Wednesday, August 10, 2011

Another way to think about fiscal policy when real interest rates are negative

Let's all be Nozickians for a second. Let's forget this ethical baggage that these questions get saddled with. I think it's poorly reasoned ethics, but let's set that aside for a second.

Let's say that the only corporate entities we have are contractually entered into, and let's call the contracts "states" if they are meant to facilitate collective action to solve social problems by (voluntarily) empowering a democratically governed authority to raise taxes and spend on the general welfare.

So we're all Nozickians and let's say we're not even Keynesians. What would our voluntary, private governments do in the face of these negative interest rates on government bonds? Forget Keynesian models about exactly why one might want to issue more government debt. Simply as a matter of private reaction to relative prices.

Would a Nozickian, non-Keynesian, private government survive if it insisted on restricting its own access to credit markets precisely at the time when issuing bonds was inexpensive - indeed profitable? Even aside from Keynesian macroeconomic concerns presumably a Nozickian private government would still have things that its voluntary citizens would want to get done, right? And presumably when the price of doing things got cheaper you would see an income effect - a marginal increase in the demand to do more things, right? Every rational Nozickian government - even without Keynesian predilections - would be doing expansionary fiscal policy right now.

There's only one reason why a rational private entity facing these sorts of interest rates on their bonds would not be expanding right now and that's if they were a profit seeking entity that saw reduced profitability in the future. But governments - whether Nozickian and private or public - are not profit-seeking entities. Even insofar as Nozick or Lysander Spooner or others conceive of voluntary private government, it's still not a profit seeking government, so it still ought to embrace fiscal policy under circumstances similar to what we're experiencing now (albeit probably not to the extent that a Nozickian state with Keynesian predilections would).


  1. It's impossible to judge because I disagree with the premise. No governments are voluntary and asking how they would play the "market game" as a voluntarily funded firm is moot. I mean.. if governments become voluntary, then they can't prohibit other so-called voluntary governments from entering the market to offer their product for the simple reason that consumers would no patronize a firm that forms obvious violent monopolies.

    At that point, if there are multiple competing governments, then any understanding of practical countercyclical policy is totally destroyed. One government out of four expanding its fiscal policy would have absolutely no effect.

    Besides, if we're talking about a non-Keynesian government, the appropriate response is to do nothing. Non-Keynesian is generally interchangeable with classical economics.

    Seems to me that a lot of Keynesian economics, at least at it relates to fiscal and monetary policy, requires the existence of a monopoly on government.

  2. With regard to your entire first paragraph note exactly what we're talking about here - a private, voluntary government. You seem to misunderstand the entire thought experiment.

    I'm saying forget macro-policymaking altogether. What would a private government do if its bonds faced these interest rates. The answer seems obvious.

  3. I'm somewhat confused by the term "private government" bootstrapped to Nozick. Nozick wasn't an anarchist; in fact, his most famous book (to non-libertarians) is in part a refutation of anarchism. It isn't a term I ever remember him using any of his books that I've read (Socratic Puzzles and Invariances are the best IMO).

  4. Gary - Of course he wasn't an anarchist. And I never said he used that term itself. What I'm saying is if we think of voluntary associations of people for mutual benefit - if we think of private governments that are acceptable to these sorts of people - how would such a government behave in response to these interest rates on their bonds?

    Do you have thoughts on that point - the point of the post?

  5. Why would you call them private governments exactly? Sounds you're talking about voluntaryism or mutualism to me. Throwing Nozick into the mix just confuses the heck out of things for no good reason.

    What sorts of people exactly?

    And to answer your question, it would depend on the goals come to by mutual consent of the individuals involved. I would imagine that a binary profit/not profit decision-making system doesn't capture what the possible goals of such actually look like.

  6. Gary if you're not understanding the Nozick point, please just drop it. The minimal state for Nozick was simply a framework for utopias constituted privately by people and groups of people. I'm really not seeing why you're struggling with this. If you want to strike "Nozick" from everything I wrote up there be my guest - it obviously doesn't depend on it.

  7. As for your last paragraph - my point is that whatever the goals of such a private government, the question of financing is obviously going to shift toward deficit financing if the relative cost of deficit financing falls. We need not specify the goals of the private government and indeed these goals would be different for different governments. But whatever the goals we'd expect to see substitution.

    The for profit/not for profit point was that this clear substitution effect would not necessarily dominate if the corporate entity was profit seeking.

  8. Sure, but he doesn't call them "private governments." When you get into "private government" speak you've veered into anarchist talk. He doesn't to my remembrance use the term private government - he talks about voluntary communities, etc. instead - and that was his point, voluntary pluralistic communities within a nightwatchmen state. And to me these voluntary communities need not even be capitalist in orientation (that's the whole point of name litany he engages in - all these kinds of people have very different interests and ideas); they may not even take loans or debt because they find it immoral or some such.

  9. If you want to strike "Nozick" from everything I wrote up there be my guest - it obviously doesn't depend on it.

  10. "...the question of financing is obviously going to shift toward deficit financing if the relative cost of deficit financing falls."

    Not if the community prohibits deficit financing for religious or other reasons.

  11. On the margin Gary. Economists think on the margin. Experience with humans, particularly modern humans, suggests that very few entities will be operating at the corner solution you're focusing on.

  12. You have to have a particular capitalist mind-set regarding capital markets, for your scenario to work, and for a lot of people that mind-set is just, well, wrong or inferior and should be rejected.

  13. "Experience with humans, particularly modern humans..."

    Only in strong, centrally governed states. You're talking about a wildly different scenario here and you have to be open to some outcomes that are different than what you would expect in the former.

  14. "Even insofar as Nozick or Lysander Spooner or others conceive of voluntary private government, it's still not a profit seeking government,"

    As the kids say these days [citation needed].

    GG is right that there are/were moral constraints on government, just as there are/were moral constraints on profit seeking.

    You seem to be operating from a position that already take unlimited government spending/power as a given. With all the failures of the Tea Party (and their specifics on the ceiling are among them), they at least propose, even if in opposition (which is what the Republicans seem to do best) limits.

  15. darnit, quoted the wrong part (I blame the so-called "smartphones). The quote/question I had is why a non-profit government is looking for the cheapest credit possible. If Keynes is right, shouldn't government seek debt when it is most expensive (in rate and opportunity cost)?

    Sorry for the clumsiness.

  16. Why would Keynes argue that government should seek debt when it is most expensive?

    re: "You seem to be operating from a position that already take unlimited government spending/power as a given."

    And in response to this too - I have no idea where you're getting this.

  17. For the Keynesian question, isn't debt most expensive (in total costs, including opportunity and uncertainty) during downturns?

    For the second point: simple, if there are moral/legal limits drawn up in the Nozickian contract then interest rates matter naught. One has to conceive of the contracts you're speaking of as having no other clause than the function/payment of government.


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