Rolling the dice?

As a self-proclaimed Cassandra, one of the more annoying things is watching how reality doesn't follow the script that I wrote.


Targeted Monetary Policy

An Idea I had while commenting on Reddit:

I think one lesson learned from this experience is that monetary policy needs to be directed towards particular sectors of the economy rather than being a broad action.

This would mean that the agency involved in setting monetary policy (a country's central bank) would actively and directly engage in important internal markets. And by engage I'm talking about buying and selling.

Of course the guiding principle should be price stability rather than making profits. A central bank can make huge profits or losses - but since it has the power of seigniorage, neither should affect it in any way (it can't go bankrupt).

It would work like this:

Let's say that an asset-price bubble appears in the share market. P/E ratios are going through the roof and people are making money simply by buying in the morning and selling in the afternoon.

The Central Bank would then directly enter the market by selling shares - shorting. This process would continue until P/E ratios begin to drop to realistic levels.

**Of course one important factor is that the share market would know and expect a direct entry into the market by the central bank once p/e ratios began getting too high. Knowing that the central bank would respond would affect their own behaviour and thus the market would end up being self-correcting**

Apply this same principle to asset price bubbles in other areas of the economy, such as property, resources, etc. ie any sector which is undergoing substantial growth and which constitutes a significant portion of the economy. The Central Bank would not act if the sector of the economy is very small, for example.

Also apply this same policy tool to achieve a reverse effect when prices are low and getting lower.


The US Gun debate - a problem in terminology

The image to the left is very clear. It says "No Guns". It is a symbol used by those on the Anti-Gun side of the current firearms debate in the US.

And it appears that the Anti-Gun lobby has some populist weight behind it. Poll after poll of Americans show clearly that they disagree with the arguments and logic of the Pro-Gun people, and want stricter laws, stricter background checks and bans on certain types of weapons.

But there's a problem here with terminology. The "Pro-Gun" people are called "Pro-Gun" because they support the 2nd Amendment, they support the right of people to buy and use firearms. What the phrase "Pro-Gun" does not support is the idea that people can buy their own personal tanks, surface to air missiles or nuclear weapons. Yet the phrase "Anti-Gun" is problematic, because it does not adequately reflect the ideas of those who wish for stricter laws. You see, for someone to be "Anti-Gun" means that they are against guns. Get rid of all guns, remove them from people's homes, etc etc etc. This is not the point of view of the (majority of) opponents of the "Pro-Gun" side.

Here in Australia we have laws against civilians owning assault rifles (automatic and semi-automatic) and other weapons that are the domain of the military. We allow people to buy and use handguns, though with a restriction on the amount of bullets they can carry. We also allow people to buy and use hunting rifles. Although our per capita gun ownership is a couple of magnitudes lower than the US, we still have people owning guns and, while we do have some level of firearm violence and misuse, the per capita numbers are very low.

And you know what? I think Australia's gun laws are pretty good. I don't think there's a need to tighten them. I'm happy that people can't purchase AR-15s but I would be unhappy if people were unable to purchase handguns. You see I have no problem with the idea of people owning a handgun or shotgun for home defence - some parts of Australia are quite remote and police response time would be measured in hours, not minutes. These people need guns. Farmers need rifles to shoot pests and put down sick animals. A metally fit and law-abiding citizen may choose to own a handgun. I'm happy for these people to have access to these firearms. But to have less restrictive firearms laws here would be a mistake. I'm happy where things are - they should not move either one way or the other.

So as you can see, while I support all reasonable means to reduce gun violence in the US - and this includes tightening access to certain firearms and banning others outright - I'm not "Anti-Gun". I don't wish to disarm the community completely, and I do not wish that Americans would universally disarm either. Yet the debate seems to be between those who are "Pro-Gun" and those who are "Anti-Gun". As a result, one of the arguments that the Pro-Gun side has used is the spectre of disarming a country and turning into tyrrany and to Nazism - which fits in very well with all the right wing garbage about Obama being the Muslim Kenyan Socialist Communist Nazi Black Panther that the completely ignorant and arrogant and easily confused eat up every day.

In essence, it's a straw man. The more radical and unhinged Pro-Gun side scream that the commies are gunna take their gunz, disarm America and give it over to the godless United Nations (probably headed by the Antichrist), with Jews, Blacks and Gays taking turns to rape and slaughter good Americans. But that's not what Obama is trying to achieve; it's not what I'm trying to argue, and it's not what the majority of Americans would want either. Having stricter gun laws does not mean universal disarmament and an eventual Communist takeover.

But it's easier to be labelled as "Anti-Gun" rather than "Stricter and more sensible gun laws".


Government Contracts and Money Velocity - an adjunct to fiscal policy

Fiscal Policy is used by governments as a way of expanding or contracting an economy. Such a policy occurs during the business cycle, whereby a fiscal expansion is enacted when the economy is slowing, and a fiscal contraction is enacted when the economy is in danger of overheating. Traditionally, Fiscal Policy requires legislation to be passed to increase or decrease spending, or to increase or decrease tax rates. Fiscal Policy is problematic in that it becomes a political issue, rather than an economic one. In order for fiscal policy to enacted quickly and properly, political influence must be somehow reduced, and the effects of the policy need to be broadened rather than aimed at a narrow area of the economy.

One solution to this is to ensure that government contracts - the money that governments pay the private sector for providing various goods and services - are given variable payment dates. Usually, when one business purchases goods and/or services from another business, payment for these goods and services is often delayed for a time. One example of this delay would be an invoice that is payable 30 days from the end of the month of the invoice. In this case, an invoice dated 15th May would be due on 30th June. Such invoicing arrangements are common in the private sector. One advantage that this system brings the buyer is the chance to build up liquidity - by delaying payment for a time, the company has an increased cash flow. This invoicing system, therefore, affects Money Velocity - the speed at which money travels through an economy. Increased money velocity is linked with economic expansion and inflation, while reduced money velocity is linked with economic contraction and deflation.

Since governments in Western countries are the largest economic and business entities in their respective economies, the way in which a government pays its bills to the private sector can have a huge impact upon an economy's money velocity.

The process of paying back money owed to the private sector can thus be used as a form of Fiscal Policy - with money being paid back to private suppliers sooner or later depending upon the state of the economy. Once legislation approving this policy is passed, all government contracts from then on would be subject to variable payment dates depending upon macroeconomic need. Payment dates for invoices would be moved from the original date - paid sooner for expansionary policy; paid later for contractionary policy.

As an example, let us assume that a government department agrees on a contract with a private business for the supply of stationary. As this government department buys from this business, the standard invoice (as an example) is 30 days from the end of month of the invoice.  Now let us assume that the economy needs expansionary policy. As a result of this, the invoice due date changes to 15 days from the end of month of the invoice. Thus the stationary company ends up with its money sooner, thus increasing the velocity of money. Now let us assume that, instead, the economy needs contractionary policy. As a result of this the invoice due date changes to 45 days from the end of month of the invoice.

There are a number of advantages to this model:

  1. This policy would fall under the scope of "automatic stabilisers" in the sense that any changes needed to the economy can be enacted straight away.
  2. There would be less need for legislative debate amongst politicians about if and how changes to government spending should be made (in the case of debating Keynesian stimuli)
  3. The effects of the policy will be broad - affecting the areas of the economy which deal directly with government contracts.
  4. The policy will be budget neutral - it would neither increase or decrease a budget deficit in real terms over the course of the business cycle.
  5. It does not replace current Fiscal Policy, but rather adds to it and may even reduce the need for such policy over the longer term.
  6. The government department responsible for enacting this policy need not be secretive but can operate faithfully in full view of the public. There is no reason for hiding information for the sake of national security - this needs to be the case given the chance that those who benefit from government contracts could attempt to corrupt the decision making process.
Important points to consider:
  1. Size of government: will the effect on the economy be bigger if governments are bigger (as a proportion of GDP)? Will the effect be smaller if the government is smaller?
  2. Should this system include welfare payments and payments to government employees? (I think not, but it is a point to discuss)
  3. How much should the government department reponsible for this policy be allowed to be influenced by central bank information? Should the Central Bank be responsible for this policy, and enact it along with Monetary Policy?
  4. Would such a policy function well in a single-currency area like the Eurozone?
  5. Would such a policy function well for non-national governments, such as state governments and municipalities?
  6. What should be the natural limits of this policy? Could super-expansionary policy involve paying for goods and services before they are supplied or even ordered? Could super-contractionary policies involve debt default?
  7. How would such a policy affect governments who purchase goods and services from foreign suppliers?
  8. Should some private sector suppliers be exempt from this policy? (I think not, but it is debatable)


US Economy shrinks

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
Who would've predicted this?
According to data... another US recession is likely to begin between now (2011 Q4) and 2012 Q4


A sane firearm policy that the US needs

While the words "Sane" and "Gun Policy" are unlikely to be found in US political discourse at the moment, allow me to suggest a policy that might actually do some good, and do so without annoying the gun lobby or law abiding gun owners.

The thing is that mass shootings of the sort experienced recently only ever make up a very small amount of the people who die each year in the US from firearms crime. As a result of the public outrage these shootings cause, there is often a focus upon the banning of assault weapons as a potential answer. Yet while a banning of such firearms much have some effect upon mass shootings, they will have little effect upon the actual death rate due to gun crime.

This is because most of the deaths due to gun crime in the US occur mainly due to street level violence, usually between two people, one of which is armed with a handgun that he or she possesses illegally. In short, most of America's gun deaths are the result of crime. Very few deaths can be attributed to mass shootings. The problem with this, of course, is that the regular shooting deaths of single individuals are so common in the US that most people are numb to it. Mass Shootings are more shocking and, may I say, make more headlines and cause more angst than the regular drip-drip-drip of street level crime.

Think of it in the same way as you would airline safety verses car safety. We all know that you are more likely to be killed driving a car than you are as a passenger on a modern aircraft. Yet the crash of plane and the media angst it causes is far more profitable for the media than car safety. The fact is that flying in commerical aircraft is safer now than at any other time in history (at least in western nations) and this has been due to various laws and regulations set up over the past few decades to ensure that the airline industry follows a safe procedure. Yet this does little to calm my fears when I (occasionally) fly in a passenger plane - white knuckles grabbing the seats, repeating over and over to myself that this is safer than me driving my car...

What I therefore propose for the US is a policy that is aimed solely at reducing the amount of illegally owned weapons while not worrying about the legal gun owners. It's not the AR-15s or Barrett Sniper rifles owned by your local survivalist / tea party member / militia member that is killing Americans. Yet the result of the recent tragedy in the US might just be more restrictions on such weapons. While I'm not too fussed about such policies existing, their effect will be but a drop in the ocean. Any policy that restricts or bans certain types of assault weapons in the US is unlikely to reduce either the instances of mass shootings or reduce the amount of people dying from them. It may make sense in a country with very low levels of gun deaths, which is why I wasn't too worried back in 1996 when the government of Australia banned certain types of guns after a mass shooting  - since then we've had no mass shootings at all, but our gun ownership and level of gun crime back then, like now, was very low. But in the US, a different policy needs to be followed.

What I am suggesting is this: A national, voluntary gun buyback scheme.

Such a scheme would offer gun owners - both legal and illegal - the chance sell their weapons to the Federal government. This would occur in locations all over the US and would be based in police stations or other government  buildings. The guns would be handed over with no questions asked - the gun owner will not be charged with any crime if they hand over any illegal weapons. The price paid by the federal government will be very, very attractive, thus ensuring quite a lot of money for anyone who gives up their weaponry. For the period of the buyback, the government will also halt the shipping of any legal firearms from manufacturers. The gun makers will be compensated financially for this action and will actually end up supporting it because they stand to make a lot of money from it. Legal gun owners - especially those concerned about the gubmint takin their gunz - will not be forced to participate and no one will be taking their weapons.

So who are the sorts of people giving up their weapons in this scheme? It would be those who need the money. In short, those who give up their weapons are highly likely to be those within or on the fringes of the criminal class. They are unlikely to be legal owners (though some who have financial problems would take advantage of it).

What would be the effect of this scheme? It would result in a substantial drop in the supply of guns - especially handguns - owned illegally. This would, in turn, result in lower levels of gun crime as criminals will find it harder to procure the weapons they need - lower supply leads to higher price. A drop in the amount of illegal guns would also lead to an increase in the value of legal guns, which means that legal gunowners would have their collections end up being more valuable. The higher price of guns will also be of benefit to the manufacturers when they begin selling them again.

And as I pointed out before, all guns start off being legally manufactured, sold and purchased. Only after that do they end up being sold to criminals, which means that some gun owners and gun sellers are making a profit out of selling legally procured guns on the black market. One result of this gun buyback scheme would be to see which owners and sellers begin buying and selling more guns.

And what happens to the guns that the government buys back? They get destroyed. They were bought illegally and used illegally - they should not be allowed to re-enter the firearms market.

What would be the cost of such a scheme? Probably billions. But it is money that will end up in the pockets of ordinary Americans. Moreover, additional wealth generated by an economy of less gun crime will more than make up for the initial cost, and this benefit will most likely be enjoyed by private citizens and businesses.

This is a policy that American Gun Owners should get behind. The NRA should support this policy

  • Legal gun owners are not forced to give up their weapons.
  • Illegal gun owners will want to sell their weapons.
  • Less guns will be available to those who buy them illegally.
  • Less guns will be available for criminals to buy.
  • Less people will be killed in street violence.
  • The firearm collections of legal gun owners will rise in value.

Regardless of which side of politics you are on, Americans generally want less gun deaths and less gun violence. Consveratives are wrong in thinking that less guns = less freedom, but progressives are wrong in thinking that assault weapon bans = less gun deaths.