Following the excellent J.W. Mason, here are the ideas I would like to blog about if I had more time:
- Let’s stick wealth into the utility function.
Please, it’s way past time. It doesn’t have to be along Caroll’s proposed solution, but something a bit more reflective of the hierarchy of needs would be nice. In fact, a hierarchy of needs utility function would be great in general. At the bottom, you have fixed costs: food, shelter, health care, transportation. The demand for these is more or less fixed. Above that you, have more luxuries: vacations, nice cars, nice restaurants, entertainment. After that, you are basically left with status and power — i.e. wealth.
- Capital values — duration effects (again).
Zero nominal rates are special because any asset earning an income stream is infinitely priced when rates are zero. There is a nominal singularity. Equivalently, we can think of this as a duration effect. As nominal rates fall, duration goes up. If the probability that a given (tangible) investment succeeds in earning a profit is fixed, this means that investments that deliver more of their earnings in the present (via dividend payouts) rather than in the future (via re-investment) are valued more highly. So there is a change in the relative market cap of income stocks versus growth stocks when nominal rates are cut. This would be a real effect arising from a change in nominal rates.
Assume that firm managers — the ones making actual investment decisions — are risk averse. By definition, the firm managers are more exposed to the success or failure of their investments. To carry zero exposure means that performance in choosing good investments versus poor investments is disconnected from pay. If their own risk premium, as a result of their positive exposure, is x% above the risk-free rate, but then in aggregate capital investments will earn a premium of x% above the risk-free rate. So who gets the x%? Is it equity investors, the managers themselves, the VCs creating firms and selling them into the equity markets, or (God forbid) labor? It seems to me that this is purely a question of bargaining power.
Borrowing (in our world) is against capital. Consumer debt, while possible, carries prohibitive rates and is limited by quantity. Therefore households do not
really have the consumption problem as typically described. A better description would be that they can borrow, but only to purchase other investments, not to consume. In which case the solution to the euler-equation is extremely wealth-dependent. If you have wealth, you can smooth consumption but if you do not have wealth you cannot. And I would add that the wage growth rates for most of america are not the aggregate wage growth rates at all.
I go back on line, and it seems that there is some splinter group from MMT that doesn’t like the job guarantee. Sheesh. I think what is happening here (and I could be wrong, as I haven’t been paying too much attention), is that the PKers are generally aware of the political and distributional issues behind economic theories, and so they have an additional reason to splinter off of each other. Mainstream macro aspires towards purely mathematical and scientific aspirations (while advocating proposals that wreck our lives — Friedman praising deflation, Greenspan and Summers advocating financial de-regulation, union-busting, ignoring the housing bubble, etc.). So the heterodox types are aware that their analysis has strong political and distributional consequences and bear the costs with additional disunity. Mainstream econ has agreed (more or less) to avoid these questions and externalizes the costs by dispensing bad advice.
P.S. I am a big fan of the Job Guarantee. That is a no brainer that everyone, even if they do not believe a word of MMT, should support. And it is much better than a basic income guarantee. The JG/ELR makes sense even if we were on a gold standard.