other industry out there.

- As investors realized that consumer spending will be down, they withdraw their investments in these companies, resulting in further depression of the stock. This in turn causes more loss of wealth for people holding these investments, and causes a vicious cycle.

Nothing exists in a vacuum.

The question that I see being repeated in the media these days is "what are the banks doing with the bailout money, why aren't they lending it?" Perhaps the answer is that there is currently nobody out there who is a good enough credit risk to lend money to. Another possible answer is that the banks now realize that they've lost the ability to quantify credit risk correctly and they are going to need to relearn that skill.

PS: We are not in a depression, but a major goal should be to avoid a depression while we let this recession fix many of the problems your talking about.

The policy prescription for the current crisis is to beef up food stamps and heating assistance programs so people don't starve or freeze, and then let all nonviable businesses fail as quickly as possible so they can be reconstituted as profitable companies.

"From 1929 to 1934, U.S. personal income plunged 44%, real output nosedived 30% and the unemployment rate soared to 25% of the American labor force." and the great depression still had 5 years left.

"By Jan 1, 1934, as many as half of all residential mortgages were delinquent" let alone all the ones that had already failed.

And it can fall far further in the next one. It's a house of cards and the bottom is far further than you might expect.

We had a positive personal savings rate last month. Once you have a positive saving rate there is no long term problem with spending. (http://www.bea.gov/briefrm/saving.htm)

Now government spending is honorably out of whack, but that's not really related to what you're talking about. (http://www.frbsf.org/education/activities/drecon/answerxml.c...)

If hoarding leads to an irrationally priced money, rational people will quickly realize this and exchange their money for other alternatives that have become favorably priced.

Once this tipping point is reached, others will realize that they were overvaluing their money and the pendulum will swing back.

For what it's worth, the only economists who consistently avoid setting off my bullshit meter are the Austrians. And yet, their views border on lunatic fringe according to mainstream economists. In a world where those same economists set policy, that is an alarming combination.

The core problem is that economics cannot use falsifiable experiments, and it is very highly politicized.

I agree that falsifiable experiments are difficult in economics, which is why we must rely instead on logic and reason---a strategy seemingly abandoned by modern economists.

I remember the ridiculous (and since discredited) argument by Card & Krueger that increases in the minimum wage increased employment, at least according to their data. And yet, when you raise prices on normal goods, the quantity demanded falls; if you force companies to pay employees more, they will hire less. If the data say otherwise, the data are either wrong or too noisy to be trustworthy. (Unfortunately, their paper wasn't merely an academic curiosity---it gave Bill Clinton and Congress political cover to raise the minimum wage in 1996.)

And now we hear economists fret that Americans, who have been under-saving and over-spending for years, may yet ruin the economy---by saving too much and spending too little. Someone needs to tell them that wagging your finger and saying "liquidity trap" doesn't magically give the emperor clothes.

N.B. I predict the rise of quantum decoherence theory will change this picture in fairly short order.

But many other are losing their jobs simply because of friction caused by the increase in demand for money. All contracts ( wage contracts and debt contracts) were written assuming an easier availability of money. When a deflation occurs, many businesses go bust not because they were "malinvestment" but simply because their contracts were denominated in 2007 dollars, not 2009 dollars. The correct response is to print money to prevent the deflation, thus removing the need for every business in the country to into bankruptcy court to get out of their debts.

Before the Great Depression, many people wanted cars and they could afford cars. After the great depression, the production of cars were even greater. Why did the factories need to stay idle during the great depression? Idle automobile factories were not a result of liquidating malinvestment, they were a result of collateral damage from deflation.

http://www.whereisthemoney.org

You shouldn't just print money if it supports theft via nontransparent government accounting, impoverishes the many, and enriches the few.

Then you are just Zimbabwe 2.0.

Fix the accounting systems first, please.