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The Money Confusion

The always-brilliant J. W. Mason’s response to what in my opinion is a quite befuddled Mike Beggs review in Jacobin of David Graeber’s Debt: The First Five Thousand Years prompts me to tackle a subject that I’ve been worrying at for a long time: Money.

I’ve been worrying at it despite (or because of) endless reading spanning centuries of money thinkers, reading that has brought me to the conclusion that economists don’t have an even-vaguely coherent or agreed-upon definition of what money is. No: saying that it “serves three purposes” — store of value, means of exchange, and unit of account — does not a definition make. Not even close. In my opinion, that fumbling tripartite stab at something vaguely definition-like actually takes us farther from, and obfuscates, any useful definition.

It’s not uncommon to find leading economists of all stripes — even deep money thinkers like Randall Wray — using vague, quasi-technical terms like “moneyness” and “money-like.” They don’t seem to have a tight technical definition that they can rely upon others to understand and use synonymously. cf., Decades, centuries of inconclusive argument on the proper definition(s) of “the money supply,” and the various definitions thereof.

What is arguably the most important word in economics remains undefined or at best variously and inconsistently defined — and used.

We find this “money confusion” in the center of J. W.’s response, where he addresses the theoretical (and historical) tangles surrounding commodity, fiat, and credit money — a quagmire he illuminates nicely, but doesn’t manage to untangle. He continues (emphasis mine):

“It is odd,” Mike says, “that Graeber claims that ‘you can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter’ – because there actually are things called dollars you can touch, carry around in your wallet, and spend.” And, “however far credit may stretch money, it still depends on a monetary base: people ultimately expect to get paid in some form or other.” And, most decisively, “What circulates [as money] need not be a physical thing, but it is a thing in the sense that it cannot be in two places at once: when a payment is made, a quantity is deleted from one account and added to another. That the thing that is accepted in payment may be a third party’s liability does not change this fundamental point.” These are all, quite simply, statements of Friedman’s quantity theory of money, refuted by generations of Post Keynesian economists but still carrying on its zombie existence in the textbooks.
Open your wallet again: Yes, you see things called dollars, but most likely you also see a piece of pallastic labeled Visa or Mastercard. This is money too — you can buy almost anything with t that you can buy with the bills. When you do so, new monetary liabilities are created on the spot, linking you to your bank and your bank to the vendor. Nothing is deleted from anywhere. You do, of course, have a credit limit, but that depends on what you’re buying an who you are buying it from, and it can rise or fall for all sorts of reasons without changes in anyone else’s. This is the fundamental difference between fiat and commodity money, on the one hand, and credit money on the other. There is a fixed quantity of the former but not of the latter. Now if the maximum volume of credit that could be created by banks was closely linked to their holdings of gold or state tokens, it wouldn’t make a difference; and thanks to various regulatory and other constraints, this was more or less true for much of the 19th and 20th centuries. But it is not true today. The idea of money as a “thing” that you “carry around” is fundamentally wrong as a description of today’s monetary system.

This fundamental wrongness (if it is indeed wrong) is inscribed right at the top of the Wikipedia article on money, and in almost every economist’s understanding of the concept (bold mine):

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts

And the Money Supply entry explicitly acknowledges the definitional problem:

There are several ways to define “money,”

I don’t think Graeber is completely right in his characterizations of money, Beggs completely doesn’t get it, and Mason doesn’t go go far enough. Despite common usage, that idea of money as a “thing” that you can carry around is not a useful technical economic definition for discussing any monetary system. It doesn’t allow us to think about money or money economies coherently.

Imagine if physicists didn’t have a solid definition of energy — if they meant slightly (or wildly) different things when they referred to it, sometimes hewing to some vernacular usage, sometimes silently assuming various technical definitions. Or if one was never sure which definition they were using in any given discussion. Or if two physicists arguing were frequently using different implicit definitions, and often weren’t even aware of it. Or if they shifted their own (implicit) definitions within the course of a discussion, often even within a single sentence?

Physics discussions would be in the same kind of eternally inconclusive mess that economics is in, and has been in for centuries.

I want to suggest a definition in which a dollar bill is not money. It’s a definition that I’m finding to be conceptually useful, tractable, and applicable to much of the good economic thought that has emerged over the centuries (emerging, amazingly, even in the absence of such a definition). Neither is a gold coin money, and neither is a balance in your checking account. Economists have been unable to disentangle themselves from that common, vernacular usage. What they (we) need is a term of art, a technical term that is clearly defined and uniformly deployed. As with many terms of art, such a definition is likely to bear little or at best only a glancing resemblance to everyday usage.

So if a dollar bill isn’t money, what is it? It’s a financial asset, as are gold coins, bank deposits, bonds, stocks, collateralized debt obligations, and so on and so forth, all of which embody or represent money. Ditto bank reserves. (This last is important because reserves are — for sensible reasons, within the definitional vacuum that economics inhabits — excluded from almost all definitions of the money supply. Nevertheless, they’re financial assets that embody money, in a complicated institutional way. They have very special properties, different from other financial assets.)

So what is money? Let’s take a look at the physics definition of energy, and see if it might be a useful guide. Here from Wikipedia (which at least has the virtue of not being widely disagreed with; otherwise it would be rewritten):

In physics, energy … is an indirectly observed quantity that is often understood as the ability of a physical system to do work on other physical systems.

That’s a pretty heady conceptual definition. Does something similar work with money? Try this:

In economics, money is a quantity that is often understood as value that can be exchanged for real-world goods and services.

Or a simpler version: money is exchange value.

Like energy, under this definition money cannot exist except as manifested in some embodiment — for energy, a gallon of gas, fields/waves/particles propagating through the void, or a boulder at the top of a hill; for money, some financial asset. Absent such an embodiment, energy and money do not even, cannot even, exist. (Though exchange value obviously can.)

Money in this definition does not exist except as it is embodied in financial assets. But that doesn’t mean that financial assets — even dollar bills – are money.

If you’ve got a battery in your pocket, do you say you’re carrying “energy”? You could, but you don’t because you know that you’re carrying a battery that embodies or contains or holds energy. You understand the conceptual distinction between the battery and the energy.

But when you have a dollar bill in your pocket, you do say, “I have money in my pocket.” You don’t make the distinction — that the bill and the money are conceptually different things.

Ditto with bank deposits: they are legally enforceable claims. They’re not “money” (in this definition). And other financial assets: we commonly say “how much money” do you have? What we really mean is “what is the net value of your financial assets?”

Let’s go back to the key word in the physics definition of energy, and in my definition of money: “quantity.” What does Wikipedia tell us about that word?

Quantity is a property that can exist as a magnitude or multitude. Quantities can be compared in terms of “more”, “less” or “equal”, or by assigning a numerical value in terms of a unit of measurement. Quantity is among the basic classes of things along with quality, substance, change, and relation. Being a fundamental term, quantity is used to refer to any type of quantitative properties or attributes of things. Some quantities are such by their inner nature (as number), while others are functioning as states (properties, dimensions, attributes) of things such as heavy and light, long and short, broad and narrow, small and great, or much and little.

So by this definition, money is a quantitative property. A property of what? I would say: financial assets. Those assets have other properties as well: exchangeability (in different markets), confidence, volatility, etc. All those properties are mutually interrelated in ways that I will not delve into here, and those other properties all affect the quantitative property — money — that is embodied in all financial assets.
It seems to me that economists’ failure to make that conceptual distinction between money and financial assets makes it impossible to discuss the economics of a money-based economy coherently, or understand such an economy properly. They end up talking about things like “the demand for money” and “the market for money” (instead of “the markets for different financial assets”) — which are at best vague and at worst meaningless phrases under this definition — when what they really mean, what they really need to discuss, is shifting preferences/demand for different types of financial assets that have different properties – all of which assets embody “money.” (Also: the forces driving changing substitution preferences among these different asset classes and properties of different asset classes — substitution being the sine qua non of demand curves.)

By this definition:

Money is not a store of value. Financial assets are stores of value, with the value quantity designated in terms of money, which in turn is designated in terms of a particular unit of currency.
Money is not a medium of exchange. Physical currency is a medium of exchange, as are the legal obligations that we refer to as bank balances. Within the financial industry there are many other units of exchange. Though it’s rare for them to be exchanged directly for real-world goods and services, they can be exchanged for things (bank balances) that can be so exchanged, so it’s quite reasonable to view them as embodying “money.”
Money is not a unit of account. Currencies are units of account. (“Currencies” in the conceptual rather than physical or particular sense of that term — “the dollar,” not “dollar[ bill]s.”)

I’m proposing a very abstract, term-of-art definition here, one that is far removed from most understandings of “money.” But look at the physics definition of energy, above. Does it have the kind of simple, intuitive clarity that we feel when we say “I’m full of energy today” or “I have money in my pocket”? Not even close. The definition is actually quite hard to understand. Nevertheless, it seems to have served its purpose very well over the centuries.

I have a lot more I’d like to say on this subject — for instance on the egregiously sloppy and criminally vague usages of the term “capital” throughout economics writing — but I want to stop here and see if my gentle readers find any value in this thinking, whether they can contribute to my muddled and ever-groping understanding of how (money) economies work. Thoughts?

Cross-posted at Asymptosis.

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Repeat After Me: Low Taxes (on Rich People) and Economic Growth Are Not Correlated

Jared Bernstein tells us yet again what the data has been telling us forever (my bold):

I agree with Chye-Ching Huang, who agrees with the Congressional Research Service, Len Burman, and me: over the long, historical record of special tax treatment for investment incomes and tax cuts to the top marginal tax rates, one simply doesn’t find significant correlations with greater investment, savings, productivity, or income growth.

Everything he cites here is about U.S. tax and growth rates — a single sample point though a long-term one — all of which is subject to the big secular thing: growth was faster pre-Reagan, and Dems were in power pre-Reagan, so the numbers just represent that secular decline (the great innovation stagnation?), not the effect of policies. It’s amazing that Republicans never make this argument, which is pretty tough to counter. But that’s mainly because they don’t even know, much less acknowledge, that growth has declined since Reagan took office. This argument ignores the boom and surplus under Clinton, of course (of course that boom was attributable to New Gingrich), but besides that it’s a tough argument to disprove.

The far more convincing demonstration, in my opinion, is this: comparing the U.S. to Europe over forty years.

Roughly the same population.

Roughly the same level of prosperity.

One taxing 40% of GDP, the other taxing <30%.

Difference in growth rates: nonexistent.

Cross-posted at Asymptosis.

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Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes

by Kenneth Thomas

Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that in every state in the country, the bottom 20% of households pay more of their income in state and local taxes than does the top 1%. Washington state was the worst, where the bottom 20% pay a whopping 17.3% of their income in state and local taxes. This was followed by Florida at 13.5% and Illinois at 13.0%. Though the report hints at an exception, a reading of their appendix shows that the only one is the District of Columbia.
As the report points out, such high taxation increases the burden of poverty on the people who, by definition, can least afford it. Moreover, this runs counter to the federal tax system, which in its overall effect (see table below) is progressive. On average, the top 1% pay federal taxes equal to 30% of their income, compared to 1.1% for the lowest 20%.
Source: Tax Policy Center

Between these two reports, we can see that the bottom 20% of taxpayers pays a much higher portion of their income in state and local taxes than they do in federal taxes. ITEP therefore recommends four major policies to make state and local taxation less regressive.

1) Enact a refundable earned income tax credit for state income tax;
2) Enact property tax circuit-breaker caps for all low-income taxpayers, including renters;
3) Enact other refundable income tax credits for childless households below the poverty level;
4) Enact or increase child tax credits, and make them refundable.

Of course, it should go without needing to be said, but to make federal tax more progressive (think of Mitt Romney and his tax rate below the average 15.1% paid by those in the third income quintile), we should tax capital gains and carried interest the same as ordinary income.

cross posted with Middle Class Political Economist

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State Unemployment Rates

Bill McBride at Calculated Risk does his usual excellent job of reporting economic data;

He just reported the state unemployment rates and published a chart comparing the current rate with each state’s peak rate.

One very significant point that popps up in this chart is that Michigan and Ohio appear to have had the greatest improvement in their unemployment rates since their unemployment rates peaked.  I think this is an important thing to consider when we evaluate the impact of the auto bailout and why Obama appears to be leading in the Presidential polls in those two states.

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Why Doesn’t Rachel Zubay Know That Most Provisions of Obamacare Won’t Start Until 2014?

Rachel Zubay, 32, works as a waitress at Abdalla’s Steak House, in the shadow of a recently idled coal-fired power plant. She’s got two kids, is in the middle of a divorce, has no medical insurance and is paying $50 a month on a $15,000 surgical bill after she injured her ankle and foot in a nasty fall. She figures she’ll have it paid off in five or 10 years.

She’ll probably vote for Romney. What about the president’s health-care plan, which is supposed to help people afford medical insurance? “Obviously it hasn’t helped me at all,” Zubay says. “I’d be better off moving to Canada.”

Michelle Obama gave a lovely, effective speech earlier this month at the Democratic convention.  But in my opinion, her best moment came two days later, while making a particular comment during a taped clip that was part of the little film played before her husband delivered his acceptance speech.  In one seemingly unscripted moment, at the end of brief comments about Obamacare, she said something about hospitals and physicians sending bills for hundreds of thousands of dollars to, say, a single mothers with hourly-wage jobs—and doing so “with a straight face.”  What was most effective were not even her words but the spontaneous, pained, incredulous look on her face as she said “with a straight face.”

I’d love to see the Obama campaign use that clip in an ad that also makes clear that the part of Obamacare that will help Ms. Zubay by the time she’s 34, and her young children, and millions of others too, won’t start until 2014.  If it starts at all.  Which, Romney/Ryan, if elected, will do their best to keep it from doing.

Seriously.  It probably didn’t occur to Obama that some people think that Obamacare’s main provisions have started but have just failed to help them.  But now, he knows.  And Ms. Zubay probably isn’t the only one who’s planning to vote for Romney, in part because of that evil Obamacare, who recognizes the benefits, healthcare-wise, of living in Canada.  Or Germany.  Or Taiwan.  Or Israel. 

What some of them don’t recognize, I guess, is that if they injure a foot two years from now, they won’t have to pay $50 a month for the next several decades.  They’ll be able instead to use that $50 a month for other things.

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Trade and Development

Trade and Development

Run 75411 picked up this recent report over at Economists View where someone (Goldilocksisableachblond?) pointed to a recent UN report TRADE AND DEVELOPMENT REPORT, 2012

Run says: There are some interesting comments within the Overview to the much longer report, which I found germaine to what is happening in the US and which have been addressed before by many of us. I have not had a chance to read the entire report. Bolding within the quotes are my own. I am more interested in your thoughts and comments. This is on developed countries and there is more on developing countries to be added later.

The turning point: financial liberalization and “market-friendly” policy reforms
In order to comprehend the causes of growing inequality, it should be borne in mind that the trend towards greater inequality has coincided with a broad reorientation of economic policy since the 1980s. In many countries, trade liberalization was accompanied by deregulation of the domestic financial system and capital-account liberalization, giving rise to a rapid expansion of international capital flows. International finance gained a life of its own, increasingly moving away from financing for real investment or for the international flow of goods to trading in existing financial assets. Such trading often became a much more lucrative business than creating wealth through new investments.

More generally, the previous more interventionist approach of public policy, which strongly focused on reducing high unemployment and income inequality, was abandon. This shift was based on the belief that the earlier approach could not solve the problem of stagflation that had emerged in many developed countries in the second half of the 1970s. It was therefore replaced by a more “market-friendly” approach, which emphasized the removal of presumed market distortions and was grounded in the strong belief in a superior static efficiency of markets.” (Page 18)

The failure of labour market and fiscal reforms
Just ahead of the new jump in unemployment in developed countries − from an average of less than 6 per cent in 2007 to close to 9 per cent in 2011 − the share of wages in GDP had fallen to the lowest level in the post-war era. Due to their negative effect on consumer demand, neither lower average wages nor greater wage differentiation at the sector or firm level can be expected to lead to a substitution of labour for capital and reduce unemployment in the economy as a whole. In addition, greater wage differentiation among firms to overcome the current crisis in developed countries is not a solution either, because it reduces the differentiation of profits among firms. Yet it is precisely the profit differentials which drive the investment and innovation dynamics of a market economy. If less efficient firms cannot compensate for their lower profits by cutting wages, they must increase their productivity and innovate to survive.”
(Page 22)

A reorientation of wage and labour market policies is essential ?????????????????

In addition to employment- and growth-supporting monetary and fiscal policies, an appropriate incomes policy can play an important role in achieving a socially acceptable degree of income inequality while generating employment-creating demand growth. A central feature of any incomes policy should be to ensure that average real wages rise at the same rate as average productivity. Nominal wage adjustment should also take account of an inflation target. When, as a rule, wages in an economy rise in line with average productivity growth plus an inflation target, the share of wages in GDP remains constant and the economy as a whole creates a sufficient amount of demand to fully employ its productive capacities.”

Run here: I think as Spencer and others have so aptly pointed out, productivity gains have been skewed to Capital since the seventies.

Influencing income distribution through taxation

The net demand effect of an increase in taxation and higher government spending is stronger when the distribution of the additional tax burden is more progressive, since part of the additional tax payments is at the expense of the savings of the taxpayers in the higher income groups, where the propensity to save is higher than in the lower income groups.

The experience of the first three post-war decades in developed countries, when marginal and corporate tax rates were higher but investment was also higher, suggests that the willingness of entrepreneurs to invest in new productive capacity does not depend primarily on net profits at a given point in time; rather, it depends on their expectations of future demand for the goods and services they can produce with that additional capacity. These expectations are stabilized or even improve when public expenditures rise, and, through their income effects, boost private demand.

Taxing high incomes, in particular in the top income groups, through greater progressivity of the tax scale does not remove the absolute advantage of the high income earners nor the incentive for others to move up the income ladder. Taxing rentier incomes and incomes from capital gains at a higher rate than profit incomes from entrepreneurial activity – rather than at a lower rate as practiced so far in many countries – appears to be an increasingly justifiable option given the excessive expansion of largely unproductive financial activities.
Page 26

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Romney’s Odd Definition of ‘Not Following the Law’

I don’t pay more than are legally due and frankly if I had paid more than are legally due I don’t think I’d be qualified to become president. I’d think people would want me to follow the law and pay only what the tax code requires.

— Mitt Romney, speaking to ABC’s David Muir, July 29, 2012

Sooo … Romney sees no difference between committing a crime—tax evasion—and consciously choosing to not employ every tax dodge conceivably available in order to barely skirt the line of legally. 

And he thinks people wouldn’t want a president who chooses not to do the latter.


I keep arguing that Obama should take this guy at his word—okay, his words—that he can’t distinguish between apples, oranges and elephants, and regularly conflates two or three obviously distinct facts or concepts.  And that maybe this isn’t really guy to get the economy moving on a faster track, or the guy to make commander in chief.  

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A Couple of Questions for Romney Trustee Brad Malt and Former-IRS-Commissioner-cum-Romney-Testimonial-Provider Fred Goldberg

Between 1990 and 2009, the Romneys’ average annual effective federal tax rate was 20.2 percent, according to [notarized tax return summaries by Romney trustee Brad] Malt. The lowest effective federal personal tax rate they paid in that period was 13.66 percent, he said.

Over the same 20-year period, the couple gave an average of 13.45 percent of their adjusted gross income to charity.

Fred Goldberg, a former commissioner of the Internal Revenue Service, said in a statement released by Romney’s campaign that the couple “fully satisfied their responsibilities as taxpayers.”

“These returns reflect the complexity of our tax laws and the types of investment activity that I would anticipate for persons in their circumstances,” Goldberg said in the statement. “There is no indication or suggestion of any tax-motivated or aggressive tax planning activities.”

Fred Goldberg, a former commissioner of the Internal Revenue Service, said in a statement released by Romney’s campaign that the couple fully satisfied their responsibilities as taxpayers?  That’s good to know, but the question remains: When, exactly, did they satisfy their responsibilities as taxpayers for the years preceding the 2009 IRS amnesty program for anonymous holders of Swiss (and other foreign) bank account holders?  Might it have been retroactively, like, maybe, in 2009?

And, there is no indication or suggestion of any tax-motivated or aggressive tax planning activities?  That’s good to know, too. But is Goldberg limiting his statement to what Romney revealed in summaries?  Or does Goldberg have privy to the records of the $20 million-to-$102 million IRA account held in a Cayman Islands account?  And to the mysterious fund, or bank account, or whatever, in Bermuda?

Just wondering.  

Malt, by the way, was the trustee of the UBS account that was disclosed in the tax return for 2010. The tax return indicated that Malt had closed the account in early 2010.

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Is Mitt Romney a 47 percenter ?

Romney paid 14.1% of his income and capital gains as tax in 2011.  But I wonder I hope I wish that all of that was capital gains tax and none of it was income tax.  What goes around comes around and he who equates paying zero federal income tax with paying no taxes had better hope that he didn’t manage to disguise quite all of his income as capital gains.

He can’t simultaneously pretend that the payroll tax doesn’t exist and that the capital gains tax does exist.

In the past, Romney paid income tax on speaker’s fees, but he spent 2011 speaking for free (or for campaign contributions).  He certainly has capital income.  But he could have sheltered it.

The fact is that his tax rate is lower than the capital gains tax rate.  He certainly didn’t declare much income.

Oh I wish I wish he declared zero.

update:  The political cartoon version by Tony Auth  via Anne Laurie at balloon juice

Not to be a dweeb, but just to be a dweeb, Tony why is that US soldier in Afghanistan firing an AK-47 instead of an m16 ?

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