Search Results for : modigliani


The ECB’s Original Sin and Franco Modigliani’s Long View

Naked Capitalism has posted the article The ECB’s Original Sin and Franco Modigliani’s Long View.

However, unemployment is not a potent instrument to control inflation when there is plenty of slack, while it has a considerable impact on social welfare.

Note the emphasis above that I have added. Too often people seem to think that a prescription to cure a particular ailment should be used to cure every ailment. Decent economists always tell you the specific circumstances that call for a specific remedy.

Even for me, some of the terminology of the article was a bit confusing. The section below explains how central banks could stimulate investment when the only power they seem to have is to control monetary policy. Monetary policy is weak to completely ineffective in stimulating investment when there is plenty of slack in the economy.

As the manifesto itself recognised, the proposed reinterpretation of the ECB role would meet with serious objections. One was that central banks are unable to stimulate investment.
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The ECB has proven unable to raise inflation through its QE programme. Higher price dynamics cannot be achieved if the monetary stimulus fails to reach the real economy. When the latter is in deep recession or deflation, and fiscal space is limited, only monetary finance can be effective as it allows newly created money to be transformed into additional (public or private sector) spending without raising public debt. One way to apply money finance at the whole EZ level would be through an initiative whereby the European Investment Bank would issue bonds to finance a large investment plan for the area, and the ECB would purchase the EIB bonds with newly created money. Through such initiative, money finance would pursue the inflation target by stimulating demand and reducing unemployment. The new investment financed would strengthen the output potential of the Eurozone.

When people wonder why their is no private investment in more production capacity, I like to frame it as “What part of no freakin’ customers do you not understand?”


The effectiveness and primacy of fiscal policy – Part 1

Economic Outlook has the article The effectiveness and primacy of fiscal policy – Part 1.

A firm will not invest, no matter how low the funding costs go, if they do not think they can sell the extra output that the increased productive capacity would produce.

When people ask me why pumping more liquidity into the economy via low interest rates does not stimulate investment, I have a quaint way to explain this. I ask “What part of no freakin’ customers do you not understand?”

Here is a partial list of posts where I have expressed my quaint aphorism

  1. The Effectiveness of Large-Scale Asset Purchases
  2. MODERN MONEY THEORY: How I came to MMT and what I include in MMT
  3. Robert Reich destroys Right Wing economist attempt to sell GOP tax cuts (VIDEO)
  4. Fed keeps U.S. rates steady, to start portfolio drawdown in October
  5. The Global Corporate Saving Glut
  6. Cutting Company Taxes is a Race to the Bottom
  7. The ECB’s Original Sin and Franco Modigliani’s Long View
  8. The Washington Consensus and Long-Term Austerity in Latin America
  9. Hillary Clinton Roundtable in New Hampshire
  10. Banking Hearing on Income Inequality
  11. 20 U.S. companies that paid 0% in taxes
  12. Central bankers issue strong warning on asset bubbles
  13. Turn That (Deficit) Frown Upside Down
  14. Corporations Are Generating So Much Cash It Is Sloshing Around

I have been yearning for an article like this one from an MMT expert. This is the first time I have heard one of these experts give a definitive and detailed explanation of why fiscal policy is a stronger tool than monetary policy to stimulate an economy. In fact, I thought I once heard L. Randall Wray say the opposite.


April 2, 2019

I have links to all three parts of the series in a subsequent post The effectiveness and primacy of fiscal policy.


A Giant Pile of Money

The Intercept has a three part series beginning with A Giant Pile of Money: How Wall Street Drove Public Pensions Into Crisis and Pocketed Billions in Fees.

Public pensions across the country now squander tens of billions of dollars each year on risky, often poor-performing alternative investments — money public pensions can ill afford to waste.

If you think that privatizing Social Security is a good idea, you’d better have a plan to protect the unsophisticated individual investor from these vulture capitalists who can dupe and corrupt people chosen to oversee public pension funds. Turns out that Franco Modigliani and Arun Muralidhar had such a plan, but it was nothing like what the Republicans propose. Also, just search this blog for either Franco Modigliani or Arun Muralidhar.


Employees to be handed stake in firms under Labour plan

The Guardian has the article Employees to be handed stake in firms under Labour plan.

Employee ownership schemes in large companies could result in almost 11 million workers being given up to £500 a year each, in plans to be expanded upon by the shadow chancellor on Monday.

Under the scheme, every company with 250 or more employees will be expected to create an “inclusive ownership fund” (IOF) under a future Labour government, John McDonnell will say.

A plan something like this has been on my mind for the USA Social Security system since the 1990s. Refer to my 2013 post Saving Social Security: A Better Approach.

A search for Franco Modigliani on this blog will garner you a slew of past article.


The Forgotten Vision of Market Socialism

The Institute For New Economic Thinking has the article The Forgotten Vision of Market Socialism.

200 years after Marx’s birth, a look at how two economists sought to reconcile his idea of common ownership with market mechanisms

I have thought that if the Social Security Trust Fund were able to invest in stocks rather than special government bonds, this ownership could lead to some of what is described in this article. It might be instructive to put these two ideas together.

The idea about Social Security was described in a previous post Saving Capitalism For The Many, Not The Few. Also see the previous post Adapting Society To The Age Of Robots. Or just look through my previous posts that mention Franco Modigliani,


Saving Capitalism For The Many, Not The Few

I have just finished reading Robert Reich’s new book Saving Capitalism For The Many, Not The Few.

I have come to a set of expectations for books of this type. The really good ones do a great job of identifying a problem, providing new ways to analyze the problem, and new ways to explain the problem clearly for the rest of us to understand. This book does all that, so I rate it really good.

These books always have a small part at the end that tell us what to do about the problem. These are universally the weakest part of the books. Most of the books do tell you what needs to be changed, which of course is pretty obvious from the excellent description of the problem. No book that I have read so far tells you any practical way to bring about the change.

Robert Reich’s book goes farther than many books because he doesn’t just tell us that people have to act differently from the way they have ever acted before. He does go through some specific rules of the market that need to change, and he does describe some ways of reorganizing the meaning of basic economic entities such as corporations. What he cannot do, and therefore does not do, is to explain how we wrest power from those who now wield it in such a way that we can never seriously contemplate how to make the changes that he says we need.

The robots of the future, along with other breakthrough technologies, will not exactly take away “common property” for which citizens deserve to be indemnified. But they will take away good good jobs that are already dwindling in number and replace opportunities already growing scarce. They will, in short, supplant the middle class that has been the centerpiece of our economy and society that is already shrinking. New market rules that cause wealth eventually to revert to the public domain rather than compound for future generations that had nothing to do with creating it, and be used instead to finance a minimum guaranteed income for all citizens, is one way to go.

This and some other ideas he discusses are starting to be tried in some places around the world, so it is not as if they are completely outside of the realm of possibility. I should give Reich more credit for bringing these ideas to the fore in a book that may be more widely read than other sources that discuss these ideas.

What strikes me is that there is a transition step that I think is more easily made, and I do not see even mentioned. The idea has been described and thoroughly researched by Franco Modigliani and Arun Muralidhar as described in several posts on this blog, but even they shied away from the deeper implications of their proposals. Possibly they downplayed these implications for fear that it would be too upsetting to the 0.01% if they were to understand what the implicatons were.

I am talking about changing the Social Security Trust Fund investment rules so that the trust fund could actually buy shares of corporations. The premise is that the trust found would have far better returns than the Treasury bonds they must buy now. With better returns, the trust fund could both do with less money being taken in from taxes, and it could safely pay higher benefits. This is the surface meaning of this idea.

The deeper implication is that an arm of our government, The Social Security Trust Fund, would own a very large part of the private corporations, given the size of the trust fund. Rather than be passive investors, the trust fund could be active in demanding that corporations pay more attention to the needs of the whole society. The trust fund as a major shareholder would do that because the trust fund has that basic responsibility to society as a whole. This is unlike private investors who have only their own best interests at heart.

Moreover, the fact that the Social Security Trust Fund was growing because of the growth of corporations would in itself be a sharing of the benefits of increasing productivity which sharing is not going on now.

This idea of starting to invest the trust fund in corporate shares is something that could start small, and grow over time. The transition could be so gradual, that people would hardly notice the impact until it had grown substantially. It would also have the benefit of changing its course if unforeseen side-effects started to appear.

As the size of the investment grew, the incentives for corporations would change. The income inequality between top executives and average workers would start to get controlled in a way that no group of small investors can cause. The funding by corporations of buying elections and elected officials to rig the system for their benefit could be brought under control. This change in wealth and income distribution, and diminishing of political power and influence would make it easier to make Reich’s more far reaching changes possible.

If the public understood these changes this way, they might be far more apt to strongly support them. Of course the people with the power now would also understand, and they would fight these ideas more fiercely. It is then a question of whether or not the power of an idea could overcome the power of the money. I think history shows that sometimes this can happen.


Will Hillary Clinton Adopt Hedgie Billionaire John Arnold’s Schemes for Retirement Insecurity?

Naked Capitalism has the story Will Hillary Clinton Adopt Hedgie Billionaire John Arnold’s Schemes for Retirement Insecurity?

The front-running scheme for “retirement security” — backed by billionaire John Arnold — looks an awful lot like it’s “on the table” because it guarantees that middlemen collect fees for “managing” what we used to call your “nest egg.” Will Hillary Clinton’s campaign platform support it?

Hillary Clinton Has Ruled Out Expanding Social Security.


This is a warning to watch your wallets. The article is too filled with just pejoratives, and a little light on specifics, but it does warn us of things to watch out for. In fact, this plan might sound a little like the Modigliani/Muralidhar plan or the one I proposed in my previous post in November 2013 Elizabeth Warren: We should be talking about expanding Social Security benefits. However, the devil is in the details. The details in this case is all about the size of the fees. Large fees can turn a retirement plan from a saving grace (pun intended) to a disaster for the retiree.

Here is a very simple test for any retirement plan. If any manager gets to be a billionaire by managing such a program, then the beneficiaries are being robbed. Those billions of dollars represent money that the beneficiaries should have had.


Adapting Society To The Age Of Robots

In my previous post The Robots are Coming for White Collar Jobs, I proposed a version of my favorite thought experiment.

When the day comes that robots can be used to produce everything that the human population needs so that nobody has to work, what will the society look like? Will everybody lead a fairly comfortable life with some sort of somewhat even distribution of wealth. Or will the robots produce just enough for the wealthy to have a good lifestyle while the rest of us are turned into beggars? What control do we have as to which way the society will turn?

The solution finally came to me.  Remember in the debate about health care reform where many people, including me, wanted at least a single payer option?  Some called for Medicare for all.  Well, how about Social Security for all?

Don’t we already have Social Security for all?  No, only people over a certain age (or some minors or people with disabilities) get Social Security benefits.

Right now the typical paradigm is that you work for enough years to build up a nest egg (including Social Security) that can support you in your retirement.  Your ability to sock some money away while you are working presupposes that you are making more money than you need to live on, and you can afford to put some of the money aside for retirement use.  I hope you can see that as robots get employed to do more and more stuff at cheaper and cheaper prices, there should be more excess earnings that can be saved for retirement. (There is no doubt the increasing excess will accrue to the economy as a whole. The question comes down to who will benefit from the excess?)

As  time and automation progress, people should be able to save enough for retirement at earlier and earlier ages.  Think of this as your inheritance from past generations.  After all, children of very wealthy parents are born with enough money to retire at the moment of birth.  What would happen if this capability were spread to more and more people?

How can this be spread without massive government interference in every aspect of the economy?  We have had too many experiments with complete centralized control for us to feel very comfortable with such a prospect.

Interestingly enough, the way forward ties in with a Social Security investment strategy that I have been proposing for over a dozen years.  (See my previous post The End of the Assault on Social Security and Medicare and its reference to the article Saving Social Security: A Better Approach.) The idea – most meticulously worked out by Modigliani, Muralidhar, et. al. – is for the Social Security Trust Fund investments start to be diversified away from sole dependence on special Treasury bonds to include stocks in public companies.  Well run pensions systems of corporations, unions, professional organizations, universities, insurance companies, countries, states, and individuals  have been doing this for hundreds of years.

For instance, Alaska has what amounts to a Sovereign Wealth fund that pays a substantial yearly dividend to every resident of Alaska.  The dividend is not restricted to people who are retired.

So starting with the Social Security Trust Fund, we can see how a cooperative of the people can start to buy ownership of “private” enterprise in order to pay more generous Social Security benefits while collecting less in contributions from the eventual beneficiaries.

As the excess profits of future automation become larger and larger compared to investment needed from the population, we  can see how the benefits of a “Social Security” system can be spread farther and farther to younger and younger people.  Ultimately, the benefit can accrue to people starting at birth.

Of course I have left out all of the details that will need to be worked out. First, I want to get people to imagine the possibility. Then we can work on figuring out how to do it, and how to overcome any problems that will arise.


Arun Muralidhar on The Public Option for 401K Plans

I received an email from Arun Muralidhar in response to my sending him a link to my previous post Elizabeth Warren: We should be talking about expanding Social Security benefits.

Hi Steve:

Thanks for the email and for the link to Sen Warren’s comments on Social Security. I totally agree with her that benefits need to be preserved, but sadly preserving benefits without making any changes to the current system will place an unfair burden on our kids. The only way to do so would be to implement our plan immediately as every delay adds to the cost of bolstering the program.

On your idea about allowing the Social Security investment option to be an offering for 401(K) plans, Franco and I had anticipated this kind of need. In fact, the World Bank pension fund was reformed in 1999 to allow such an option so that even retirees in 401Ks could be protected from market volatility, and it became the default option for staff who did not want to select equity/bond funds.

Thanks again for your thoughts.

Arun Muralidhar
Founder
Mcube Investment Technologies

Arun is co-author with Franco Modigliani of the book  Rethinking Pension Reform. I was glad to hear Arun confirm that the idea of a 401K public option is not farfetched at all.  The fact that the World Bank offers this type of investment in its pension plan, is as close as I know to an existence proof that such a plan is possible  on a national scale.

I note in Arun’s comments the use of an insight I first read about in the works of behavioral economists.  That is, that when you offer a bunch of complicated options to people, the best outcome happens if you make a good option be the default option.


Elizabeth Warren: We should be talking about expanding Social Security benefits

Rachel Maddow’s web site has the article We should be talking about expanding Social Security benefits featuring the Elizabeth Warren floor speech below.

Over the past generation, working families have been hacked at, chipped, and hammered.  If we want a real middle class – a middle class that continues to serve as the backbone of our country – then we must take the retirement crisis seriously.  Seniors have worked their entire lives and have paid into the system, but right now, more people than ever are on the edge of financial disaster once they retire – and the numbers continue to get worse.

That is why we should be talking about expanding Social Security benefits – not cutting them…. Social Security is incredibly effective, it is incredibly popular, and the calls for strengthening it are growing louder every day.


Search this blog for all I have written about Social Security. After all that, Elizabeth Warren’s speech inspired a new idea for me.

What we need is a 401K option to invest into a Government run pension system that invests wisely.  Such a plan has almost been proposed at MIT by Modigliani, et, al,  Such a plan has almost been put into legislation by Rep. Peter DeFazio (in 2001).  What is new in my idea is that this plan is not (only) to be part of Social Security, but it expands Social Security to cover the 401K also.  Think of this as the “public option” for retirement that is the equivalent of the “public option” we so much wanted for health care in the Affordable Care Act

I just realized that this “public option” idea is very nearly contained in the article that is the subject of my previous post Saving Social Security: A Better Approach. Not excerpted in my previous post, is the following excerpt from the article Saving Social Security: A Better Approach by Thomas K. Philips and Arun Muralidhar.

In addition, centralized administration and record keeping make pension portability exceptionally easy to implement. Therefore, workers would be free to gravitate toward the most productive sectors of the economy without fear of losing their accrued pension benefits. When an employee left a company for a job elsewhere, his vested pension benefits could be sent to the Social Security system for credit to his account. Adding a table to each account to track all the additional contributions made to it over the course of time would be a relatively simple matter. Employees’ payments in retirement would be based on the sum of their Social Security contributions and any additional contributions made to those account.

My innovation takes this idea for portability of vested part of an employer provided pension, and applies it to the 401K plans naming it the “public option”.  If the private pension assets were put into this new “public option” right from the start of the accrual of benefits, this would do away with the possibility of vulture capitalists taking over a company to raid its pension system.  This would be a tremendous benefit to society all by itself.

The extent of the howl of complaints about this from the private sector would be a good measure of the wisdom of this plan.