Story of Sam and Janet, with added tale of when Gus join in.Follow

Some days it's takes just a simple story to explain complex thoughts that many people have a problem grasping. Which is why I been enjoying reading the Financial conservatives favorite Boggie Man Paul Kugman blog. The following post is from a repeat of one he wrote back in Oct 2010.

I'm wondering what people here think of his explanation of why we need to spend our way out of debt?

True. But not just anybody can make analogies to very easily support any argument. gbaji fails at it all the time.

Also, inflating currency market ultimately reduces the cost of current debt at the cost of raising the cost of future debt, akin to a system wide partial default and credit score lowering, if we're in the game of making mediocre analogies.

Krugman is a fair economist. His greatest skill IMO is his ability to poetically write about Keynesian economic principles in ways designed to make them understandable to the lay person. And it seems like he makes sense. Kinda. His problem is that he doesn't really understand people and how they act in the real world. Most of the models and assumptions he's operating on don't work outside an academic environment (looks great on paper, but...).

People act in their own best interests. That's why the Janets aren't going to willingly allow their own assets to be reduced in order to help out the Sams. Krugman's "solution" doesn't really fix the problem, it's just a method to effectively force the Janets to do something to help the Sams which they would not do on their own. We even had a discussion about this a year ago or so about how inflation can eliminate debt. That's correct. But it also eliminates savings at the same time. Basically, those who have borrowed money and therefore owe money to someone else benefit from inflation. The number of dollars they owe costs them less to pay back. But those who lent the money lose to exactly the same degree. Krugman knows this. He mentions it in the article.


But the question isn't whether this will "fix" the problem of debt, but whether it's the right thing to do in the first place. He says that "economics is not a morality play", but then one has to ask why he's bothering? What, other than some moral objective, would make him want to help out Sam at the expense of Janet in the first place? He also misses (or ignores) that people other than himself know this stuff too. They know that some knucklehead like him will propose doing exactly that sort of inflationary process to "get us out of debt". And even though he comments on the whole "debt isn't really real" aspect of this, he fails to understand that the reason why debt causes slowdowns in economic activity is precisely because the people act in their own best interest and they are concerned that someone might listen to the Krugmans of the world and ***** them if they put their money into the market.


He also dismisses something very key at the start: That there is no interest from lending. That's obviously not true, but it's easier for his argument to assume an absolute zero-sum game going on. By dismissing this, he ignores the reason why Janet might still lend to Sam *and* ignores why Janet will be concerned about lending to Sam as a result of Krugmans own proposal. If Janet suspect that Gus will do what Krugman wants, then Janet has no incentive to lend money to anyone. Now, if the only purpose for money was consumption (as Krugman assumes), then that's not a problem. Janet will simply spend all her money buying stuff, so that when the inflation hits, she has very little dollar wealth, and more material wealth. Thus, she'll weather the storm just fine.

But Janet doesn't want to consume. Krugman ignores the very reason she is Janet. She knows that in the real world, if she saves and invests instead of consuming every dollar she earns, she'll build a better life for herself in the long run. Krugman's world view makes all of us into wage slaves essentially (or assumes that we'd live in a world where that's all we could ever be). Janet will fight against Gus doing what Krugman wants. And if she can, she'll move her money to another country where Gus can't reach it. And then Gus will really be screwed. And so will Sam.


It's a concept that liberal economists tend to have a hard time understanding. The harder you try to force a desired result to the game, the less likely the better players are going to bother playing. Do this long enough, and all you have is Gus and Sam. Janet will move somewhere else and play a different game. If you want to fix things, you need to let Janet succeed if she plays well. Don't handicap her because she does, or she'll stop playing. If you let her succeed, she'll lend that money. And if Sam could be more like Janet, he'll be able to get himself out of debt eventually as well. It's not a quick or easy fix, but it's the right way to do things.



He also completely ignores the fact that while money/debt is relative and somewhat illusory, there are very real economic factors (productivity for one). Keynesian's focus way to much on monetary policy, as though that's all that matters. But it really doesn't. The only thing that really matters is how much people produce. The more we produce, the better off we all are. And the unfortunate fact for Krugman, is that the Janets are critically important for production. They're the ones who provide the grease which makes the economic machine run. And their motivation for doing this *is* the return on investment. Ignoring that and/or dismissing it when discussing this is a huge mistake. If you want economic growth, you need to encourage Janet to invest more money. To do that, you want to do the exact opposite of what he proposes.


But it's not a shocker that he pretends that consumption is the only driver to economic growth.

Well, assuming his suggestion works as he believes it should, he isn't helping Sam at the expense of Janet, he's helping them both out, though slightly unevenly.

Lets try this. Sams of the retailers and manufacturers of goods and services. Janets are Banks, Gus still is the goverment and we add Advage Joes and Jane's are the worker bees.

Now we have worker bee Joe, who would love to buy things from the Sams, but Sam can't get a loan from Janet to pay Jane. So Sam lays off Jane and suddenly Joe feels he may be next and won't buy anything that the Sam's sell. Joe then loses his job and Gus is force to give both Joe and Jane unemployment payments by going into greater debt to the Janet's. So Sam, Joe and Jane, are stuck along with Gus into suffering for all the Janet's though they are only 1% of the total population.

How will Janet fee if the Joes, and Janes, suddenly with Sam's support, rise up against them by electing a new Gus, who listens to them not her and loan the Sam's the money needed to rehire Joe and Jane, who then pay back Gus and not Janet.

It doesn't work though. That's the problem. It doesn't work because it requires perfect prediction of the actions and reactions of all the players in the economy *and* the ability to shift from high to low inflation on a dime. We tried this before in the late 60s and 70s. It was a disaster because it required constant shifting through cycles, but each one got more out of control than the one before, with wilder swings of effects. Each attempt required a successively larger correction in the other direction. It was only when we stopped trying to force monetary flow and let the natural corrections happen (ie: don't have Gus fiddle with it) that the economy finally recovered.

The reason it doesn't work is because Janet isn't going to lend to Sam as long as she knows that she'll lose money doing it. Thus, the part that Krugman glosses over is the requirement that after you turn the mountain upside down so that the river flows uphill for awhile, you have to flip it back. And this ain't so easy to do. The other problem is that Janet is a person, not a robot. She's going to remember what just happened and that she just got screwed. So even if you can flip things around and make it profitable for her to lend again, she's going to be hesitant to do so. You have to really make things worth her while. But that means you re-create the bubble conditions which got you into the mess in the first place.

Rinse and repeat a few times and your economy starts just spiraling into the mud.



Yes. And that's his starting flaw. He believes that economic growth comes about as a result of consumption and *only* as a result of consumption. Thus, he believe that by artificially increasing the amount of consumption, you can increase the economic growth. But it doesn't work that way. While consumption and growth are related, it's only "natural" consumption which helps spur the growth. They are both affected by other factors. If consumption is up because your workers are more productive and confident about their economic outlook, then growth will result. But that's because the economic conditions are right for it. Increased consumption is an effect of a healthy economy. It has a feedback effect, but it isn't a cause by itself.

Unfortunately for Krugman's theory, the right economic conditions are inevitably when those who are producing the goods are able to make a profit doing so. This is the same whether we're talking about someone making TVs, or building homes, or lending money. If you give them a profit incentive to provide a better deal for their customers than their competitor, they will find ways to do so, and we'll all be "richer" down the road. The consumer gets a better product at a lower price *and* is more likely to be gainfully and securely employed, and the producer earns greater profits as well. Everyone wins.



Except that it never ever actually works that way. We can do the "make some people relatively poorer and others relatively richer", but we never manage to get to the point of it making everyone richer on balance. Nothing in his plan increases total productivity of the economy as a function of those operating within it. Nothing. What it does instead is provide a disincentive for those who produce to do so.

The nearly universal net effect of that approach is to make everyone poorer on average. Enough people will feel like they are richer for awhile that you can get some people to buy into it. But in the long run, and on net, the whole is less than it would have been otherwise. It's happened every single time they've actually employed that theory. Like I said. This isn't new. There's a reason people dismiss what Krugman is arguing for, and it's not because everyone else is just a bunch of ignorant people who don't understand economics. People dismiss it because we have tried this before. Exactly this. It was a universally clear disaster. Now, folks in his school, for ideological reasons can't admit it. And lots of politicians on the left like to claim it'll work (again for ideological and political gain), but most of those people are smart enough to know not to actually implement it. Talk about it? Sure. Use it as a political tool to try to get people to support something related? Absolutely.'


But not one actually wants to do this. Even those who say they do know it's a bad idea. Even Krugman probably knows it's a bad idea. But he can make money saying that we should do it, so that's what he does. It's a good deal for him as long as no one actually does what he says. Which has got to be an odd way of going about things, but that's what you do when you realize that you're a well known advocate for an economic theory that doesn't work and you know that it doesn't work. You sell books talking about how great it would be if only someone would do the thing anyway.

Edited, Jun 8th 2011 6:25pm by gbaji

Hello and welcome. Next time, don't take over someone else's account, just start your own. Now, be polite and introduce yourself to gbaji.

I think I might be wrong about something. I tend to assume that people disagree due to differing underlying assumptions--different knowledge and experiences--but that everyone understands the forms of an argument and there is never contention over what the exact same set of facts would mean.

Refinancing is just renegotiating the cost for the money lent. It doesn't affect the amount of debt per say, unless for instance, you purchase more loans up to your income value.



I can agree with a comfortable level, but not the same income level as the working class unless it's for a temporary period of time. incentives, etc.



As long as tax rates are not 100% (or near 100%) and inflation remains predictable, lending institutions can make money. The rates will adjust themselves, to correspond with costs, risk and growth, but they will still be profitable.

You're putting in an awful lot of effort discussing something meaningless then.

But Paul just wanted to make a Sam and Janet Evening, reference.

It makes current loan products run at near zero, or negative, but does not prevent future loan products from being profitable. Rates will adjust to meet financial realities. What would be even more likely to occur is more adjustable rate, short term financial products being sold instead of flat rate, long term, as well as consumer side multilevel products.

I would prefer a different solution, where tax rate adjustments would not outright destroy debt, but rather incentivize economic movement rather than incentivize currency pooling.

Edited, Jun 9th 2011 3:17pm by Timelordwho