Tuesday, December 30, 2008


New Energy Blog and Why Governments, Not Human Nature, Foster Mass Warfare

Rob Bradley (disclosure: the guy who hired me for IER) has a new energy blog. Some of the big guns who will be posting are still on vacation, but it looks to be great for daily commentary on energy issues.

David Henderson had a great Christmas Eve article discussing the outbreak of peace on the front lines in World War I. Naturally, the commanders nipped it in the bud and made sure their men resumed killing ASAP. If you have no idea what I'm talking about, you should definitely read the article.

Sunday, December 28, 2008


Krugman: You Can't Prove My Plan Is a Bad Idea

As always, I am stunned by Krugman's latest blog post (HT2MR). Check this out, and note that this is his entire post:
Readers have been correcting me for saying “niggling nabobs of negativism” in this post. Yes, I know the original (written by my former colleague William Safire.) But “niggling” is better for the current situation.

Here’s how I see it: the opponents of a strong stimulus plan don’t really have an alternative to offer. They don’t even have a really coherent critique; as Brad DeLong points out, if you believe that a surge in private spending would raise employment — and even the critics agree on that — it’s very hard to explain why a surge of public spending wouldn’t have the same effect.

The critics are instead mainly engaged in a series of minor complaints, aka niggles; FDR didn’t do so well, the statistical evidence ain’t so great, you can’t trust government, etc., etc..

So niggling nabobs it is.

Do you understand how crazy this is? To give context, Tyler Cowen has been repeatedly arguing lately that proponents of stimulus have not made the case that it has ever actually, you know, WORKED. That's what Krugman means by "FDR didn't do so well, the statistical evidence ain't so great, etc."

Notice that the two biggest case histories to "prove" the need for a huge stimulus right now, ARE EXAMPLES WHEN HUGE GOVERNMENT STIMULUS EFFORTS WENT HAND-IN-HAND WITH ECONOMIC DISASTER. Everyone got that? Clearly FDR was more of a Krugmanite than, say, Warren Harding or Calvin Coolidge, and yet the depression under FDR was much much worse than any previous one.

By the same token, what the Japanese tried in the 1990s was far from libertarian liquidationism, and it went hand-in-hand with the "lost decade."

Now Krugman et al. have responses here. E.g. both Hoover and FDR idiotically raised taxes during the 1930s, so it wasn't textbook Keynesian fiscal stimulus. And Japan didn't credibly promise large price inflation (to get adequate negative real interest rates) as Krugman recommended, so his prescriptions weren't fully tried.

But Tyler's point (and I'm paraphrasing) is that Krugman et al. are just excusing apparent FAILURES of pump priming to kickstart the economy out of recession. OK fine, so give us one good example WHERE IT ACTUALLY WORKED.

And to this challenge, Krugman offers the above.


Those Fighting for Economic Freedom Need a Good Halftime Speech

I recently wrote a piece for Mises.org (should run soon) saying something to the effect that what more could the SEC do, than its handling of the Madoff Ponzi scheme, to prove that it's doing an awful job and should be abolished? In other words, if one thinks that all this proves is that some heads need to roll and some priorities need readjustment, then this is an admission that the case for the existence of the SEC is non-falsifiable.

But while chasing my son around, outside the church on Christmas Eve (he was NOT going to sit quietly during the Mass that my parents took us to), it struck me: Those of us who have volunteered to fight the good fight against State power...Um, we screwed up pretty badly the last 6 months. I'm not saying we should quit, but I do think we should seriously think about HOW THE HECK DID THIS HAPPEN, and run the film over and over trying to figure out what we could have done differently.

One huge thing that occurs to me: We should have spent more time debunking the conventional story that the free market (and/or Fed allowing money stock to decline) caused the Great Depression, and then Roosevelt got us out of it. If that's what you "learned," then no kidding you'd fall for Paulson's hysterical threats.

I am being serious with this post. Let's think outside the box if you'll forgive the cliche. (C'mon kids, let's be pro-active and foment some synergy here, to implement some preventive protocols going forward...)

Last point: I am traveling and posts will not resume normal regularity until the new year.

Tuesday, December 23, 2008


Yet Another Reason Paying Interest on Fed Reserves Stinks

I think it's safe to say that the standard economist take on the Fed paying interest on reserves is that it was a tool to (try to) keep the federal funds rate from sinking. The Fed had flooded the market with tons of new reserves (see my new favorite chart below), and so naturally the interest rate on overnight loans of these reserves would sink. Thus, Bernanke may have thought that he could achieve both of his objectives--(1) buy up dubious assets and (2) peg the federal funds rate--if he started paying interest on reserves.

If that was in fact Bernanke's plan, it obviously didn't work. (Robert Wenzel points out that one problem is that the GSEs are still able to lend reserves in the federal funds market, but they're not allowed to earn interest from the Fed. So they would lend them out.)

Tyler Cowen links to this interesting Interfluidity post that discusses a different aspect I hadn't even considered:
Interest rates are, for the moment, excruciatingly low. But a subsidy to the banking system, once put into place, will be quite hard to dislodge. So, let's imagine that the Fed will pay interest on bank reserves in perpetuity, that it will pay such interest at or near the risk-free short-term interest rate, and that the expansion of the Fed's balance sheet is more or less permanent. How large a subsidy to the banking system do the interest payments on reserves represent? Some problems are arithmetically challenging, but not this one. The present value of a perpetual stream of market-rate interest payments is precisely the amount of the principal. Therefore, the present value of the Fed's de facto commitment to pay interest to banks on $800B of freshly created reserves is $800B. We fought and wailed and gnashed our teeth over potentially overpaying for TARP assets. Meanwhile, we are quietly allowing the Fed give away, as a direct, literal subsidy, more than the entire $700B that Paulson was allowed to play with. Note there is no question about this being an "investment": The interest payments that the Fed is now making to banks on its suddenly expanded balance sheet are not loans. The banks owe taxpayers absolutely nothing in return for this windfall.

Now we can quibble about the calculation. What the guy (?) means is that the higher the interest rate the Fed pays, you'd think the greater the subsidy. But not if we take the interest rate to be "the" interest rate. A dollar the Fed pays to the banks next year isn't the same as a dollar today, and so if you discount future payments at the same rate of interest at which the initial principal is rolling over, then the present value of that entire future stream of interest is exactly equal to the original principal.

For what it's worth, it wouldn't surprise me if the Fed discontinues interest payments once inflation gets out of control. But then again, if the banks are still on a morphine drip (which they will be--just look at housing projects), then maybe it will be too painful to contemplate.

Last point: Even more than the mysterious open market operations, in which the Fed buys an asset (such as a government bond) from a bank and then credits its account with more reserves, here the Fed quite openly is "creating money out of thin air." Perhaps the actual mechanism is more subtle than this, but my understanding right now is that if you are a bank and have $1 million on deposit with the Fed, they pay you interest simply by changing the number in their records. No need to debit this payment from some other fund, no need to get Congressional approval, no need to float bonds to raise the money for it. You need to pay out a million dollars in reserves today? Go right ahead, just change the 1s and 0s in the computer.

I think it's starting to sink in with people, even members of Congress, how powerful the Fed really is. I'm still pretty sure Bernanke is mostly an academic, and he's trying to do what he can in an admittedly impossible situation. The only real deceit I think coming from Bernanke is his acting like he knows what the hell he's doing.

But what happens when a real schemer runs the Fed? Do you realize that the Fed chairman effectively has a printing press at his command? Can you imagine the outcry if one sheik controlled the entire world's supply of oil? Well the Fed chair controls the world's supply of dollars.


Total Costs of Bailouts So Far...

This Slate piece tallies them up. In terms of commitments (not actual money going out the door), the government had promised, as of Nov. 25, $5.6 trillion in new handouts, er, measures to revitalize the economy. (I think it starts with the Term Auction Facility from the end of 2007.) To put it in perspective, I heard on the radio that a Bloomberg story had found that this was more than all of the United States major wars (and it included Afghanistan), even when adjusting for inflation.

Now remember back when they first bailed out Fannie and Freddie (and then especially AIG), and all of the bad things that certain economists were predicting? Do you think at that point, if we knew for sure that it would lead to an outpouring of almost $6 trillion in new commitments in just a few months, that they would have said, "Let them go bankrupt and let the chips fall where they may"?

Monday, December 22, 2008


Obama Raises Target to 3 Million New Jobs

This job creation stuff is really getting absurd. Now the President-Elect and his partner in crime are saying they will create 3 million jobs, not the 2.5 million they promised earlier, because (according to Biden) the economy is in worse shape than they originally realized.

The CNBC article doesn't say how much more it will cost to save 3 million jobs versus 2.5 million; such specificity isn't even appropriate in an announcement like this, because no one actually thinks there are serious calculations involved when politicians throw numbers around. (And wouldn't it stink if you were the 3,000,001st person to get laid off?)

But let's use the numbers that some people are throwing around for the total stimulus package. The article mentions three possible numbers: $600 billion, $700 billion, or "in the trillion-dollar range." Dividing by 3 million, the cost per job saved is:

(A) $200,000.00
(B) $233,333.33
(C) $333,333.33

I think instead of Obama's current plan, what he should do is this: Take the lowball estimate of $600 billion. Next, identify the 10 million Americans who are most in need of immediate assistance. Then, send each of them a tax-free cash payout (split up over twelve months if you doubt their discipline) of $60,000.

I'm guessing that $60 grand after-tax is a lot more than most of these people are used to making, and it's not bad to get that while you are still eligible to go get a job in the private sector. Notice that my plan is the low-ball cost estimate, and saves 4x as many unemployed people as Obama's original plan. Plus, my plan is guaranteed to actually "work," in the sense of saving families who are on the verge of foreclosure etc. (In other words there's no guarantee that Obama's job training plans etc. will get these people a job that pays them $60 grand after taxes, especially not right away.)

Obviously, my plan is stupid. It would simply ensure that the unemployment rate stays high for a year, and then we'd be back to square one. At the same time, it would take $600 billion from taxpayers and hand it out to people who aren't working. (If you want to help such people, charities and churches are happy to take your donations.) But my point is that my plan is better than Obama's, even on his own terms.

Now ask yourself: Have Obama and his team just not realized the above? Or is it just possible that they want to spend a trillion dollars to reward their own pals, just like Paulson & Co. did with their own set of cronies?


Epstein Hearts Callahan

Gene Epstein places Gene Callahan's Economics for Real People (book or pdf) at the top of his holiday list. (In the box it's third in the list, but Epstein discusses it first.) It really is the best intro to Austrian economics available; I used it as a textbook in my Austrian I class at Hillsdale.

Sadly, the best economics book ever didn't make the cut this year. What's odd is that Thomas Sowell's book Applied Economics is on there, when--as all who read my Wikipedia page know--in his review of my book and Sowell's previous one, Epstein declared:
I only wish Sowell [in Basic Economics] were as informed about the economics of the Austrian school as author Robert Murphy. While Basic Economics and The Politically Incorrect Guide to Capitalism work well as companion volumes, in the few cases where they seem to disagree—as in the discussion of money and business cycles—Murphy's version is the more trustworthy.

Hmm, something tells me that in this festive time of year, I should rejoice in Gene's success and not pout about the injustices I endure daily. Maybe...


I've Found an Even Better Alter Ego

...or is it doppelganger? Anyway, for a while I've been amused by the Robert Murphy who is a left-leaning historian of economic thought in Boston. However, his middle initial is different from mine.

Well today my good friend Google Alerts notified me of a guy who is a "planning consultant" for local government projects. His name? Robert P. Murphy, the same as mine.*

* Admittedly confusing, since Danger is my middle name.


I'm the Lyrical Gangster--Savior Style

This will no doubt be either irrelevant or old news to many readers, but in the past few years I have a newfound appreciation for the lyrics of Christmas carols. When I was younger, they were just what they were, and I didn't think about them. Then I spent several years being "rational" and didn't think about such things. But now that I am coming back to Christianity as an adult, I am really impressed with some of the lyrics of traditional carols. This is no yummy yummy yummy I got love in my tummy. For example:

Hark the herald angels sing
"Glory to the newborn King!
Peace on earth and mercy mild
God and sinners reconciled"
Joyful, all ye nations rise
Join the triumph of the skies
With the angelic host proclaim:
"Christ is born in Bethlehem"
Hark! The herald angels sing
"Glory to the newborn King!"

Christ by highest heav'n adored
Christ the everlasting Lord!
Late in time behold Him come
Offspring of a Virgin's womb
Veiled in flesh the Godhead see
Hail the incarnate Deity
Pleased as man with man to dwell
Jesus, our Emmanuel
Hark! The herald angels sing
"Glory to the newborn King!"

Hail the heav'n-born Prince of Peace!
Hail the Son of Righteousness!
Light and life to all He brings
Ris'n with healing in His wings
Mild He lays His glory by
Born that man no more may die
Born to raise the sons of earth
Born to give them second birth
Hark! The herald angels sing
"Glory to the newborn King!"

Sunday, December 21, 2008


Government "Creating Jobs"--Someone Please Make It Stop

(Ha ha get it? My title has at least two meanings. One of which is mildly amusing.)

My next mises.org piece is going to tackle this whole notion of idle resources and how there is (allegedly) no tradeoff involved when the government directs workers and other resources into public works boondog--I mean investments in infrastructure. But for now, I just loved this confident comment over at Env-Econ where John Whitehead is getting attacked (with the rhetorical equivalent of cardboard tanks) for his claim that "green jobs are bogus":

Sniff, sniff... yes, that's it - I do smell reductionism. And packaged in an overly general assertion to boot - my, my!

Let's apply your point to highway construction. Are you really ready to defend your view that the massive investment the US government made in highways from the 50s onward did not contribute any net jobs to the economy, and that it only shifted the balance of jobs?

Yes yes yes, that IS what John should be saying. (Not sure if John had the courage of his convictions to go that far.) Would the unemployment rate have been 15% up through today, in the absence of federal highway construction? Or, did the construction of federal highways lead Americans to have more unprotected sex? If not, then clearly the federal highway program didn't contribute net jobs to the economy.

The only real way to create net jobs within the country's borders is to allow more immigration. Of course, that just destroys jobs in other countries.

So long as wages are allowed to adjust, unemployment will (certainly in the long run) sink to the "natural" level. Government policies can perhaps affect how high that "natural" level is. Other than that, government policies really affect real wages, not job creation per se, if we are talking about the long run. Even massive tariffs don't (in the long run) "destroy jobs" on net. In an autarkic economy, so long as the labor market is relatively free, everyone can still get a job. The (real) wages will just be a lot lower because of the protectionist barriers.


The Guys At Env-Econ Smell A Green Jobs Rat

I'm glad to report that the two (fairly clever) guys over at Environmental Economics have been questioning the green jobs/fiscal stimulus orthodoxy. Now to be clear, they actually agree that there is a huge market failure and that the government should take steps to make greenhouse gas emitters "internalize the externalities." But the point is, the textbook way* you deal with that is you slap a carbon tax on, then sit back and let the market process work. You don't need Barney Frank doling out another trillion dollars on wind turbines and solar panels.

Anyway, try these posts--one, two, and three--to see John and Tim's thoughts. Then here's Mark Thoma giving the "scarcity disappeared in December 2007" counterresponse.

* I disagree strongly with this standard textbook approach, of course. But my point is, this new "consensus" about saving the planet and economy simultaneously doesn't even make sense to serious economists who think the government needs to raise the price of carbon emissions.

Saturday, December 20, 2008


Great Klein Post on the "Free Market" Bush Administration

I am still in the Dark Ages (an anti-Church misnomer) when it comes to reading blogs. My wife once tried to set up a Bloglines thingie for the sites I like, but it didn't take. So that means I only read a limited number of blogs during a normal session. Consequently, I only read Peter Klein's blog posts when they get linked from another site. Perhaps it's just selection bias, but man Klein always knocks it out of the park... Check out Klein on journalists (HT2 Steve Horwitz):
Bush and Paulson and Greenspan and their clique are “free marketeers” in the same way (to borrow from A. J. Jacobs) that Olive Garden is an Italian restaurant. They adopt the language, and some of the form, of market advocacy without any of the content. The Bush Administration was already, before the “financial crisis,” the most economically interventionist since LBJ; it now ranks with Hoover and FDR as the most aggressively anti-market in US history. Greenspan and Bernanke expanded the money supply like none before; Bush and Cheney borrowed and spent trillions to finance overseas adventures; the Federal Register added pages at a record-setting pace; now the banking and automobile industries have become GSEs. Lassiez-faire, indeed!...

And yet, there was Juan Williams on yesterday’s Diane Rehm show explaining, matter-of-factly, how Bush and Paulson had allowed their “free-market ideology” and “resistance to regulation” to “commitment to the idea that the market works itself” to lead the nation into ruin. Williams may be a good news reporter, but he has the political-economy understanding of a fifth-grader. Does it ever occur to these “watchdogs” to investigate what government officials actually do, rather than simply repeat what they say?

Fight the power, Pete!


Brad DeLong: Budgets Deficits Are Awful Unless They're Obama's

Readers know that lately I've come to doubt the evenhandedness of Brad DeLong. (This makes it difficult for him to "grasp reality with both hands," the professed goal of his blog.) My suspicions were further aroused when I saw him make this statement at TPMCafe (HT2 Arnold Kling):
What is going to be the new leading sector? What is going to allow us to maintain full employment without running huge long-term budget deficits that will, eventually, sap our rate of economic growth somewhat?

Now that raised some red flags for me. Catch the two qualifiers that DeLong uses, to make sure the reader doesn't get the wrong idea and think that federal budget deficits have a downside: he says "eventually" and then even has to throw in "somewhat"!! And there's no doubt either about the nature of the beast here. He's explicitly talking about "HUGE LONG-TERM budget deficits" (my emphasis of course).

To check my suspicions, I decided to do a Google search of "bush deficit" at DeLong's blog. Go ahead and click on some of the results. When the huge deficits were George Bush's actual, or John McCain's hypothetical, then DeLong was quite severe in his criticism. This post from from just last August is the best example I found:
It says more about me than I should probably admit, but back in 2000 I found the prospect of paying off the national debt to be very exciting.

To me, the pledge to do that, which Bill Clinton made towards the end of his presidency and George W. Bush made as his years in the White House were just beginning, was absolutely thrilling. Because of the lower annual interest payments that would result, no other change then being seriously talked about had the potential to alter the long-term federal budget outlook as positively and permanently.

That's why I found the mid-session review of the budget released yesterday to be so depressing. It was the official notice that the pledge, and all the good things that would come from it, would not be fullfilled. It was also time to admit that the budget politics, economics, and limits of the past decade would continue...and continue...and continue.

That's just not a happy occasion for anyone but those of us who blog, write, and talk about the budget. Business will be booming.

None of this was a surpise, of course. The prospects for paying down the national debt firmly ended back in the first year of the Bush administration. And the close to $490 billion deficit that OMB projected for 2009 has long been assumed or leaked.

Nevertheless, the release of the midsession review on July 28, 2008 should be noted as the official date when the dream of a very different budget debate and fiscal policy opportunities died.

I'll have more about the following shortly. But other observations:


From a budget, deficit, debt, interest rate, and fiscal policy perspective, the Bush administration is leaving the country so much worse off than it found it that it will likely hamstring the next president and Congress in ways that aren't yet fully understood.

Based on what we now know for sure about next year's budget, none of the presidential candidates' promises should be taken seriously. Unless they, the country, and those lending us money are willing to tolerate much higher nominal deficits and a larger debt than has so far been imaginable, the next president's options will be severely limited.

Hmm that tone seems a heck of a lot different from the more recent statement quoted in the very beginning of my post. And to repeat, you can't get DeLong out of this by saying, "C'mon, right now we're in a massive recession that requires deficit pump priming." First of all, we were in a recession back in August, though the NBER didn't know it. Second, to repeat myself, DeLong was referring to LONG-TERM budget deficits and what they would EVENTUALLY do. So even if you think he means all of the new pro-deficit talk in terms of a depression economy, then you're still left with the implication that massive budget deficits won't get us out of the slump even in the long-term.

In conclusion, I think Occam's Razor says that the best explanation is that deficits are awful when they are the fault of George Bush. When the incoming Barack Obama pledges them, and Paul Krugman says any fiscal stimulus number should be doubled to get it right, then DeLong can only bring himself to say that HUGE LONG-TERM deficits would EVENTUALLY slow down economic growth SOMEWHAT.


CARB Takes Criticism Well

Here is my Townhall column explaining how the California Air Resources Board (CARB) ignored scathing peer reviews of its economic analysis, and voted unanimously to go forward with the statewide cap-and-trade program (and other goodies) contained in AB 32, aka "The Global Warming Solutions Act of 2006." (So now we can stop worrying about global warming.) Excerpt:

The fallacy in CARB’s reasoning is easy to spot. Right now there is nothing preventing businesses from lowering their emissions, and consumers right now are able to adopt the “efficiency” measures that would allegedly save them so much money. And yet, CARB would have us believe that the private sector is so incredibly shortsighted (or just hates the planet that much), that the California politicians have no choice but to force their constituents to become richer.

Outside experts—some of whom were explicitly invited by CARB itself to provide comments—have agreed with my harsh assessment....[For example, consider] the remarks of Harvard’s Director of Environmental Economics Program, Robert Stavins. Now let’s be clear, this guy is no Rush Limbaugh ditto-head. He has been a lead author for the Intergovernmental Panel on Climate Change (IPCC), and was Chairman of the EPA’s Economic Environmental Advisory Committee—a post to which he was initially appointed during the Clinton years. So this professor is no “denier.” Yet here’s what he had to say about CARB’s rosy predictions:

I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the State government or the public for the purpose of assessing the likely costs of CARB’s plans. I say this with some sadness, because I was hopeful that CARB would produce sensible policy proposals analyzed with sound scientific and economic analysis.

Although readers know my views about cap-and-trade programs, that's not why I wrote about this episode. It is truly shocking how crazy CARB's economic analysis was. If you want to take the IPCC science and make a case for a carbon tax or cap-and-trade, you can certainly do so; William Nordhaus makes a strong case [pdf], for example.

But that's not what CARB did; instead they claimed that setting an aggressive emissions target would boost the California economy. I'm just speculating, but I bet higher-ups told the economists something like, "With the recession and huge budget deficit, there's no way this is going through if we report that it will kill jobs and tax revenue. So you come up with a way that AB 32 boosts the economy."


Why Aren't the Fed Injections Leading to Massive Price Inflation?

As longtime Free Advice readers know, my favorite graph lately has been of the monetary base, which consists of currency plus bank reserves on deposit with the Fed. (Note that a broader definition of money, M1, includes total demand deposits, i.e. checking accounts, whereas the monetary base doesn't.) In contrast to the broader measures of money, the Fed can directly control the monetary base through open market operations (and other ways if need be), and that's why most economists look at the behavior of the monetary base to see whether the Fed is tightening or loosening.

Anyway, the graph below illustrates the old "pushing on a string" notion of impotent money-pumping. In the past year the Fed has pumped in a ridiculous amount of bank reserves--meaning that the Fed goes out into the market and buys assets such as government debt or even mortgages from institutions, and then out of thin air increases the electronic entries for their deposit balances with the Fed itself. But as you can see, the increase in reserves is basically just sitting in the (electronic) vaults on the Fed's ledger. Even though banks have the legal ability to make new loans to customers (which would increase M1, M2, MZM, etc. by more than the base itself increased), they aren't doing so. In other words, the total amount of checkbook balances (as well as other very liquid forms of money included in the definition of M1) has gone up sharply, but not nearly as much as the base has increased (an increase itself driven by the spike in one of its constituents, reserves).

Here's another way to view it. "Excess reserves" means those reserves that banks hold on deposit with the Fed, that they don't need to back up their outstanding demand deposits. So when excess reserves rise, that means banks have the legal ability to make more loans but are choosing not to. Now I'm just eyeballing it here, but if you look closely you can see an uptick in recent months...

But back to the serious issue at hand: What happens when the panic in the financial sector subsides, and banks feel comfortable lending again? Well, loosely speaking, it means that the amount of money in the hands of the public (as opposed to reserves that commercial banks have on deposit with the Fed) can increase the same percentage as reserves have increased. So even if Bernanke cut the spigot off Monday, and didn't let reserves increase any more, that would still mean there was enough slack in the system for demand deposits to increase some 1,400%. (Reserves have gone up yr/yr a bit more than that, while demand deposit year/year growth has been around 38% or so.)

Now obviously Bernanke is not going to sit back and let prices go up by a factor of 14. But how does he suck reserves out of the system? Why, he has to sell off the trillions in new assets that the Fed has recently acquired. And of course, this is precisely all of the "troubled" assets that nobody wanted to hold in the first place, and that had caused the major players to seize up.

And even if Bernanke decides to hang on to all of the mortgage derivatives--you know, the ones that are going to make us taxpayers so much profit in the coming years--and he just dumps U.S. Treasurys, guess what that does? It lowers the price of Treasury debt, meaning interest rates rise. Fortunately, the incoming Obama Administration has plans to sharply pay down the federal debt, so at least skyrocketing interest rates won't be so painful. Oh wait.

I hope my advice to acquire physical gold and silver makes more sense now. And I hope you also see why I find all this talk about the market forecasting 30-year average inflation rates of 2 percent (or whatever) to be absurd.

Friday, December 19, 2008


The Policeman Is Not Your Friend

I realize I get cynical a lot here, but check out this story from Galveston. (HT2LRC) I'm not even going to comment.
It was a little before 8 at night when the breaker went out at Emily Milburn's home in Galveston. She was busy preparing her children for school the next day, so she asked her 12-year-old daughter, Dymond, to pop outside and turn the switch back on.

As Dymond headed toward the breaker, a blue van drove up and three men jumped out rushing toward her. One of them grabbed her saying, "You're a prostitute. You're coming with me."

Dymond grabbed onto a tree and started screaming, "Daddy, Daddy, Daddy." One of the men covered her mouth. Two of the men beat her about the face and throat.

As it turned out, the three men were plain-clothed Galveston police officers who had been called to the area regarding three white prostitutes soliciting a white man and a black drug dealer.

All this is according to a lawsuit filed in Galveston federal court by Milburn against the officers. The lawsuit alleges that the officers thought Dymond, an African-American, was a hooker due to the "tight shorts" she was wearing, despite not fitting the racial description of any of the female suspects. The police went to the wrong house, two blocks away from the area of the reported illegal activity, Milburn's attorney, Anthony Griffin, tells Hair Balls.

After the incident, Dymond was hospitalized and suffered black eyes as well as throat and ear drum injuries.

Three weeks later, according to the lawsuit, police went to Dymond's school, where she was an honor student, and arrested her for assaulting a public servant. Griffin says the allegations stem from when Dymond fought back against the three men who were trying to take her from her home. The case went to trial, but the judge declared it a mistrial on the first day, says Griffin. The new trial is set for February.

"I think we'll be okay," says Griffin. "I don't think a jury will find a 12-year-old girl guilty who's just sitting outside her house. Any 12-year-old attacked by three men and told that she's a prostitute is going to scream and yell for Daddy and hit back and do whatever she can. She's scared to death."
Update: This is from the officers' lawyer, William Helfand:
Both the daughter and the father were arrested for assaulting a peace officer. "The father basically attacked police officers as they were trying to take the daughter into custody after she ran off."

Also, "The city has investigated the matter and found that the conduct of the police officers was appropriate under the circumstances," Helfand says. "It's unfortunate that sometimes police officers have to use force against people who are using force against them. And the evidence will show that both these folks violated the law and forcefully resisted arrest."


Bryan Caplan Gets Pre-Emptively Attacked by Hawks

Over at EconLog, Bryan Caplan made a surprisingly courageous post about disarmament. Now granted, Caplan's argument wasn't airtight, but give the guy a break; you're not going to get world peace with a few paragraphs. Anyway, the majority of commentators lecture Bryan about human nature, A is A, therefore we need nukes, etc., but this one really pushed me over the edge (and note that I changed "Ghandi" to "Gandhi" throughout):
Would Gandhi, going up against any power other than Britain, have succeeded as well as he did -- or would he have been executed for treason?

Now the author, "liberty," is a guylady I like; heshe posts a lot at The Austrian Economists blog. But I think this type of quick dismissal of Gandhi is goofy:
C'mon guys, let's "think like economists" here and reason on the margin. You're saying, e.g., that Gandhi would have been slaughtered by Hitler. Yes he would have. So what that means is the way to beat Hitler is to try to kill him with a suitcase bomb placed under his table! Violence is clearly a more successful strategy.

(And yes, I understand you will say, "Huh? I'm talking about the Allies coming in with tanks and bombers." But Gandhi didn't have tanks and bombers at his disposal. I get exasperated when people somehow flip the example of Gandhi to show that nonviolence doesn't really get you anywhere in the real world.)

Now let me be clear: I am not claiming I just made the case for pacifism in the above retort. I'm just pointing out the sloppy arguments often made in the "obvious" case against nonviolence.


Robert Wenzel Gives Me Props on Paulson

Robert Wenzel and I have formed a mutual fan club, which means I don't have to toot my own horn on my Paulson call. The entirety of Wenzel's post (and note my convention here, that I don't italicize my own words to avoid confusion):

Bob Murphy Is Going to Flip

On Wednesday, Bob Murphy wrote at his blog:

Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP

Now I didn't specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it's a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn't need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, "Yeah, of course I want to spend another $350 billion. But I meant I wouldn't be spending it on troubled asset relief."

Guess what?

Paulson, in his statement on the automotive bailout, flips again and says he needs the remaining $350 billion of TARP funds for "financial market stability":

As a result of this decision [to bailout the auto industry], Treasury effectively has allocated the first $350 billion from the TARP...In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.

I think Murph has Paulson figured out.

Thanks RW, I do think I've got Paulson figured out. But I must confess that Wenzel's own blogging habits are still mysterious to me. For example, he doesn't include a picture of me or of Paulson, even though this blog post clearly focuses on the two of us. And yet, in another recent post, Wenzel includes a photo of a person who's not even the focus of his analysis. What gives?


Great (and Depressing) TV Show About the New Deal

Bryan Caplan and David Henderson have been raving about this half-hour Canadian show on the New Deal, and boy they were right. Like David, I intended to just watch a few minutes, and finally around 20 minutes into it I decided to stop agonizing, and just resolve to watch the whole thing.

What's really amazing is that even the pro-FDR guys only rebut the anti-FDR guys by saying things like "Roosevelt wasn't trying to fix unemployment, he was trying to revamp American capitalism, so he succeeded in that respect" and of course "He made Americans feel good." (Not exact quotes but close.)

I think I'm going to write a book about this.

Thursday, December 18, 2008


They Don't Teach You This in Law School

This is a very interesting story about a lawsuit between Texaco and Pennzoil, told by Carl Icahn, described by Wikipedia as a corporate raider and the 46th richest man in the world. (HT2EPJ) Incidentally, there are a few naughty words so watch yourself.


The Great Credit Thaw

Von Pepe passes along this 5-minute CNBC video. A small potatoes banker from Montana was just about to explain why the Fed rate cuts were devastating his business, and then the feed mysteriously gets interrupted, ruining his presentation. A random glitch, or sinister corporate censorship of anti-Bernanke sentiment? Who can say.


Battening Down the Hatches vis-a-vis Credit Cards

I have been telling Free Advice readers for months that the conventional old school wisdom is not necessarily correct in the present environment. Yes yes, you should cut your spending and save, but this doesn't mean you should pay down your credit card balances.

However, there is a point of clarification that is in order. The rationale for my advice is that if and when prices go through the roof (and again, see my favorite chart below--which I often reproduce because some outside readers stumble upon an individual post through a Google search, not because they are my fans), you don't want to hold all of your savings in the form of diminished dollar debt. On the contrary, your student loan debt, mortgage, car loan, etc., will all become smaller burdens if prices go up by 50% and (say) your paycheck goes up by 40%.

BUT, be careful. If you have huge balances on your credit cards, where the rate adjusts based on some formula involving the prime rate, then you could be screwed. You don't want to get caught with $20,000 in credit card balances that roll over month to month at 43.9% APR. (You don't want to have an ARM on your house, either.)

So what I just did was a balance transfer onto a Discover card at 3.99% locked in to November 2012. In a sense, it's my way of ensuring I'm near the front of the line with all these new dollars Bernanke is handing out. Let it rain, Ben!

(Once more giving the lie to the alleged "credit crunch," they gave me a $15,000 credit line based on my verbal statements of income, and of course on my credit history. The tightwads said if I wanted more, I'd have to provide them with documentation of my income. Oh the horrors! Where's Steinbeck?)

In conclusion, I am saying that if you've got a bunch of disposable income you've freed up by cutting your spending (and good for you if you've got that discipline), I think it makes more sense for you to buy some physical gold and silver coins first, rather than paying off fixed-rate dollar-denominated debt.*

* If we have deflation for the next three years, then obviously this is some horrible advice.


Woman Stuck on Railroad Tracks Dials 911 Instead of Running

This is a pretty shocking story:

Police say a woman who died after her car was struck by a freight train in Anaheim was on the phone with a 911 dispatcher in the moments before the crash.

Police said Tuesday that 68-year-old Linda Kruger-Small told the dispatcher her car was stuck on the railroad tracks and she was urged to get out. The train collided with her car Monday night on the Burlington Northern Santa Fe tracks.

Anaheim police Sgt. Rick Martinez says the dispatcher heard someone trying to help her before the line went dead.

The right-wing talk radio show I listen to in the morning (when driving my son to school) was making a big deal about this, saying it was a metaphor for American society. I.e. there is an economic freight train headed for us, and nobody wants to save himself but instead wants the government to swoop in and rescue him (her).

I admit it's hard to fathom why someone would dial 911 in that situation, but the fact that she was 68 and someone was there trying to help her are details they didn't mention on the radio. Presumably the lady panicked and years of PSA habituation made her dial 911.

Wednesday, December 17, 2008


Rebunking Five "Lies" of Economists

They are trying to debunk the lies, so I am rebunking... Now I'm no fan of mainstream economic orthodoxy, but the critiques on this (spooky) page are childish. I must be brief--my corporate masters want output output output from me!!--but let me at least deal with two that jump out:
DELIBERATE LIE #3. People are “rational utility maximizers”.

Although even economists admit this is a lie, [7] it is still boilerplate economic theory. Economists MUST lie about this because if people are being manipulated by marketing, then the so-called “free market” obviously requires government intervention.

In a Liberal Democracy, tax payers are ultimately responsible for an individual if that individual becomes destitute or a criminal. Economists use the “rational utility maximizer” lie to prevent government intervention in markets when intervention would serve the common good.

The mistake here is so elementary that it's comical. If people are manipulated by advertising (and they certainly are to some extent), why in the heck would liberal democracy "work"? Wouldn't you get ridiculous (and "wasteful" in this site's horrified sense) political campaigns that appealed to the basest of passions? In short, wouldn't you end up with the lousy politicians we currently have?

This is the problem with any solution that relies on a benevolent government. E.g. if you think a country is horribly racist, then the last thing in the world you want to do is give the majority more power through the government. Duh.
DELIBERATE LIE #4. Money is just a “medium of exchange”.

Money is literally “created” (and backed by consumer debt) every time a bank makes a loan. At the time the loan is made, not enough money is in circulation to pay the interest on the loan, so more money must be eventually “created”, by more consumer debt, to pay back the interest on the loan.

I'm answering this one because I think someone in the comments here at Free Advice asked this a few weeks ago. Anyway, it is not true that if a bank makes a loan, then there necessarily needs to be further creation to allow for the interest repayment. This is partly because not every bit of money is due to a loan that must be paid back with interest to the bank, but more fundamentally the website is wrong because the same piece of money can change hands more than once during the year.

For example, let's say there are two neighbors, Bill and John. John asks Bill for a loan of $100, to be repaid with $110. Bill agrees, and gives John the money. John uses the $100 to buy materials, such as a canvas and paint, from Sally. Then John combines the materials to create a nice portrait, which he sells for $120 to Sally. Then John pays the $110 back to Bill, keeping $10 for himself. It is clear that what has happened is that a net $10 went from Sally's cash balance to Bill's, and another $10 went from Sally to John. Everybody is happier than without the voluntary transactions. The universe didn't blow up.

But let's really push it to see what's fundamentally wrong with the website's analysis. Suppose there are just two people, and Bill starts out with all the money. (This way we can't get the net interest payment by reducing someone else's cash holdings.) John asks to borrow $100. Bill says, "OK, but I charge 10% interest per month." John agrees.

Near the end of the first month, John makes his payment of $10. But then he cuts Bill's grass for $10. Thus John's cash balance is restored to $100.

John does this every month. When he decides to pay off the principal, he does the same thing: He pays the installment, then cuts Bill's lawn to get the $10 right back, and then hands over the $100 to pay off the loan. Once again, the universe does not blow up.

Last way to see it: Suppose we had a society with 100%-reserve banking on a gold standard, and the mines were empty. Would the nominal interest rate necessarily be 0% in this world?


A Tutorial on Corporations

I'm not sure I entirely agree, but interesting. (HT2 Ian.) And make sure your sound is on.


Commercial for My New Study Guide

...is here. Excerpts:
Once you realize that Mises has a definite plan for the book — it is certainly not a Joycean stream-of-consciousness riff — then its 881 pages are not as daunting. You realize with each chapter, "Yes, now I see why Mises couldn't really get on to Important Topic X until he first dealt with the material he just covered."
Since I discovered it in high school, I have now read Human Action at least three times cover to cover, and each time it was different. I am confident that it is one of the most important books (let alone economics books) written in the 20th century. For those who have dabbled with it, I strongly encourage you — with the help of the study guide — to pick it back up and start reading from the beginning. If you would just decide to suck it up and start reading from page 1, you may find that "the boring part where I get stuck" never comes.
...Human Action is so much more than an economics book. If for no other reason, modern Austrians should read the book just to appreciate the sheer might of Mises's intellect. I can't think of another writer who shows such competence in discussions of issues as diverse as the fall of Rome, the Heisenberg uncertainty principle, German military strategy in the First World War, the Weber-Fechner physiological law, the foundations of probability theory, and Kantian philosophy.

In closing, I would once again stress to modern Misesians who have yet to read Human Action that it really is well worth the effort. In it you'll find that even stronger than his belief in free markets was Mises's faith in the power of reason. The fact that we're still talking about his ideas — and that we created a study guide to help newcomers understand them — shows that Mises hit the bull's-eye once again.


In Fairness to Dr. Krugman...

...I should correct a slightly unfair post. When a CNBC story reported that the Fed promised to hold rates at low levels for an extended period, I posted that this was exactly what Krugman had called for. Well, not quite. Here is the full context of the actual Fed statement:
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

So this isn't what Krugman (and now Mankiw) want. Here, the Fed is saying, "We will end up keeping rates low because recession will be the big danger, not inflation, for the foreseeable future."

In contrast to that kind of declaration, what Krugman and Mankiw want is for the Fed to promise future inflation, so that the real interest rate can be pushed lower. This is necessary because the nominal rate has butted up against the 0% wall, and so the only way to provide even more "stimulus" in terms of standard monetary policy is to promise that prices will rise more quickly, making the real costs of borrowing negative. (Note that the last time this happened--see the red line in the chart below--was smack dab in the middle of the housing boom, and then before that it was the late 1970s. Seems like good examples to follow.)

Real Yr/Yr GDP Growth (blue, right)
vs. Real Effective Fed Funds Rate (red, left)


Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP

Now I didn't specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it's a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn't need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, "Yeah, of course I want to spend another $350 billion. But I meant I wouldn't be spending it on troubled asset relief."


Mankiw Wants a Nobel Too So Starts Writing Like Krugman

Look at his latest blog post calling for the Fed to explicitly abandon price stability (HT2EPJ). In his words:
[E]ven if the Fed cannot reduce nominal interest rates, it can reduce real interest rates by committing to a modest amount of inflation.

Some would view this as a radical change in monetary policy. In some ways, it would be. Given how weak the economy is, however, a bit of radicalism may be called for. I am more comfortable having the Fed commit itself to modest inflation than having the federal government commit itself to a trillion dollars of new spending. The more we can rely on monetary rather than fiscal policy to return the economy to full employment and sustainable growth, the better off future generations of taxpayers will be.

The abandonment of "price stability" would be the modern equivalent of Roosevelt's abandonment of the gold standard. Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful. Today, monetary policy is fettered not by gold but by fear of inflation. Perhaps it is time is get over that fear, at least for a while. As Jim Tobin said in an earlier era, there are worse things than inflation, and we have them.

I think all there is to say, is a line from a childish MTV show: "No Beavis, that would suck."

Tuesday, December 16, 2008


Old School Video Explains the Joys of Inflation

This 10-minute video (HT2LRC) could be a documentary on That Which Is Seen.


Fed Slashes and Promises to Make It Stick: Let's See if Krugman Is Right

The Fed cut the target today down to "0 to 0.25%" and "made an explicit commitment to keeping official interest rates near rock bottom for an extended period." This is exactly what Paul Krugman has recommended. So let's see if it works.

My point here is that for every period where the standard "cut rates and spend a lot of borrowed money" approaches failed miserably, the Keynesians always say, "It was too little, too late."

For example, Paul Krugman amazingly describes the Bush Administration response to all this as an example of a government too constrained by free-market ideology to actively rescue the markets. (I'm not going to bother digging up cites; I hope I didn't shock you by claiming that he said that.)

My prediction is that the economy will still be in the john come summer. And Krugman will still be saying, "We need to take the gloves off and really stimulate this economy! Man I can't believe how screwed up the free market can get sometimes."

Oh, one last thing: Those who keep saying that the humungous base injections are nothing to worry about, because the wise Bernanke will suck those reserves out once the economy picks up the slack--what do you say now? Is Bernanke going to invent a way to suck out $450 billion in base money without raising the target above 0.25%?


Hayek Tells Bill Buckley That Even Keynes Was Afraid of the Keynesians

Last month Bob Roddis caused a stir when he made available the audio recording of Hayek's 1975 "Meet the Press" appearance.

Well Roddis has done it again. He has provided me with this recording (mp3) of Hayek on Bill Buckley's Firing Line. Buckley asks Hayek about the popularity of Keynesianism, if (as Hayek claimed) it was so "manifestly ill-adviiiiised" (picture Buckley's scary eye rolling).

Let me map what Hayek says, because it gets a little tricky in the middle but the ending is amazing. Hayek explains that in Great Britain during World War I, the pound was cut loose from gold, leading to large increases in prices and wages. Then after the war, the British government wanted to return to pre-war parity. Prices generally came down, but nominal wage rates remained high. Thus, workers saw a huge increase in their real wages because of the efforts at deflation (needed to go back on the gold standard at the old parity).

So, in order to prevent widespread unemployment (i.e. allow British workers to be competitive with the rest of the world), they either had to lower nominal wages or raise prices again. Hayek explains that the first option was politically unpopular, and also was--according to a complicated argument from Keynes' General Theory--not even effective. (I.e. Keynes argued in his book that even if all nominal wages fell, that might end up reducing overall prices and hence not lead to a fall in real wages.)

But now the awesome part. Hayek says that Keynes' theory was, at best, appropriate for the specific deflationary environment of the 1930s. After the war had passed, the great danger was inflation. And--according to Hayek--Keynes himself agreed with this, and even promised to rein in his foolish disciples if they ever got the crazy notion to advocate pump-priming in an inflationary environment. But alas, Keynes died six months after pledging this to Hayek.

As I said, Hayek sounds like he's rambling for a bit, but try to stay focused because the end of the clip is really incredible.


What Was Madoff's Exit Strategy?

Econophile asks some good questions:
Ponzi schemes are fascinating. Why would anyone do one unless they have a plane to Rio waiting on the runway? They know that they have to get off the train at some point and then it's all over.

Why did Bernie Madoff do it?

$50 billion is real money. Aside from the question of what he did with the money, why did he think he'd get away with it and why did it last so long?

Econophile doesn't really answer these questions, but he does manage to blame the Fed and government. My kind of guy.


Dan Mitchell Blows Up Keynesianism

Yeah yeah, this video (HT2 Pete Boettke) from Dan Mitchell is a bit elementary, but it's not his fault that our society is enthralled by a ridiculous idea. Incidentally, the defender of Keynesianism would argue that Hoover and FDR didn't do it right; they shouldn't have raised taxes, just spending. And with Japan, the response is that it was too little, too late.


More Problems in Paulson's Explanation of the Lehman Collapse

Robert Wenzel at EPJ explains the latest twist in the Lehman story: Even though Paulson & Co. first said they didn't have legal authority to help Lehman, and then said they never once considered putting taxpayer money at risk for the company, it turns out the Fed lent a Lehman subsidiary $87 billion after Lehman had failed. Click on the link above for more details. You know, I'm really starting to wonder whether Paulson's pants are on fire.


Freeman Article on Fannie & Freddie Seizure Now Online

The December issue of the Freeman is up, and it has my article on the F&F seizure. I don't remember the exact date, but I think I submitted this piece in October. I confess that I was somewhat nervous to read it just now, because so much has changed since I wrote it. Fortunately, I only saw two statements that I now think are a bit off:

* "What should have been a large hit to real estate and a few institutional investors has now spread and is currently threatening the global financial system itself."

This shows how naively I bought the Paulson hype. Even though things were (and are) bad, I don't think the global financial system itself was at stake. And now the second claim I regret:

* "Although he is very smart and understands financial markets, Henry Paulson cannot centrally plan the mortgage market to improve on the spontaneous outcome of voluntary interactions among millions of professionals in the private sector."

I will leave it to the reader to guess with which portion of the above sentence I now disagree.

Monday, December 15, 2008


Oops, Base Growth Was Probably Higher in 2001 Than in 2002

In my latest mises.org piece, I argue that the monetary base grew more rapidly in 2002 than in 2001, whereas Henderson and Hummel give the opposite impression.

After further review, I think they are probably right.

The problem is that the base whipsawed around due to Y2K and the 9/11 attacks. Look at the levels:

Now the Fed gives us the data by month. So when trying to figure out which year had the highest rate of growth, I first went through and took the annual average for every year. In other words, I got "the base level" for 2000 by averaging the Jan 00 through Dec 00 monthly base figures, and I got "the base level" for 2001 by averaging the monthly figures of Jan 01 through Dec 01. Then, I computed "2001 growth rate" by seeing how much bigger the 2001 average was, compared to the 2000 average.

Well, I'm sure Free Advice readers can see the pitfall in my approach. (Too bad I didn't catch it until now.) If the base grew very rapidly at the end of 2001 (which it did because of September 11th), then my technique could allow some of that growth to spill over into the official growth rate for 2002. After all, even if the monetary base had stayed flat from December 01 through December 02, the average level in 2002 would be higher than the average level in 2001, and hence my method would (erroneously) indicate growth in 02.

So using my method, we find that base growth in 2001 was 5.6%, while growth in 2002 was 8.7%. However, if we do the year/year rate in December (which still isn't perfect, but it's a lot better than my method), then we get the Dec 01/Dec 00 growth rate at 8.6%, while the Dec 02/Dec 01 growth rate is a smaller 7.3%.

What's ironic is that this correction both helps and hurts my case. On the one hand, it makes more sense that the base expanded more rapidly in 2001, when Greenspan did most of the rate cutting--the fed funds rate fell from 6.5% down to 1.75% in 2001 alone. On the other hand, the correction places that much more time between the ludicrous phase of the housing boom, and the "reckless" injection of base.

One last thing: What threw me with Henderson and Hummel's claim was that they referred to the "year to year annual growth rate" in the base (my emphasis). So I thought they were referring to taking some kind of annual average, since otherwise the word "annual" is redundant. I.e., I think what they are referring to is that the Sept 01 / Sept 00 growth rate is 10.x%. But again, adding the word "annual" is redundant; I would normally just say that was the yr/yr growth rate in Sept 01, or "in 01."

Notwithstanding that, it's better for them to be redundant and right, rather than me being precise but wrong. To repeat, I correctly described how I got my numbers, but I said base growth in 2002 was higher than in 2001, and under any reasonable definition this claim is wrong. Oops, sorry guys.*

* Greenspan is still a fink.


IER Comments on Scoping Plan for California's AB 32

Here (pdf) are the comments I submitted on behalf of IER to California's Air Resources Board regarding the economic analysis contained in the Scoping Plan for AB 32, aka "The Global Warming Solutions Act of 2006." It would force California greenhouse gas emissions back to 1990 levels by 2020, which would be about a 25% reduction under business-as-usual projections.

What was funny in this episode is that I didn't have to deploy cynical Public Choice analysis; even the peer reviewers were stunned by CARB's economic analysis. The CARB analysis was claiming that the cap-and-trade plan (as well as other mandates such as efficiency targets) would boost California's economy.

Some excerpts:

IER appreciates the opportunity to provide comments on the California Air Resources Board’s (CARB) “Climate Change Proposed Scoping Plan: A Framework For Change.” We have serious reservations relating to the economic analysis underpinning the Scoping Plan. (The Economic Analysis Supplement was originally released in September 2008, and an updated version is included as Appendix G in the current Scoping Plan.1) We echo the concerns raised by such respected parties as the Legislative Analyst’s Office, which concluded that CARB “failed to demonstrate the analytical rigor of its findings” and that “economic analysis played a limited role in the development of [the] scoping plan.”
In the same vein, Director of the Harvard Environmental Economics Program Robert Stavins writes: “I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the state government or the public for the purpose of assessing the likely costs of CARB’s plans.”
With or without AB 32, businesses in California already have the option of reducing their greenhouse gas emissions, and households already have the option of installing energy-efficient windows, new installation, solar panels, etc. If it really were the case that the measures of AB 32 would, on net, make California businesses more profitable, it raises the question of why the legislature needs to use the force of law to implement the changes. CARB should simply fax its economic analysis to the owners of the major businesses, and they would make the changes voluntarily. By the same token, if households really do stand to save so much money from the efficiency measures contained in AB 32 that it is clearly worth their effort to implement the renovations, then the state should focus on educational efforts, rather than mandates.

What's interesting in these things is that I think any Joe Schmoe is allowed to post comments for all the world to see. I will give a heads-up the next time something like this opens up, in case any of Free Advice's eloquent readers wish to tell their employees (i.e. politicians) how to do their job.


Evidence That the Fed Caused the Housing Boom

At mises.org today, I have an article taking on some of the empirical arguments that try to exonerate Greenspan. I take on Megan McArdle, Henderson and Hummel, Brad DeLong, and Casey Mulligan. (In short, I do my best to alienate as many groups as possible from Austrian economics.) An excerpt:
I realize that these disputes may just further convince some readers that economics is not a science but rather an ideological contest in which each side throws its own set of lying statistics at the other. But even so, I will now use the same underlying data as the writers above, to reach the opposite conclusion: Greenspan allowed the monetary base to grow quite rapidly precisely when the housing boom shifted into high gear, and precisely when interest rates collapsed.

Before proceeding, I want to remind readers that my story is the textbook explanation of how the Fed operates. It is the writers above who are downplaying the Fed's ability to push down interest rates or to "stimulate" (however temporarily and artificially) the economy. During the boom years, Greenspan and his fans wanted to take credit for his "merciful" low rates which allowed the United States to avoid a painful recession, but now Greenspan and his defenders want to claim that he was an innocent bystander in the face of Asian thrift and shortsighted bankers. In any event, on to the data, this time presented by the "prosecution" as it were.


George Bush Is Not an Idiot

I think George W. Bush is one of the worst presidents in modern times, because of his lip service to free markets while allowing an outrageous growth of government power. Still, I think his critics are wrong when they lampoon him as a bumbling idiot. (Just the other day, I was talking with a guy and I said, "His critics like to paint him as such, but you don't become the most powerful person in world history if you're a complete buffoon." The other guy said, "You can if your dad used to run the CIA.")

My opinion of Bush's wits went way up during one of the debates with Kerry. The details are a bit fuzzy at this point, but it was something like this: Bush called for medical tort reform, Kerry explained that the true problem with health care was insurance costs, and then Bush came back and explained that his proposed reform would deal with what Kerry had brought up. And there was just something about the way Bush quickly handled the point, that made me think, "Whoa, his deer-in-the-headlights look is an act. That's a sharp guy."

Now we have more evidence. Given the Al Franken opinion of the clueless bumbler, you would think Bush would get smacked in the face. But look at this guy (HT2 James Ostrowski):


Nash Supports Gold Standard

Nobel Laureate and game theorist John Nash recently gave a talk at Fordham explaining the need for a hard money, such as was provided by the gold standard. (HT2EPJ) From the Fordham account:
Nash told the audience that such financial crises would be less likely to occur if there was some international monetary standard, such as the gold standard or competition among worldwide currencies, to curb inflation and prevent the rise of mortgage abuses. He expressed some skepticism about a government bailout as a solution.

“I get the impression that the government is not ready to do anything that is really beyond a short-term basis,” said Nash, a senior research mathematician at Princeton. “[But] we need a natural stability of value.”

Nash said that various interest groups that subscribe to Keynesian, or short-term, economic theories have sold the public on the notion that inflation is acceptable or that “bad money is better than good money.” Such a notion, he said, led to the dangerous proliferation of bad mortgage loans—loans made on the gamble that house values would continue to rise and eventually turn a profit.

“A fixed-rate 30-year mortgage would be reasonable under the gold standard,” Nash said. “Now, there are variable rates, and adjustables, and convertibles, and it is very complicated” for homeowners to figure out what they are getting into. In fact, Nash said, nobody really knows the depth of the financial crisis.

Having an internationally oriented money standard would promote better quality currencies and less inflation, he added.

The announcement then starts talking about "A Beautiful Mind," which was a good movie but a terrible introduction to the life of Nash and his work. For one thing, Nash was a lot "crazier" (in quotes because I think that word really just means, "unusual") in real life than the movie portrayed. Apparently he walked into faculty meetings and would throw the New York Times (or some other paper) on the desk and say, "You guys see that headline? That's aliens communicating with me." Another time he turned down a job offer (I'm pretty sure in writing) by explaining that he had just become the ruler of Antarctica. (BTW I'm relying on my recollection of the book A Beautiful Mind, and so I might be botching the specifics. But the spirit is right.)

And in the movie, they depicted his wife as supportive, when in reality she had him committed, and arguably what pushed her over the edge was her learning that his productive powers might be compromised if he wasn't treated. (I remember writing something like, "He was her slave" in the margins.) Last thing: You know the bar scene, where Russell Crowe drawls, "Adam Smith needs updating!" and he goes through the analysis of how he and his buddies should pick up girls? Well that is THE EXACT OPPOSITE of a Nash equilibrium. It would be akin to Ron Howard making a movie about the young Einstein, and having him declare, "Isaac Newton was wrong! Light travels at different speeds, depending on the observer."

BTW if you enjoyed the above rant, you may like my dissection of a Hal Varian op ed that had boiled down game theory for the unwashed masses, and declared everyone irrational for not playing subgame perfect Nash equilibria in experimental settings.

Sunday, December 14, 2008


A Stern But Sobering Lecture from Lew Rockwell

Lew Rockwell, president of the Mises Institute, has an amazing article at his website today, imploring libertarian intellectuals to stick to their principles even now when things are scary. A taste:
If you write and follow politics enough, you eventually realize that most evil in this world is brought about by those seeking a lesser of two evils. And those who assist in this very much resent it when you point out that they are promoting evil.


To bail [the Big Three] out with tax dollars is an amazing insult to American consumers. What Americans have chosen not to buy, the government is now effectively forcing them to buy. You want a Toyota and paid for it with your money but your government is now saying that you should have bought a Pontiac, so it is tapping into your bank account to make it happen – and then not even giving you a car for your money!

But let's return to the problem of those who have caved in. I'm getting messages from people who believe in free markets saying that we have to do this bailout anyway, otherwise we will face worse consequences. The unions will strike back. There will be massive protectionism to prop up the industry. Free market people will get a bad name for not supporting the little guy. Our industrial base will further erode. Unemployment will soar and then the masses will riot and we'll get Bolshevism. And so on.


I grant that all the predicted results of failing to pass it would be bad. They might even be worse than a bailout, who is to say? But these are speculations about the future. What we face right now is a terrible evil of a bailout, and great good comes from its failure to pass. What's more, if free market people can't bring themselves to oppose that, what good are they anyway?


If a dystopian nightmare of the totalitarian state finally arrives in the United States, it will be a result of a compromise, and there will be people around until the very end who will insist that we should be grateful because it could be much worse.

This kind of strategizing also works as a cover for selling your soul. The temptation to do this is very great indeed. The state loves nothing more than a seeming libertarian who weighs in from time to time with a pro-state position. This allows the state and its minions to justify their oppression even from the standpoint of libertarian intellectuals. When you sell out, this is the role you are playing (and this is the role that some D.C. organizations have been appointed to play).

There is only one sure way that you can know that you are on the right side of history, and that is by saying what is true and defending what is right, without exception. It is not left to intellectuals to play political games. Intellectuals are supposed to tell the truth, regardless of the moment. That means, in these days, completely opposing all increases in state power under the cover of "countercyclical policy."


Subjects Are Like Little Children

...in the mind of a politician. The easiest way for me to get across the point of this post, is to recreate how I happened on the idea:

So I was trying to get my 4-year-old to go to the bathroom since we had just driven home from somewhere. He wanted a drink, and I said, "OK let's go on the potty and then we'll get some juice!" (and I was really chipper about it).

Clark got mad of course, since wouldn't you get mad if every time you suggested something to this really tall guy who was always in your face, he would try to amend the plan to suit his whims--and if you didn't agree, he would physically overpower you? What the heck?!

But I've noticed lately that if I just wait out the tantrum (instead of trying to reason with him), he gets over it in literally 8 seconds and then suggests the very thing that I proposed one minute earlier (and which, 60 seconds previously, had triggered Clark's crying).

So I don't think it's that he's a pushover or weak-willed, it's that my wife and I basically mold 80% of how Clark even interprets the world. I mean, he now divides his day up into play times, meal times, potty breaks, naptime, bath and bedtime with story. Where did all those concepts come from? Clark certainly didn't get a menu of ways to categorize his experiences and then picked; no, he is basically copying my framework.

So since I get to frame the issues, naturally he is going to be steered in the direction I want him to behave.

* * * * *

It occurs to me that this is how the government operates. Take the "Troubled Asset Relief Plan." Just the very name of that thing makes it hard to oppose. And the acronym is catchy, too. They wouldn't have named it the Credit Reset and Assist Plan.

Of course, what's great is that the resistance can come up with terms like "bailout." No matter how you spin that, it's dirty.

Saturday, December 13, 2008


Celent Report Says "What Credit Crunch?"

I have seen this story linked all over the place, but just in case you missed it:
PARIS (Reuters) - The credit crunch is not nearly as severe as the U.S. authorities appear to believe and public data actually suggest world credit markets are functioning remarkably well, a report released on Thursday says.

As a result, governments are pumping masses of public money into the economy across the world because of the difficulties of a few big, vocal banks and industries such as car manufacturing, which would be in difficulty anyway, according to the report published by Celent, a financial services consultancy.

"It's just stabbing in the dark with trillions of dollars," Octavio Marenzi, report author and head of Celent, told Reuters in a telephone interview where he questioned the depth of the analysis that preceded numerous fiscal stimulus packages.

The report, much of which is based on U.S. Federal Reserve data, challenges a long list of assumptions one by one, arguing that there is indeed a financial crisis but that, on aggregate, the problems of a few are by no means those of the many when it comes to obtaining credit.

"It is startling that many of (Federal Reserve) Chairman (Ben) Bernanke and (Treasury) Secretary (Henry) Paulson's remarks are not supported or are flatly contradicted by the data provided by the very organizations they lead," said the report.

I would just like to point out that I've been saying for months--try here, here, and here for some samples--that this "credit crunch" claim is bogus. Hats off to Alex Tabarrok, though, who was skeptical several months before I was.

Friday, December 12, 2008


The Future of the Auto Industry

Mario Rizzo (relying on the elusive Jeremy Sapienza) tips us off to a future car ad. The whole thing is pretty good, having the quality of a decent Onion article. An excerpt:
It’s in the way you dress. The way you boogie down. The way you sign your unemployment check. You’re a man who likes to do things your own way. And on those special odd-numbered Saturdays when driving is permitted, you want it in your car. It’s that special feeling of a zero-emissions wind at your back and a road ahead meandering with possibilities. The kind of feeling you get behind the wheel of the Pelosi GTxi SS/Rt Sport Edition from Congressional Motors.


Ex-Austrian Declares: "We Need to Save More and to Spend More"

Really, that's what he says, though not in the same sentence. (HT2 Jim Fedako.) I'm not going to bother quoting this guy, who says he believed in Austrian economics until the Lehman collapse. I guess the guy's position is analogous to somebody who says, "We never should have gone into Iraq, but now that we're there, we need to drop a few nukes to show them we mean business."

Except it's worse than that; to make it truly analogous we have to add, "So let's go ahead and drop those nukes, but keep in mind--as I've said ever since Bush ordered the invasion--that only a non-violent approach can really resolve this situation."

Am I being unfair to this guy? Go ahead and read his post if you doubt me. And you don't need to parse closely; just skim his sentences that are in bold.


Police / Firefighter Shakedown?

I just got a Christmas solicitation from a fireman (yes he was a man) and politely declined. (It was awkward because we both knew within 3 seconds that he was going to hit me up for money, but I had to sit there and listen to the song and dance for two minutes before he actually asked me and I could say no. Now I know how pretty girls in high school must feel.)

Does anyone else get nervous that when you say no, the guy on the other end checks a box that says, "Don't speed on the way to this guy's house"?


ISIS Magic Photo Gift Maker

Reader Lance (not sure if he wants me using his last name) emailed me about some issues, and then offered to print me up some free mugs using his business' new technology. I have now been enjoying hot tea in my Free Advice / PIG to Capitalism mugs for several days now, and no accidental spills yet to report. Thanks Lance!


Sean McBeth: Right or Wrong?

Reader Sean McBeth writes and says he enjoyed the PIG to Capitalism. (BTW, if you want a favor from me, that's always a good way to start the email.) He has begun blogging himself, and wants to know if he's on the right track, is persuasive in his arguments, etc.

Unfortunately, due to time constraints I really can't help Sean out. But I said I would link to his blog post on the bailout and ask Free Advice readers to render their constructive criticism, if you are so moved.

Thursday, December 11, 2008


Mario Rizzo Reminds Macroeconomists About Economics

My dissertation chairman, Mario Rizzo, was invited to comment in the Social Science Research Council's forum on "What Do We Know About Bailouts?" There are some big guns who contributed, and they all say basically variations of the stuff we've been hearing from the talking heads over the last few months.

Then Rizzo steps to the plate and shatters the box into which all the macro guys had painted themselves:
I am not a macroeconomist. I am not even a financial economist. So much of my reaction to the current financial and economic problem may seem a bit out-of-step with what most commentators are saying. Yet I think it is important.

The macro-economic frame of mind is quite peculiar, it seems to me. In the name of the emergency, the macroeconomic way of thinking dismisses most concerns about the efficient allocation of resources and throws almost total emphasis on maintaining levels of expenditure and employment....Thus the solution lies is returning to the status-quo ante. Restore the condition of the financial institutions perhaps by buying toxic assets or perhaps by infusing capital into them. Restore the conditions of the housing market by getting the Fed and/or Treasury to buy Fannie and Freddie mortgage securities, thus sending capital into housing and lowering mortgage rates. Restore the condition of industries with large numbers of employees and others indirectly dependent on them....Once economic agents believe all of this will take place, confidence will be restored.

I believe that the above analysis is an intellectual disaster that threatens not only the intermediate-term economic condition of the United States but its long-term reliance on market institution and the liberty they undergird.

The conventional macroeconomic diagnosis and proposed cures ignore many important factors, including the following:

The “irrationality” is not primarily in the system’s response to the initial financial impulse but in the unsustainable expansion of the housing and other capital markets in the first place....Too many resources went into the housing market due to the low interest-rate policy the Fed followed for too long....

Recessions are not simply crises of confidence or of insufficient demand (due to increases in the demand to hold money). They also have their allocational – or microeconomic – aspects....

I do not think that these hastily devised macroeconomic schemes will succeed in promoting recovery because they ignore the microeconomic fundamentals. I do fear, however, that will succeed in fundamentally transforming our economic system for the worse.

Go Mario! I think the only time I was ever more pleased by his words was when he said, "Congratulations Dr. Murphy!" (after my doctoral defense).


More Greenspan Loving: Is Everyone On Crazy Pills?!

I am getting increasingly frustrated by some economists' attempts to deny that the housing bubble had anything to do with the )#$#4 negative real interest rates that Greenspan foisted upon us...during the exact period when housing prices exploded. What is particularly annoying is when these Greenspan defenders say things that are simply not true.

Take Casey Mulligan, whom I really like by the way, over at Cato Unbound. (Incidentally, I am starting to really love their format. They really take advantage of the Internet. Go Wilkinson!) Mulligan is taking Larry White to task for thinking the negative real rates--not seen since the 1970s, mind you, when I assume even Mulligan would admit the Fed messed with the real economy--might have spurred a jump in home prices.

Mulligan goes through some neoclassical analysis of the rational impact of short-term rates on housing prices. OK fair enough; I may come back to that in a future post. But then he says:

Perhaps Professor White would argue that market participants expected short term interest rates to remain low for much longer than a couple of years. If so, he is on shaky ground. First, such a claim is at odds with long-term interest-rate data. As I indicated in my article, long-term mortgage rates were not low during the housing boom. It’s not hard to find commentary from those years recognizing the low short-term rates were not expected to last.

To this, all I can say is, "What the hell are you talking about, Prof. Mulligan?!"

Seriously folks, look at this chart:

So if by "not low" he meant "the lowest they have been in the 35 years for which the St. Louis Fed keeps records," then OK I see his point.

In fairness, maybe he means inflation-adjusted mortgage rates weren't low during the housing boom. But at the very least he could have clarified that.

But this just goes to show that when people start throwing evidence at you for why Greenspan couldn't possibly have caused the housing bubble, be sure to first make sure what they're saying is even true. Then, once you've verified that they're not saying the opposite of reality, you can go ahead and decide if it affects your opinion of Greenspan.

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