In The SS TRUST Fund I conclude that even if the SSTF contained real economic assets instead of the non-marketable Treasury securities that it does, the distribution of those assets as a part of SS payments would have essentially the same economic effect as if the payments were made with a current equivalent number of newly printed paper dollars.
Ignoring the implications, please provide the logical economic reasoning required to convince me that my conclusion is wrong.
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Your “SS Trust Fund” blog entry on catallarchy.net links to and relies upon an earlier entry (“Money and Government”)in which you argue that, “as far as the economy is concerned, there is no difference between [a hypothetical government entity destroying and reprinting money, or merely holding money] … [and therefore,] if the money supply is to be used as a theoretical input in applying the quantity theory of money to help determine the objective exchange value of money (its purchasing power), then money held by the government must be excluded from the effective total money supply.”
I think your hypothetical case does not strictly lead to the conclusions you claim. The reason that the total money stock should be considered in any analysis of the PPM, is that any money that could be brought to market and traded must be counted. Now, it is conceivable that, for instance, the gold in Fort Knox be sold. I grant that it is a difficult complication that the government can print money at very low cost. However, this must be understood to act in the market as speculation by market participants about the future total stock.
Also, and more to the point of the blog entry regarding the social security trust fund, it is conceiveable that the treasury notes in the SSTF could be converted into marketable securities and sold.
Now, another comparison you make is between the options of the SSTF holding “real” assets versus treasury securities. While I don’t agree with the implicit characterization of treasury notes as “unreal”, I think the error you make concerns not counting the effect of saving the “real” asset.
That is, at time t1, gold (for instance) is taken in taxes and placed in the SSTF. Then, at time t2, this gold is distributed to someone.
The initial confiscation at t1 has the following effects: the taxpayer experiences disutility. His reservation demand for gold is now unmet, since his stock of gold has fallen, so his “supply curve” for labor becomes more forward-sloping (this assumes that the fact of taxation does not change his preferences). This produces good results for those who trade with him, since they can now get more work from him for the same income, or pay him less for the same work. Physical productivity may go up. In macro ERE terms, the total demand to hold has increased because of his loss, which means that the PPM has risen. So, as with most interventions, there are winners and losers.
You have gotten correct the effects at t2, but they are unconnected from the effects at t1 only in the case of SS payments being made from new fiat currency.
I agree with Gil and was going to post something similar when I got the time. There are all sorts of subtle differences that could make what are at face value identical systems substantively different. I’ll cover one or two other issue.
The example from your post “Money and Government” would be an example of decreasing and increasing the money supply as long as no one knows about the money. If the citizens knew about it and knew it was planned for their retirement then it would effect their behaviors. If government officials knew about the money it would effect their behavior. Thus you would have to burn the money to get the proper effect.
My position would be that it is part of the money supply if someone (or someones) has control over it. Thus, a sunken treasure does not count as part of the money supply. Whereas, a SS trust fund does not.
There is a big difference between holding the money as fiat cash or bonds, and holding it as other assets. Holding gold would have different effects than holding stocks, or private issued bonds. The very fact that the government is holding the stocks and bonds would have a different effect than if the individual citizens held them privately. These differences of effects would be felt both at the time of government hoarding and upon dishoarding.
Think about what it would be like if SS “trust fund” were actually invested in the economy. Imagine the political favors for investing in any particular company, the temptation to subsidize those investments if they were failing in the market, etc.
You also have to take into account the current price structure.
Note that on the other blog a fellow called Grant mentions about “What if they extract the money by doing odd jobs”. He is correct that this would have different effect at the time of withdrawl because the amount of “goods” would be increased by this activity whereas your original example extracts money without an increase in goods. I didn’t have time to read the rest but just wanted to point that out.
Gil,
Thanks for responding.
“…The reason that the total money stock should be considered in any analysis of the PPM, is that any money that could be brought to market and traded must be counted. Now, it is conceivable that, for instance, the gold in Fort Knox be sold. I grant that it is a difficult complication that the government can print money at very low cost. However, this must be understood to act in the market as speculation by market participants about the future total stock….”
I suspect that we are more in agreement here than not. Gold and paper money are different in this regard. The speculative regard that must be given to paper money cannot logically be different for money in the hands of government that has already been printed and money that might be printed in the future. The issue is the capability of the government to print money, not whether it was printed yesterday or might be tomorrow. As unlikely as it might be, more money may not actually be printed, and already printed money may never be distributed.
Only part of the technical money supply actually affects the PPM, i.e. that part which can be called discretionary or unallocated. When Jane Doe sets aside part of her paycheck to pay her rent at the end of the month, it no longer depresses her effective marginal utility of money used in making exchange choices for the remainder of the month. Any portion of held money that can vary without affecting the terms of subsequent exchange choices cannot be considered part of the effective money supply. This is true of money held by the government as it basically spends against a pre-determined budget. However, after the purchase is made, part of the money spent will likely end up in the possession of someone whose future exchange choices ARE sensitive to the amount of money held, and this WILL THEN be part of the effective money supply.
More later, Don
Gil,
“…You have gotten correct the effects at t2, but they are unconnected from the effects at t1 only in the case of SS payments being made from new fiat currency….”
The intent, and I think the effect, was to consider t2 as independent in all cases. This is accomplished by quantifying the payments to be of equal purchasing power at the time of distribution.
Whenever the government intervenes in the supply of money, or gold for that matter, if it is a one time event, the dynamic effects will equalize out with time as the market deals with a changed reality. Monetary inflation and deflation are no more cures for one another than expecting to undo an accident where you’ve driven your truck over someone’s leg by backing over it in reverse.
Since there is no such thing as an optimum supply of money, the fact that a 50 year earlier confiscation of money has left nominal prices different is not of any real significance to the current effect of an injection of money or goods.
“…it is conceiveable that the treasury notes in the SSTF could be converted into marketable securities and sold….”
The question of non-marketability is just part of their description, and is not of economic significance. The redemption in any case would require either new paper money or the liquidation of a real asset, or new taxes or borrowing. In any of these cases, the SS payment obligation is not met by these actions alone.
Regards, Don
Brian,
Thank you.
“…The example from your post “Money and Government” would be an example of decreasing and increasing the money supply as long as no one knows about the money. If the citizens knew about it and knew it was planned for their retirement then it would effect their behaviors. If government officials knew about the money it would effect their behavior. Thus you would have to burn the money to get the proper effect. …”
If I take government money into account in my actions, it is not logical to differentiate between money which was printed yesterday and money which may be printed tomorrow. It is the capability of government to print money that is significant. I shouldn’t logically care about government physical money, but rather about how much I judge that the government is willing to expose its officeholders to the political risk of an overexpansion of money and accountable damage to the economy.
This particular subject is about the equivalence of the effects of the ‘distribution’ of social security payments, for printed money and for other economic goods. This is a different question than that of the holding of the assets. When the government holds gold, it DOES effect the external economy, in particular the speculative value of gold. However, if the SS distributions are equalized in terms of current purchasing power immediately after distribution, the differences in asset holding effects are, I believe, eliminated in a form of ‘mark to market’ operation.
Regards, Don
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