Small Town Resort - Unrealized

Turn on the Printing Press?

Indulge me a little amateur economics here.

I think that the Austrians would tell us that credit is massively important to the money supply. Extending credit, by levering against collateral, is essentially introducing money into the system.

As an example, if somebody deposits $200 in a bank, and the bank's reserve-to-loan ratio is five to one, then the bank can lend out $1000 that can be spent on inventory or buildings or what have you. This essentially adds $800 to the money supply and in a simple world of nothing created or lost that $800 can go chase the same amount of goods, thereby driving up the cost of things. This is inflation as sure as if the Fed had added eight one-hundred dollar bills. Credit gets extended year after year at about the same rates, and as the money supply grows the whole thing pretty much works in sync.

However, over the last decade or so "financial innovation" meant that ever more credit was squeezed out of each dollar invested (risk metrics and what not.) Part of this was fancy calculation, part was plain old laxer lending standards, and part was widespread fraud. All of which had the effect of increasing the multiplier, and thereby effectively increasing the money supply - viz. inflation. (Although, as Von Mieses would tell you, the sector where the money went into the system saw the effects first.)

When the prices of housing and its ilk (the sector where the money went into the system) fell apart, the supply of money (collateral that had just become worthless) suddenly decreased, and there was a massive deflationary wave thrown through the system. All of the money that had the fueled the (at least perceived) boom disappeared and you had fewer funds chasing the same amount of stuff.

So, my question then would be this: To avoid a deflationary spiral, wouldn't the answer have to be to bring the money supply into line with the prices of things (at least averaged over the economy)? Which is to say, haven't we already had massive inflation and now the thing to do is just add back in the money that suddenly went away before we deflate the thing back to the 30s?

Sure it'll be devastating to those on fixed incomes, the poor, and the savers, but hasn't it already happened whether we admit it or not?

Thesis

The Price of Work

The economists tell you that the price of labor is dependent on productivity; the more skilled or rare or swift the laborer, the more the wage. I think that this fundamentally misunderstands the labor market.

First, there is the conventional problem of market inefficiency. In many if not most sectors, it's difficult to impossible to (from the supply side) line up the hours, terms, wages, conditions, or what have you that allow one position to compare with the next. This makes the price-product balance that a market depends on totally out of sync. From the demand side, the availability, productivity, and efficiency of labor (short of fundamentally flawed indicators like educational status, employer name, star sign, or credit rating) are also nigh-unpredictable, meaning that even if the will were there, it would not be easy to offer workers wages indexed to their productivity.

Secondly, and perhaps more insidiously, there is the human issue. If wages were, in fact, indexed to productivity, then the labor input should be precisely calibrated to the amount of output required. Short of good old eighteenth-century piecework methods, this never happens. People work to their maximum ability, or the least they can get away with, or some other random and arbitrary standard almost all of the time. It's a shame that the system seems to be set up so that an increasingly productive worker benefits himself not at all for being more diligent, more forward-looking, or more efficient, despite the assumption of this kind of thing being arguably one of the lynchpins of the system. Job interviews should run like this: "What kind of work do you need?" "What kind of output are you expecting?" "Okay, I'm going to need this much to do that level of work, and if it only takes me twenty minutes, or if I can do it standing on my head, I don't want to hear any crap out of you, because you're not paying for anything further. " This, while the theoretical transaction that is assumed to be going on, doesn't get you very far. Until you gain the ability to stop work when the task is complete without penalty, then the exchange is not efficient. (This, I assume, the origin of the whole labor union movement, with all of its warts.)

Short of an actual and explicit free-market exchange, we get these horrid power asymmetries that take advantage of the deeper time reserves of the capital side and competition between laborers who don't know the actual conditions of the offer, their competition, or the exchange value in the market.

People, it would seem, aren't numbers after all.

Uncle Karl, we hardly knew ye.

Collage: Wish You Were Here

Right and Proper(ty)

There seem to be about two issues that get overlooked when trying to deal with the American city. The first is the importance and intractability of public education, which I’ll leave for later. The second is the massive emphasis on fee simple ownership.

Other than all of the privacy, space, and education issues that have driven the development of the suburb full of single-family houses, the phenomenon has also been driven by a desire for a certain kind of property right. Fee simple ownership, that is eternal and uncontested ownership of an entire parcel of land and improvements from the center of the earth to space, has inserted itself deep into the psychic DNA of the country. With roots probably going back to the homestead act and maybe as far as the founding, the idea of “owning property” is seen in certain circles as the end-all and be-all of lifestyle decisions. Why?

No one understands better than I do the desire to own a piece of land in the original homestead sense. There is an image of independence and self-determination that runs back to Jefferson and beyond. However, that’s for a fairly sizeable plot of agricultural land. A farmstead, where it is in fact possible to sustain one’s family, improve the property, and perhaps most importantly, reap the income from its exploitation, is a real democratic asset. It’s worth remembering that until very recently most wealth was directly a product of the land and control of land was control of an income source. This idea of independence of livelihood and freedom from the feudal arrangement of the Old World was an economically significant thing to the individual; enough of one for Jefferson and Franklin to revise Locke in the Declaration.

This is not the same thing as owning a suburban plot of less than an acre. What, exactly, kind of economic (and thereby political) independence can you reap from a few hundred feet of ground? A garden? Sale of a little fill dirt? For that matter is a plot that is too small for a septic system really independently owned at all? You’re always hostage to water supply and basic disease-preventing hygiene.

This isn’t to argue against private property, owning things, or even this particular form of ownership – only to say that it’s not absolutely obligatory in every situation, and especially not in an urbanized area. The main problem with the whole fee-simple single-family thing (other than land assembly, eminent domain, and labor mobility,) is the insidious effect is has on our politics.

The franchise is supposed to extend to all adult citizens regardless of age, sex, or class. What we’ve seen is the institution of a two-tier system of citizens’ rights. As so many towns and cities have become filled with row after row of single-family houses owned fee simple, a de facto property requirement has crept into the election rolls. There is a division in the minds of many in suburbia between the “owner” and the “renter” as if they were different species of being. Having a “rent house” on the block is seen as tantamount to infection, multi-family buildings are zoned into ghettos (thereby concentrating and perpetuating stereotypes,) and citizens . . . and that’s their proper name, citizens . . . become “homeowners” when there is a local political issue at stake.

If there is anything the great speculative meltdown should have taught us it is that it is neither necessary nor healthy for everyone to be required to participate in a real estate swindle in order to become full citizens. If the respect of the community, social acceptance of one’s children, and the ability to have a voice in how your democracy runs its affairs hadn’t been seen as dependant on the deed to a tiny unproductive piece of heavily-regulated land, how many fewer bankruptcies, evictions, and devastated lives would we have? Somebody ought to picket the NAR.

. . . . . and that’s not even starting on education.

Collage: Advanced Geometry