The Slack Wire

Who Gets the Surplus?

The post below, on price effects and the case for public provision, left out one of the articles that got me thinking about these questions in the first place: Robert Gordon’s Has the Rise in American Inequality Been Exaggerated? The piece makes a number of provocative claims about inequality, some convincing, some less so. But the interesting bit, in terms of the price effects argument, is on college wage premium and geographic variations in the cost of living:

A stunning new data set [on geographic price-level differences] undermines our previous conclusion (2008) that real income per capita has increased significantly in superstar bi‐coastal metropolitan areas. … Without adjustment for price level differences, per capita incomes in Massachusetts and New York are respectively 26.1 percent and 20.0 percent above the national average. With correction for regional price disparities, these percentages drop to 10.7 and ‐0.2 percent respectively.

In an important and related piece of research, Moretti (2008) notes that college graduates disproportionately cluster in metropolitan areas that have a high cost of housing. He finds that fully two‐thirds of the previously documented increase in the return to college between 1980 and 2000 vanishes when he corrects for differences in the cost of living across metropolitan areas. His cross‐area price measures are comprehensive and ingenious and take account of differences in housing costs, housing quality … and price differences of non‐housing goods… Moretti then asks why college graduates sort into expensive cities. He carries out an empirical analysis that distinguishes between supply and demand factors and concludes that college graduates move to expensive cities because jobs for college graduates are increasingly located in those cities, not because they particularly like living in those cities. [my emphasis]

Gordon goes on to suggest some reasonable caveats to these findings, but whether the exact figure is two-thirds or something lower, the point remains that the supposed education premium can often only be fully realized in cities, where a large part of it is claimed by urban landowners rather than the person with the education.

And this is the fundamental point: We always have to ask, where is the market power? Who gets the rents? Wherever the surplus originates, where it ends up depends on who has the monopoly — who controls something in inelastic supply.

This is an important question for policy, as in the post below. But it’s also something you’ll find union and community activists thinking about. If you’re trying to put pressure on the boss, you better make sure it’s the boss with power; and that means the one who controls the relevant scarce resource. A couple decades ago, that was often a manufacturer, while the retailers downstream were dispersed in a competitive market. Now it’s often the other way round.

Public Options: The General Case

Last week at Crooked Timber, there was an interesting discussion of for-profit diploma mills. Short version: They exist to suck up federal loan and grant money.

Here, I want to generalize that discussion. Under what conditions does public spending on higher ed increase the number of people in college, and under what conditions does it just enrich Kaplan and the Harvard endowment? More broadly, it seems to me that the price effect of subsidies is a neglected argument for direct provision of public goods.

Formally, a subsidy is just a negative tax, and like a tax, its incidence depends on the relative elasticities of supply and demand. [1] If supply is less elastic than demand, most of the cost (of a tax) or benefit (of a subsidy) will fall on the producer; if demand is more less elastic, most will fall on the consumer. In the extreme case of perfectly inelastic, i.e. fixed, supply, taxes and subsidies will end up being simply transfers from, or to, producers, with no effect on consumers at all.

This argument got brought out during the 2008 presidential campaign to explain why proposals to deal with high gas prices by cutting the gax tax were foolish: With the short-term supply of gas highly inelastic, almost the whole tax fell on producers. As long as refineries were running at full capacity, changes in the gas tax would not affect the price at the pump.

So far, so familiar. The interesting question is what happens when we generalize this logic to other areas, like higher education. Imagine a state that’s considering a choice between spending, let’s say, $1 million either subsidizing its public university system, enabling it to keep tuition down, or as grants to college students to help them pay tuition. On the face of it, you might think there’s no first-order difference in the effect on access to higher ed — students will spend $1 million less on tuition either way. The choice then comes down to the grants giving students more choice, fostering competition among schools, and being more easily targeted to lower-income households; versus whatever nebulous value one places on the idea of public institutions as such. Not surprisingly, the grant approach tends to win out, with an increasing share of public support for higher education going to students rather than institutions.

But what happens when you bring price effects in? Suppose that higher education is supplied inelastically, or in other words that there are rents that go to incumbent institutions. Then some fraction of the grant goes to raise tuition for existing college spots, rather than to increase the total number of spots. (Note that this must be true to at least some extent, since it’s precisely the increased tuition that induces colleges to increase capacity.) In the extreme case — which may be nearly reached at the elite end — where enrollment is fixed, the entire net subsidy ends up as increased tuition; whatever benefit those getting the grants get, is at the expense of other students who didn’t get them.

Conversely, when public funds are used to reduce tuition at a public university, they don’t just lower costs for students at that particular university. They also lower costs at unsubsidized universities by forcing them to hold down tuition to compete. So while each dollar spent on grants to students reduces final tuition costs less than one for one, each dollar spent on subsidies to public institutions reduces tuition costs by more. [2]

The same logic applies to public subsidies for any good or service where producers enjoy significant monopoly power: Direct provision of public goods has market forces on its side, while subsidies for private purchases work against the market. Call it progressive supply-side policy. Call it the general case for public options. The fundamental point is that, in the presence of inelastic supply curves, demand-side subsidies face a headwind of adverse price effects, while direct public provision gets a tail wind of favorable price effects. And these effects can be quite large.

This is exactly the argument of the Austan Goolsbee paper cited in the post below. As he shows, capital goods (and the scientists and engineers responsible for them) are in very inelastic supply, especially at time horizons of a few years or less. So almost the entirety of subsidies to research and development is collected as rents by the suppliers of these goods; actual R&D activity increases by little or nothing. Of course Goolsbee, like most economists who’ve studied this, only considers the negative side, the case against subsidies. But the exact logic that leads him to conclude that the impact of subsidies for R&D buyers is dampened by price effects, should lead him to conclude to that the impact of direct public provision (e.g. training scientists and engineers) would be multiplied by them.

It’s easy to think of similar cases — housing would be another obvious one, or the original public option, health insurance. But let’s consider an example of the same logic in reverse: wage subsidies like the EITC. Here, we want to subsidize the “producer” (the worker) while it’s the “consumer” (the employer) who may have the market power to claim the subsidy as a rent. What’s nice about this example is that we have a good study by Jesse Rothstein that estimates the size of the price effect. [3]

Rothstein starts by observing that most estimates of the EITC’s impact assume an infinitely elastic demand for labor, or in other words, a fixed wage. (This is equivalent to the assumption of elastic supply in the cases above.) As he shows, once we allow for realistically inelastic labor demand, a very large fraction of EITC payments is captured by employers rather than received by workers. Even worse, ineligible workers also see a reduction in wages, since they are competing with the EITC-subsidized ones.

When I allow for a finite demand elasticity, … I find that the EITC produces sizable reductions in equilibrium wages that offset many of its benefits to low-skill workers. With my preferred parameters, the net-of-tax incomes of women with children rise by only $1.07 for each dollar spent on the program. Moreover, this is accompanied by a decline of $0.34 in the net-of-tax incomes of women without children… The contrast with the [Negative Income Tax] is dramatic. The NIT imposes positive tax rates on earnings, leading to net reductions in labor supply among eligible women and thereby to increased wages. A dollar of government expenditure on the NIT produces a $0.97 increase in the after-tax incomes of women with children and an increase of $0.42 for women without children.

In other words, the same dollar spent on a negative income tax (or public employment program, tho Rothstein doesn’t discuss it) results in twice as large an increase in the wages of low-income workers as a dollar spent on the EITC. And even the gains that do come from the EITC depend on increasing the hours worked by the recipients, which is a cost; those hours would otherwise not be wasted but used for “consumption of leisure” (Rothstein’s unfortunate economism) or, more realistically given that the main recipients of the EITC are single mothers, for child care. Taking the additional working hours into account,

a dollar of EITC spending produces net increases in the welfare of women with children with cash value of only $0.83… Employers of low-skill labor capture $0.36 via reduced wage bills, while the welfare of (EITC-ineligible) childless women falls by the equivalent of $0.18. Moreover, this obscures the even worse welfare consequences for single mothers, the primary group targeted by the EITC. Fully 55% of the marginal EITC dollar given to this group is captured by employers through reduced wages, and single childless women lose almost exactly as much as single mothers gain. Again, the NIT offers a dramatic contrast: The welfare of women with children rises by the equivalent of $1.32 and that of women without children by $0.23, with transfers of $0.55 from employers to their workers magnifying the direct transfer from the government.

So in this fuller analysis, a dollar paid directly to low-income households goes three times as far as a dollar of wage subsidy. And the market power of employers, while often substantial, is almost certainly lower than that of suppliers of goods like higher education or urban housing. So in those cases we should expect price effects to be even larger.

This argument seems straightforward and logical, and has some empirical backing. But it’s only very rarely made in support of direct provision of public goods. One can speculate why that might be. But the important thing is those of us seeking an incremental de-marketization of society, should recognize that the logic of the market is often on our side.

[1] For the hypothetical non-economist reading this, elasticity means how much one number changes in response to a change in another. When we say elasticity of supply or elasticity of demand, we implicitly mean elasticity with respect to price. So for instance, a demand elasticity of 0.5 means that if the price rises by 10%, demand will fall by 5%.

[2] The case is slightly complicated by the fact that higher education is not only rationed by price. So a subsidy to students has the additional effect of making colleges more selective by academic criteria, while a subsidy to institutions makes them less so. One could argue either side as far as which of these effects is desirable, but either way they don’t change the basic picture in terms of cost and access.

[3] Thanks to my friend Suresh for pointing me to this paper. He also suggests that “there is a general Polanyi-esque point here about how land, labor, and capital have ‘supply’ curves that don’t respond generally to short-term prices terribly well.”

Goolsbeeism

Obama to propose $100 billion permanent extension of research and development tax credit.

Meanwhile, speculation is growing that Austan Goolsbee is the favorite to replace departing CEA chair Christina Romer.

Looks like Goolsbee is the perfect pick to succeed Romer — his advice is already being ignored even before he’s been hired.

From his Investment Tax Incentives, Prices, and the Supply of Capital Goods:

Although there appears to be an abiding faith among policy makers that tax incentives can influence the investment decisions of firms and serve as a tool for stabilizing the economy, empirical evidence for the connection is weak. Econometric research has commonly found that tax policy and the cost of capital have little effect on real investment. Economic theory predicts that the marginal user cost of capital should be the primary determinant of investment demand but actual estimates of the price elasticity of nvestment … mostly lie between zero and -0.4… The evidence that investment is only modestly responsive to price has been one of the most robust findings of the empirical investment literature…

In addition to their large revenue costs, investment tax subsidies may give large, unintended rents to capital suppliers without increasing real investment until several years later because of the short-run asset price responses of capital goods. For policy makers interested in using tax policy to stimulate investment or, especially, to smooth business cycle fluctuations, the results are not promising.

[Down payment on a long analytic post coming along real soon now.]

The Wheels of Justice Do Grind Slow

I’ve had only had one job that paid minimum wage (or minimum plus 50 cents, as I recall.) That was as a bookstore clerk at Shakespeare & Company on the Upper West Side in the mid-90s.

The 85th St. bookstore was the flagship of the Shakespeare operation, which at that time included four Shakespeare and Co stores, two or three Murder Inks, and I think one or two other literary bookstores. It was generously, maybe from a strict business standpoint, overgenerously, staffed. We did spend a lot of time reshelving.

What’s memorable about the place is how everybody there was a book person. Some of us wanted to write fiction, some essays, some plays (that was kind of the store’s thing). Some wanted to work at publishers, some — for serious — were into the printing and bookbinding side of things. Most of of us wanted to write book reviews; some — well me, at least — left to edit the book review section of a marginal left-wing magazine. The book culture of the place was smoothly continuous from those of us behind the registers to the buyers to the mysterious owners upstairs. When publishers’ representatives came by we all met them, as a matter of course: they were selling to the store. I remember one of them spinning out this mystery novel she was going to write about a serial killer knocking off Granta‘s best young American novelists one by one; it seemed like a pretty good joke.

They used to have contests, beginning of the week, pick a book, whoever sells the most of it wins, well, I don’t remember what the prize was. Anyway I took it seriously; books I thought people ought to read. Oh hey, you’re interested in history, do you know Eric Hobsbawm? Oh, Jared Diamond, sure, but you know Plagues and Peoples covered a lot of that same ground? It was a point of pride.

And we hated shoplifters. There was one fellow who was a regular — he was obviously getting instructions on what specific resaleable books to steal. One time we’d had enough — it so depressing when two hours before closing there’s no one in the store except the professional shoplifters — and when he made his run for it we didn’t just accept the alarm-went-off;-oh-well as always. We took off after him. Why? it wasn’t our money. But we did: we caught him: or rather, like a lizard’s tail, we caught his bag, full of stolen books and hypodermics.

I first encountered the word “snarky” working at that bookstore. It was in a New York Magazine article about what was wrong with us, what was wrong with independent bookstores in general, why chains were the future. People wanted an antiseptic book purchasing environment, not all those book people telling them what to read. Whatever, we thought, all separately wondering how to incorporate “snark” into our new novel. But we should have seen the writing on the wall.

When the Barnes & Noble opened at 66th St., that was bad. When the next one opened at 82nd and Broadway, that was the end. This was not long after I started; surrendering, they had a going-out-of-business sale. And that was even worse. There was a brief false summer as the locals — our former customers! — picked over the stock that was suddenly attractive at 40% off; but as soon as the owners unwisely tried to reopen at full price those same customers tripped over each other rushing back to the lattes at Barnes & Nobles.

For the record, I suspect that if the Shakespeare & Co. guys could have competed with Barnes and Nobles at their scale, they would happily have done so. They weren’t doing it for the sake of small. Still, what matters is that you can get the books you want, and there it’s all progress, right? From your point of view as a consumer, probably, sure. I’m prepared to argue that you lose something when there are no more bookstore clerks like me, trying to sell you on William H. McNeill. On the scale of things it’s a small loss, but it’s a retreat from the world as it should be.

I don’t know if Shakespeare hired us because no one but book people would work for what they would pay, or because they had some vague idea that their clerks would rise to manage their little empire or simply because they were book people themselves. But hire book people they did. Within their world, you could imagine that it was a natural progression from clerking at a bookstore, to buying for a bookstore, to editing novels, to writing novels. As in a civilized world it will be.

Which is all to say: Fuck you, Barnes & Noble. I hope all of your stores close.

Kline

I know nothing about visual art. So all I can do, when I find myself in a museum, is to walk briskly from room to room — ah, Miro! ah, Johns! ah, Giacometti, the world’s most expensive sculpture! — until I find something that speaks to me. As today in LA’s Museum of Contemporary Art, walking briskly, until-

What spoke to me today, was half a dozen large canvasses by Franz Kline, who I don’t believe I’d heard of before. I walked through the whole gallery three or four times, each time more convinced that these were the only things there really worth looking at. Black and white abstract geometric paintings. The whole style inspired by the guy’s visit to de Kooning’s studio with some representational pencil drawings, which the master encouraged him to blow up to extreme magnification. An ah ha moment for Kline apparently. From then on these black and white paintings that could be a zeroed-in-on detail from a pencil drawing.

What you learn, when you are beginning to paint or draw, is that you have to stop seeing the thing in front of you as a familiar abstraction — a chair, a woman, an elephant — and learn instead to see what you see: the contour, the shadow, the volume, the tone. This is what Kline’s paintings do. Without representing, necessarily, any particular object, they use the language of representation. You see the process of looking without ever seeing the thing being looked at.

What I mean is there’s a visual vocabulary we use to depict three dimensional objects and spaces on a flat surface. And Kline — not uniquely, but more than most abstract expressionists — knows how to use that vocabulary even without any specific referent. So you have the sense of looking at a thing — an object, a building, a place — without the image ever resolving into anything in particular. (Like a constellation.) It challenges you, is there something in this farmhouse in the snow, in this knife or bridge or flower, that affects you visually directly, without some sentimental association? If there is, whatever there is, that’s what these paintings contain.

Nonoverlapping Magisteria

This looks like an interesting book.

She’s arguing, as I understand it, that science cannot be ontologically complete, that it always coexists with other kinds of truth:

There is always ‘room left’ for alternative ontologies in cognitive-intellectual space, a realm that is neither cramped nor finite but, on the contrary, appears – both historically and for humans individually – exceedingly and perhaps infinitely elastic. … For many people … accepting, applying, and/or producing scientific knowledge and being religiously observant are no more in conflict than would be, for any of us, both playing the violin and practising law.

Interesting, maybe, as a bare assertion; more for the particular argument. Let’s say, on the one hand, that we accept a scientific view of religion. It’s a pattern of human behavior created by the interaction of our biological brains and our social environment; the potential for it was favored by its usefulness to our savannah ancestors and its actual existence by its usefulness for some social-political purpose today. Group cohesion then, the ploys of the Jesuits now, something like that.

The problem with this isn’t that it isn’t true; it is true, within some limits. The problem is that it explains too much. Every human belief system is the product of our Darwinianly-evolved brains and our social environment. You can fully explain religion, in principle, by a combination of genetic predisposition and practical advantage, but you can just as fully explain science, or anything else that people do. After all, we’re natural beings in the natural world; everything we do has a natural explanation. The most you can say in this framework is that science has displaced religion from many areas of life because of its greater utility; but by the same token you have to concede that religion has held on in other areas thanks to its greater utility. A purely naturalistic account of human beliefs has no place for them being true or false. People adopt them all for the same kind of reasons.

(Sraffa to Wittgenstein: “If the rules of language can be constructed only by observation, there can never be any nonsense said. This identifies the cause and the meaning of a word. The language of birds, as well as the language of metaphysicians can be interpreted consistently in this way. It is only a matter of finding the occasion on which they say a thing, just as one finds the occasion on which they sneeze.”)

On the other hand, almost anyone who cares about science prefers to believe it corresponds to some external truth about the world. One can’t object to this (Thomas Nagel, in this review, accuses Smith of objecting, but I suspect he’s got her wrong), but it’s not consistent with science being ontologically complete. A scientific account of scientific beliefs can offer various reasons for why people happen to hold them, but it has nothing to say about whether they are true. You may believe, if you like, that Betelgeuse would be 630 light years from the Earth whether anyone had measured the distance or not; but in a naturalistic account of why people do believe that, it all comes down to the measurements; independent of those the “objective” distance has no effect on anyone.

Put it another way: science offers heuristics for sorting beliefs into relatively confirmed and relatively falsified piles; but it doesn’t, and can’t, tell you why should prefer to hold the beliefs in the confirmed pile. Oh, say the new atheists, because they’re more useful. But right there they’ve conceded that if someone finds some social or psychological advantage in being religious, that’s as justified as anyone’s belief in science. To get along with your neighbors, to be free of angst about The Point of It All: aren’t those useful too?

Galileo is a hero of science and of civilization for eppur si muove. But what’s he saying? With respect to the heavens, he’s asserting that the demands of reality take precedence over what we think is right. But with respect to the earth, it’s just the opposite: He’s insisting on the priority of abstract right over concrete reality. After all, if he applied the same unromantic empiricism to his life as he did to his astronomy, he’d take one look at the instruments and conclude that practical experimentation revealed that the Earth goes around the Sun. (As did Brecht’s Galileo.) A belief that’s liable to get you tortured to death is pretty clearly less practically useful than a belief that leaves you torture-free. Galileo’s insistence that one should believe in science, come what may, is entirely unscientific, and — Brecht struggled with this — so much the better for Galileo.

The thing about the contradiction between the scientific method and belief in science is that it can be resolved either way. Nagel thinks that Smith is trying to apply the naturalistic, constructivist view of human beliefs “all the way down”. Me, I prefer to think she’s showing that’s exactly what you cannot do.

Blogs

In a fit of internet narcissism, I recently installed Google Analytics. Turns out this blog gets about 25 visitors a day, which is at least 20 more than I would have guessed. At least half come from Crooked Timber, presumably clicking on my “Lemuel Pitkin” link. So evidently, if I want more people to read this stuff (do I?), I need to find more blogs to comment on. But which?

I used to be a regular at Lawyers Guns and Money, but I can’t deal with Charli Carpenter. Apostropher is dead. The Poorman might as well be dead. Three Quarks Daily is ok but no one comments there. (Why?) Unfogged is too big a commitment. So is LBO-Talk (rocking it old-school mailing-list style), altho I’m tempted. Commenting on obscure blogs that no one reads is a mitzvah but, well, no one reads them. How about the heterodox econ blogs? Real World Economics Review? oh, but there are so many cranks. Angry Bear? Bruce Webb is good, but the rest of them… DeLong? I could comment on DeLong, but I’d get very angry. EconoSpeak? I like EconoSpeak, I was reading it back when it was MaxSpeak. (I got the original email announcing the creation of MaxSpeak, yo.) But it doesn’t feel like a community there.

It’s a mystery why there are so few left-of-liberal blogs. (It’s because the leftists are all too busy doing serious organizing work. Ha.)

Got to start a new group blog, clearly. Any of you 25 interested?

HAMP

I have nothing to add to what Atrios, Felix Salmon, my friend Mike Konczal, and others have to say. I just need to register my disgust with the Obama administration.

Steve Randy Waldman (via):

On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that … even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least. There were murmurs among the bloggers of “extend and pretend”, but I don’t think that’s quite right. This was extend-and-don’t-even-bother-to-pretend. The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. … I believe these policymakers conflate, in full sincerity, incumbent financial institutions with “the system”, “the economy”, and “ordinary Americans”.

I want to write something longer, soon along the lines of that last sentence. It’s a good heuristic that when seemingly intelligent people keep doing things that fail to achieve their stated goals, their actual goals might be different from their stated ones.

In economic-policy debates, we tend to operate with the convention that maximizing economic growth — with perhaps some consideration of distribution — is the only objective, and we’re only disagreeing about means. But whose objective is that really? Ok, it’s society’s, insofar as society is embodied in the state; which is to say, in conditions of total war. (Another future post: All Keynesianism is military Keynesianism.) But outside of the case of a broadly-supported government fighting for national survival, the interest of “society” is seldom operational. Especially in a hyper-pluralistic polity like the US, what you have are broader and narrower particular interests. And when it comes to economic policy, the interest that matters is the interest of owners of financial assets.

You know the old joke of adding “in bed” to the end of fortune-cookie fortunes? I’ve increasingly felt the same kind of thing works for economic writing, especially financial journalism: Anytime you see a word implying a value judgment (good, bad, disaster, opportunity, frightening, promising), you just need to add “for bondholders” for it to make sense.

This is all more or less abstract and theoretical. But not with HAMP. There, the government of hope and change is willing to say right out that they don’t care about people losing their homes, as long as the banks don’t lose money. That it’s true is bad enough, that they’re willing to say it is worse.

As I said, at some point soon I want to write something more substantial about how things look when we take the bond’s eye view. But I can’t right now. Right now I’m so angry I can hardly breathe.

What’s the Difference Between Money and Debt?

(An idea I’ve been playing with lately, just wanted to get something on virtual paper.)

Currency, dollar bills, are liabilities of the Federal Reserve. Federal debt is a liability of the US Treasury. Leaving aside some deliberate obscurity around the precise legal status of the Fed, both are liabilities of the US government. Of course there are various formal differences, but economically, wouldn’t it be simplest to regard them the same?

In other words, while we are taught that there are no close substitutes for money but that government and private debt are substitutes for each other, wouldn’t it be better to say that money and government debt are substitutes for each other and both are complements for private debt? More concretely, given lenders’ need for liquidity, an increase in their holding of government debt may make them more willing to hold private debt, i.e. under some circumstances, an increase in government debt could put downward rather than upward pressure on interest rates further out the yield curve.

The canonical case is the recent financial crisis. As I’ve discussed before, there’s an argument (which gets at least some support from non-crazies like Perry Mehrling and Brad DeLong) that insufficient federal debt contributed to the crisis, by creating demand for equivalently liquid but higher-return substitutes, thus fueling the financial innovation of the 1990s and 2000s. Of course this dynamic would have increased the availability of credit for private borrowers whose liabilities were (a) seen as implicitly enjoying a federal guarantee and (b) easily securitizable. But for borrowers that didn’t meet those criteria, the lack of enough new federal debt may have made banks less willing to lend to them, in exactly the same way a lack of reserves would have in the old days. And even if the restriction of credit to non-securitizable borrowers was not that big in the boom, the lack of federal debt certainly exacerbated the crash.

So far this is just thinking aloud. But a bunch of smart people seem to be heading in this direction. Take for instance Roger Farmer’s call for more quantitative easing (via DeLong). Says Farmer, “Even if the Bank of England were to buy the entire UK national debt, this policy would not be inflationary.” This is just a dramatic way of making the point that as government debt and money have become closer substitutes, the economic consequences of shifts between them have become smaller. As Farmer says, money no longer occupies a discrete, unique role. Instead, there is a continuum of assets: “At the safe end of the spectrum there is cash. At the risky end there is equity and low grade bonds.” And in a rich country like the US or UK, government debt is very close to the money end. Where Farmer is less convincing is his idea that the interchangeability of money and public debt came about all at once, when central banks began paying interest on reserves. Seems to me it was a longer process of institutional evolution.

One implication of this, again, is that a smoothly functioning financial system requires more public debt, indefinitely. (Another reason to agree with Davidson, Galbraith and Skidelsky that austerity tomorrow is no more desirable than austerity today.) But there’s a second implication: If money as a discrete category is obsolete, then so is monetary policy as we know it. If Treasuries are as liquid as so-called high-powered money, then monetary policy — which comes down to injecting and removing liquidity — must work on the former and not just the latter; but of course the volume of federal debt is orders of magnitude greater than the volume of reserves. Which suggests that quantitative easing may be the only kind of easing there is, from here on out, that is, no more distinction between monetary and fiscal policy.

EDIT: What’s the affinity between cranks and money? Everyone knows that discussions of monetary theory bring all the cranks to the yard. But am I the only one who finds that writing about this stuff, makes me feel like a crank?