Archive for the ‘economics’ Category

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I predict: 1. Seemingly good economic news

Wednesday, July 15th, 2009

I predict that around 2009 October or so, there will be lots of seemingly cheerful economic news. Quite possibly sooner, possibly some time in August.

I predict that the Keynesian element of the depression will rapidly and visibly diminishing towards the end of the year.  Crises that are well described by Keynes (aggregate demand falling below aggregate supply) never last long, except to the extent government intervenes to forbid businessmen to adjust to them.  Say’s law is observed to be mostly true in practice, except where the government makes it illegal.   Obama, for all his faults, has not done much to stop Say’s law from operating, therefore aggregate demand is going to be fine very soon.

It will then become apparent to what extent this is a crisis as described by the Austrian school – (unemployed financiers, real estate agents and union car makers that have to learn new careers) and to what extent this is a Galt strike, a crisis as described by Ayn Rand in “Atlas Shrugged” (horrified entrepreneurs despair and flee.)

I also predict that when it becomes apparent to what extent this is a Galt Strike, the cheery economic news will not look so cheery in retrospect – that at some time between late 2010 and early 2012 the “green shoots” of 2009 will be discovered to have been composed of poison ivy.

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Speaking power to truth

Monday, July 13th, 2009

If  an economist wants to get places, he had best tell politicians and bureaucrats what they want to hear.  The danger is that if says it often enough, he will himself come to believe it.

Larry Summers is an economist.  When Bush was in power, he believed in Bushonomics, which got him into trouble in an academic environment of rigid, mindless, and unthinking left wing orthodoxy.  Now, however, it seems he firmly believes in Obanomics. (more…)

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The “stimulus” is far too large and far too small.

Saturday, July 11th, 2009

Republicans are getting traction by condemning the “stimulus”, as an outlandishly extravagant porkfest, as miserly and inadequate, and as a disaster that should not be repeated – an attack made all the more effective by the many radical Democrats who complain the porkfest was inadequate, and call for a bigger and better porkfest: “Stimulus II”

Obama’s approval ratings, though still high, are plummeting fast under this withering criticism.

In Japan, they are now on stimulus umpteen, the Japanese economy is not looking very stimulated, and the Japanese government is getting close to bankruptcy.

The porkfest is too small in that it takes the government a very long time, several years, between deciding to spend money, and the money actually getting into people’s pockets, so the only stimulus that has had any effect are the tax cuts – and the carbon bill looks suspiciously like an alarmingly large tax rise: “tax and raid”, as the Republicans are calling it.  This is not very stimulating.

As for too large – well we cannot definitely say it was too large unless serious inflation or national insolvency sets in, and so long inflation remains subdued, people can always say it would have worked had it been larger.

My expectation is that it will not work, not matter how large, because this is primarily a Galt Strike, and only to a minor extent the inadequacy of aggregate demand that Keynes described.  But this theory can only be tested if the Democrats put the pedal to the metal, and do enough stimulus that serious inflation sets in.

If inflation sets in without recovery in employment and investment, that will be compelling evidence in favor of the Galt Strike theory and against the Keynesian theory.  But as long as inflation remains low, people can say of the American stimulus, as they say of the Japanese stimulus, that it would have worked if only it was tried hard enough.

If, on the other hand, the stimulus actually stimulates something broader than gigaprofits at Goldman and Sach, then that will be compelling evidence that Keynesianism or neo Keynesianism does describe the present economy accurately enough.

If inflation with high unemployment and stagnant investment, then I am proven right.

If low inflation with high unemployment and stagnant investment, then everyone can plausibly claim to have been proven right, though in fact nothing will be proven – the situation we now have with Japan.

If low unemployment and adequate investment, the Keynesians will be proven right.

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Constitutionality of the removal of the Presidente of Honduras

Tuesday, July 7th, 2009

Because the president of Honduras proposed to change the constitution to allow him further terms of office, he was accused of violating article 239 of the Honduran Constitution:

No citizen who has already served as head of the Executive Branch can be President or Vice-President.

Whoever violates this law or proposes its reform, as well as those that support such violation directly or indirectly, will immediately cease in their functions and will be unable to hold any public office for a period of 10 years.

So the Honduran constitution says that if the presidente proposes to extend his term, he shall be immediately fired.

ARTICULO 239.- El ciudadano que haya desempeñado la titularidad del Poder Ejecutivo no podrá ser Presidente o Vicepresidente de la República.

El que quebrante esta disposición o proponga su reforma, así como aquellos que lo apoyen directa o indirectamente, cesarán de inmediato en el desempeño de sus respectivos cargos y quedarán inhabilitados por diez (10) años para el ejercicio de toda función pública.

OK. He shall be fired. And the Supreme Court and Legislature proceeded to fire him.

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What is wrong with the Bush/Obama economic stimulus

Sunday, July 5th, 2009

Tim Kane tells us:

Ironically, the harshest critics of Obama are also overly optimistic. The White House wants to believe the stimulus is working. The critics want to believe the stimulus wasn’t necessary because the economy is getting better already.

No, that is not what the harshest critics believe.  The harshest critics, such as myself, believe that the Keynesian description of the crisis only addressed a small and unimportant part of the truth, thus stimulus could only have a small and unimportant benefit.  The economy is not “starting to get better already”, rather it is only beginning to go bad.

The crisis was originally well described by the Austrian model of recessions – we discovered that we were erroneously over investing in the finance and housing sectors, that the value supposedly created by financiers and real estate agents was largely phony, and that many of the customers for housing were unable or unwilling to pay, and that as a result of CAFE and other restrictions on new cars, new cars were less useful than old cars.  As a result, we got a diminution not in aggregate demand but in demand in particular sectors, which cannot be remedied by aggregate stimulus, but only by labor and capital mobility.

The continuing crisis is well described by the “Atlas Shrugged” model, rather than the Austrian or Keynesian model: the government smashes capitalism causing the economy goes to hell.  Thus, for example, a substantial part of the stimulus package was to impose burdens on employers who lay off workers, which of course increases, rather than decreases layoffs.

Our new permanently high level of unemployment will resemble the permanently high unemployment of many European countries.

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Rising natural rate of unemployment

Saturday, July 4th, 2009

The nairu is the natural rate of unemployment, the level of unemployment that arises from people changing jobs, minimum wage laws and trade unions.

Felix Salmon cheerfully tells us

As for the possibility of a higher Nairu, we’re so far away from there right now that for the time being such discussions are probably academic.

On the contrary, the nairu has risen right now – the US is not in a Keynesian recession where aggregate demand is less than aggregate supply, we are in an Atlas Shrugged recession where employers are punished for employing. If the current crisis in the USA was well described by Keynes, then core inflation would have fallen as unemployment rose. Instead core inflation has remained pretty much constant, indicating that any increase in employment that reduces the unemployment rate to below present high levels will result in accelerating inflation.

A substantial part of the Obama “stimulus” package was to make it more expensive for employers to lay off employees. Since employers, unlike politicians, regulators, and voters, tend to take a long term view, this of course makes them more apt to lay people off, and less apt to hire people.  If you increase the cost to employers of people changing jobs, the nairu resulting from people changing jobs will increase.

Another part of the “stimulus” package was to privilege unions in various ways.  Unionization directly raises the Nairu.

A large part of the “stimulus” package was to privilege big companies over small companies, the extreme case being “too big to fail”  Market concentration increases the nairu.

Rapidly rising unemployment without falling inflation indicates that this rising unemployment is directly caused by the “stimulus” and is likely to be permanent.  Moving to a European style political and economic order means moving, permanently, to European levels of unemployment.

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Creating the next crisis 2

Friday, June 26th, 2009

Remember all that junk mail:

Bad credit?
No credit?
No problem! Buy the house of your dreams with no money down!

Well thanks to the great Bush-Obama stimulus package, looks like you will be seeing it again.

When the government says that private lending has dried up, this is code for the strange absence of no money down loans to people with bad credit.  People I know, such as my sister in law, who had money and good credit found that lenders rolled out the red carpet for them.  There was never lending crisis for traditional borrowers.

When the government says there is a lending crisis, it means the problem is that a drunken no-hablo-English wetback seems to be finding a bit of trouble borrowing.  But never fear.  Your ever helpful and benevolent government is remedying this terrible market failure.  Whatever would we do without regulation and subsidy?

The FHA is now providing one hundred percent government guarantees for loans to people with bad credit.  Supposedly the borrower must put three and a half percent down, but since real estate agent fees, mortgage broker fees, and assorted charges theoretically add up to slightly over ten percent, a clawback from the various people involved can and does reduce this to zero.  When I transact a house, I usually manage to clawback four to six percent from these various charges, so if I was purchasing a house with what on paper was a three and half percent down loan, and managed to get my usual clawbacks, I would get the house and two percent cash in hand – negative money down.  And that is without a kickback from the seller. Of course that is why the lenders would rather do the loan with a drunken no-hablo-English wetback, who is unlikely to be so fierce at clawing back and chiseling down their fees as I am.

When you buy a house on a loan with small money down, you usually also get an under the table kickback from the seller.  With a kickback from the seller and clawbacks from agent and broker fees, three and a half percent down vanishes fast.

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The universal government white paper:

Friday, June 19th, 2009

In my earlier post Creating the next crisis I critique the same white paper on solving the financial crisis as Arnold Kling critiques

On of his commentators has an excellent summary of this paper, and indeed every similar governmental and quasi governmental paper addressing every crisis:

  1. Politicians are of course entirely lily white and innocent, except that the other party allowed bad people in the private sector to do bad things.
  2. Some government agencies failed to do enough.
  3. Solving the problem requires more power to the government.
  4. Those government agencies that failed the worst, shall get the largest increase in money and power.

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Inflation looms

Friday, June 19th, 2009

Bryan Caplan, favorably citing Sumner, tells us “stop worrying about inflation”

Supposedly we should stop worrying about inflation, because the bond markets predict only moderate levels of inflation. Supposedly we can determine future inflation by looking at the difference between Treasury Securities, and Treasury Inflation Protected Securities. Supposedly, this tells us what the people investing in securities think that inflation will be, and they are pretty good at predicting inflation.

However, this tells us only what people who are confident that inflation will be moderate think inflation will be, because if you are worried about immoderate levels of inflation, you do not diversify into long term Treasury Inflation Protected Securities, you diversify into gold, silver, guns, ammunition, rice and beans, which is roughly what the Chinese are doing, except that they are also diversifying into copper and iron, and private Chinese are not allowed to diversify into guns and ammo.

The bond market does not tell us what the smart money people think inflation will be. It tells us what those among the smart money people who do not expect very high levels of inflation think inflation will be.

What are the Chinese worried about?

They are not worried about the possibility four percent inflation in 2011. They are worried about the possibility of four hundred percent inflation in 2020. And so they are not buying Treasury Inflation Protected Securities. And so the difference between Treasury Securities and Treasury Inflation Protected Securities fails to reflect their concerns. And so, if we look at the bond market, what it tells us is that the Chinese think inflation may well hit four percent in 2011, but does not tell us what they think inflation will be in 2020. But if you listen to what they are saying, what they are saying is that they think there is a substantial risk of very high levels of inflation in eight years or so.

Governments tend to go down the tubes when total public debt is around two hundred percent of GDP or so. Thus a deficit of ten percent of GDP or so is sustainable for ten or twenty years or so. Trouble is that in addition to an on budget deficit of ten percent or so, there is also a much larger off budget deficit, in the form of an ever growing pile of government guarantees, which there is no will to restrain. Put the two deficits together, crisis looms.

Trees do not grow to the sky. That which cannot continue, must stop.

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Internet Gold alive and well

Monday, June 15th, 2009

Iang gives us an obituary for e-gold.

E-gold is only dead the way Napster is dead. Like Napster they demonstrated that the business model was viable, and also demonstrated that as soon as you started transferring serious money the US government would come after you.  As a result, there are a lot of replacements for e-gold, which the US government will find hard to shut down, notably Pecunix and Webmoney.

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