Latest Free Liberal Article: Milsted is Confusing!

I enjoy reading articles by Carl Misted Jr. of Holistics Politics and Free Liberal. I like his ideas of bringing idealogies together to find better solutions thru libertarianish means.

His latest article that I just read on Free Liberal "Department of Aristocracy Release" (click thru on the left of the screen) is insightful and interesting but confusing and very hard to follow at times.

He makes a series "if this, then that" statements that leave me shaking my head and rereading several times to connect all the dots clearly.

Maybe some more economically literate types can help me make sense of it all and rephrase some parts for clarity.

he says:

"Adam Smith pointed out that risk-adjusted profits track interest rates. If profits are less than interest rates, investment stops. If profits exceed interest rates, new businesses are financed which drives up labor costs and/or drives down consumer prices."

OK. Makes sense and I get it mostly. If profits are less attractive than interest gained from savings, why invest (in captial ventures--risk adjusted?)? When there's greater captial profit than interest interest gains, we invest (in captial )and expand (captial drops). Now based on that we move on:

"Adam Smith pointed out that real interest rates, and thus profits, naturally fall in a market economy as capital accumulates." (meaning it's not being invested I assume?)

OK. Profits (interest rates) fall when captial accumulates. It's not a clear continuation that builds off the previous quote. He also fails to include why capital would accumulate and how all three are consistenly related.

he continues:

"In Smith’s day, the government used tariffs and monopoly patents to allow favored industrialists to make excessive profits."

OK! He's gonna build on this and tie it all together...NO. He goes on directly...

"Today, we have high budget deficits (which consume excess savings), Social Security (which discourages savings by the working classes), overregulation of the capital markets (which gives existing big corporations an unfair advantage) and government sponsored pure research (which creates new investment opportunities)."

SO? Tie this in cohesively to what you've already said, Carl!

and on:

"The modern day wealth subsidies come not from an explicit desire to help the rich, but from attempts to stimulate the economy during the Great Depression. John Maynard Keynes prescribed a set of anti-savings measures in order to stimulate the economy. The Left took his ideas to heart since they provided an excuse for welfare programs – the poor tend to spend what they get, so taking from the rich and giving to the poor leads to increased spending.

What the Left failed to realize is that the rest of Keynes’ agenda consists of subsidies for the rich! If the government consumes savings, the demand for capital goes up. If you discourage workers from saving via payroll taxes and a promise of retirement income, then the supply of capital goes down. The end result is a greater return on investment for those who have money to invest."

Bottom line that brings everything to logical, easy to follow culmination? No.

"If you want a more egalitarian society, you want to have a savings rate that is so high that high return investment opportunities are hard to find, where the rich need to work or take risks in order to make more than a couple of percent return on their holdings."

Umm.....

Just for reference, in case the link moves down the page and off of it, the link is: http://www.freeliberal.com/archives/002355.html

I'm going to have to sort through it myself. Overall, I can see his point. By discouraging saving, and trust me Americans have huge problems saving, you make it very profitable for the wealthy with excess capital to invest and make a living off of wealth not work (to borrow from John Edwards).

Ideally, if capital is so scarce it would make sense for people to try to save more. I think the biggest problem is that we're trapped in a consumer society that discourages saving not through rational appeal but emotional appeal.

I can see his point that an egalitarian society would have high savings and the like, but I can't see how this could be sustained except through a culture that encouraged saving at a potentially irrational level.

you say:

"I can see his point. By discouraging saving, and trust me Americans have huge problems saving, you make it very profitable for the wealthy with excess capital to invest and make a living off of wealth not work (to borrow from John Edwards)."

Fine. but he doesn't make that conclusion in a clear and understandbale manner.

It looks like Carl just dumped his thoughts onto paper without linking it all together. I makes sense if you think harder about have some economic background.

First he's establishing the connection between savings and supply of capital. Naturally a smaller supply of capital makes it more expensive (higher profits).
Then he goes on to establish how government has in the past supported excess profits - a economic libertarian idea.

John Maynard Keynes uses a series of ideas of how to control the economy in the short run. But in embracing his ideas, we have created a society where it is entirely RATIONAL to have a ridiculously low savings rate.

The safety net of Social Security (which really isn't savings - gives an illusion of it), and makes it rational not to save for retirement.
The government fiscal policy of deficit spending is rational in that by encouraging the lowering of savings rates, the economy will perform better in the short run, which for politicians is a positive outcome.
If I remember economics correctly, it's not the low savings rate that produces a short term boon for the economy, but rather making the savings rate lower that produces a short term boon. To sustain short term stimulus of the economy, we need to continuously increase our spending rate(decrease our savings rate).

All of that contributes to lower savings and thus the high cost of capital in the United States today. Capital is so scarce, we import millions of dollars of capital into the United States every month (the trade deficit).

Misted is pointing out what are the root causes of the low savings rate in the United States today, and showing why the low savings rate is a problem.

well said....and very very clear, methodical and easy to follow. Maybe Milsted should have you re-write his articles for him!

I have typos everywhere and some word omissions and all that. I need a proofreader.
I'm guilty of the same stream of consciousness.

Now to tackle the final part of Midsted's article (hopefully free of grammatical errors this time.)

Milsted wants us to replace payroll tax with consumption tax and pay down the national debt. In the meantime, the Federal Reserve has to maintain a relatively tight monetary policy to ensure that savings rate really rises. These two activities will have painful consequences for the economy in the short run. Any politician brave enough to propose and enact them will pay a heavy political price for it. (It is likely that the savings rate went DOWN during Clinton years. While we were able to pay down the national debt, the federal reserve had a very loose monetary policy that encouraged spending.) The US needs to undo 25 years of government that emphasized short term stimulus.

The pain can be lessened if the debt is paid down gradually, if we promote savings before moving to the consumption tax, and if we can encourage consumers in foreign nations (China and Japan) to pick up the slack in spending.

edit: speak of the devil: grammar->grammatical

how does maintaining a tight monetary policy ensure tht savings rates rise?

Wouldn't a monetarist argue that a loose monetary policy decreases the value of money and increase the opportunity cost of hold it versus saving (or investing) it? Therefore, a tight monetary policy would increase the value of money and put downward pressue on saving (or investing)?

Loose monetary supply is the Federal Reserve loaning money to banks at a lower than natural interest rate. It gives the banks access to an imaginary cache of savings and raises the available amount of capital that is circulating. But that's an imaginary cache of savings. It doesn't really exist. By temporarily depressing the cost of capital, Federal Reserve encourages spending/investment and stimulates the economy. In practice this takes about 9 months or so. I'm not sure on the exact length of time.

If we intend to raise savings rate we need the Federal Reserve to not encourage spending.

end of original post: clarification: skipping quite a bit of logic here, I think I'll try to clarify.

Let's go back to the temporary depressing the cost of capital.

Federal Reserve encourages investment with borrowed money - not savings. The glut of investment reduces the interest rate and that forces savings downward since they are so connected. The net effect is that real savings - not the borrowed kind - is reduced. In addition to this effect on savings there is usually a distortion of prices (a wealth transfer) that follows the injection for investment. Durable capital goods like real estate generally grows in value comparitively with less durable capital goods.

After thinking about this a bit yesterday. I realized that I am completely wrong about the relationship between monetrary supply and savings! There may be a relationship, but my arguments are totally BS. I don't know why I thought this argument made sense yesterday. Anyways the explanation that follows about savings is an inaccurate explanation.

I think I was confused by the US spending statistics which doesn't differentiate between investment spending and consumption spending. I would have to study more macro-economics if I were to provide a good explanation.

"...and if we encourage consumers in foreign nations (China and Japan) to pick up the slack in spending."

You mean so consumption levels don't slump?

Correct. We would at least not be importing or maybe even exporting.

I'm pretty much reaching the end of my knowledge of economics. I think we need an expert.
But it seems that if Americans stop spending at our ridiculous rate, we might kill the entire world economy in the short run.

In the long run the world economy should be fine. In Midsted's end condition, where we have a more equal distrubition of wealth - that there will be fewer concentrations of wealth - that there will be fewer filthy rich people who have very low consumption ratios - despite a lower consumption at all income levels, the consumption rate of the entire society will not be much different from what it is today.