Randomized trials may not be definitive even when they show clear and indisputable evidence of both a statistically significant and practical difference between the average in the treatment group and the average in the control group. Statistically significant randomized trial results are not always useful to a doctor or nurse when there is substantial practical variation within the treatment group. That is why a statistically significant randomized trial is not definitive proof of causation. Think of a situation where the randomized trial ignores gender. What if a treatment works really well for men but actually does a little bit of harm to women with no benefit. The “average person” may do fairly well with the treatment and even show statistically significant improvement. But the “average person” does not exist. There are only men and women in the trial. The “average person” represents no one. The solution is to use control variables (such as gender) in a randomized trial in order to zero in on the subsets within the treatment group in order to sort out who will really benefit from the treatment and who will not benefit. This means using regression analysis (or analysis of covariance) on data from randomized trials. Hopefully, the new generation of doctors and nurses understand this and are not led astray by “highly significant” results from some randomized trials. This opens the door to the use of anecdotal evidence as useful in alerting a doctor or nurse that the results of a particular randomized trial may not be definitive for some types of patients.
Federal Reserve individual “My America” smartphone bank accounts
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From pages 149-153 in “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone” by Lawrence C. Marsh. (Avila University Press, 2020)
Have Fed Create Individual “My America” Accounts
The Federal Reserve can stop excessive inflation quite effectively by raising interest rates. However, as mentioned earlier, when the economy is in a recession, the lowering of interest rates by having the Federal Reserve purchase Treasury securities in the New York financial markets is sometimes referred to as “pushing on a string,” in not being very effective in quickly stimulating demand for goods and services. To provide the Federal Reserve with the ability to inject monetary stimulus more quickly and more directly into the far reaches of the economy, every person over the age of 18 with a Social Security number would be assigned a bank account directly with the Federal Reserve Bank. Such accounts could be called “My America” prosperity accounts to encourage their use. An initial $1,000 would be placed in each account, which would be treated as a minimum deposit that could not be withdrawn until after age 70. To help people become familiar with their account, all Internal Revenue Service (IRS) tax refunds would be deposited into these accounts. An individual could deposit additional money into their account up to a maximum annual limit, which could be adjusted from year to year depending upon the state of the economy.
To avoid disrupting commercial banking and to focus on the less affluent, the interest rate would only be applied to the first $10,000 of the account value. Funds above $10,000 would earn no interest. Most people have checking accounts with very little money in them, so the banks would not lose much in investible funds in phasing out paper checking accounts. At this point the $1,000 initial amount and the $10,000 upper limit are arbitrary. These numbers may be changed after more careful analysis and remain subject to change depending on economic conditions.
Each smartphone would be preregistered with the Federal Reserve through any post office. Transactions would be verified by both smartphone identification and a user-selected password, as well as fingerprint and/or iris recognition using the camera on the smartphone. In addition, there would be a 60-digit alphanumeric security code generated by an algorithm unique to the user and coordinated with the corresponding algorithm for that account at the Federal Reserve. After each transaction, the 60-digit security code would change both on the smartphone and in the corresponding Federal Reserve account so that no security code would be used more than once. A blockchain across all the account holder’s communication devices (smartphone, laptop computer, desktop computer, etc.) could record each verified transaction in sync with their “My America” Federal Reserve Bank account.
Each year the IRS would deposit all tax refunds directly into these individual accounts.[1] Any money deposited by individuals into their accounts, any additional money injected into the accounts, and any interest earned could be withdrawn at any time. Only the initial $1,000 would have to be retained in the account until age 70.
This would allow for transactions between smartphones, similar to those used in Kenya’s M-Pesa system of smartphone money transfers. The interest earned could be designated as tax-free. These Federal Reserve accounts could take the place of the old, often unprofitable, paper checking accounts that are holdovers from the 20th century. Eventually, these accounts could also replace cash, as smartphones replace wallets in people’s pockets.
The Federal Reserve could then inject money directly into these accounts to provide stimulus as needed whenever a downturn developed, and recession threatened. These bank credits would be created by the monetary authority of the Federal Reserve out of “thin air”—with no taxation required. There would be no addition to the debt, because there would be no government securities issued. As long as the economy has unused capacity, the injection of cash would not trigger inflation. These cash payments could be referred to as tax refund equivalence payments, although everyone would get them, even those who paid no taxes. These accounts could be used to implement the late economist Milton Friedman’s proposal of a negative income tax, which would especially help the poorest Americans. Such an approach would make the “My America” accounts very powerful in stimulating consumer demand using the least amount of money, because the poorest Americans have the highest marginal propensities to consume.
Not surprisingly, Wall Street bankers prefer to have the stimulus money given to them, which they typically use to buy more stocks and bonds, which inflates stock and bond prices but does little to increase consumer demand for ordinary goods and services. During Japan’s economic slump, Federal Reserve chair Ben Bernanke suggested that the Japanese government provide direct cash payments to Japanese citizens to stimulate demand. By implication he raised the idea of direct cash payments to consumers as an alternative to giving money created out of “thin air” to Wall Street bankers by buying Treasury securities during an economic downturn. Wall Street supporters responded to the idea of giving cash payments directly to consumers by coining the phrase “helicopter Ben,” as if such a plan was equivalent to dropping money from helicopters. To belittle such “helicopter money” further, the bankers and their supporters posted “helicopter Ben” videos on YouTube. But the critics of quantitative easing (known as QE) and other Federal Reserve injections of cash into the economy warned of a great inflation that never happened. The critics were wrong! Not only did QE help revive the American economy without significant inflation, but also a substantial proportion of the Fed’s bond purchases was from European banks, so the Federal Reserve helped revive the Eurozone as well.
Direct cash payments through “My America” accounts would have a much quicker and bigger impact on consumer demand and require much less money than giving a lot of money to Wall Street bankers by having the Federal Reserve Bank buy Treasury securities in the New York financial markets. Consequently, it makes more sense to bypass the Wall Street bankers and give the money directly to the American people who know best how to spend the money and, thereby, directly stimulate the economy by increasing the demand for goods and services.
Conversely, when inflation threatened, these individual “My America” bank accounts could offer attractive interest rates to absorb funds directly from the public to take money out of the economy and reduce excess demand. The high interest rates would cause people to put off consumption now for the prospect of greater consumption sometime in the future. At the same time, the Fed could pursue a mixed strategy to stimulate business investment by lowering the federal funds rate (discount rate) that banks pay for overnight loans, as well as the interest rate the Fed pays on the reserve funds that banks have at the Fed. Offering higher interest rates to consumers would reduce excess demand, while the lower rates on bank funds would make investment money available for expansion of plant and equipment, which would also help ease price pressure by increasing the supply of goods and services. Together the reduction in demand and increase in supply (over time) can ease pressure on prices and fend off inflation. The Fed can also engage in open market operations to buy or sell government securities. Econometric analysis can provide the Fed with guidance on getting exactly the right mix of these policy tools to achieve the Fed’s objectives.
[1] Such accounts could also be used to deliver a universal basic income (UBI) if a UBI law is passed by Congress and signed by the president.
Redirect Money Flowing Inexorably to Top of Wealth Pyramid
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Optimal Money Flow addresses the pile up of money at the top of the wealth pyramid which has driven up stock and bond prices and driven down interest rates toward zero. The low interest rates have discouraged savings and encouraged a large build up of debt for middle class and working class households. With high debt and little savings, a job loss, accident or illness can throw a household into financial distress with a sudden drop in consumption creating, in the aggregate, economic instability.
In an economic downturn the Fed’s response of buying Treasury securities in financial markets boosts stock and bond prices but does little to stimulate investment in the real economy when businesses already cannot sell all they are producing in existing lines of production. The additional money flows into stock buybacks and dividends with little trickling down to the real economy.
The money flow paradigm views the flow of money to the top of the wealth pyramid as inherent, inevitable, and inexorable to the free enterprise system. This paradigm requires that government assume its rightful responsibility to direct sufficient money flow from the top to the bottom (like a heart pumping blood throughout the body) in order to maximize employment, economic growth, and efficient resource allocation. In a healthy economy, the money then flows naturally back up to the top in a circulatory flow.
Thus, the money flow paradigm that sees government as the heart of the free enterprise system where it does and should play an active part. Previous economic paradigms such as the neoclassical, Keynesian and monetarist paradigms saw government as an external, alien force outside of the system that was only called upon in response to an unexpected breakdown in the free market system.
Optimal Money Flow calls for the creation of Federal Reserve smartphone bank accounts for every American, where the Fed can give money directly to consumers. Using algorithms from machine learning and artificial intelligence the Fed can vary the amount of money flowing to consumers based on current and developing economic conditions.
Conservatives appreciate that consumers, not government, will decide how to spend the money, which will not require an increase in taxes or add to the national debt, and will involve a lot less money to stimulate the economy, because the average consumer has a much higher marginal propensity to consume that the average Wall Street banker, who is more likely to put additional money right back into the financial markets or buy exclusive properties, rare paintings or expensive jewelry with little increase in new products or services. With more bang for the buck, much less money is needed to keep unemployment low without triggering excessive inflation.
The author has agreed to forgo book royalties so that the entire book price will go for student scholarships when Optimal Money Flow is purchased through the Avila University Press website at: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
Money Flow Dynamics in a Disequilibrium Economy
Static equilibrium analysis is insufficient for understanding and controlling our economy. Our economy does not transition smoothly from one well-defined equilibrium to another. Rather we experience periods of dynamic disequilibrium which require more careful analysis.
Moreover, the nature of the USA economy has changed fundamentally since the nineteen eighties. Earlier the economy was occasionally subject to bouts of strong consumer demand and constrained supply that led to excessive inflation. This was countered with tighter fiscal policy and higher interest rates in monetary policy which sometimes produced recession. The challenge was to keep inflation in check while providing enough stimulus to maintain full employment. During that period the Phillips curve with its trade-off between inflation and unemployment was a useful device for understanding the policy challenge. But this relationship has fundamentally changed in recent decades.
Many authors have documented our transition to extreme income and wealth inequality. Both pay-to-play politics and advances in technology have greatly increased the return to capital relative to labor. What has been less discussed and understood is how this has contributed to a disequilibrium state where consumer demand is constrained while money has piled up in financial markets driving up stock and bond prices while depressing interest rates. Money is readily available for investment but investment opportunities are limited. Investing in an additional production line doesn’t make sense if you are unable to sell all of the product from your first production line. A combination of rapid and extensive automation and massive global supply has overwhelmed consumer demand and driven prices down or at least greatly constrained potential price increases. Inflation has fallen below and stayed below our monetary policy target of two percent.
One aspect of this situation has proven to be especially important. The very low interest rates has discouraged savings and encouraged consumer debt. Little or no savings has greatly contributed to economic instability. Consumers have taken on massive amounts of debt in the form of mortgage debt, credit card debt, home equity debt, student loan debt and, in conjunction with our aging population, medical and health related debt. In fact, in our current state of economic disequilibrium the middle class can no longer afford to buy back the value of the goods and services it is creating.
With virtually no savings, members of the middle class are operating paycheck to paycheck with no safety net. This turns income and wealth inequality into inherent economic instability. Any accident or unanticipated medical issue, not to mention job loss, could mean a sudden drop in consumption of ordinary goods and services.
To compensate for what would otherwise be a shortfall in consumer demand, the Federal government has stepped in with unpaid-for tax cuts and increased expenditures that have substantially increased the Federal debt. The proponents of new monetary theory who generally dismiss the importance of this ever increasing national debt have implicitly understood the growing and essential role of the Federal government in supplementing the otherwise inadequate consumer demand.
But it is monetary policy that is partially to blame for this situation. The practice of buying Treasury securities in the New York financial markets has greatly contributed to stock and bond price bubbles, but, more importantly, to lower interest rates and the over-indebtedness of the middle class. In this way, with the help of the mathematics of compound interest, monetary policy exacerbates income and wealth inequality by making the rich even richer (higher stock and bond prices) and the middle class poorer (deeper in debt).
Forthcoming book “Optimal Money Flow” proposes creating “My America” Federal Reserve smartphone bank accounts for everyone with a Social Security number. When the economy slows, money can be injected directly into these accounts to avoid recession. This would be much more effective in reviving the economy and require much less money than the enormous amount of money given to Wall Street bankers, which is a waste of time when consumer demand is inadequate to justify adding another line of production when companies can’t sell all they are producing with their first line of production. Instead, Wall Street bankers just buy more stocks and bonds. Giving the money directly to consumers makes much more sense.
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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
Money Flow paradigm
The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.
Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.
We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of neoclassical, monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.
Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.
The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.
The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important. Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.
For additional details see 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS
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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
Thousands of Small Colleges to go Bankrupt as Birth Rates Decline
Is there a small college or university near where you live? Declining birth rates threaten to cause it to go belly up in coming years unless more students are found. Do you want to see a vibrant campus become a bunch of empty buildings? That would just attract illegal drug dealing and become a possible hangout for street gangs.
How about giving more financially challenged students a chance to attend college? We like to call our country the land of opportunity, but children who happen to be born into poor families cannot afford the high cost of college without financial assistance.
Let’s make a major effort to make it possible for financially disadvantaged students to attend college. Basically this means contributing money, both directly as individuals, and together as a community, to student scholarship funds that pay for tuition and college expenses such as books and student housing.
Many people are concerned about extreme income and wealth inequality, but they don’t seem to realize that economic inequality is just as extreme between the most well-known and highly-ranked big universities, and the less well-known, but highly-respected, smaller colleges and universities. The large, well-known universities are in great demand and have very large endowments of over a billion dollars, whereas the smaller, well-respected colleges and universities may have less than 10 million dollar endowments, which will have to be tapped, and will be consumed quickly, as enrollments drop off. As with people, the well-to-do are well-to-do indeed, while those with little to start with are struggling to get by.
It’s great to say we live in the land of opportunity, but let’s make it a reality for those who didn’t happen to be born into financially secure families. In thinking about tax write-offs for charitable giving, why not include giving some money for student scholarships, especially at those smaller, less-well-known, but highly-respected colleges and universities?
Lawrence C. Marsh, the author of “Optimal Money Flow: How a Dynamic-Growth Economy Can Work for Everyone,” has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
Poor Money Flow Has Produced Our Dangerously Unstable Triple Bubble Economy
=> Understanding the origin of our very unstable triple bubble economy: the Middle Class Debt Bubble, the Federal Debt Bubble, and the Wealthy-Savings Bubble. <=
Too often our economic textbooks describe economics as a simple transition from one static equilibrium to another without a full understanding and explanation of the accommodative or disruptive forces that drive us toward or away from such an equilibrium state. We need dynamic analysis to better understand the underlying forces that contribute to or disrupt optimal money flow in our economy. This involves population dynamics, technological innovation and the role of globalization with the increasingly interdependent world economy.
In 1839 Thomas Carlyle declared economics to be “the dismal science” because of Thomas Malthus’ argument that the supply of food could never keep up with demand, because population growth would always expand demand to more than absorb any increase in supply. For centuries demographers and economists have warned of the unsustainability of the world’s population growth and all of the economic and environmental problems that would follow.
Full stop. Rather suddenly, the dynamics have reversed abruptly. Population growth has dropped dramatically and many advanced economies have populations in decline. Japan, Germany, Italy, Russia and many other developed countries have been losing population. The United States would have a declining population if it were not for immigration. Even China is destined to see its population peek and then decline partly as a result of China’s one-child policy, which was introduced in 1979 by Chinese leader Deng Xiaoping.
In my economics class at Notre Dame at the start of class on a Monday morning, right after an exciting football weekend, I was trying to get my students’ attention. After several failed attempts to begin our discussion on international income distribution, I suddenly announced: “Today we are going to discuss birth control.” My students immediately blurted out: “Birth control. This is a Catholic university. We can’t be discussing birth control.” I persisted. “What is the most effective birth control method in the world?” I asked. The students were shocked and incredulous. Finally, I said: “It turns out that the most effective birth control method in the world is per capita income. When per capita income rises above $6,000 US dollars, birth rates drop like a rock.”
The problem is not just fewer people, but fewer young people. Other than more medical care, most older people don’t need a lot of things. Typically, they already have accumulated too many possessions from clothing to pots, pans, tools and books. And old people tend to be more conservative and want to hang on to their possessions. It is hard to convince them that they need a whole new wardrobe or a new style of furniture in their old age. At the same time, young people are expressing a desire for experiences (often involving international travel) instead of acquiring lots of possessions. This also reduces the demand for goods and services in our economy.
Now consider the role of changes in technology in driving a transition from a primarily variable cost (labor) economy to a primarily fixed cost (capital) economy. ………………………….
While demand slows with declining population growth and the aging of the population, the supply of investible capital has grown exponentially. Extreme income and wealth inequality has provided a small segment of the population with way more money than they know what to do with. This wealthy-savings bubble has led to a build up of investible funds in financial markets driving up stock and bond prices. Large corporations often use the excessive pool of cash to buy up rival companies or buy back shares of their stock.
At the same time, middle class people are up to their eyeballs in debt. People have credit card debt, mortgage debt, college loan debt, home equity debt and ever more debt from rising health care costs. With so much debt the middle class cannot afford to buy back all the goods and services they are producing. To counter this middle class debt bubble, the federal government has filled in for otherwise inadequate consumer demand by providing unpaid for tax cuts and expenditures. This has produced an ever increasing federal debt bubble.
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Lawrence C. Marsh, the author of “Optimal Money Flow: How a Dynamic-Growth Economy Can Work for Everyone,” has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh