The non-normative case for Jeff Bezos to buy 460 yachts per year

U.S. household wealth is $112 trillion, and Americans spend $14 trillion per year -- one eighth of our wealth -- on goods and services. One person's spending is another's income, so people who spend more than one eighth of their wealth per year on goods and services are boosting economic growth and the vitality of American capitalism.*

As a serious economist, I will not offer a normative assessment of whether I believe more growth is better than less growth, or whether buying useful things is better than buying wasteful things.** I just look at the numbers. If you're spending more than 1/8 of your wealth per year on goods and services, you're pulling economic growth up. If you're spending less, you're pulling growth, business investment, and interest rates down.

Here's a little arithmetic.

If your net worth is $18,500 and you're spending more than $2,300 per year, you're boosting economic growth.

If your net worth is $1.85 million and you're spending more than $230,000 per year, you're boosting economic growth.

If your net worth is $185 billion and you're spending more than $23 billion per year, you're boosting economic growth. It makes no difference to me as an economist whether you get to this number by buying 460 $50 million yachts per year or only 80 yachts plus school lunches for every American kid who needs help.

Capitalism is all about buyers and sellers. Sellers won't invest if buyers won't buy. When aggregate demand is scarce, buyers boost growth.

Excerpts from Whatever Happened to the Cambridge Capital Theory Controversies?

In 2003 Avi Cohen and G. C. Harcourt wrote a retrospective about the Cambridge capital controversy. American economists like to forget about these capital theory controversies that took place from the 1950s through the 1970s. They're probably a big deal because they call into question the entire theoretical framework we teach ourselves.

"Did the Cambridge controversies identify "sloppy habits of thought" that have been handed down to yet another generation, or were they a teapot tempest of concern now only to historians of economics? In this article, our aim is to put into perspective what was at stake and to argue that the controversies were but the latest in a series of still-unresolved controversies over three deep issues. The first is the meaning and, as a corollary, the measurement of the concept of capital in the analysis of industrial capitalist societies. The second is Joan Robinson's complaint that equilibrium was not the outcome of an economic process and therefore an inadequate tool for analyzing processes of capital accumulation and growth. The third issue is the role of ideology and vision in fuelling controversy when the results of simple models are not robust."

...

"While neoclassical economics envisions the lifetime utility-maximizing consumption decisions of individuals as the driving force of economic activity, with the allocation of given, scarce resources as the fundamental economic problem, the "English" Cantabrigians argue for a return to a classical political economy vision. There, profit-making decisions of capitalist firms are the driving force, with the fundamental economic problem being the allocation of surplus output to ensure reproduction and growth (Walsh and Gram, 1980). Because individuals depend on the market for their livelihoods, social class (their position within the division of labor) becomes the fundamental unit of analysis. The potential rate of profits on capital arises from differing power and social relationships in production, and the realization of profits is brought about by effective demand associated with saving and spending behaviors of the different classes and the "animal spirits" of capitalists. The rate of profits is thus an outcome of the accumulation process. Robinson argued--citing Veblen (1908) and raising the specter of Marx--that the meaning of capital lay in the property owned by the capitalist class, which confers on capitalists the legal right and economic authority to take a share of the surplus created by the production process [sounds like Pistor's The Code of Capital]."

...

"The Cambridge controversies were the last of three great twentieth-century capital theory controversies. Earlier controversies occurred at the turn of that century among Böhm-Bawerk, J. B. Clark, Irving Fisher and Veblen and then in the 1930s among Knight, Hayek and Kaldor...

"At the turn of the century, J. B. Clark and Böhm-Bawerk were consciously countering Marx's theory that the return to capital involved exploitation of labor. Clark's response, that wages and interest were simply prices stemming from the respective marginal products of labor and capital, is best expressed in his famous claim that "what a social class gets is, under natural law, what it contributes to the general output of industry" (Clark, 1891, p. 312). Veblen disputed Clark's marginal productivity theory, arguing instead that profit was institutionally grounded in the social power of the capitalists that enabled them to appropriate the technological achievements of the society as a whole. Irving Fisher (1907) believed that the interest rate could be viewed as the equilibrium outcome of simultaneous equations. Böhm-Bawerk ... sought a one-way explanation tracing interest determination back to the original physical factors of labor and land."

Clearly the Brits and Veblen talking the most sense here.

Excerpt from Trade Wars Are Class Wars

Matthew Klein and Michael Pettis explain what the US should do to address its extreme inequality, degraded infrastructure, and (because of the dollar's role as reserve currency and US financial system inventiveness) current account deficit:

"In the short term, America's first objective should be to shift the burden of absorbing unwanted financial inflows from the U.S. private sector to the federal government. American households and companies should not be pushed to borrow more than they can afford out of misguided concerns about the budget deficit or the level of government spending. As we have shown, the fact that the United States must absorb a permanent financial account surplus means that the only way to prevent rising American unemployment is with some combination of higher private borrowing and higher government borrowing. That is why, in the near term, U.S. Treasury debt should be issued as needed to accommodate the desires of foreign savers. Lower payroll taxes, larger standard deductions on income taxes, and a better social safety net, particularly for health expenses, would all help generate the necessary budget deficits while simultaneously ameliorating the unequal distribution of income.

"It would be even better if the federal government absorbed foreign financial flows by directly or indirectly increasing investment in much-needed American infrastructure, particularly public transit and green energy... Federal spending could also help sustain demand for American manufactures even if the domestic market remained swamped by gluts from abroad... the United States should also find a way to accommodate the legitimate desires of certain governments to protect themselves from crises without having those governments accumulate emergency savings denominated in dollars... These measures, however, are mainly short-term stopgaps. They are not enough to resolve the underlying problems in the global economy. The United States would still remain the world's dumping ground for the world's excess savings and the surplus production that comes with it. The open global trading system will remain under threat as long as elites in the major surplus economies remain committed to a system that continuously squeezes the purchasing power of their workers and retirees.

"If we want to end the trade wars before they further damage the global economy and undermine international peace, we must therefore address the twin problems of income inequality and the world's unhealthy dependence on the U.S. financial system." 

Treasuries are gold

United States government debt is gold. I mean this almost literally.

Would you rather have a bar of metal worth $10,000 or a Treasury security worth $20,000?

Tomorrow, after the government has issued a few billion dollars more debt, would you rather have a bar of metal worth $10,000 or a Treasury security worth $20,000?

Ostensibly serious economists will say I am missing a critical point here. If the government issues too much debt, the value of that debt will fall. This is true, but what is too much debt? If we think about Treasuries as gold, it changes the nature of the question. Is $20 trillion of gold too much? $40 trillion? Who's to say.

Complaining about the US national debt is like a 17th century Spanish king whining about how much gold he has given his subjects. The fix is either to mine more gold (create more debt) or, if your subjects have so much gold that they don't value it anymore, demand some of it back (raise taxes).

Pretending to fret about the amount of gold in the economy is a distraction from real reform. If teachers, doctors and nurses, construction workers, and others are willing to work for gold, and we can magically mine gold, we have the option to give it to them. We are wealthy and powerful enough to provide affordable education, healthcare, and modern infrastructure to ourselves, if we want to.

Of course, we should be wary of a time when there is so much gold that people don't value it anymore. When this happens, we can demand some of it back and bury it or put it to better use.

Economic narratives, politics, and historical processes

Economics is a moral science with a powerful ability to shape minds and policy. From the conservative suppression of Lorie Tarshis’ Keynesian economics textbook in 1946 through the assumptions baked into the Congressional Budget Office’s models today, economics is not (and cannot possibly be) non-normative. When it’s wrong, the results can be devastating.

A tale of two narratives

Deeply conservative assumptions and obstacles to reform are embedded in neoliberal economic models and budget scores. These models, which are used to devastating effect at places like the CBO, make passage of progressive legislation hard if not impossible. As David Dayen has explained in The American Prospect, “Republicans like to talk about “cost-benefit analysis,” but Congress has created a structure to simply run the costs without the benefits. That mentality must change if we’re to have a decent conversation about the role of government.” Knowing the assumptions used by official scorekeepers and identifying where they are unrealistic is critical for promoting good policy.

Two economic narratives can be used when modeling the economic effects of policy. Let's take student debt cancellation as an example.

CBO's narrative is based on the assumptions of scarcity and rational expectations. This narrative says that cancelling student debt means that the economy might shrink because companies will invest less and people will consume less today because they feel poorer because they expect their taxes to go up in 20 years when the government shrinks the deficit. This is the same economic thinking that imposed crippling austerity on Europe: if governments cut spending and lay off workers, the economy will grow because people will rush to buy furniture today because they feel richer because they expect their taxes to go down in 20 years. The assumptions are ludicrous and the results are devastating.

A second narrative is based on the facts of abundance and uncertainty. Cancelling someone’s student loan enables that person to consume more, which boosts investment and employment, raising other people’s incomes in a virtuous cycle. Debt cancellation could even give more people the opportunity to start a business, which might further increase the productive capacity of the economy. This has all been modeled, it just needs to be modeled in the right way by the official scorekeepers.

We face the same hurdles with free public college, universal healthcare, green investment, wealth taxes, more generous Social Security benefits, and so on. When the state fulfills its role of mitigating unknowable risks in an uncertain world, it allows all Americans to prosper and creates additional economic growth as a positive side effect. But there is a real risk that legacy economists continue to prevent necessary change based on a neoliberal ideology dressed up with a façade of hard science and talk of trade-offs and crowding out. These theories were much more legitimate for the 18th century world on which economics is based.

Politics and messaging

For centuries America has successfully spoken the rhetoric of Jefferson and implemented the policies of Hamilton. We enacted tariffs and industrial policy to help develop northeastern manufacturing, issued land grants to railroads to support the development of the west, and invested in the research that created virtually every significant Silicon Valley technology and many of the pharmaceutical products that we use today. We accomplished all of this while somehow preaching the Randian gospel of self-sufficiency. Implementing progressive policy will be very difficult if the messaging doesn’t change to better reflect the symbiotic relationship between the public and private sectors.

Of course, some of the difficulty in implementing reform is cultural – there’s the quip that socialism never took root in America because the poor don’t see themselves as an exploited working class but rather as temporarily embarrassed millionaires. Rural communities don’t see Democrats as the party of the working class. Democrats need to reach out to these communities more effectively. We won't succeed if we continue to ignore the historical and economic forces that create tremendously wealthy cities at the expense of rural economies. 

Nothing new under the sun

When workers are not paid for their productive output, money is transferred to the wealthiest citizens who cannot possibly use their expanded consuming power. Consumption stagnates, and investment stagnates because it is consumption that produces yields on capital. In countries like the US where consumption has not gone down, it is only because debt has gone up. Avoiding the problem does not solve it. This process of increasing inequality results in a cycle of economic stagnation and democratic dysfunction. The cycle is not new, and there is no easy fix. 

In the (very) old days, debt would build up to socially unsustainable levels, leading to revolutions in which all the clay tablets recording debts were burned, among worse things. This destructive process of debt accumulation and rising inequality might be why the Old Testament mentions a debt jubilee as necessary policy. The Mesopotamian kings eventually realized that peaceful redistribution was a better policy for virtually everyone involved. We’re seeing a version of these dynamics today, going back to 2008 and before. In places with high inequality, almost everyone can become better off -- and the economy can grow faster and be more resilient -- through thoughtful transfers to the working class and poor, whether those transfers come in the form of debt forgiveness, a decent minimum wage, cash, childcare, education, or other reforms.

The last four years have reinforced the notion that a great society’s decline is not something that can just happen in the distant past. To succeed and prosper as a nation, we need less Milton Friedman and more William Jennings Bryan, Henry Wallace, and Ken Galbraith in our economic policy.