Get Your Gaman On

The other day, I quoted Howard Davies explaining the big macroeconomic advantage of a country like Latvia over a country like Greece:

Latvia could make austerity work because they’d been in the USSR for 50 years, they were used to unpleasant and dramatic things happening. The population would accept incredible privation. 

As a sort of followup, here’s a letter from one Mr. Zachary Pessin, in yesterday’s FT:

I have often thought that acclimatisation to a depressed economic environment is a state of mind that the Japanese have adjusted to… I first went to Japan in 1995 to live for a semester, then lived there full-time from 1999 to 2002. I have been every year since, save the last two. So, for 15 years I have seen how a generation of Japanese lost pride in their country, lost hope of an inspiring life and came to terms with the drudgery.

“Yikes,” you’re probably thinking, “Lost pride, lost hope and drudgery? That sounds awful — we’d better figure out fast how to avoid it.” Well, if that is what you’re thinking, then you’d better think again. Losing hope is the whole point. The Japanese, Pessin says, are

a decade ahead of us in dealing with the world we now live in. … Perhaps you know the Japanese term gaman, which is effectively translated as “to persevere valiantly through pain or difficulty; stoic determination”. This too will be another import from Japan, because they have been living in the House of Gaman for almost 20 years now, and we Americans are just arriving. And make no mistake, the deleveraging that must continue across the US economy for at least another five to eight years at best will keep us walking the precipice of deflation for at least that long. There will be a need for gaman.

I don’t know how much pain or drudgery is in store for Zac Pessin personally, given that he is President and Chief Executive of the Distributed Capital Group; you can find him here crowing about double-digit returns on his investments in sub-Saharan Africa. But it’s nice of our masters to let us know about the sacrifices we will be expected to make on their behalf.

Those who take the meat from the table
Teach contentment.
Those for whom the taxes are destined
Demand sacrifice.
Those who eat their fill speak to the hungry
Of wonderful times to come.
Those who lead the country into the abyss
Call ruling too difficult
For ordinary men.

The Capitalist Wants an Exit, Facebook Edition

In today’s FT, John Gapper reads the Facebook prospectus. [1] And he doesn’t like what he sees:

There is still time to cancel its IPO and the filing provides plenty of reasons why it ought to… It begs a question if a company trying to raise capital from investors cannot think of anything to do with the money. Yet this is Facebook’s predicament – as it admitted in its filing on Wednesday, its cash flow and credit “will be sufficient to meet our operational needs for the foreseeable future”. … So what are its plans for the additional $5bn it may raise from an IPO? It intends to put the cash into US government bonds and savings accounts…

Gapper, looking at the IPO from the perspective of what it does for Facebook the enterprise, understandably thinks this is nuts. Why incur the costs of an IPO and the ongoing requirements of a public listing, if you have so little need for the cash that you are literally just planning to leave it in a savings account. But of  course, the purpose of the IPO has nothing to do with Facebook the enterprise.

Given that it doesn’t need capital…, why the IPO? … Facebook’s motivation is clear: to gratify its venture capital investors and employees. This is not a cynical statement; it is a quote from Mr Zuckerberg’s letter to new shareholders. “We’re going public for our employees and our investors,” he writes. “We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment.”

In terms of Silicon Valley’s logic, it makes sense… For the company itself, however, the logic is far less obvious. As a corporate entity, Facebook could clearly thrive without seeking new shareholders, whose main purpose is to allow the insiders to get rich and eventually exit.

 As I’ve written before, the function of the stock market in modern capitalism is to get money out of corporations, not put money into them. The social problem they are solving is not society’s need to allocate scarce savings to the most promising investments, but wealth-owners desire to free their fortunes from particular firm or industry and keep them as claims on the social product as a whole.

[1] It’s been said before, but can I just point out how unbearably stupid is the FT’s policy of actively discouraging people from excerpting their articles?

It’s Not About the Deficits

I was going to write something about tonight’s debt-celing deal. “Reduces Domestic Discretionary Spending to the Lowest Level Since Eisenhower,” says the White House in triumphant title case. Yay! No more EPA, no more civil rights enforcement, no more federal spending on housing or child care or clean energy. They didn’t need them in the Eisenhower era, so why should we?

It makes me mad. And it’s not good to write when you’re mad. As the man says,

Hatred, even of baseness,
Distorts the features.
Anger, even against injustice,
Makes the voice grow hoarse.

So instead of this appalling deal, let’s talk about the trajectory of the debt historically. Specifically, this very interesting take from the always-interesting Willem Buiter:

The last time the US sovereign radically lowered the ratio of public debt to GDP was between 1946 (the all-time high for the Federal debt burden at 121.20 percent) and 1974 (its post-World War II low at 31.67 percent). Arithmetically, of the 89.53 percentage points reduction in the Federal debt burden, inflation accounted for 52.63pp and real GDP growth accounted for 55.86 pp. Federal surpluses accounted for minus 20.51pp.

Longer average maturity and occasionally sharp bursts of inflation helped erode the real burden of the Federal debt between 1946 and 1974, but so did financial repression – ceilings on nominal interest rates. … Until the Treasury-Federal Reserve Accord of March 1951, the Federal Reserve System was formally committed to maintaining a low interest rate peg on Treasury bonds – a practice introduced in 1942 when the Fed pegged the interest rate on Treasury bills at 0.375 percent. This practice was continued after the war despite a 14 percent rate of CPI inflation in 1947 and an 8 percent rate in 1948. The rate on 3-month Treasury Bills remained at 0.375 percent until June 1947 and did not reach 1.40 percent until March 1951.

Even after the Treasury-Federal Reserve Accord, there remained financial repression in the form of ceilings on bank lending and borrowing rates like Regulation Q, which prohibited the payment of interest on demand deposits. Without financial repression and with a relatively short average debt maturity, it would take high US rates of (unanticipated) inflation to bring down the burden of the debt appreciably.

This is the key point that comes out of the relationships that govern the evolution of the federal debt: Deficits/surpluses are just one factor, along with growth rates, interest rates, and inflation, that determine the trajectory of the debt. There’s no a priori reason to think that long-term shifts in the debt-GDP ratio are more likely to come about through changes in the government’s fiscal stance rather than one of the other three variables; and there’s historical evidence that in practice growth, inflation and interest rates usually matter more. At some point I’ll do an exercise similar to Buiter’s. But in the meantime, I’m happy to take it from him — the dude is the chief economist at Citibank — that, in the the postwar decades, growth and inflation contributed about equally to the very large reduction in the US debt-GDP ratio, while fiscal discipline contributed less than nothing.

So if you wanted to follow the postwar US in reducing the debt-GDP ratio over a long period — it’s not entirely clear why you would want to do this — you should be thinking about faster growth, higher inflation and policies to hold down interest rates (aka “financial repression”), not higher taxes and lower spending. Anyone who says, “The growth of the debt is unsustainable, therefore we need to move the federal budget toward balance” doesn’t know what they’re talking about.

Or, they’re talking about something else.

You can interpret Obama’s relentless pursuit of defeat in the budget-ceiling fight in psychological terms. But it seems more parsimonious to at least consider that he’s simply an honest servant of the country’s owners, who see the crisis as a once-in-a-lifetime chance to roll back the social wage. Raising the Medicare eligibility age wouldn’t have done anything much to reduce the long-term debt-GDP ratio. But it definitely would reduce the number of people with Medicare.

UPDATE: This post is evidently the kind of thing Matt Yglesias has in mind when he says he’s

frustrated by lefties who seem to see the unprecedented Republican obstruction the President is dealing with as part of an 11-dimensional chess game through which Obama “really” wants his progressive initiatives to be frustrated at every term. 

 But this gets the n-dimensional chess metaphor backward, I think. The whole reason people claim Obama is playing a deeper or more complex game is to argue that even when his actions don’t seem to get him closer to his supposed goals, he really is getting there but by some devious route. But if your theory, as here, is that the actual outcome was the intended outcome, you don’t need to assume any deviousness. If I sacrifice my knight for no apparent gain, then maybe I have some complex plan you don’t see — that’s the extra dimensions. But if I’m playing to lose, no extra dimensions are needed to explain my bad move. Yglesias’s frustration here would apply to lefties who argued that Obama’s big progressive victories were really serving a conservative agenda. And there are certainly people who would argue that — if there were any big progressive victories to argue about.