Sunday, November 30, 2008


Don't Worry, God's In Control

For this Sunday's deep thoughts, I just want to remind everyone that if you believe in an omniscient, omnibenevolent Creator, then this has implications. You are acting inconsistently with this belief if, say, you are constantly worried about the future.

Note that there is a difference between preparation and worry. God appears to have designed reality to obey regular (and surprisingly simple) laws, and He equipped us with reason to discover them. So I don't think it is being "faithless" to anticipate future contingencies and prepare for them. However, it is violating scriptural precepts to fret:

Matthew 6:25-34 (New King James Version)

Do Not Worry

25 “Therefore I say to you, do not worry about your life, what you will eat or what you will drink; nor about your body, what you will put on. Is not life more than food and the body more than clothing? 26 Look at the birds of the air, for they neither sow nor reap nor gather into barns; yet your heavenly Father feeds them. Are you not of more value than they? 27 Which of you by worrying can add one cubit to his stature?

28 “So why do you worry about clothing? Consider the lilies of the field, how they grow: they neither toil nor spin; 29 and yet I say to you that even Solomon in all his glory was not arrayed like one of these. 30 Now if God so clothes the grass of the field, which today is, and tomorrow is thrown into the oven, will He not much more clothe you, O you of little faith?

31 “Therefore do not worry, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ 32 For after all these things the Gentiles seek. For your heavenly Father knows that you need all these things. 33 But seek first the kingdom of God and His righteousness, and all these things shall be added to you. 34 Therefore do not worry about tomorrow, for tomorrow will worry about its own things. Sufficient for the day is its own trouble.

Friday, November 28, 2008


Think Before Acting

Regarding the earlier thread, where we are discussing a climate scientist's handling of the alleged halt in global warming: It only occurred to me a couple of days after posting it, but isn't it crazy that one of the climate scientist's responses is that some of the temperature series show a warming? Specifically, he said:
The confused argument hinges on one data set - the HadCRUT 3V - which is only one of several estimates, and it is the global temperature record that exhibits the least change over the last decade. Other temperature analyses suggest greater change (warming). Thus, one could argue that the HadCRUT 3V represents the lower estimate, if a warming could be defined for such a short interval.

Isn't it rather amazing that we are being asked to give all sorts of taxing and regulatory powers to the government when the climate scientists aren't even sure if the earth is warmer now than it was ten years ago?! This isn't the silly, "Ha ha they can't even tell me if it's going to rain next Tuesday!" quip. They are here admitting that they're not sure if there has been warming over a ten-year interval. And it's not as if one decade is a spit in the bucket for their whole sample period. The human contribution to the globe's temperature was allegedly concentrated in a 60-year period or so; i.e. the serious GHG emissions didn't kick in until the post-war boom.

So isn't it strange that they are that certain, the science is settled, etc., based on waht really is about 60 years of actual measurements where the independent variable has significantly changed, and yet they themselves admit that 10 years is really not long enough to say much in this type of analysis?

As always, I am not claiming the climate scientists are dumb or lying. What I am claiming is that they are overrating the confidence we should place in their understanding of the relative contributions of various drivers of climate change.


Economics Is One Discipline With Low Perceived Barriers to Entry

I know there is a much more eloquent Rothbard quote to this effect, but I want to second his observation: For some reason, many people have no hesitation in confidently offering views about economic topics even though they would be much more modest if it came to another specialty.

For example, at Thanksgiving I was talking with a perfectly pleasant and intelligent relative of my wife. We were chatting about our respective businesses. He explained that he did video editing, and I explained that I was an economist. I asked him a few questions about his line of work, and when I was explaining mine, the issue of price movements came up. I gave my standard spiel about the monetary base and prices taking off once the panic subsides. Then he confidently told me that it's not a matter of how much money there is, but how fast it moves from person to person; it was like water moving through a pipe (I think was the simile he used).

Now his statement was fine as far as it went, but it just struck me how breezily he "corrected" my own views on monetary theory. It would be as if he told me how he knew where to stand when taping a wedding, and I said, "Well it's not so much that, but rather that you have to ask the father of the bride where he wants you to stand, since he's paying for it."

To repeat, I'm not picking on this guy in particular; it's just a recent example of something you see all the time. I think it's partly because politics is so partisan that people don't think there really is an objective science of economics. So since any random econ PhDs might disagree about price inflation next year--whereas two physics PhDs won't disagree about the trajectory of the moon--people don't take "trained professionals" seriously when they are economists.

However, I think there's more to it than just that. I think most people have no idea how complicated an economic system actually is. And the last thing, people have a first-hand knowledge of the basic content of economics. So it really doesn't seem hilarious for someone to pontificate about the causes of price movements, whereas that same person wouldn't dream of "taking issue with" something a heart surgeon says about his job while passing the gravy.

Monday, November 24, 2008


Chicago vs. Vienna Tag Team!!

I haven't read Doug's piece yet, but today at you've got my Open Letter to Gary Becker (regarding whether depressions are "good") and MacKenzie's critique of Richard Posner on the same topic.

Sunday, November 23, 2008


Trusting the Model Over the Measurements?


This may shock some readers, but I really do try to keep abreast of the work of the "real climate scientists" and not get trapped in a corner listening to various skeptics argue whether Al Gore is evil or just crazy. Since one of the latest snarky things is for skeptics to point out that the world hasn't warmed in the last ten years (despite large increases in CO2 concentrations), I was interested to read the latest post at RealClimate which took on this (alleged) canard.

Anyway, the writer says:

Confusion has continued regarding trends in global temperatures. The misconception 'the global warming has stopped' still lives on in some minds. We have already discussed why this argument is flawed. So why have we failed to convince ;-) ?

The confused argument hinges on one data set - the HadCRUT 3V - which is only one of several estimates, and it is the global temperature record that exhibits the least change over the last decade. Other temperature analyses suggest greater change (warming). Thus, one could argue that the HadCRUT 3V represents the lower estimate, if a warming could be defined for such a short interval.

A comparison with other temperature analyses, such as the NASA/GISS...reveals differences. We can also compare with model-generated data (re-analyses), keeping in mind that one must be very careful with these data since they are not appropriate for studying long-term climate change (they give a misrepresentation of trends - at least on a local scale). Nevertheless, information from independent data suggest an increase in global mean temperatures even over the last decade.

(Note that the figure above comes from one of the comments in the RealClimate thread, and note that the source is GISS, run by Hansen. I.e. I'm not taking the graph above from the Michael Crichton estate.)

I really am trying to not jump to conclusions here. I know some of Free Advice's readers are on "the other side" so to speak, so by all means, please explain if I've missed something here.

However, it seems to me that what the writer above is saying, is that we shouldn't take seriously the skeptic claim that "global warming has stopped" (for the last ten years), because (a) only one set of measurements shows this, and (b) such a halt in warming doesn't fit our models.

Now point (a) is fine, and point (b) isn't terrible, subject to a caveat. And yet, the caveat the writer gives is NOT, "Of course, these are just models, and in the long-run the data must trump the models." I admit I don't really understand what the stated caveat is, but I'm pretty sure it's not pointing out the obvious danger in ignoring temperature readings (over the course of ten years) because they don't match what your model predicts.

Like I said, I am trying to be fair. I suppose one could argue that I have done an analogous thing in my cynicism regarding the BLS's inflation figures. But even there, I have not been saying, "I think inflation is higher than the BLS is admitting, because look at the money supply and I believe Milton's theory!" Rather, I have been saying, "I think inflation is higher than the BLS is admitting, because no matter how I manipulate the government's own gas price data, I can't get the 'seasonally adjusted' fall that the BLS reports (back in April), and because the BLS' own yr/yr increases suggest far more inflation than their seasonally adjusted, annualized rates."

And you can be darn sure that if ten years go by and gold has never broken $1000,* I will admit that I was waaaay the heck wrong in my forecasts.

By the way, in case you are entirely new to all this stuff: The main reason the graph above annoys the proponents of the theory of manmade global warming is that 1998 was unusually warm. I.e. there was a huge spike from 1997 to 1998, and so it's natural that temperatures fell immediately after it. Gavin Schmidt I think gives a better first pass at the "why hasn't the globe warmed in ten years?!" attack than the guy I linked to in this post. But the guy above amazed me for how casually he relies on "model-generated data." In my line of work, I think that would be a contradiction in terms. You've got the data, and you've got your model. The model is supposed to fit the data, or predict the future data, but not generate it.

* The one out I grant myself is if the government takes over the gold market again, and declares an official price. Then my predictions would of course refer to the black market price of gold.


More Evidence That Libertarians Aren't the Rudest Ones Around

At MR they link to this Yglesias blog post on pricing carbon, and how libertarians just don't get it. There are some rather strong comments regarding the intelligence and integrity of libertarians who oppose government caps on carbon emissions. (Note that I haven't even read the piece Yglesias is ripping, so please don't construe my post as endorsing it.)


Tim Swanson Hearts China

Here's a neat article from Free Advice reader (and hot-tip-giver*) Tim Swanson, who just moved to China. He explains why he thinks the construction boom in China is the real deal. Plus, some cool photos, such as:

* Please excuse the liberal use of hyphens, but I was afraid that "hot tip-giver" would imply he was one who (a) gave tips and (b) was hot.


"Why Does God Allow Bad Things to Happen?" Joseph's Answer

I have always loved the Genesis story of Joseph (Gen. 37-50). The runt in the family, he was a bit of a braggart and so his older brothers decided to kill him. But for various reasons the plan changes at the last second, and they "only" sell him into slavery. (What's funny is that when I was younger and read this story, I was horrified. Now that I am older and rereading it, I was more understanding. "Well, he was being kind of a punk what with those dreams and all." I don't know if I should be pleased or disturbed by my change in reaction.)

So to make a long (and great) story short, Joseph ends up being promoted from a dungeon in Egypt to being Pharaoh's second in command, because (with God's guidance) he can interpret dreams. He correctly predicts that all the land will be hit with seven years of plenty and seven years of famine, and so the Pharaoh makes out like a bandit selling stockpiled food to everyone during the famine years. (No mention on what futures markets were saying during the boom years, or what rating Moodys gave to wheat-backed securities.)

When his brothers come to Egypt hoping to buy food, Joseph has a bit of fun with them at first. But then he reveals his identity--they of course assumed he was long dead--and they are wracked with guilt. Joseph tells them (chapter 45):

4 Then Joseph said to his brothers, "Come close to me." When they had done so, he said, "I am your brother Joseph, the one you sold into Egypt! 5 And now, do not be distressed and do not be angry with yourselves for selling me here, because it was to save lives that God sent me ahead of you. 6 For two years now there has been famine in the land, and for the next five years there will not be plowing and reaping. 7 But God sent me ahead of you to preserve for you a remnant on earth and to save your lives by a great deliverance.

8 "So then, it was not you who sent me here, but God. He made me father to Pharaoh, lord of his entire household and ruler of all Egypt..."

Obviously this type of thing--by itself--would not refute an atheist; after all, God caused the famine! Yet I do think the answer is here.


We Have Always Been At War With Troubled Assets

A little 1984 reference for ya...

So for a brief window on Sunday, it seemed the government was considering buying "toxic" assets from Citigroup to get them off of its books. (See the first update in this CNBC story. HT2 CalculatedRisk via MR.) You know, the original rationale for the $700 billion, and then the one that Paulson just two weeks ago said he wasn't going to ever use because he knew when Congress passed it that it wouldn't work.

Why the switch-switch-switcheroo? I don't know, but Robert Wenzel predicted the Citi bailout would be special because of its ties to Goldman Sachs. Maybe Paulson & Friends figured the asset buyout would be a great idea if they could limit it to one "special" company and give really good prices.


Are Libertarians Superlative in More Ways Than Political Analysis?

In an MR thread discussing Paul Samuelson's (rather hypocritical) condemnation of libertarians, someone calling himself goodnessOfFit declared:

As someone who identifies with libertarians more than the other guys I will say this. For some reason it (along with Objectiveism and Austrian Economics) attracts some of the rudeist a**holes you will ever meet online or in person. I am not sure which way the causal arrow runs or what the selection mechanism might be but man is it true.

Besides Mr. Fit's refusal to drop e's after certain words--he's a non-conformist!--we have to ask, does his claim fit?

I think that if it does fit for a particular person--i.e. if a certain person can truthfully say that some of the rudest people he or she has met online or in person are libertarians--then it is because the person in question is attracted to libertarian ideas, and so hangs out at the relevant websites. Thus, the most dogmatic and cocksure people, will necessarily be hardcore libertarians (or Objectivists, or subscribers to the Austrian school of economics).

I mean, as in-your-face as you think some libertarian commentators are, are they really worse than people at a union rally? Check out the comments at Mark Thoma's blog regarding a recent Tyler Cowen article on the New Deal. What's funny is that (a) these people accuse Cowen of being a libertarian and (b) they are extreme jerks about it.

So I think what is happening is that goodnessOfFit is embarrassed by obnoxious libertarians more than obnoxious interventionists commenting on Tyler Cowen. And if you went to any other site discussing political issues, you would find the most "extreme" people being complete jerks and questioning the honor and intelligence* of the "less pure" people.

In conclusion, I want to reiterate that I think libertarians need to study the tactics of nonviolent resistance as taught by Gandhi and leaders of the civil rights movement in the U.S. If the majority has no problem violating (what you perceive to be) your basic rights, then you need to change their minds (or leave the country). And you don't do that through name calling or, even worse, blowing stuff up or hurting people.

* In contrast, it is completely acceptable to accuse one's intellectual opponents of temporary insanity.


Elected Officials Bomb Test on American Heritage

From MR, via Mark Steckbeck who (if it's the same guy) was my colleague at Hillsdale College, and note that the regular indentation refers to Tyler's words, while the indents are his quotes from a news story:

-----US elected officials scored abysmally on a test measuring their civic knowledge, with an average grade of just 44 percent, the group that organized the exam said Thursday.

-----Ordinary citizens did not fare much better, scoring just 49 percent correct on the 33 exam questions compiled by the Intercollegiate Studies Institute (ISI).

Here's one detail:

-----Asked about the electoral college, 20 percent of elected officials incorrectly said it was established to "supervise the first televised presidential debates."

Here is the clincher:

-----The question that received the fewest correct responses, just 16 percent, tested respondents' basic understanding of economic principles, asking why "free markets typically secure more economic prosperity than government's centralized planning?"

This one is a little tricky:

-----Forty percent of respondents, meanwhile, incorrectly believed that the US president has the power to declare war, while 54 percent correctly answered that that power rests with Congress.

For those who are curious, I got 32/33. I will post my reactions to the quiz in the comments, so as not to spoil anything for those who want to take it.


Murphy to Write The Politically Incorrect Guide to the Great Depression & the New Deal

I am now working on a new book in the PIG series, this on one the Depression and New Deal. It should come out sometime in the spring.

It puts me in a bit of a quandary. When the book is available and I link to it from this blog, should I call it the second best economics book ever? Or do I demote my first book?

Saturday, November 22, 2008


Megan McArdle Has Buyer's Regret With Obama

First let's set the stage. In a recent post, Megan McArdle links to this story and quotes the following:

Chicago economist Austan Goolsbee -- once the chief economic adviser to candidate Barack Obama -- may be less of a shoo-in to chair Obama's White House Council of Economic Advisers than his admirers once imagined.

The Obama transition team is interviewing to find a woman, perhaps a minority woman, to fill the CEA chair -- a Senate-confirmed position. Informed sources suggest the candidates on the CEA list now include Princeton University economics and public affairs professor Cecilia Elena Rouse, whose specialty is labor economics. The hunt for a woman, explained several sources close to the transition deliberations, is aimed at broadening the white-male cast of the White House team assembled to date (the current tally of announced picks is 3 women, 9 men).

Goolsbee, a respected University of Chicago professor, remains in contention for other administration posts, the sources added.

Commenting on the above, McArdle says: "I'm flabbergasted. If true, this is a bloody embarassment [sic]."

Then she tells us at the end of her post:

More to the point, the worst financial crisis in seventy years is really not the time to see if you can brighten up the CEA offices with a nice, decorative matched set of X chromosomes. Goolsbee has been advising Obama since the beginning; presumably, this is some sort of testimony to the esteem in which Obama holds his competence. Throwing him overboard now makes this look like less of a "plus factor" and more like Obama is much less concerned with competence than painting a pretty picture for voters. Given the stakes, that's more than a little irresponsible.

Needless to say, given that Obama's sterling choice of highest-caliber economic advisors was one of my main reason for supporting him, my regret is mounting faster than ever.

No Ms. McArdle, I'm sorry, but you can't get away with this. Obama showed quite clearly during the campaign that he would do whatever he needed to win. One day North Korea and Iran are tiny countries that pose no threat to us, and within that same week (possibly the very next day, I'm not sure) he said, "I have always said that Iran posed a serious threat to the United States."

On the whole Jeremiah Wright thing, one day he is practically a father to Obama, and Obama could no sooner disown him than his own parents or the black community. And then Wright gives a speech to the Press Club and Obama throws him under the bus.

Folks, whatever you think of Obama, the one thing you really can't say is, he's an idealistic young man who doesn't play politics like others do. There is no way you come out of Chicago, and then beat Hillary Clinton in the primary, unless you are a savvy politician.

Last thing, Ms. McArdle: I don't care whom he had on his list of advisors. Are you telling me your primary support for Obama was because of his economic views?! Are you out of your mind? Does that include his plan to slap a windfall profits tax on oil companies to lower prices at the pump? What about his plans to raise the capital gains tax, and then saying "It's an issue of fairness" after someone pointed out that it would bring in less revenue? How about the ludicrous "green jobs" programs? Need I mention Joe the Plumber?


Canadian Court Rules That Obese Have "Right" to Two Airline Tickets

Nope, it's not from The Onion. And no, it doesn't mean that obese people have the right to buy two adjacent seats if they want:

OTTAWA (Reuters) - Obese people have the right to two seats for the price of one on flights within Canada, the Supreme Court of Canada ruled on Thursday.

The high court declined to hear an appeal by Canadian airlines of a decision by the Canadian Transportation Agency that people who are "functionally disabled by obesity" deserve to have two seats for one fare.

It's still wrong, but I can at least understand the motivation to force "public" buildings to be wheelchair-accessible, etc. But this is just crazy. Should obese people be able to go to a steakhouse and get two entrees for the price of one? Why not?

If you go to the story, you'll see they have a photo of an obese woman. That kinda bummed me out. Do you think they told the woman, "Hi, we need a photo of an overweight person, mind if we snap yours?"

This reminds me of a Saved By the Bell episode. (My younger brother would watch them when we were latchkey kids. I quite possibly have seen each episode three times.) I forget why, but Zach had to take some homely girl to the dance. But the thing was, the whole "joke" was how ugly this girl was. And this was some 15-year-old actress! What the heck, does her agent go looking for scripts calling for girls who can (perhaps with help from makeup) be made to look so ugly that it can motivate the plot?

And as far as I remember, this wasn't a typical she-starts-out-ugly-but-you-change-her-hair-and-give-her-contacts-and-then-realize-she's-hot thing. I was mad at that girl's parents for letting her do the episode.


Rob Bradley on Promoting His New Book

Rob Bradley, founder of the Institute for Energy Research (and yes, the guy who hired me), talks with about his new book, Capitalism at Work. (HT2 Dan Simmons.) Great job, Rob, you're awesome!

Seriously, Rob provides a great response to all the people who think Enron = deregulated capitalism. Rob worked for Enron for 16 years, and explains that they were actually a darling of the left until, well, they collapsed. I touch on this particular issue in this Townhall column.

Friday, November 21, 2008


"End the Fed" Rallies Planned for 38 Cities on Saturday

I just learned of a coordinated protest outside of every Federal Reserve bank planned for this Saturday (i.e. tomorrow) November 22. I would like to point interested parties to a main website but I spent 5 minutes with Google and couldn't find it, just proving that leftists are way better at organizing than libertarians. Anyway, here is the site for the Houston rally, and their "poster" is below. If you live in a city with a Fed branch, presumably you can try googling it directly for your specific event time.

Thanks to English Bob in the comments for giving us the general site. Below is a "poster" tailored to the Houston event.

Incidentally, I was glad that the email I received about the event, stressed that the organized want this to be very peaceful. The Houston event even recommends business attire. I think they are trying to distinguish themselves from angry anarchist teenagers who vandalize McDonalds chains to fight the power.


Sen. Jim Inhofe: Paulson Warned Worse Than Depression If We Didn't Fork Over the Money

According to Republican Senator Jim Inhofe, Henry Paulson warned that things would turn worse than the Depression if he didn't get his $700 billion to buy toxic assets, and then changed his tune as soon as he had the money. Here is an exchange (including the audio) between Inhofe and a radio interviewer:

Pat Campbell: “Somebody in D.C. was feeding you guys quite a story prior to the bailout, a story that if we didn’t do this we were going to see something on the scale of the Depression, there were people that were talking about martial law being instituted, civil unrest….who was feeding you guys this stuff? Because clearly it worked on [Oklahoma Congressman John] Sullivan, clearly it worked on [Oklahoma Senator Tom] Coburn, it didn't work on you.”

Sen. Jim Inhofe: “That was Henry Paulson. We had a conference call early on, it was on a Friday I think -- a week and half before the vote on Oct. 1. So it would have been the middle … what was it -- the 19th of September, we had a conference call. In this conference call -- and I guess there’s no reason for me not to repeat what he said, but he painted this picture you just described. He said, ‘This is serious. This is the most serious thing that we faced. This is going to be far worse than the Great Depression in the 30s' -- and all these things, he was very descriptive -- if we didn't buy out these toxic assets, which he abandoned the day after he got the money.

Thanks to Kalim Kassam for the link.

Wednesday, November 19, 2008


The Housing Bubble: Greenspan or Asian Savers?


In today's article, I take on Henderson and Hummel's recent Cato piece that said it was a foreign savings glut, not Fed policy, that caused the housing bubble.* The conclusion:

David Henderson and Jeffrey Rogers Hummel have tried to exonerate Greenspan from his alleged role in the housing bubble. However, to do so they must rely on novel transformations of the conventional monetary measures, in order to demonstrate "tight" Fed policy, when all of the conventional indicators show a very "loose" policy precisely when the boom was at its greatest. Furthermore, Henderson and Hummel offer an alternative thesis—a global savings glut—that hardly fits the most basic of facts. Global savings rates were lower for most of the housing boom than in the preceding decade, and global savings rates are higher now (amidst the bust) than they were during the boom that they allegedly fueled.

Putting aside the details, we can also step back and ask ourselves, does it really make sense that one of the worst financial crises to grip the world was caused because people started saving too much? Or does it make a lot more sense to blame it on huge central-bank injections of phony credit into the markets? How two economists who appreciate the strength of the free market could opt for the former hypothesis—despite the dubious evidence for it—is puzzling indeed.

Naturally, there is more to the story of the housing boom than simply saying, "The Fed chairman did it." A full explanation would involve the Chinese government, Fannie Mae and Freddie Mac, and the ratings agencies that gave high marks to dubious mortgage-backed securities. But the original Misesian insight has withstood the test: it still seems that the Fed was a necessary condition for the worst speculative bubble in world history.

UPDATE: * One angry emailer took me out to the woodshed and said that H&H never claimed foreign savings were responsible for the housing bubble, but that instead foreign savings were responsible for the low interest rates. I still think everyone (including H&H) agrees that the low interest rates helped the bubble, so it's a distinction without a difference. I think it is pretty clear though that Hummel himself thinks a foreign savings glut is a necessary component of the explanation, and more relevant than Fed policy; see here. I am waiting to hear back from either of them on the matter; I will of course issue a clarification / retraction at this blog (and on the Mises blog tied to the article) if I have misrepresented their view.


Two Questions on the Pirate Capture of the Saudi Oil Tanker

First question: After looking at the size of this thing, can someone explain how the heck some guys with automatic weapons in speedboats were able to capture it? Couldn't the crew just lock the doors and say, "Go away, we know it's not a candy gram!" ?

Second question: When the news first broke, do you think Pete Leeson said "oh baby oh baby!" ?

Tuesday, November 18, 2008


Is There A Simple Connection Between Monetary Aggregates and Prices?

I think we are in store for massive yr/yr price inflation (where 8% < massive < 100%) within the next 6 - 12 months. My reasons are qualitative: (1) Bernanke is terrified of deflation and has allowed the base to grow like crazy, (2) real output is going to tank, and (3) once the panic has subsided and people calmly consider what the US government has done in the past few months, the dollar will get crushed in the foreign exchanges.

Now I can't really give much more specific predictions than that, because I still haven't found a model (or "framework" if the word "model" scares you) for empirically handling these issues with which I'm comfortable. For example a monetarist might like Friedman's idea of looking at the quantity of money per unit of real GDP. You'd think that if you could predict those two things, then you could predict (price) inflation.

But no you can't, because the demand for money could change. During the 1970s, the graph of the quantity of money (measured as M1, say) divided by real output, tracks the CPI pretty well. But during the 1980s it breaks down completely. M1 per unit of real GDP goes way up, even though price inflation was very modest. The answer (according to Arthur Laffer, and I agree with him) is that the Reagan tax cuts and other pro-business moves made US assets more attractive, and increased the demand for dollars. (I think also the disinflation might have caused a feedback effect too, where lower inflation expectations are partly a self-fulfilling prophecy, though I don't know if Laffer would endorse that angle.)

Now even though he is possibly my favorite blogger right now, even so I think Robert Wenzel has oversimplified the analysis in a recent post, where he said:

Stop Printing the Fed did this summer and you kill inflation.

Wholesale prices plunged a record amount in October.

The Labor Department reported today that wholesale prices dropped by 2.8 percent in October, the biggest one-month decline on records that go back more than 60 years.

The 2.8 percent overall decrease marked the third straight month that wholesale prices have fallen.

Money supply growth, as measured by M2 nsa, was under 2% on an [annualized] basis this summer, but is now back up over 7%. Take advantage of the inflation pause while it lasts by buying hard assets.

Wenzel's analysis might be fine as far as it goes, and I agree that people should buy gold right now if they haven't already. But if Wenzel is saying that M2 growth is a reliable harbinger of price inflation, then I think he is wrong. (If he wants to clarify in the comments I will gladly post a correction here if I am misrepresenting his view.)

The chart below plots annual percentage changes in M2 against annual percentage changes in the CPI. If anything, the two almost seem to move inversely. If I had a crystal ball and knew the monthly M2 figures out till 2020, I'm not sure I could make much money from that information. (Then again, with my PhD in economics, you could probably tell me the weekly share price of Exxon out till 2020, and I wouldn't be able to profit from it...)


Ron Paul Shows Ben Bernanke Has No Backup Plan (?!)

In the video below (HT2LRC), Ron Paul asks Fed Chairman Bernanke whether there are any plans to replace the "dead fiat dollar system" with one based on gold. Now I realize a lot of his fans may have seemed silly in their over-the-top enthusiasm during the primary; I understand why habitual smirkers were amused. But c'mon folks, can you even believe that there is a Congressman who talks like this to the Fed chair?! This is awesome.

Now what is really interesting is that Bernanke says that he and other central bankers never even discuss the possibility of switching over to gold in the case of a collapse in the fiat system, even though (as Paul claimed) central banks right now own some 15% of the world's stockpile of gold. (I guess they plan on doing a lot of tooth fillings.) So I don't know whether to think Bernanke is lying or just incredibly incompetent. I mean, doesn't the US military have contingency plans to take over France, just in case? So you're telling me the Federal Reserve, with its legions of economists, doesn't even think about what to do if, say, China decided to dump its dollar holdings and that caused a global run?

Monday, November 17, 2008


Paul Krugman Makes Sure We Understand How Crazy He Is

It is really amazing to see how glib Paul Krugman can be about his insane recommendations. (HT2MR) I can't take this apart right now; it surely deserves its own article. For now, let us just read it and "enjoy":

It’s a curious thing that even now, when we are clearly in a liquidity trap, we still have a lot of economists denying that such a thing is possible. The argument seems to go like this: creating inflation is easy — birds do it, bees do it, Zimbabwe does it. So it can’t really be a problem for competent countries like Japan or the United States.

This misses a key point that I and others tried to make for Japan in the 90s and are trying to make again now: creating inflation is easy if you’re an irresponsible country. It may not be easy at all if you aren’t.

A decade ago, when I tried to make sense of Japan’s predicament, I used a simple, unrealistic model to ask what we really know about the relationship between the money supply and the price level. We normally say that an increase in the money supply, other things equal, leads to an equal proportional increase in the price level: double M and you double the CPI. But that’s not actually right. What a model with all the i’s dotted and t’s crossed actually says is that the CPI doubles if you double the current money supply and all future expected money supplies.

And how do you do that? No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers. And once you realize that central banks may not be able to move expectations about future money supplies, it becomes a real possibility that the economy will be in a liquidity trap: if interest rates are near zero, money printed now just gets hoarded, and monetary policy has no traction on the real economy.

Zimbabwe wouldn’t have this problem: people believe that any money it prints will stay in circulation. But the likes of Japan, or the United States, print money for policy purposes, not to pay their bills. And that, perversely, is what makes them vulnerable to a liquidity trap. Back in 1998 I argued that the Bank of Japan needed to find a way to “credibly promise to be irresponsible.” That didn’t go down too well, but it was what sober, careful economic analysis prescribed.
The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem.

BTW, if you are a supergeek, here is Krugman's more formal exposition on the liquidity trap. I have to read this in preparation for an article on all this stuff. (I can hear Drago saying to Rocky, "I must break you.")


Robert Nozick Is Overrated; or, Pete Boettke Needs to Get Out More

In a recent blog post, Pete Boettke tells us that Robert Nozick is the smartest man he's ever met. In the comments, I mention that I have thought Nozick was overrated since the time I saw him give a talk at NYU, and he botched the "Edgeworth Box" (a diagram from economics). Some people were telling me that anybody can screw up a diagram, so I clarified:

Just to reiterate: I was not merely saying, "Nozick screwed up the Edgeworth box, and so he must be an idiot."

Rather, I'm saying that the points he was making in the lecture depended crucially on the diagram, and so it led me to wonder if he ever *really* understood the diagram (as opposed to seeing it laid out in an econ textbook, and getting the basic gist of it).

If he had been puzzled by his diagram--since it wasn't depicting what he was telling us in the audience that it was supposed to be showing--and then said, "Sorry folks, something is screwy here..." I or someone else could've yelled out, "You drew the curves the wrong way!" and that would have been fine. I wouldn't have filed it away in my mind that "Nozick is overrated."

But like I said, what really seemed odd to me was that he breezed right through his lecture, and wasn't at all tripped up by the fact that his diagram wasn't showing what he told us it was showing.

Posted by: Bob Murphy | November 17, 2008 at 10:52 PM

And then I added:

Actually, now that I just clarified with the last post, I think that really clinches it for me with the stuff in [Anarchy, State, and Utopia]. I mean, to me (and I think to other Rothbardians), Nozick's whole demonstration where he builds up the legitimate minimal state (or whatever his terminology is) is absurd in several respects.

So for him to go through that chain of reasoning, and then tell his reader, "See now, I just justified the State!" was as much of a non sequitur as him drawing curves and saying, "See now, I just showed you Pareto improvements!" when he had done no such thing.

To sum up, the common mistake was him not realizing he was giving an invalid argument.


NASA Forced to Revise Temperature Data, But Skeptics Looking Suspicous Now Too

As this UK Telegraph story explains, NASA had to revise its temperature records because it had failed to catch a reporting error from Russian stations. Because the records used September temperature readings for October, it originally seemed that last October was the hottest on record; that has now been changed.

However, there's an interesting twist to this. As the Telegraph story tells it, James Hansen* held a press conference (or at least, "announced to the world") that last October was the hottest ever; this is totally plausible, given his past history and the fact that the original, mistaken data sets said so.

Yet Gavin Schmidt claims in this "OK, you got us, big deal" post, that Hansen never made any such proclamation.

I must report, that I spent about 6 minutes using Google News' advanced search feature (where you can filter by date), and it seems Gavin is right. I can't find any news stories talking about the "hottest October on record," except for those now responding to the correction!

Can anyone resurrect the good name of the deniers? It would be bad if GISS made a bonehead move, and then the Gore Haters overplayed their winning hand by inventing Hansen anecdotes.

* UPDATE: Rereading the Telegraph article, I realized that it doesn't actually say Hansen made the announcement:

On Monday, Nasa's Goddard Institute for Space Studies (GISS), which is run by Al Gore's chief scientific ally, Dr James Hansen, and is one of four bodies responsible for monitoring global temperatures, announced that last month was the hottest October on record.

I still think that is a bit misleading, if Schmidt is right and NASA just released the data, without any commentary. The Telegraph story for sure leads the reader to believe that Hansen & Co. were making a big deal of this, and now have egg on their faces.


Zimbabwe Central Banker Blames Lazy Citizens for Inflation

According to this report (HT2LRC),

Reserve Bank Governor Gideon Gono is quoted in The Sunday Mail, a state-owned newspaper, as saying inflation is due to what he calls a "collective failure as a nation" to produce enough, particularly food. He calls on Zimbabweans "to actively play a part in producing for the nation."

Zimbabwe's inflation rate is officially 231 million percent, the highest in the world.

I think we will have to wait till after the holidays for Henderson and Hummel to pen a defense of Gono for Cato.


Another Funny Adventure from Google Alerts

Apparently Bob Murphy won first prize for his photo op with a grizzly.


The High Cost of "Green Recovery"

This piece ran in over the weekend. Again, it is pretty low-brow stuff for those readers who wish I would spend more time on Bohm-Bawerk's critique of Marx's law of surplus value. But hey, part of the function of this blog is for me to keep track of all my publications. It's not you, it's me.

Sunday, November 16, 2008


Two Things Christians Should Keep in Mind When Dealing With All These #$#(*$# Idiots

Lately one of the personal flaws that has been bothering me the most is that I am a bit, shall we say, unmerciful, in my blog posts. Now some of my repeat targets I have at least talked with over email, and I'm pretty sure I'm not making them cry. Still, a lot of times I will hit Publish Post and then think, "Is this really something I want going up under the headline, 'A'?"

When I find it necessary to recalibrate myself, and begin effecting* change rather than entertaining my loyal readers, I remind myself of two things:

(1) We are all brothers and sisters in Christ, even if some of us don't know it. (I'm not trying to "force my religion" on anyone, but let's face it, there are certain implications of my worldview. If I think an omnipotent Being created the universe and everyone in it, well, that includes atheists.)

(2) Jesus chose Saul, a person who was literally persecuting His followers, to be the chief publicist for His word. We shouldn't write off anyone as "irredeemable."

* Yes that is the proper spelling.


Issa Slips Up

This is great. Congressman Issa was grilling Neel Kashkari, playing up his outrage for the cameras at the Paulson bait & switch. But lo and behold, in his tantrum, he lets slip that the original plan was for Treasury to spend half of the money buying troubled assets from foreign institutions. In case you have forgotten, that was never part of the official plan. Some cynics and people in the know were saying that that would be the actual result, but certainly Paulson & Bush didn't tell the American people, "We need you to lend us $350 billion so we can bail out foreign speculators."

This guy Denninger sounds a bit goofy at first, but I think he is spot on (except for his grammar). HT2EPJ.


Brad DeLong Does His Part to Fan Fears of the Bogus Credit Crunch

Now that Paulson has almost literally admitted he was lying when he asked for the loot, I can't believe people are still defending his story. At this point I think it's more an issue of proving "I was right all along on this!" rather than the search for the truth. (And yes, I have taken sides so presumably I myself am subject to this bias. But the charts below will speak for themselves.)

So Brad DeLong posted the following chart:

Next to the chart, he writes, "Will somebody please tell Chari, Christiano, and Kehoe...that there is too a credit crunch?" (He also puts in a link to their paper denying a crunch, though he uses a naked URL, shocking the sensibilities of all professional bloggers.)

I must confess, at first I was surprised by this chart. I actually thought, "Huh, I guess Tyler Cowen was right in his argument with Tabarrok. Just because the absolute quantity of credit in some of these markets is at all-time highs, doesn't really prove that the price of credit is low."

Ah, but then I thought, "Hang on, what if DeLong is posting a chart that is completely misleading?" After all, his chart (which he copied from another site) shows the spread between Aaa and Baa yields, versus the 30-year Treasury. And we all know that Treasury yields have dropped sharply, particularly in the shorter end but also in the longer maturities. So what happens if we look directly at the interest rates corporations have to pay to borrow money, on Aaa and Baa bonds?

Fortunately, that information is easily accessible via FRED; it would have taken DeLong about 200 seconds for him to grasp reality with both hands and generate this graph:

I grant you, there is a pretty sharp spike in the Baa yields. Even so, the absolute level isn't anything shocking.

And check out the Aaa yields. Neglecting the period 2001-2007--when all parties agree there were much-too-low yields that encouraged overleveraging and caused the current mess--the yield right now on Aaa is lower than it has been since the late 1960s. (Caveat, we should adjust all of this for expected inflation. Even so, the above chart hardly tells the story DeLong wants to spin.)

Remember folks, the "credit crunch" really means, "Credit markets returning to their conditions before the criminally insane state during the housing bubble." In other words, Paulson, DeLong, Cowen, and all the rest giving us this line, want to (a) figure out who is responsible for the shockingly lax lending standards and artificially low interest rates during the bubble years, and (b) take $700 billion+ of taxpayers' money to prevent the market from purging itself of these conditions.

Last thing: One might say, "OK Murphy, sure, the absolute yield on Aaa and Baa isn't any higher now than it has been during past recessions. But still, doesn't that huge spread reflect something real?"

Well, sure. But you know what? I am not entirely sure that the falling yields on Treasurys is being driven entirely by private sector investors. (After all, do you consider 30-year average inflation, or the creditworthiness of the US government, to be higher or lower now, versus two years ago?) I need to look into it more, but I wonder if all the Fed machinations of late are suppressing the yield on Treasurys.

Saturday, November 15, 2008


Yet Another Austrian Economics Blog

The NYU Colloquium participants have decided that their weekly seminar is not inducing the Misesian vanguard quickly enough, and so now they have set up a blog. I recall the last time I linked to new Austrian blogs, and someone remarked (paraphrasing), "Just what the world needs, another econ blog." I think it is appropriate that this new blog--the posters at which presumably reject Keynesianism--will be a good test of Say's Law.


I Offer Constructive Advice at MarginalRevolution

Over at MR, Tyler Cowen refers to the latest issue of Cato Unbound, where Matt Yglesias chides libertarians for claiming to oppose corporatism while not taking real practical steps to limit it. Tyler says:

In my view at the margin it would be better to have both less corporate privilege and less labor union privilege. Maybe we have no good theory (much less a strategy) for how to get there, but surely some marginal improvements are possible and who knows maybe more.

In the comments I offered this helpful remark:

Here's a suggestion on strategy: When the former CEO of Goldman Sachs asks for $700 billion to dish out as he pleases, in light of an alleged disaster that he had no idea was coming just two months prior to the request, then all libertarians say "HECK NO!"

Seriously, I guess I can understand why some libertarians--especially those with "respectable" positions where they can't come off as cranks--didn't raise a ruckus when Paulson first asked for the money. But now that he has almost literally admitted he was lying through his teeth at the time, what's the holdup, fellas? At the very least, please spare us all this faux hand-wringing over 'how oh how can we limit corporatism?'


The New Deal Made the Great Depression; and What's the Trade Fallacy? Quick!

This will be a post in two parts. First, let's celebrate historian David Beito's great column on LRC today, where he makes a basic point I've been pounding away at. Namely, even if you knew little about economics, if I told you that the worst economic downturn in US history occurred when the government applied the most "stimulus" in US history, what would you conclude? Then if I added that basic economic theory teaches that the "stimulus" efforts would be expected to increase unemployment and delay recovery, what would that do to your confidence in your original answer? And yet, our most recent Nobel laureate concludes from all this that the New Deal spared the US from what would have been an even bigger disaster. Here's Beito's take on this:

I don’t know for sure that that the old anti-depression policy would have made for a shorter downturn but, then, Krugman doesn't know that the reverse is true. I point to the historical evidence from previous depressions that were fought by using the old anti-depression policy. These were mostly over in two or three years.

If Krugman believes that the decade-long Great Depression was exceptional in nature compared to previous depressions and could only be fought with a new Keynesian approach, he needs to give some evidence for that claim. As far as I can tell, however, he doesn't try. Pending such an attempt, the main burden of proof is on him, not me.
It is not ridiculous at all [to compare the 1921-1922 depression with the Great one], that is if the goal is to understand why we had an unprecedented decade long depression. The comparison becomes especially instructive if we limit the analysis to the first year of both downturns. Between 1921 and 1922, there was a significantly faster drop in prices and GDP and a greater rise in unemployment than between 1929 and 1930. From 1921 to 1922, Unemployment advanced from 4 percent to twelve percent, the gross national product fell by a staggering 17 percent. All this was in one year. By contrast, unemployment was still well under 10 percent at the end of 1930.

I have not verified Beito's claims, but the guy has a PhD in history and blogs at HNN; he doesn't sound obviously crazy or shady. I had no idea that unemployment was so high or that output fell so much in the previous downturn. Beito's right: this is a great case study in the effectiveness of two different approaches. (I am sure Rothbard went over all of this, and that I have just forgotten the numbers relating to the earlier depression.)


Anyway, I went to Beito's original blog post and was reading the comments. I came across this:

Basically I am wondering if anyone in the world is actually an economist. Or is everyone a bunch of stupid idiots with big titles and completely no sense. I am not an economist but I do know a few things. 1. To improve an economy you have to be able to produce more with less input. 2. Any policies that help this will help everyone. 3. Any policies that hurt this will hurt everyone. So with that simple definition what do wars do that will increase economic output. Almost nothing...Trade agreements that move jobs from highly automated equipment to highly unskilled labor, ie more workers less equipment is bad for the economy. Why, because you are producing less with more people, dumb (*&^!! So all this stuff we buy from China and Indian and Mexico is a complete bunch of baloney that ruins the economy. So you get really three simple ways to fix the economy in about 2 months. 1. End the war and slash military spending. 2. End any trading with countries who do not have the same minimum wage laws we have. 3. Loan any money to business's who are very likely to become highly automated, ie less people more output.

Now in the spirit of this guy's comment, I will refrain from pointing out what I perceive to be its glaring flaw. (First, I could very well be an idiot with a big title, and second, I want to produce my blog posts with the least amount of labor as possible.) Can anyone quickly come up with it? If this guy said the above at a dinner party, would you be able to explain in 30 seconds to everyone's satisfaction why he's a buffoon?


Ron Paul on the G20 Meeting: Bretton Woods II or III?

Ron Paul is probably the best person in the world to comment on this stuff, because he understands the economics better than 95% of professional economists, and he of course understands politicians better than 100% of professional economists. (HT2LRC)


Bubble, Schmubble: Mexico Shows Why Derivatives Are Still Cool

The WSJ reports (HT2 Dan Simmons) that the Mexican government is worried that oil could really collapse, so it is hedging its exposure:

Mexico said it has hedged all of its oil exports for next year against a price of oil below $70 a barrel, in a sign of how some resource-rich nations are trying to protect themselves against slumping commodity prices amid a global economic slowdown.

Mexico's Finance Ministry said Thursday that it bought $1.5 billion of put options that guarantee Mexico will get at least $70 a barrel for some 330 million barrels.

If the price is above $70, then Mexico can choose not to exercise the option and sell for the market price.

Mexico has been hedging against the price of oil for years, but normally the country covers only a fraction of total exports. But the steep fall in the price of oil from last year's highs alarmed Mexican officials. The price corresponds to Mexico's expectations of oil income for next year's budget.

"We started this back in July, doing it very slowly to avoid affecting the market," said Rodrigo Brand, a Finance Ministry spokesman.

With oil at Wednesday's closing price, Mexico would have made $9.55 billion on the hedges, the Finance Ministry said.

Just to clarify a few things, because I've heard even some energy insiders misinterpreting the above:

(1) The Mexican government did not lock itself into $70 oil for 2009. That would have occurred if Mexico sold 330 million barrels worth of futures contracts, with a futures price of $70 per barrel. This move would not have cost anything upfront; no money changes hands when a producer issues (i.e. goes short) a futures contract to a party going long.

(2) The Mexican government is not "betting" that oil will average below $70 for 2009. They might think that, but strictly speaking they are buying insurance against this possibility. If you buy fire insurance for your house, it's not because you are predicting it will burn down.

(3) The Mexican government will make more money if oil shoots up again. The last line about "making money" on the hedges is correct, but misleading. The $1.5 billion that the government spent on the put options is a sunk cost; that money is gone at this point. Now if oil is $70 or below, that's how much the government makes on it per barrel. The difference between the actual price and the strike price of $70 shows up in the market value of the put options; the Mexican government "makes money" on them only because it is making less money from selling its oil. (If oil is at $50, then the puts are worth $20 per barrel; if oil is $40, then the puts rise in market value because they are worth $30 per notional barrel, etc.) If oil sells for above $70, then the put options are worthless, but the Mexican government is still better off.

All the put options do is allow the government to limit the downside to $70 per barrel; the government now has the ability to sell its oil for $70 or the market price, whichever is greater. And for that option, the government spent $1.5 billion in the present. Once you frame it like that, it is obvious the government is hoping for a high oil price. It's true, the options would be worthless, and in retrospect they could have saved themselves the $1.5 billion expense. But given that that money is now a sunk cost, the government certainly doesn't want to "make money" on the hedge. (Of course, if some policy makers fought hard for the purchases, while others said it was too much, then clearly group A might be hoping for $50 oil next year so they don't look like idiots.)

Friday, November 14, 2008


Deep Thoughts: Saving vs. Consumption

Back in October, I posted a link to my article "The Importance of Capital Theory." In the comments, reader randallsquared (RS) was confused by this passage from the article:

As for Cowen, he seems to be assuming that "real income" is equivalent to "real consumption." I don't know what to say except, "No it isn't." If a worker gets a job in a silver mine and gets paid in ounces of silver that he stores in his basement, he can have very high "real wages" even if his consumption is very low.

So RS was confused by this, and asked why that wasn't an example of the worker consuming silver. I replied by asking (paraphrasing here), "What if he had been paid in dollar bills and stuck them in his piggy bank? Would you agree with me that that was saving? So how is it different if he gets paid in silver ounces and stores them in his basement?"

RS could see the logic in that, but was still uncomfortable. He then gave me a different example, where a person buys gems and places them all over his house as decorations. This is similar--physically--to my example of a worker taking ounces of silver and putting them in his basement, but clearly we will call the gem story an example of consumption. To explain the difference, I explained in my reply:

The criterion is your subjective intention. If you are buying something with the intention of using it down the road to get something else, then it is saving. (E.g. the guy is holding the silver in his basement, planning to sell it later on and buy cars or whatever.)

[Now] if I fear roving looting bands, and turn my cash into gems, and then strategically hide the gems in the walls etc. around my house, then that is [also] savings. It's not the physical act per se, it is the intention behind it. If you are deriving direct pleasure from it, [like putting the gems around your house because they look pretty, then it] is consumption. But if you are doing it as a means to consumption in the future, then it is saving.

So then RS finally asked the big question in reply to all of this:

See, this is what I don't understand. How can my subjective intention (assuming exactly the same outward actions) make any difference to the economy? If it's the inner life of the actor that makes the difference between consuming and saving, then how can they be different in terms of their effects (given the same action)?

Now this is a great question. I was totally confident in my answers to the hypothetical scenarios of the worker getting paid in silver or dollar bills, or the homeowner placing gems around his house. But RS's question tries to link these definitive "micro" answers to how economists talk about "macro" things. In other words, economists--especially classical or Austrian types, as opposed to Keynesian nuts like Krugman--often stress how important savings are to economic growth. It certainly seems like there is a physical difference between the two activities (saving vs. consumption). So how can it all just be "in your head"?

Now this is really an interesting issue, and I bet even many professional Austrian economists (all 16 of us) haven't considered before. I think in order to reconcile the two seemingly obvious positions--namely, that (1) subjective preferences determine the difference between saving and consumption, and (2) others can be affected by one's decision to save vs. consume--some weird things need to happen to make everything "balance." It's sort of like pushing the implications of special relativity onto unusual thought experiments; you get surprising results but if you still believe in the axioms (e.g. speed of light is the same measured by all observers) then you have to endorse the conclusions (e.g. length depends on the observer).

OK the "trick" I suggest, in order to resolve these apparent paradoxes, is that real output increases based on the switch in someone's subjective preferences. This seems weird at first, because you want to say that "real output is real output," regardless of how much utility people get from things. E.g. if all of a sudden I decide that I really love my Barry Manilow collection, whereas yesterday I only enjoyed it, I'm not really wealthier. I'm just happier. But despite this observation, I think we have to conclude that real output increases in at least some of these weird cases.

Let's switch away from silver and into fiat currency, because I think my position will be clearer. OK in scenario one, a worker gets paid $1000 per week in cash at his job in the factory assembling cars. He spends $900 of it on consumption goods (including his rent to his landlord), and every week he puts $100 under his mattress. At the end of 2 months, he spends the $900 on a fancy new TV. The analysis here is straightforward: he was basically selling some of his current labor for a future TV. By saving during the two months, he freed up factors of production that could have gone into more immediate consumption goods, and allowed them instead to be devoted to the production of an additional TV set available in two months' time. (Naturally we are assuming entrepreneurs correctly forecast everything.)

OK now scenario two: Here, a worker at the same factory gets paid $1000 per week in cash for the same type of labor that the other guy does. This second worker also spends $900 in the community every week on consumption goods, including his rental payments. But every week, he takes a crisp $100 bill, puts it on his garage floor, douses it with lighter fluid, and burns it. Nobody knows why he does it; the guy's kind of a nutjob. But there is no doubt that he enjoys doing this, and never regrets it. He is quite literally consuming this portion of his income, there's no doubt about that.

Now this is odd. The first guy every week put the $100 bill under his mattress, and economists classified that as savings. By refraining from potential consumption, his farsighted behavior freed up physical resources and allowed for the production of an additional TV in two months time.

But with the second guy, he is not saving at all. He consumes his whole paycheck week after week. And yet, he is drawing on the community's output of consumption goods no more than the first guy, and on top of that, he has no cash with which to purchase a TV in two months. So it would seem that the community is richer in the second scenario, even though there was less saving occurring!

OK first thing: There was actually no net saving in the first example, over the whole period. What the guy accumulated in his mattress, he ultimately spent on the TV. (Even if he deposits the money at a bank earning interest, so long as he blows the whole balance when he buys the TV, there is no net saving.) So in both scenarios, there is zero saving over the whole period in question. The issue is really, how can the community be richer in the second scenario?

And I think the answer is obvious: There is more real production in the second scenario; real output is higher. Not only is the factory producing cars, but in addition that guy is getting $100 per week in cash-burning entertainment. If he paid $100 to a juggler to come perform every week in his garage, that would clearly be an example of real output. So if he "pays himself" $100 to put on a show of burning cash, he is enjoying real output (of a service). It just so happens that in his capacity as producer of that service, his wages are zero. His cost of production (ignoring the lighter fluid and match) is just equal to his revenue.

Of course you can tweak these examples all you want. The reason I had the guy burn the money, instead of (say) framing the bills and putting them up on his wall as fine art, is that I wanted to make sure he couldn't change his mind down the road and try to exchange them for other goods and services.

My overall point is that in these odd cases, where savings can rise or fall apparently at whim with someone's change in subjective preferences or intentions, I think the way you balance the accounts is that total output (and hence real income) changes too.


Hank Paulson Is a Bald (-Faced) Liar: I Have Proof

Here is an ABC story (HT2EPJ) reporting on Paulson's sudden change of heart regarding how his requested $700 billion "Troubled Asset Relief Program" (TARP) would now not involve any troubled assets:

So, is this the biggest bait and switch in American history? There will certainly be critics who say that Paulson and the Bush Administration were disingenuous when they were selling Congress and the American public on the program back in September. And they’d probably be right. Paulson said today, he knew when the bill was signed the purchase of trouble assets wasn’t the right solution to the problem.

(Incidentally, if someone can point me to a direct quote from Paulson--preferably from an official transcript--that would be great. Paulson's defenders could argue that the ABC reporter is fudging what he actually said.)

Assuming the statement above is true, and that Paulson really did just admit that he knew purchasing "toxic" mortgage derivatives wasn't the solution when the bill was signed, then the following clip casts our Treasury Secretary in a less than ideal light, wouldn't you say?

Thursday, November 13, 2008


Peter Schiff's Critics: Who's Laughing Now?

I felt terrible for my smug treatment of Peter Schiff in a few articles in 2006 and early 2007--though in my defense, strictly speaking the arguments in his articles that I read were invalid, and so 99% of my critiques were "good." But since he was warning everyone the US economy was on the edge of a cliff, and most others (including me) were saying, "Watchou talkin bout, Peter?" I think he should feel vindicated.

But OK, I was a little unfair to him, and since then I have made up for it (I hope) through a few official recognitions of my mistake; here is the mea culpa (with links to some of my harshest Schiff critiques if you feel like taking a trip down memory lane). But MAN check out the video below, which an anonymous commenter put in an earlier post at this blog. You've probably seen the first one several times by now, but make sure you watch the second exchange. These two guys literally laugh out loud at Schiff, when--with the benefit of hindsight--we can see that Schiff is 100% accurate in his predictions. Seriously, you have to watch at least the second example in the clip below. I can't believe what jerks these guys were, with the cameras rolling. They might as well have waved their hands in a circle next to their heads and said, "Coo coo, coo coo."


Should the Government Close the Money Hole?

(HT2LRC.) This is pretty good; it sustains the joke for the entire clip. Warning, there is one naughty word in the beginning, so be careful if you are playing this at work or your parents' house.

In The Know: Should The Government Stop Dumping Money Into A Giant Hole?


So Was Oil in a Speculative Bubble or Not?!

Over the last year, I pretty definitively painted myself into a corner regarding speculators and oil prices. I said in many places (here and here, for example) that speculators weren't driving the record run-up in oil prices, and that the default explanation--changes in the fundamentals of supply and demand--were responsible. Specifically, I testified to the committee of my good friend Barney Frank (though he actually was never in the room when I was speaking) that record oil prices were the result of a weak dollar and explosive growth in demand in places like China and India.

Well, here's a chart of oil prices:

I think we can all agree, that looks pretty bubblicious.

So what gives? Well, the thing is, I still don't see any obvious mistakes in the chain of reasoning I used in the two articles linked above. And for the record, I didn't come to the analysis thinking, "OK, for political reasons it can't be the fault of hedge funds, so I have to work some Murphy Magic here and spin a story."

On the contrary, I initially thought it was speculators in the futures market driving up oil prices, especially since the take-off in commodities really kicked in when the Fed started cutting rates in September 07. (For example, the yr/yr change in monthly oil prices was actually negative until then, but afterward of course oil prices started exploding.) So I was coming to the analysis thinking speculators were holding prices up above the equilibrium price as determined by the "short-run fundamentals" (if you will), and I was prepared to explain why that was a good thing. E.g. if the US started bombing Iran, then at that point a build-up in oil inventories would be a blessing.

So I was very surprised when the initial tests weren't showing any tell-tale signs of a speculative bubble. If you want to talk about ideological bias, you could say that it was apparent since I was prepared to argue "trust the market" whether or not speculators were pushing up the price of oil. But my views on whether the speculators were responsible weren't driven by a preordained conclusion.

But back to the question at hand: Reader Joe Potts emailed me and asked if the apparent bursting of the oil bubble has made me revisit my arguments about speculators. I would definitely need to study the matter more carefully before giving a definitive answer, but here are my quick reactions:

(1) The big swing in prices certainly looks like it has nothing to do with fundamentals, but keep in mind (a) the dollar fell sharply and then rebounded very sharply from September 07 - October 08; the graph of oil prices measured in euros or pounds wouldn't look nearly as bubblicious, (b) the prospects for future economic growth have completely collapsed during the period in question, and (c) the US removed the moratoria on billions of barrels of domestic reserves (see the surprising graph below). So when smart alecks say, "Oh, you told us it was supply and demand. Did those curves for oil really shift that much in 4 months?!" the answer is, "Maybe." When you throw in the fact that oil is famously price inelastic, then it is just possible that much of the apparent bubble is really due to changes in the fundamentals.

(2) Even if it were true that hedge funds and other institutional investors were pushing up oil prices during 2007 and the first half of 2008, nonetheless 95% of the people who "called" it were still spouting nonsense. In particular, they were acting as if the hedge funds could push the price up automatically and make guaranteed money--that's why the CFTC needed to step in and lay down the law to protect hapless motorists. The sudden collapse in oil prices shows that their worldview was rather flimsy.

(3) I would need to first run some back-of-the-envelope calculations to see how much wiggle room the factors I discussed in point (1) give me. If it still looks like I need to do some serious 'splainin, it occurs to me that there is a theoretical possibility that the typical "It's those greedy speculators!!" people would have missed, but also that I would have missed with my (somewhat) methodical process of elimination. What if the demand by end users (such as refiners) is fairly malleable, based on expectations of future prices? Something like, the refiners will buy 5 million bbl/day when the price is $90 per barrel, and they expect prices to remain at $90+ for at least the next 12 months. But if they consider $90 to be a ridiculously unsustainable price, then they only buy 4.5 mbd at that price.

I haven't worked this through yet, but it's something that neither side really considered. The people blaming "speculators" had in mind hedge funds or, for the more sophisticated analysts, they blamed the oil producers who cut production and "stockpiled" oil underground. But as I explained in the articles linked in the beginning of this post, the data just don't support either of those claims.

However, what if the "speculation" was being done by the actual end users? That would be indistinguishable (with the approach I was using) from saying, "Nah, physical oil demand is way up. There are no inventories accumulating." And yet, this case was clearly not what I had in mind when talking about the "fundamentals." (We are already getting into this gray area if we say that the lifting of the executive and then congressional bans on offshore drilling moved prices. Because obviously, if those policy changes have an immediate impact, it must be working through expectations. All along--even before it happened, mind you!--I expected the effect would come from producers increasing output, since they expected more competition from the US in ten years or whatever. But maybe that same mechanism was at play on the "fundamental" demand side too.)

In conclusion, I am not yet throwing in the towel and saying, "Yep, it was a speculative bubble." But if I do end up deciding that, I think it would be along the lines of point (3), since the logic in the earlier articles still seems solid to me.

Wednesday, November 12, 2008


Who Were the Worst Economists During the Housing Boom?

John Carney is starting a list of economists who botched the housing/financial crisis, and his first victim is Cato's Alan Reynolds. I feel bad for Reynolds, because when you read the "shocking" quotes that Carney reproduces, I totally understand why a free market guy would say those things at the time. (Incidentally, this is why libertarian economists almost have no choice* but to embrace Austrian business cycle theory: If you don't think the Fed caused an unsustainable boom, then it really is inexplicable why everything blew up like it did. It's not like the government raised taxes or imposed price controls in early 2007.) I just hope nobody points Carney to the second-last paragraph of this piece. *whistling*

It's not great, but the below video has some embarrassing predictions by Bush Administration people, as well as Dubya himself. "Diablo" at Carney's blog posted the link.

* Incidentally, I recognize that a critic of unregulated markets would find my statement to be hilarious, and serve as proof that free market economists are ideologues. So, for the record, I will admit that economists who were completely stunned by how bad the credit markets screwed up, should first consider the possibility that decentralized markets don't work very well. If you still think there is way too much evidence against that position, then you need to find some other way to explain what happened, and I submit the best explanation is the Fed.


Thinking Green: It's All About Tradeoffs

This Wall Street Journal article (HT2 Rob Bradley) explains that some of the money you save in fuel from switching to a high-mpg vehicle is offset by higher insurance premiums:

Small cars generally cost more to insure than larger ones because they're involved in more accidents and incur bigger claims, especially for injuries. That's true regardless of the driver profile, though younger and less-experienced drivers tend to buy smaller, cheaper cars.

A 40-year-old male driver would pay an average of $1,704 to insure a 2009 Mini Cooper that gets 37 miles per gallon on the highway, according to a study by, an online insurance broker. That same driver would pay only $1,266 -- a difference of $438 -- to insure a Toyota Sienna Minivan, which gets 23 mpg.

Similarly, a Honda Civic compact that gets 36 mpg on the highway costs $412 more a year to insure than a Honda CR-V, a small sport-utility vehicle that gets 27 mpg.


Three Thoughts on the Bailout Switcheroo and Bogus Credit Crunch

(1) Isn't this hilarious that the $700 billion "Troubled Asset Relief Program" contains all sorts of money for various companies--here's a partial list--but not one thin dime for troubled asset relief?

(2) So how do all those fools who were running around saying how much money the taxpayers were going to make on these purchases of mortgage-backed securities feel now? I admit, in this article I just cautioned that the government would fleece the taxpayers on both ends of the deal, by buying the "toxic" assets at overvalued prices, and then dumping them down the road at below-market prices to their cronies. It didn't occur to me that Paulson might blow through the whole $700 billion on other Super Important Things before getting around to spending a cent on what (he told us) was necessary to avert a worldwide financial collapse.

(3) In late summer I formally incorporated my consulting business. As part of the process, I opened up a business checking account, and just for kicks--since Tyler Cowen and Alex Tabarrok were arguing about it at MR--I applied for a business credit card. Keep in mind, I am a relatively new business owner; I didn't show any history of revenues to the bank. All they could do was run my credit history; I only had a half year of consulting income on my last tax filing (if they even checked that). Nonetheless, they approved me for a $7500 credit line (with purchase APR right now of 12.99%) and I had the card in about two weeks from the time of application. I asked the lady at the bank (when I was applying) if she anticipated any problems, what with the "credit crunch." And she said something like, "Well we're a smaller bank, you know, and we didn't get into all that stuff that the bigger banks did. We're being a little more cautious in our review process because of all that's happening, but no, if there's a 'crunch' we certainly haven't felt it."


Paulson on His Bailout: The Ol' Switcheroo

So you know how it was a little weird that Paulson initially asked for $700 billion to buy dubious mortgage-backed securities and other assets, and then very quickly changed course and said they needed to use some of the money to "recapitalize" troubled banks? And then remember that the first $125 billion got injected into the biggest 9 banks, most of which were healthy and some of which didn't even want the money? And then the automakers and (for all I know) Orange Julius producers started asking Paulson for their piece of the action?

Well now the transformation is complete. According to the headlines on CNBC (but for which no story is yet available*), Paulson is right this moment explaining that not one penny of the $700 billion will actually be used to buy "toxic" assets. That's right, about 5 or 6 weeks after asking Congress for $700 BILLION for Unbelievably Important Task A, Paulson is now admitting that he has decided in the interim that actually, that money is better spent on Super Unbelievably Important Tasks B, C, D, ...

In the beginning I thought Paulson was an evil genius. Now I'm wondering if maybe that is only half right.

* UPDATE: Here is a brief story with this juicy quote:

Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.

So, umm, what exactly changed in the last 5 weeks? Many economists were saying from the get-go that his plan made no sense. Was it that Paulson's staffers actually read some of the informed critiques of the plan, after they literally begged Congress for the money and warned that the world will end if they didn't get it for their Unbelievably Important Plan? Actually, that probably wasn't it. It was probably more like, Paulson and his staff discovered for themselves that their plan made no sense, without having read any of the outside commentary on it.

Tuesday, November 11, 2008


Consumers Don't Cause Recessions

Ah, I have outdone myself in this one. You know how you've wanted someone to rip apart the "circular flow diagram" for years? Well, enjoy. Learn it. Live it. Love it. Here's an excerpt for those readers who are "busy" and need a hint before clicking a link:

In his discussion of the "paradox of thrift," Paul Krugman proves that he is not an economist—or at least, not a very good one. His policy recommendations are based on a Keynesian model bereft of time and the capital structure of production. Recessions are rooted in misalignments in this unbelievably complex structure, and there needs to be a period of below-normal output as these pipelines are fixed. Most important, consumers are doing the right thing when they increase their saving during a downturn. If solving a recession really were as simple as getting people to spend, then we wouldn't keep experiencing them.

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