Economics in Debate

Rodda John

Outline

1. Overview
2. Debt
3. Interest Rates
4. Nationalization

Overview

How to think about economics

• An economy is a set of transactions
• A transaction is an exchange of money, credit, goods, or services, for money, credit, goods, or services.
• Price of a good is total money and credit chasing the good / total quantity of it
• On a macro scale
• On a micro scale, you can think of it as what someone is willing to pay for something
• Anything that affects the incentive of the buyer or the seller will affect the price
• If a buyer has $100, then loses $50, spending $20 is suddenly a lot of money to spend
• If a seller has 100 items of a good, then loses 50, selling 45 is now a significant percentage of their stock
• If scarcity doesn’t exist, none of this matters

• Implication: If you want to understand an economy or a market, just study the incentives facing the buyers and sellers at a transactional level
• Implication: You don’t need to be able to draw demand and supply curves to engage with the impacts of an econ case- just link it back to this transaction based framework.

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Debt

What do I mean by debt?

• Give me a $100 today, I’ll pay you back $110 in a year. When I spend the $100 today it’s called credit. You (the lender) also now have an asset in the form of $110 I owe you

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Why do we care about debt?

• It makes the world go round (credit >>> money so what happens to it matters, drives transactions)- particularly in recessions when incomes are low
• It helps allocate resources to their most efficient uses
• It lets people consumption smooth
• Investment opportunity/source of future cash flows for creditors (banks but also gentlemen)

Debt #2

Said differently, if debt is so great, why don’t we just keep borrowing and keep the party going?

1. Often just can’t keep borrowing more (obvious at an individual or companies level but sometimes for countries too, or if you can at a much higher cost)
1. What about countries that issue debt in their own currency? Can’t they just print more money to pay back debt?
1. Yes but too much seigniorage=too much inflation. That’s not fun, just ask Zimbabwe in the 20^th century or Germany in the 1930s
2. Debt service sucks- austerity, high interest rates, often when your economy requires the opposite. Also $ spent on debt service=$ not being used on transactions elsewhere=less consumption=less income
• So why not just default?
1. Who would lend to you again?
2. Punitive measures/creditors come in and fuck your shit up
3. Capital flight out of your country

Basically, borrowing too much today is like drinking too much tonight- you’re just borrowing happiness from tomorrow

This is applicable to lots of cases about development: See Yale r5, Megasports, Stupid APDA arguments about “being able to spend your way out of recessions” no matter the conditions

Disclaimer: Absolute debt levels are meaningless, need relative numbers (Debt-to-GDP)- me borrowing a hundred thousand dollars is very different from Ray Dalio borrowing a hundred thousand dollars

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Interest Rates

What is an interest rate?

• The cost of borrowing money
• Essentially, it’s a price

Hence our old framework can apply nicely to thinking about them

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Who sets them?

• The Central Bank

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In a world without central banks, when would they fall and when would they increase?

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Interest Rates #2

What effect does a fall in interest rates have on your economy?

• Makes borrowing cheaper so incentivizes that, in general just makes it more attractive to borrow and invest in new projects as a firm
• Reduces discount rates (as lower time value of money)
• Contributes to making investments by firms seem more profitable
• Also increases the value of other investments like stocks which creates a wealth effect

Overall, disincentivizes saving, encourages consumption

Implication: Generally desirable in a recession when consumption levels low, unemployment high and inflation low

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Interest Rates #3

What about high interest rates?

Exact opposite- encourages saving, discourages consumption

Implication: Desirable to raise them if the economy is “becoming too hot”, or done to prop up a currency

Side note: Why is this a problem?

1. Bubbles
2. Inflation has downsides
1. Redistributes PP away from creditors towards debtors
2. Fucks over those not compensated for it- generally these people are poor (don’t have their savings in an interest bearing investment) or pensioners
3. High inflation leads to high uncertainty so can discourage investment- is hard to know what conditions will look like in the future so firms or foreigners don’t invest
4. Hyperinflationary cycle risk

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Nationalization

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Why do governments nationalize certain industries?

• Some are of outsized importance to some countries’ economies (e.g. Saudi Arabia and Oil historically) so the government wants control
• Convenient source of government revenue- could mean they need to tax people less

Particularly good for countries that have poor tax collecting histories

• Source of jobs for the population, makes sure wealth stays in the country

“Evil foreign corporations well send the money they earn off of our resources back to their countries”

• It makes sense to have one company run as a “natural monopoly” in some industries from a cost stand-point
• Infant Industry Argument
• Infant industries don’t have the economies of scale that their larger competitors do have

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Nationalization #2

What are the benefits of free market competition?

• More competition implies more innovation, (better products), lower prices and just generally a better deal for consumers
• Less red tape/bureaucracy, ability to pay higher salaries potentially attracting the best talent
• Less prone to favoritism and corruption than the government in many cases

Why are infant industry arguments almost always stupid?

1. You don’t know the counterfactual
2. How are you supposed to know what industries are most likely to be globally competitive?
3. The government picks the winners- leaves itself open to massive corruption and favoritism
4. When is the right time to remove the protections?
5. Even if it is the right time to remove protections, if companies grow big and important enough there’s a strong countervailing incentive facing the government to not remove them
6. Lack of competition in the interim may mean these companies don’t develop as fast as they otherwise would, grow lazy
7. Consumers get f****d over in the interim
8. Lose out from knowledge spill-over effects, lower prices, better products from Free Trade in interim

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