Recent Posts

Wednesday, April 24, 2019

Minsky Versus Steindl Debt Dynamics?

 In Marc Lavoie's Post-Keynesian Economics: New Foundations, he has an interesting discussion in Section 6.10.4, which is labelled "Minsky or Steindl Debt Dynamics?" The Minsky dynamics are the well-known Financial Instability Hypothesis (link to primer), while the Steindl dynamics refers to the discussion in Maturity and Stagnation in American Capitalism by Josef Steindl. Lavoie's discussion raises some issues with the limitations of aggregated analysis in this context. This is a brief comment on this topic.

Lavoie's discussion is based on some calculus that demonstrates that we can have two stable regimes for growth: one in which the debt-to-capital ratio is rising, and one where it is falling. He identifies the rising debt ratio regime as being associated with Minsky, and the falling debt regime with Steindl.

As I argued in my discussion of the Financial Instability Hypothesis, its most natural interpretation is in terms of agent-based models. (Minsky used the term "unit" in his texts extensively, so "unit-based models may be more fitting.) In a growing economy, it is unclear that aggregate debt ratios will match the intuition that higher risk lending always corresponds to higher debt ratios.

This is because in an environment of fast growth, debt principal can be "inflated away" by greater nominal income growth (which may either be inflation or real growth). Even if interest rates are raised to compensate for higher inflation, the principal amount is still being whittled away by inflation, which shows up in the ratio.

In order to control for these effects, we need to look at the trends in debt service ratios to get a better handle on the riskiness of lending.

Furthermore, even if inflation is not reducing debt ratios, the aggregates may be hiding trends for risk. Although the usual framing of the Financial Instability Hypothesis is that there is an across-the-board rise in risk-taking, it seems possible that dominant mature industries could reduce leverage as they no longer face large fixed investments to finance. This could reduce debt ratios in aggregate as newer industries pursue more aggressive strategies. Since the credit markets are sensitive to tail risk, it does not matter much if low risk borrowers become even lower risk if troubles are brewing elsewhere.

In summary, we need to be cautious about putting too much emphasis on aggregate debt ratios as a shorthand for riskiness of borrowing.

 (c) Brian Romanchuk 2019


  1. Brian, what is your views on land value tax and speculation on land. A 100% tax on unimproved value of land, not including buildings and improvements, "location, location, location" value could replace many taxes and be used to fund a basic income.

    1. Not a fan of land tax. Courtesy of adding an extension on my house, I will face a greater tax bill than my neighbour, who has a lot that is probably the same size as mine. Meanwhile, some dimwit ripped down the house a few doors over, and put up a monstrosity that has probably 40% more square footage than my house, but on a smaller lot. Taxing land alone would reverse the tax burden than what happens under property taxes (the monster house faces the largest property tax, but the smallest land tax). This would be so unfair that Canadian voters would obliterate anyone foolish enough to propose such a policy.

      Since there are almost no transactions for land alone in developed areas, there is literally no way to get a legitimate value on land; any valuation is purely guesswork pulled out of some "expert's" nether regions.

      Furthermore, funding a basic income with a land tax shows a huge lack of understanding of Functional Finance. A basic income is extremely inflationary, which is why it is a bad idea relative to a Job Guarantee. Taxing land (or property) is hitting the people who have the lowest propensity to consume out of income -- which is a terrible way to control inflation.

      If you want to soak "the rich," go ahead -- but don't assume that it will be useful for inflation control.

    2. Firstly, the Job Guarantee would still be in place.

      I love Pigovian taxes. Fuel duty even more than land tax for example, is not really a tax on petrol or a tax on pollution at all, it is a very simple but effective road user charge. What you are paying for is not the fuel itself, what you are paying for is the right to drive a certain number of miles over public roads. Fuel duty is rent for roads. If it were scrapped then pump prices would halve, there'd be fifty per cent more cars on the road and the country would descend into complete gridlock. So while haulage companies complain about the cost of diesel, it would probably be the case that if we halved diesel and petrol prices, the extra costs of having twice as many lorries on the road with twice as many drivers travelling at half the speed means that their profits are completely wiped out. Similar reason to which I love the land value tax.

    3. 1) You need to attach numbers to this. A basic income plus a JG wage would put someone near a middle class income - all coming from the government. What happens to the wage structure in the private sector?

      2) it’s not as if the tax can reduce the amount of land. I really don’t see what problem this is solving.

  2. "Me" referred me to your arguments.

    I have rebutted here.


Note: Posts are manually moderated, with a varying delay. Some disappear.

The comment section here is largely dead. My Substack or Twitter are better places to have a conversation.

Given that this is largely a backup way to reach me, I am going to reject posts that annoy me. Please post lengthy essays elsewhere.