Saturday, January 31, 2009


A Disagreement on the Efficacy of Government Regulation

Over at Env-Econ, some of the commenters were taking pot shots at the free market in the wake of the salmonella outbreak from the Georgia peanut butter plant. (Incidentally that is a factory I'm talking about, not a photosynthetic organism that secretes peanut butter.) I said:

Ah yes, I think we had this same argument with the tomatoes.

I oppose government regulations because (a) they waste taxpayer money and (b) don't keep us safe. In fact they give a false sense of security and crowd out private certification mechanisms because people assume "the government is taking care of this."

How can we distinguish my theory from your guys'? What happened here perfectly fits my worldview.

In contrast, your worldview would be better supported if we had no government regulation of food safety and then somebody got sick from tainted food.

I'll try it a different way: Suppose for the sake of argument that I'm right. What better evidence could I find, to document I'm right, than to show that businesses (or Bernie Madoff) get away with ridiculous things even amidst the allegedly vital government regulation?

My favorite response:


Have you ever thought to back test your theory by looking back on history before we had all this pesky regulation? Did you know there was a time when it didn't exist? Are you aware that virtually all of it was AS A RESULT of far worse abuses of the public trust than this peanut fiasco? Your absurd assertion that regulation does not protect us can only be supported by willful ignorance of history. It is factually untrue and that's not a matter of opinion. Homework assignment #1 read Updike's "The Jungle".

If I felt like it I could list literally hundreds of cases of regulation dramatically reducing public harm and with a little more work I could support ever assertion with statistics to prove it. Consider just the example of Airline safety. Look at the deaths per passenger mile flown, and try to explain that dramatic fall with anything other than FAA regulation and enforcement.

Friday, January 30, 2009


Murphy Mention at National Review

John Hood links to my Atlanta Journal Constitution op ed (via PRI) on the fallacy being stimulating consumption.


Talking Heads on NPR

I just heard Ky Risdall interview Megan McArdle and Felix Salmon on the financial crisis. I think I lost the use of polysyllabic words.

Salmon was cockily saying that nationalization was necessary, in the sort of "at least I'm the adult here who can make the hard choices" tone.

For her part, McArdle said something like, "The market needs to capitulate before things can get better. Until we hit rock bottom, stocks will keep falling. The paradox of capitulation is that if people think things will get better, they won't."

That's not an exact quote, but it's close. I would just like to say that if she actually believes that, then she is ensuring continued free fall of markets, because she is telling us when to expect recovery...thereby preventing recovery.

I actually did gain something from the interview. I had had the impression that the stock market tanked since November, but it actually has been fairly flat in the grand scheme of things.

One last comment: What was great about McArdle was that Risdall would ask her a specific question--like, "Felix says the banks need to take $4 trillion in writedowns, does that sound about right to you Megan?"--and she would answer like a politician, confidently giving an answer that was orthogonal (my vocabulary is coming back finally) to the question.


The Road to Serfdom: CA City Bans Smoking In Your Own Car

I am getting old enough so that the "slippery slope" warnings against government intrusions now have extra validity for me, because I actually lived through this stuff. I vividly remember when the government started cracking down on cigarettes in the 1990s, that "right-wingers" warned, "What's next? Are they going to start regulating fatty foods? Once they ban smoking in restaurants, will they ban it in your house?" And of course the critics laughed and scorned such scare tactics, when all they were trying to do was save lives from an awful product.

Well, here's a story about politicians wanting to tax soda to help you lose weight. (Oh, I guess they'll spend the revenues that come in, but that's just a minor detail. The point is, they're here to help you.)

But check this out (HT2LRC):
Belmont is set to make history by becoming the first city in the nation to ban smoking on its streets and almost everywhere else.

The Belmont City Council voted unanimously last night to pursue a strict law that will prohibit smoking anywhere in the city except for single-family detached residences. Smoking on the street, in a park and even in one’s car will become illegal and police would have the option of handing out tickets if they catch someone.

The actual language of the law still needs to be drafted and will likely come back to the council either in December or early next year.

“We have a tremendous opportunity here. We need to pass as stringent a law as we can, I would like to make it illegal,” said Councilman Dave Warden. “What if every city did this, image how many lives would be saved? If we can do one little thing here at this level it will matter.”

The really sad thing is (for those of you who are also parents), our kids won't know that this is unusual. Just like they will think there were always soliders with M-16s patrolling the airport.


Casey Mulligan: "Wow, I Was Only Wrong By 72 to 575%"

UPDATE below

Folks, I understand that I am highly critical of other economists, and I probably need to work on that. But I am sorry, Casey Mulligan's handling of today's GDP numbers (for 4Q 2008) just sent me over the edge. Let me be clear, I think Mulligan is a really good economist; earlier I trumpeted his awesome arguments against mortgage writedowns being tied to income. But I cannot remain silent in the face of today's events.

Let's set the context: Mulligan has been a maverick on many issues lately, saying that the credit crunch is bogus (having an entire "WMD week" to show that Paulson's warnings were baseless), that the talk about helping homeowners is completely messed up, etc. But another of his "these guys are so stupid" theme was that everybody was freaking out about a depression, when per capita GDP was going to set records and such. Let me quote his post from January 19, entitled "My Q4 GDP Forecast Details":

The pundits (eg., Goldman Sachs or the White House) say that real GDP will fall about 5 percent (seasonally adjusted at annual rates) Q3-Q4.

I have used three different methods to make my own forecast, and each of them says that the pundits are wrong. Here is what I find for seasonally adjusted real GDP growth Q3-Q4 at annual percentage rates (and thus in the same units as the -5 cited above):

* Productivity based: -2.2%
* Income based: +0.4%
* Spending based: +0.8%

Everybody got that? Mulligan's big thing was that yes, nominal GDP was going to drop, but price deflation was going to mitigate or even completely offset it (yielding positive growth).

Well, here is how CNBC described the numbers that came out today:
The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.

Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at a pace of around 5 percent.

Now, Mulligan does not need to concede defeat here; I would have been perfectly happy if he posted on this release and said, "Well, it doesn't look good for me at the moment, but let's all realize that we don't have new information here. I always conceded that nominal GDP was going to drop, and I just thought deflation would be a lot more than the BEA is admitting. But unless they bring that number down in future revisions, I was wrong."

Nah, Mulligan didn't say that, or at least, you would have to really comb through his (many) posts on the new release to realize that is what happened. In fact, the casual reader might be led to think that Mulligan's predictions had been vindicated. After all, Mulligan has a post today titled, "Wow I was close on nominal GDP," which opens with:
Wow, in dollar terms, I was close on each of the spending categories (see below)!

I expected the GDP deflator to fall a lot more, and the experts thought it would rise. I wonder how much GDP deflator revision is possible.

Does everyone see what he did there? He's making it sound as if he was basically right--certainly better than those ignorant "experts" popping off dire -5 percent contraction estimates--when Mulligan was totally wrong, at least regarding the numbers the BEA just put out. Two of his estimates actually had positive growth, when we just got the worst contraction in 25 years.

Hey, that last phrase reminded me of something. Wow I'm good.

UPDATE: I just now saw that Mulligan in this post tries to defuse wise guys like me (I think he wrote this before my post, and I just didn't catch it):
I had previously predicted that real GDP "might" go up, although I still said that slightly down was the more likely. I was very precise about that: I said that it was 1/3 likely to go up and 2/3 likely to go down.

There are no rules in the blogosphere, but it is factually incorrect to quote me as predicting that real GDP WILL go up. "WILL" and "MIGHT" are different in plain English (not to mention that I also put it terms of probabilities).

Let me be clear: As I continue to read Mulligan talk about his GDP predictions, my opinion of his handling of this MIGHT go up...

Thursday, January 29, 2009


Martin Feldstein Opposes This Stimulus

This article by Feldstein--who calls himself a conservative economist--is breathtaking. I am not kidding, I don't see how someone could have written an op ed opposing the current stimulus bill, that would have annoyed me more. I truly think by the end of it, my jaw had dropped. (HT2MR) Here's the part where he shows we're all Keynesians now; but you must read the whole thing to see just how awful it is. ("Awful" if you aren't a fan of the government, I should clarify.)

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That's not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year's tax rebates led to additional spending.
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.


"Pattern Is Playing Out Again"

So argue fellow PRI author Jason Clemens and I. (Incidentally, he was just the president-elect when we wrote the piece. I understand that he has been sworn in.)

UPDATE: Hey kids, can you spot the mistake in the article? (And no, I don't mean a mistake in our analysis.)


"A Night of Clarity"

I apologize for not giving more notice, but if any of you are within driving distance--please don't charter a jet in this economic downturn--of Nashville, you might consider checking out the event described below. I will be selling autographed copies of the Best Economics Book Ever, though I have a cold so I can't kiss babies.

Wednesday, January 28, 2009


Krugman Expands the Ranks of the Cultish

A typical objection to Austrian economics is that it is a cult. We worship Mises, we excommunicate heretics, etc. (The second point is true but c'mon, just look at this stuff.)

Anyway, I'm glad to note that Paul Krugman has now expanded the ranks to anyone who is a non-New Keynesian:

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

It’s a sad story.

Incidentally, if some of you regulars can help me remember, I want to come back to this Ricardian equivalence stuff. Krugman links to this post which allegedly proves that Wikipedia is wrong to assert that Ricardian equivalence implies that deficit spending can't boost aggregate demand. (In other words, Krugman and Econospeak say that even with Ricardian equivalence, the government can boost aggregate demand.) Econospeak thinks his numerical demonstration is a counterexample, but it's not; it just begs the question. Here's what he says:

Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?

So to repeat, Econospeak is simply begging the question here. A proponent of Ricardian equivalence could use the same numerical example to make his point. He'd say, "On the surface this might look like you'd get a boost in aggregate demand, but no you wouldn't. The households would realize they now had a perpetually higher annual tax payment of $5 billion. So to budget for that, they'd have to put aside an extra $100 billion today, such that at 5% interest they would be able to pay those future taxes without cutting back consumption. Thus, no change in aggregate demand."

Now I admit that sounds weird; why take the hit to consumption all in year one? But if the government is spending that $100 billion on present consumption, then it makes perfect sense. Or rather, it makes just as much sense as the standard Ricardian equivalence example, where the government gives a deficit-financed tax cut and households just save it all.

At this point, Krugman is right--you need to use formal models to keep all of your assumptions straight, and to think through the full general equilibrium implications. Sometime in February, after the book is turned in and I've caught up with my "real job," I will dig up some of the stripped-down New Keynesian models and see if Krugman really is surrounded by friggin' idiots. (Note that I agreed with DeLong about Fama, so it's possible that Krugman is right vis-a-vis the right-wing critics who rely on purely mainstream economics.)


Murphy Debut "Daily Reckoning" Article

Today my debut article at the Daily Reckoning ran. (They saw my sarcastic doom and gloom at and thought, "This is our kind of guy!") The plan right now is that I will contribute columns every month or so. (BTW there are some missing hyperlinks because they just switched to a new format and there were some posting snafus.) In today's article I make a lot of the same arguments about Bernanke having no options, but I spell some of the issues out more carefully, especially "open market operations." The conclusion:

The Federal Reserve under Ben Bernanke’s leadership has painted itself into a very tight corner. He has cleverly managed to stave off utter disaster so far, but he is running out of options. Ironically, the effects of his incredible injections of new reserves have been masked simply because the financial sector is still paralyzed. If and when the economy begins to improve, Bernanke will have to decide whether to allow double-digit price inflation or instead contain prices by strangling the incipient recovery.


"With All Due Respect, Mr. President, That Is Not True"

A Cato petition (pdf) signed by a ton of ethics-free Republican hacks (not my term, new readers!). I was pleased to see Alberto Bisin, one of my professors at NYU who would at least visit the Austrian colloquium, on the list. Apparently this is a full-page ad in a few major outlets. (HT2 Steve Horwitz)


When Money Was Literally Backed By Gold

Ah, wouldn't you feel more comfortable investing in a country that issued these? (HT2 MoneyGirl)

Tuesday, January 27, 2009


The Difference Between Milton Friedman and Paul Krugman

Friedman famously said (though apparently didn't coin), "There's no such thing as a free lunch."

Krugman, on the contrary, believes:

(A) There is such a thing as a free lunch, and

(B) It costs $2.57.

Thanks to von Pepe for pointing out the column and the money quote.

Incidentally, this whole argument involving school lunches had me stumped for a couple of days, but it just clicked while I was giving my son a bath. (I suspect this means Krugman's logic was dirty.) First, the argument:
As the debate over President Obama’s economic stimulus plan gets under way, one thing is certain: many of the plan’s opponents aren’t arguing in good faith. Conservatives really, really don’t want to see a second New Deal, and they certainly don’t want to see government activism vindicated. So they are reaching for any stick they can find with which to beat proposals for increased government spending.
First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.

It’s as if an opponent of the school lunch program were to take an estimate of the cost of that program over the next five years, then divide it by the number of lunches provided in just one of those years, and assert that the program was hugely wasteful, because it cost $13 per lunch. (The actual cost of a free school lunch, by the way, is $2.57.)

Now this baffled me for days. Did Krugman seriously mean to tell us that the "5 million jobs" figure was a per year statistic, and that really there would be a total of, say, 15 million jobs created by the stimulus package? And that the dumb Democrats weren't using the bigger number, even though the $825 billion (or whatever) price tag was a cumulative figure?! C'mon, that's nuts.

But then I realized what Krugman must mean in the quote above. I think he is saying that if Joe the Unemployed Hedge Fund Manager gets a stimulated job making solar panels in 2009, and then he has that same job in 2010, and then in 2011, that this is 3 job-years that have been created by the $825 billion stimulus package. So it's wrong to just give a total figure for the dollars used to create that slot for Joe for 3 years, since when people hear "$275,000 per job" they are thinking of an annual salary.

Right, does everyone agree that that's what Krugman has to mean? If so, then he is being incredibly dishonest in his arguments, even for him.

(1) At best, he should be saying, "This is misleading, because a new job lasts for several years." It is simply NOT TRUE to say that we have created 1 new job three years in a row, for a total of 3 new jobs over the period. When I worked at Hillsdale College, I was there for 3 years. I didn't hold 3 jobs, I held one job.

(2) More to the point, those new jobs aren't all going to be created in year one. If Krugman wanted to actually edify, instead of misleading his readers, he would have (fairly) switched away from "cost per job" to "cost per job-year." But you know why I bet he didn't do that? Because if he had, he would need to admit to his readers that most of the stimulus money isn't even going to hit until 2010. And that might make even his die hard fans say, "Huh? I thought this was supposed to be a quick shot in the arm to keep aggregate demand from falling? But if most of the money won't even hit until 2010...?"

I think another reason Krugman probably didn't go for the more accurate job-years stat, is that he'd have to consider how long these stimulated jobs would last. And then he'd have to get into the tricky issue that Mario Rizzo has been harping on, namely, that when this pork spigot turns off, won't you have 5 million people suddenly thrown out of work?

It would be clear that a stimulated job is a simulated job. And that's why Krugman, I believe, ignored the proper way to do the calculation, and just accused his opponents of arguing in bad faith. The monsters! Imagine saying that somebody who has a job for 3 years just held one job. Crazy stuff coming out of those Republicans.


Ron Paul Educates the Talking Heads

Folks, I only post about 10% of the Ron Paul stuff that comes my way. It is my filtering service, for you. The clip below is about 10 minutes but it's really good. Paul fields all the questions fired at him, and not only gives sound answers but usually packages them fairly sleekly as well. There is only a hint of the standard politician's, "Whatever the question, quickly steer it back to your talking points." And in any event, his talking points are awesome. My only objection was that he basically conceded there would be double-digit unemployment for a long time if his advice were followed, and I don't think that is true. (But in fairness to Paul, maybe he thought the question was, "If we don't do stimulus and just 'do nothing,' won't there be high unemployment for years?") (HT2 LRC)


Response to 60 Minutes Hit Piece on Oil Speculation

We had to wait for the coronation coverage to die down before running this piece, which is a response to the 60 Minutes hit job on oil speculation. If you want to truly appreciate my talents as defense counsel, first watch the 60 Minutes segment below (it's not that long). Then read the IER piece for the rest of the story.


The Difficulties of Price Fixing

I am getting really sick of hearing all these bank experts explain the difficulties in government "bad bank" programs to buy "toxic" assets from the frozen lending institutions. They sound so serious and aware of the problems when they explain, "If the government pays too little for these troubled assets, then the banks will still be insolvent. But if the government pays too much, then the taxpayers lose."

And then they move on to the next question, instead of saying, " that's why this scheme is ridiculous. It was a bad idea when Paulson first lied and said he would implement it, and it's a bad idea now."

The idea seems to be that there's a sweet spot, a zone of prices in which the banks would win and the government would make money. But if that's true, why aren't private financiers swooping in and reaping the gains from trade? You could make some convoluted argument that "partial equilibrium" analysis doesn't work here, and that the massive government buying would change the landscape and hence the marginal value of any given mortgage-backed security.

Yes, you could make such an argument, but you would be wrong, methinks. It wasn't a sudden crisis of confidence that made these MBS assets tank in value, it was the fact that people started defaulting like crazy on their mortgages. And that wasn't because a bunch of racist Americans were spooked by the prospect of a president who didn't look like them, it was because house prices crashed and they were getting laid off.

Also, it is wrong to think that the federal government is qualitatively a bigger buyer than the entire private world market. It's true, Uncle Sam is bigger than any particular hedge fund or speculator, but if these toxic assets were such a steal, a bunch of oil sheiks and software moguls could come up with hundreds of billions to invest in them.

Part of the reason that isn't happening, is that the insolvent banks are sitting on underwater balance sheets, hoping for a federal bailout. I think that is one of the main reasons for the lingering "credit crunch" and "frozen" credit markets.

Monday, January 26, 2009


Another Strike Against Friedman's Theory of the Depression

This is too technical for the book, but check out the difference in monetary base growth rates during the 1920-1921 depression versus The Great One. If Friedman is right, then it's odd that the 1920s weren't awful. (Incidentally, the Fed hiked rates way up in the beginning of 1920, and kept them there for almost two full years. In contrast, the Fed cut rates down to then-record lows from the stock market crash through late 1931 [.txt]. A slightly different impression from Friedman's summary?)


Another Austrian Website

Established as a reaction against those of you drawing bushy mustaches on poor Friedrich, or pitting him against Salma.


The Mish-Schiff Tiff

I haven't had time to read any of this, but I bring to your attention Mike "Mish" Shedlock's criticism of Peter Schiff. Both EPJ and Tim Swanson rush to Schiff's defense. But more important than the financial issues is this: Is that Tim Swanson in the last photo of his article?! And did he lose his shirt investing with Mish?


Robert Lucas' Strange Faith in Bernanke

Details here. The intro:
Lately the Mises Daily may have given the impression that we just bash Paul Krugman. In the interest of balance, today I will cast aspersions on another Nobel laureate, the Chicago School economist Robert Lucas. As is typical among many "promarket" economists, the undeniably sharp Lucas inexplicably sees no problem with government price fixing when it comes to interest rates.

Sunday, January 25, 2009


Quick Thoughts on Luke

During my (attempted) daily Bible chapter reading, I finished Exodus the other day and just couldn't bear to jump right into Leviticus. So, I decided to take a break by reading random chapters from the Gospels for a few days. I happened upon Luke 12 one night, and wow it is really just chock full of amazing stuff. You could write an essay on every two verses.
4 “And I say to you, My friends, do not be afraid of those who kill the body, and after that have no more that they can do. 5 But I will show you whom you should fear: Fear Him who, after He has killed, has power to cast into hell; yes, I say to you, fear Him!

My church in Hillsdale once did a series on "What are you afraid of?" or something like that. And they interviewed people on the street who said stuff like, "Losing my job" or "dying" or other normal answers.

It didn't surprise me that my pastor said you shouldn't be afraid of those things. But what did surprise me is that he said, "You should have a healthy fear of God." But it slowly sunk in that it made sense (and of course it was scripturally based). Just for purely psychological reasons: People are going to be afraid of stuff, just like "you're gonna have to serve somebody." So it's good to focus that fear and anxiety towards wondering if you are pleasing to God, as opposed to wondering if you are pleasing your boss or your spouse or your parents. (And yeah yeah, I get it, if you are an atheist you think you don't need to fear anything or serve anyone but yourself. I think you are mistaken. And since I believe Satan exists--though I know you don't, and really, I do get it how hokey it sounds to you--you will be easy pickings for him.)

8 “Also I say to you, whoever confesses Me before men, him the Son of Man also will confess before the angels of God. 9 But he who denies Me before men will be denied before the angels of God.
This passage always makes me squirm because it reminds me of another occasion at Hillsdale when a group of people we would often hang out with, would start ripping Christianity (because a lot of the Powers That Be at Hillsdale made it easy to rip Christianity). I didn't laugh, but I didn't say anything either. Wuss. Some people go to the stake, and I am afraid of causing slight social awkwardness.

10 “And anyone who speaks a word against the Son of Man, it will be forgiven him; but to him who blasphemes against the Holy Spirit, it will not be forgiven.
I'm still not really sure what to do with that one. But I make sure I don't blaspheme the Holy Spirit! (Fortunately when I slip and take the Lord's name in vain, it is either the Father or the Son.)

11 “Now when they bring you to the synagogues and magistrates and authorities, do not worry about how or what you should answer, or what you should say. 12 For the Holy Spirit will teach you in that very hour what you ought to say.”
That passage gives me goosebumps.

13 Then one from the crowd said to Him, “Teacher, tell my brother to divide the inheritance with me.”
14 But He said to him, “Man, who made Me a judge or an arbitrator over you?” 15 And He said to them, “Take heed and beware of covetousness, for one’s life does not consist in the abundance of the things he possesses.”
This one is fascinating. Assuming the translation is good, I think Jesus might be playing coy here, the way I think He is with the "render unto Caesar" response, or the "Why do you call Me good?" query. Because obviously Jesus is judge over them, and He was appointed so by God. So in context, it sounds like Jesus is saying that He isn't the judge of the guy, but that's not actually what He said.

Saturday, January 24, 2009


Barro vs. Krugman on World War II

UPDATE below

All right, I've been letting the tabs accumulate on my browser, so I'd better blog this and knock them down to a reasonable number. As many of you probably know, Robert Barro published an article in the WSJ saying that back-of-the-envelope calculations show that the multiplier on World War II military spending is 0.8, not the 1.5 figure Team Obama is using for its rosy predictions.

Before turning to Krugman, let me note two things about Barro's piece:
(A) He is using military spending during World War II because that avoids a simultaneity problem. (I hope I'm using the right econometric term; it's late and I'm going to wing it.) If you just tried to run a regression of government spending against real GDP, that wouldn't be a fair test of the Keynesian ideas, because they only implement stimulus during recessions. (Actually that not true of course, but go with me on this one.) It would be like doing a regression of police spending versus violent crime, and concluding that cities who hire more cops get more murders. (Actually, that's probably true, but again, go with me on this.) So anyway, since World War II didn't have a direct connection to the Depression (or did it?), Barro is focusing on that episode as a truly "exogenous" shock to government spending, and then trying to assess its impact on real GDP.

(B) I'm pretty sure Barro is using a funky definition of multiplier; what he calls a multiplier of 0, I'm pretty sure in undergrad macro is a multiplier of 1. Now I don't know if he and Team Obama are using PhD-level Keynesianism, in which they have a different starting point, but if not--i.e. if Team Obama's figures are using the same scale that I taught in undergrad macro--then that means Barro's results show Team Obama is understating the stimulus multiplier (!).

OK, Paul Krugman comes along to respond to Barro's piece. Krugman, bonehead that he is, fails to realize my point (B) which would have allowed him to say, "Barro you dolt, you just proved government spending raises GDP!"

So instead of doing that, Krugman panics because the single episode where it kinda looks like government spending pulled the economy out of recession, now collapses according to Barro's (mis)calculation.

So what does Krugman do? He says that Barro is a bonehead for thinking World War II was ever supposed to be an example of fiscal stimulus boosting real GDP. (!!!!) I am not making that up. Tyler Cowen busts Krugman on this absurd response, and note Tyler also makes the point about Barro's change of scale, though he doesn't make the point I do, that Barro's adjustment flips the conclusion.

Now, the thing that finally pushed me over the edge to blog this, is Krugman's latest blog. Krugman reminds us of Barro the Bonehead:
You see, Robert Barro made much of the fact that private spending actually went down during World War II — which he took as evidence of “crowding out”. But what types of private spending fell, and why?

So how does Krugman deal with this allegation that government military spending crowded out private spending? He says:
The answer is that (1) There were draconian building restrictions in effect — in fact, the end of those restrictions helped set off the postwar housing boom, and (2) new cars weren’t being produced, because the factories were making tanks instead (and if you did manage to acquire a car somehow, gasoline was rationed).

Why anyone thinks that private spending during those years is a model for what will happen as a result of fiscal stimulus now is beyond me.

Everyone got that? Krugman is mystified that Barro thought military spending would crowd out private spending, when what really happened is that military spending crowded out private spending.

Final thing before I leave in a huff: If you bend over backwards you can come up with an explanation for Krugman's responses. Maybe he means, if Barro ran the numbers in 1941,* he would have gotten a bigger multiplier, since the 1940 unemployment rate was higher than the 1943 unemployment rate. And maybe he means in his subsequent post, that the government's rationing was dumb, and the public could have spent more and bought houses and new cars, without affecting the military purchases.

But I am done giving him the benefit of the doubt. I don't think he means those things, I think he is putting on a show, and in his flippant haste decided that "we stimulus proponents have always been at war with the claim that World War II boosted the economy."

* I tried doing it myself, but I got huge multipliers--like 4 through 6--for some of the earlier years, and I got big numbers for 1943 and 1944 too. So since I didn't replicate Barro's 0.8, I can't say what his technique would have yielded for earlier years.

UPDATE: OK I calmed down; I realized Jesus would want me to always give Krugman the benefit of the doubt. I think I "get" what is going on now:

==> I think what's happening is that the multiplier in undergrad macro is a gross figure; it is saying, "If the government had $100 billion from heaven to spend, how much would GDP end up rising?" But then if the government has to get that money from borrowing or taxing, you have to contrast the effects of the government spending with the possible reductions in GDP from the way you raised the money. And so Barro (I think) is right, that Team Obama (and Krugman) is saying that ON NET, if they borrow and spend $800 billion, then real GDP will rise by $1.2 trillion. So if Barro did his math right, then yes, he is getting a multiplier much lower than Team Obama's apparent figure.

==> Regarding Krugman being mystified about the "crowding account": OK, even though it's tough, we have to remember that Krugman has now convinced himself that World War II was not an example of fiscal stimulus creating jobs. So he is saying, "Sure, no kidding if we are at full employment, then the government spending more to create tanks will force consumers to spend less on cars. But we're not at full employment right now, so what the heck is Barro talking about? If the government spends more on bridges, that won't cause anyone in the private sector to spend less, since the bridge construction will just draw on idle resources."

The problem here is that Barro was trying to compare the Depression condition with the World War II condition, and trying to gauge how much military spending could have been responsible for the transition. I.e. Barro was not looking at a full-employment peacetime economy, and then showing that government military spending caused significant crowding out. (In fairness to Krugman, Barro was very cryptic about what he actually did to come up with his 0.8 figure, so I can understand if Krugman misunderstood what Barro was doing.)

==> Last point, we should just drop this by saying, "Thank you Professor Krugman for clarifying that World War II was not an example of job creation through deficit spending. The next time someone brings it up as a great case where fiscal stimulus 'worked,' we will refer him to your blog post."


"Would You Chinamen Stop Saving So Much?!?!"

You might expect such analysis from The Dishwasher or The Water Boy, but no, it's from The Economist (HT2 Tim Swanson). I don't even need to read this article. Even if it were somehow true that Chinese savings are causing "global imbalances" and hence our financial crisis, that would just prove to me our current financial system is screwed up. (But I don't think it's true anyway.) You gotta love this picture:

Incidentally, I know that "chinaman" is not the preferred nomenclature.


Obama Makes His Bones as President ordering Predator strikes that allegedly killed at least 3 children. (HT2 LRC) Some of the comments at the Times UK site were great; the featured 3 (when I clicked on it) were:

There are few places in the West where a man could be convicted on the basis of the evidence we have seen concerning the events of 11 September, and glaring discrepancies abound in the news clips of that day, but we occupy Afghanistan and attack Pakistan on the basis of vague connections.
----Luke, Liverpool, NS, Canada

If Bush had ordered this Pakistan strike it would have been the old warmonger at work again. Now, according to one gushing journalist elsewhere, it is Obama proving he is a leader and not afraid to use the military option. My ohmy, how much has changed since last Tuesday,
----Donald Last, Worthing, UK

where is the change Mr Obama?
----kal, London, UK

I really hope to be proven wrong on this, but I still think Obama will stand up for peace the way I thought (in 2000) George Bush at least would be a free market kinda guy.

Friday, January 23, 2009


WIll Krugman Defend Thain's Stimulus?

In case you haven't heard, former Merrill CEO John Thain resigned today, presumably because of this scandal (HT2 Gene Callahan for the video):

UPDATE: This video was messing up my precious Google ads, so I took it down. You can click the link above to watch it.

On his show today Rush made the great point that people should be congratulating Thain for creating jobs. Rush was kidding of course, but really, it works: If Thain hadn't spent that money, Merrill / Bank of America would just be sitting on it. So the politicians are simultaneously yelling at the banks:

(A) "What are you doing, playing it safe with your loans? We gave you those billions so you would get it out into the community, putting people to work on infrastructure."


(B) "What are you doing, taking money that we gave you and wasting it on fixing up your office building?! Be careful with those taxpayer funds!"


Stephan Kinsella Launches New Journal

It is unclear if he is asserting copyright to it.


Lew Rockwell Podcast with Bob Murphy

Available here. (Note: Don't let the .mp3 ending fool you; the hyperlink takes you to a page where you can play the podcast from your browser.)


Motley Being a Fool on "Enterprise Value"?

A colleague asked me about "enterprise value" and passed along this discussion:

Enterprise value (EV) represents a company's economic value -- the minimum amount someone would have to pay to buy it outright. It's an important number to consider when you're valuing a stock.

You may remember that market capitalization (the current stock price multiplied by the number of shares outstanding) also serves as a company's price tag. But market cap ignores debt, and with some companies, debt is substantial enough to change the picture significantly. Enterprise value, on the other hand, is a modification of market cap that incorporates debt.

To better understand the concept of enterprise value, imagine that you're looking at two companies with equal market caps. One has no debt on its balance sheet, while the other one is rather debt-heavy. If you owned the latter company, you'd be stuck making lots of interest payments over the years, so you probably wouldn't pay the same price for each company.

At the risk of saying something foolish that I will later have to retract...the above strikes me as ridiculous. It's like asking if a pound of feathers is lighter than a pound of lead. Investors presumably understand how debt works, and so if they are valuing a debt-heavy company at $50 billion and a debt-free company at $50 billion, the first company must be superior in other respects.

Just look again at the last sentence in the quote above: The writer is saying "You would pay more for the first $50 billion company than for the second $50 billion company." Huh?

If you still don't see it, try this one:

Suppose you have one million-dollar-property in a low-tax region, and a different million-dollar-property in a high-tax region. Because you would have to make lower tax payments, you would be willing to pay more for the first property than for the second.

Let me kick this thing one more time, just to make sure you realize how crazy it is. Let's go with the guy in his example. Because of the huge popularity of Free Advice, millions of people read the Motley Fool analysis, slap their foreheads, and say, "Holy cow! It never occurred to me to look at a company's debt before buying its stock. Let me go investigate this new angle."

The two companies originally had a market cap of $50 billion a piece. Now, because of the Motley Fool revelation, investors pay more for the shares of the debt-free corporation and less for the shares of the debt-heavy company. The debt-free market cap rises to $51 billion, while the debt-heavy market cap sinks to $49 billion.

The same process happens with every corporation on the exchange. Investors suddenly take debt into account when bidding on stocks.

Now, after the dust settles, we once again look for two companies of equal market cap, but with vastly different debt loads.

Can we once again use the Motley Fool article to prove that these companies are obviously mispriced?



Jason brings to my attention this documentary project. I think these guys are nuts--meaning, I can't believe they are screwing with cops like this. What they do is set up a room designed to look like a marijuana growing operation, but they don't actually do anything illegal. And then they install hidden cameras to catch the police when they (allegedly) come in without a warrant etc.

The main idea here is that they claim the police routinely get a bogus witness to say there is illegal stuff going on at the private residence, and then the judge signs a warrant. So for real drug dealers, obviously they can't prove that the police just invented the "evidence" to get the warrant.

But if the cameras have been rolling the whole time, and the whole thing is a reverse sting, then it's obvious the cops must have lied when they said they had an informant saying he'd bought drugs at the house.

Anyway, an interesting project, but like I said I don't mess with cops. When I get pulled over, it is hands-on-the-steering-wheel, and "Yes officer." And I don't try to catch them breaking the law on tape.


More Subtleties in the Claim that "Free Markets" Caused the Crisis

Per Bylund passed along this video interview with Krugman. He blamed the present mess on 30 years of rigid free market ideology, and then clarified that the regulatory apparatus failed to keep up with the changing financial system. In case you're curious, the reason he has to say it that way is that there was no smoking gun of "deregulation" that the critics can point to. The only possible candidate is the 1999 relaxation of Glass-Steagal. Obviously I can't prove that this is untrue, but if you study what that change did, I find it highly implausible that it sparked a housing boom that didn't really kick into full gear until a few years later, and also coaxed banks to make trillions in bad loans.

The other gem of the interview is Krugman saying this is the worst financial shock since 1931/1932, but that (paraphrasing) "hopefully our policy responses will be different this time, so we won't get another Great Depression."

I agree, Professor Krugman. In 1931 and 1932,* the policy response was to run an unprecedented peacetime budget deficit, to urge businesses not to lay off workers or cut wages, to engage in massive public works spending, and to bring the discount rate really low to help the financial sector.

Good thing we're not making the mistakes of the past.

* I would have to double check the timelines, but my description might more accurately apply to 1930/1931. By 1932 the government and Fed started to realize that their Krugmanian medicine (not their term) wasn't working and they started changing course, like jacking up taxes (to try to close the deficit) and raising the discount rate (to stem the outflow of gold). But clearly they tried Krugman's policies for two full years after the stock market Crash and got the worst depression in history.


Did Deflation Cause the Great Depression?

Yet another sneak peek at my upcoming book. The standard mythology of the Depression holds that one of the main causes was (price) deflation: Falling prices make consumers reluctant to spend, but this just feeds on itself, blah blah blah.

So you probably think that the most severe deflation in U.S. history occurred in the early 1930s, right?

Nope, it actually occurred during the 1920-1921 depression. From June 1920 - June 1921, CPI fell 15.8%. In contrast, starting at November 1929 and going forward in 12 month increments, the greatest deflation was 10.4% from November 1930 - November 1931.

You know, the 1920-1921 depression, the one caused by laissez-faire reactionaries in the White House that you spent a week in history class discussing? Boy, I don't know about you, but I got so sick of how much class time we wasted going over the causes of the 1920-1921 depression. They didn't even have an SEC or Social Security back then. No wonder it was so awful!

Thursday, January 22, 2009


Tyler Cowen, a Sensible Central Planner

I know, I know, I'm just beating up on the guy all the time because I have impossibly high standards for my libertarian economists. I suppose the following is actually a responsible plea to limit Big Government:
Here is my guest post on bank nationalization. I could have stressed further that bank nationalization works best in small countries with a small number of banks. The more banks a country has, the greater the danger that nationalizing a few of them will make the rest much harder to recapitalize, thereby leading to a kind of contagious need for nationalization.


Remind Me Not to Move to South Korea

Jeff Tucker passed along this story:
South Korean prosecutors indicted a blogger on Thursday who had warned of financial doom for the country with critics saying he was targeted because his gloomy forecasts upset the government battling an economic downturn.

The blogger, writing under the pseudonym Minerva, became a household name for his predictions of sharp falls in the won and the local stock market and the collapse of U.S. investment bank Lehman Brothers. Prosecutors said he hurt the local currency by posting incorrect information online.

"The suspect in this case was indicted on charges of false information on two occasions," an official at the prosecutors' office said by telephone.

As South Korean markets tumbled late last year amid the global downturn, the main financial regulator warned it would crack down on what it considered malicious rumors and some economic analysts say they have come under pressure from authorities not to voice negative views on the economy.

At this point, I think the governments of the world should stop playing softball, and just order everyone at gunpoint to go buy something. Boom, recession solved.

...unless of course, there is some actual reason for the recession, besides fidgety consumers.


Patriotism, the Last Refuge of an Unprofitable Banker

Here is the story to which Glenn Beck was alluding on his awesome (radio) show the other night:
Hours after the bank received a new government bailout to cover heavy losses at its Merrill Lynch subsidiary, [Bank of America CEO] Mr. Lewis came under fire Friday from investors wanting to know why the bank did not notify them of Merrill’s losses in December, when the bank told the government it would need additional support to ensure the merger would survive.

Merrill Lynch reported a devastating $15.3 billion loss in the fourth quarter, its last quarter before the merger closed. Those losses came atop Bank of America’s own $1.79 billion loss last quarter...The shares closed at $7.18, down 13.7 percent. In a conference call with analysts, Mr. Lewis found himself fending off a barrage of questions about what he knew of Merrill Lynch’s losses, and when he knew it.
Mr. Lewis told analysts that he was surprised to learn in December, three months after the bank snapped up Merrill Lynch in a shotgun deal, that the magnitude of losses at the brokerage was far greater than expected. He said he had considered walking away from the deal at that point, but was persuaded not to, partly by regulators who feared that a failure to seal the deal could set off a new round of panic in the markets.

The decision to stick with Merrill despite its problems, he said, was patriotic. “I do think we were doing the right thing for the country,” Mr. Lewis said.

But that may not be the right thing for the bank’s shareholders, who were already upset that Mr. Lewis appeared to have overpaid to achieve his dream of dominating the brokerage business.
In the months after the merger, however, financial markets deteriorated more brutally. The bank’s shareholders voted on the merger on Dec. 5. And while the full extent of Merrill’s fourth-quarter losses might not have been fully known then, had shareholders had an idea of the extent of the losses, they may have agitated for the deal price to be renegotiated.

Mr. Lewis said he had considered trying to renegotiate the price once he learned the extent of Merrill’s losses. But he feared that the length of time required for a new shareholder vote would put Merrill and the markets at risk. More important, he said, the government did not want to risk new turbulence in financial markets if the deal were to be delayed.

“In recognition of the position that Bank of America was in, both the Treasury and the Federal Reserve gave us assurance that we should close the deal and that we would receive protection,” Mr. Lewis said.

And now you know why I think the economy is in the toilet for years. If you think capital markets serve a purpose, then you will have to agree with me that we are screwed.


Liquidation vs. Stimulus: Lionel Robbins From 1934

Another sneak peek from my forthcoming book... Check out this awesome quote from Lionel Robbins' The Great Depression:

Nobody wishes for bankruptcies. Nobody likes liquidation as such. If bankruptcy and liquidation can be avoided by sound financing nobody would be against such measures. All that is contended is that when the extent of mal-investment and over-indebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse. No doubt in the first years of depression, to those who held short views of the disturbance, anything seemed preferable to a smash. But is it really clear, in the fourth year of depression, that a more astringent policy in 1930 would have been likely to cause more disturbance and dislocation than the dislocation and disturbance which have actually been caused by its postponement?—Lionel Robbins, 1934

Wednesday, January 21, 2009


Glenn Beck Is the Man

I know he dissed Ron Paul back when it mattered, but I don't care: Glenn Beck is on fire. Unlike other "right wing" hosts who whine about liberal hypocrisy yadda yadda yadda, Beck every night keeps hammering home the fact that the government is taking over the financial sector. Tonight he gave two very specific examples of how Citigroup and Bank of America were pressured to make bad business decisions because they were dependent on the government. This isn't, "Hey, Pelosi took a limo to the inaugural, sic Al Gore on her!" This is serious stuff.

I didn't catch the guy's full name (Beck kept calling him Steve), but there was a free market economist on tonight who was saying the stimulus plans were nonsense. Fine, fair enough. But then Beck pushed him on the inflation issue. Beck did an aww shucks "what do I have wrong here?" and said what I've been saying for months now--that when real output is falling and the Fed is printing money like crazy, you are going to get big time price inflation. (And yes, Beck went over the aspect of falling real output--not his term of course--and knew full well what he was saying.)

So anyway, the free market economist "Steve" wussed out. He said something like, there would be not inflation like the 70s, but maybe 6 - 7%. And then--bless his heart--Beck laughed in the guy's face, though goodnaturedly. He said, "Steve, if you think we're going to have 6 or 7% inflation, you're fooling yourself."

Woo hoo! Keep it real, Glenn!


Euro vs. the Dollar

I am one of the contributors to a new financial newsletter out of Ireland. My topic this month was to predict the relative fortunes of the dollar vs. euro. I said I thought that by 3Q the dollar would fall at least to $1.50 / euro and probably more. I'm going to ask the editor if back issues will be posted online, but I think it's OK to give this excerpt:
In contrast to the reckless Federal Reserve, the European Central Bank is behaving much more responsibly. The ECB is definitely adopting an “easy” policy to stimulate the economy, but its actions are within the bounds of reason: The annualized three-month growth rate in bank capital and reserves is running around 25 percent. (In contrast, U.S. bank reserves with the Fed in the last three months have grown at an annualized rate of over 400,000 percent--that is not a typographical error.)

Incidentally, even though I've quadruple-checked it, that number still seems impossible. But U.S. bank reserves were some $100 billion in September, and then were some $800 billion in December. So that means over the course of three months, they increased by a factor of 8. So that means over a year, they would grow by a factor of 8x8x8x8 = 4096, which is 409,600%, and then you subtract 100% to make it a growth figure.

Am I doing that right? Did bank reserves grow at more than a 400,000% annualized rate in the last three months of 2008?

Tuesday, January 20, 2009


"Well do you have a better idea??"

I just answered some questions for a Slovakian business weekly. (I'll post it here if/when it's online.) One of the questions was what I would recommend to the governments of the world, since (as would be clear in my earlier answers) I didn't think "stimulus" spending programs were a good idea. My answer:

Governments should slash their spending and then cut taxes by the same amount. Ideally, the tax cuts should be implemented not through “rebates” but instead through reductions in the marginal rates applied to income. This would make the tax cut not merely a transfer from the government back to the taxpayer, but would also provide incentives for people to produce more. At the same time, central banks should stop inflating their currencies. Because of their monopoly positions, we can’t say what the “right” interest rate is, but I am pretty sure it is higher than 0%.


President Obama's First Speech

Just heard it while getting lunch. I had to turn to the NPR feed because Rush kept making comments and it was annoying me. Obama certainly is a wonderful speaker, and if you are going to be stuck listening to somebody for 4 years, it could be worse. I loved his themes on foreign relations, but I am waiting to see if he actually closes Gitmo, draws down troops "over there" (and moving troops from Iraq to Afghanistan doesn't really count), stops warrantless wiretapping, etc. Since I believe he has only promised to just do the first of these, I am not optimistic.

On the domestic front, his rhetoric was pleasing to the ear but not to the brain. In particular, he said something to the effect that he was going to use government smartly to make sure our economy exhibits all that a free people can produce. That's a whopper a la Mencken's critique of the Gettysburg Address.

Last nitpick: He said he was the 44th person to take the oath, but I think Cleveland's non-consecutive terms mess that up. So that poses an interesting issue, of how that slight mistake got into the speech that will go down in history. I can think of at least three explanations:

(A) Obama deviated from the teleprompter. The prepared remarks said this was the 44th time a person had taken the oath, and Obama just switched it a little bit in the moment.

(B) Obama's team knew of the Cleveland technicality, but didn't want to confuse people, and it sounded weird to say a technically correct statement using the 44 number.

(C) No one on Obama's team had enough of an inkling of U.S. presidential history to bother checking that the number of the presidency was the same as the number of presidents.

(A) is fine, (B) is a little worrisome but not awful, whereas (C) is scary.

And I'm betting it was (C).


Another Push for "Master Resource"

I mentioned this new website when it first launched, but for those interested in energy issues, "Master Resource" is definitely worth checking out. Now that people are back from vacations etc., there are a bunch of new posts going up. In particular, check out Chip Knappenberger, who is a co-author with Pat Michaels. I loved this post, where Chip takes on the warnings of global warming leading to huge agricultural losses. Chip posts the following two charts, which paint a more reassuring picture:

Monday, January 19, 2009


Does God Want You to Slaughter Your Enemies?

For this week's post involving the finer things, I want to discuss this news story (HT2LRC):
All civilians living in Gaza are collectively guilty for Kassam attacks on Sderot, former Sephardi chief rabbi Mordechai Eliyahu has written in a letter to Prime Minister Ehud Olmert.

Eliyahu ruled that there was absolutely no moral prohibition against the indiscriminate killing of civilians during a potential massive military offensive on Gaza aimed at stopping the rocket launchings.

The letter, published in Olam Katan [Small World], a weekly pamphlet to be distributed in synagogues nationwide this Friday, cited the biblical story of the Shechem massacre (Genesis 34) and Maimonides' commentary (Laws of Kings 9, 14) on the story as proof texts for his legal decision.

According to Jewish war ethics, wrote Eliyahu, an entire city holds collective responsibility for the immoral behavior of individuals. In Gaza, the entire populace is responsible because they do nothing to stop the firing of Kassam rockets.
In the letter, Eliyahu quoted from Psalms. "I will pursue my enemies and apprehend them and I will not desist until I have eradicated them."

Eliyahu wrote that "This is a message to all leaders of the Jewish people not to be compassionate with those who shoot [rockets] at civilians in their houses."

Now of course, a secular humanist could understandably say: "See what a barbaric book that is? Humanity will never stop senseless warfare so long as people in this supposedly rational age keep reading this garbage."

Yet things are not so simple for someone like me, who: (a) is a Christian, (b) believes the Bible is the inspired Word of God, and (c) is a pacifist. I can't simply reject the rabbi's conclusions, because his reference to scriptural slaughter--some of which was ordained by God--is accurate. So if I recoil from his views (and I do), then I need to reconcile my rejection with his pointing to previous Biblical episodes.

Before proceeding, the two standard caveats on these types of posts: (1) I am not trying to convince a non-Christian here. I am talking to other Christians who may be struggling with this type of cognitive dissonance. (2) This is a quick blog post. I am not claiming that this is a definitive statement of theological truth.

Now then, on to my various reactions on these issues:

#1) If God told the Israeli forces they should carpet bomb Gaza, then they should obey Him. In the Old Testament, when God told the Israelites to wipe out certain cities--even killing the children--it was moral for them to obey Him.

#2) Absent a direct command from God, we need to live our lives the way we believe He wants us to. As a Christian, I do not think God wants me to slaughter my enemies. Jesus fulfilled the Mosaic Law and gave all (willing) humans a new covenant. He replaced "an eye for an eye" with "love your enemy." Of course, even born again Christians will disagree on what that means in practice; there are many such Christians serving in the U.S. armed forces. But I think it is safe to say that the rabbi's views are not compatible with the teachings of Jesus. (To repeat, I am talking to other Christians with this blog post. I am in no position to say whether the rabbi is correctly crystallizing Jewish law.)

#3) This raises a favorite snare of the atheists: Am I now a relativist, saying it was OK for the Israelites to indiscriminately slaughter children thousands of years ago, but it's not OK for IDF soldiers to do so today? (Note that I am not saying IDF forces are indiscriminately slaughtering children in Gaza. Rather, I am responding to the rabbi's claim that they have the moral authority to do so.)

Let's deal with the philosophical issue first. Is an action good because it conforms to an objective moral law, or is it good because God says so? (To put it another way, is God Himself good by definition, or is He good because His actions/nature match independent, objective criteria of goodness?)

As with most theological paradoxes, I think this standard college freshman question sets up a false dichotomy. God is good in the same way that 2+2=4. Now, does 2+2 really equal 4 in objective reality, or does it merely equal 4 by definition? If you can see the strangeness of the dichotomy in the arithmetical context, you can at least understand my thoughts regarding God's goodness. A final curve ball on this stuff: I also claim that God is good, and 2+2=4, because of decisions that God made. In other words, it's weird to ask whether God is good merely by definition, versus some objective characteristics of goodness that we can derive using our reason, because God created us, our brains, our minds, and the logical structure of the universe as we perceive it. Reality is the way it is, because God decided He preferred it that way.

After that philosophical tangent, we come back to the practical question: If I'm right, then why would God change the rules? Why was it OK for the ancient Israelites to purposely kill the children of their military foes, but it's not OK for soldiers today?

The answer is that God didn't change the rules. It is our human limitations that try to impose a very short list of principles that guide moral behavior. God did NOT say to Joshua, "I want you to lead your men and annihilate the city before you, and by the way, I just laid out a general command for the rest of eternity."

When I'm taking my son outside, I tell him to put on a different coat in the winter than in the summer. That's not because I'm a relativist, it's because I tailor my specific instructions to his specific circumstances. Now it's true, I also try to teach him general rules to follow in his life, but even if I had perfect foresight and were completely altruistic and honest, I couldn't give him at 4 years of age the complete list of all rules he would need in his life, because he wouldn't be able to remember them all. (Suppose for the sake of argument that it was actually possible to condense the information at all. After all, it might not be; he might have to instead see a complete catalog of all future histories depending on his actions, and then just pick the "optimal" choice at every point along the way, in which case the most economical description of how he ought to live would be a listing of every choice he would make until he died.)

Well, I think I've given far more than enough in this post to fascinate and/or alienate most readers. In the future we can discuss why in the world it was a good idea (and it must have been) for God to order the ancient Israelites to slaughter babies.

Sunday, January 18, 2009



* NASA scientist James Hansen has declared that Obama has four years in which to save the planet (from manmade climate change). I don't see what the rush is. As Dr. Hans Zarkhov (formerly at NASA) can attest, the last time the fate of the planet was at stake, the hero waited until there were only 14 hours left before taking decisive action. Details here.

* Robert Wenzel, hunkered down in DC, gives some great shots of preparations for the leader of the "free" world.

* Not only are these leftists humorless, they apparently don't realize that corporations are owned by people.


Becker Cribs From Murphy?

Von Pepe suggests so, pointing out this passage:
[W]ith unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.

Unfortunately I don't think the timing works. My piece ran on January 12, whereas Becker's was posted the day before. (Of course I wrote mine before Becker's ran, so I am certain I didn't subconsciously take from him without attribution.)

Saturday, January 17, 2009


3-D Simulation of US Airways Crash Landing

This actually turns out to be pretty cool.


Old Statistics for Data Geeks and History Buffs

It took me a while to track it down, but here (pdf) is an online version of the US statistical information from colonial times. The link I have given takes you to the federal government's stats, but you can use the left-hand navigation to get at all of the information.

In particular, check out page 38 of the pdf. The bottom table lists the federal budget from the 1890s through 1939. Tell me your opinion of Calvin Coolidge doesn't go up a few notches.


DeLong Draws a Line in the Sand

Commenting on Fama's critique of fiscal stimulus, Brad DeLong writes:
What is extraordinary is that these mistakes are being rederived today, at the end of the 2000s--without any consciousness of their past or of the refutations of them made by past theory and history.

I think it is time to draw a line in the sand: no more economists who know nothing about the economic history of the world or the history of economic thought.

I am in the process of writing my book chapter dealing with Herbert Hoover. Let's just say, if you wanted the poster child for a liberal Democratic response to the stock market crash, Hoover would have been your guy. (Seriously, I don't want to sound like Glenn Beck who couldn't shut up about his Christmas Sweater show for 6 months, but you loyal readers are going to be stunned at some of the stuff I'm digging up for my book.)

For now, just check out page 12 of this DeLong paper (HT2 Greg Ransom), and then go reread his quotation above.

I am very amused. It will be a fun year.


Fama vs. DeLong

Von Pepe has been peppering me to address the skirmishes generated by Eugene Fama's critique of fiscal stimulus. Fama wrote:

There is an identity in macroeconomics. It says that in any given year private investment must equal the sum of private savings, corporate savings (retained earnings), and government savings (the government surplus, which is more likely negative, that is, a deficit),
PI = PS + CS + GS.
The quantities in the equation are not predetermined from year to year, and government actions affect them. The goal of government policy is to expand current and future incomes. When I analyze the auto bailout and the stimulus plan below, I judge them on whether they are likely to achieve this goal.

Government bailouts and stimulus plans seem attractive when there are idle resources - unemployment. Unfortunately, bailouts and stimulus plans are not a cure. The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

Now this sounds very compatible with my critique of the "idle resources" argument for stimulus, but actually I don't think it is the same. (I should note that I didn't read Fama's whole post, just the beginning.) In my article, I was making the point that even if government deficit spending pulled resources into use that would otherwise have remained idle, it still makes the economy poorer because it locks them into inferior uses, when they eventually would have found a new home in the truly productive private sector.

In contrast, it seems that Fama is making an argument from accounting, rather than making an economic point about the "social function" (if you will) of idle resources in a market economy. He is literally saying that deficit spending can't make unemployment budge, whereas I am saying that if it does, it is a bad thing. (I.e. the goal is not to reduce unemployment per se, but rather to get those unemployed people into useful occupations.)

It is with great sadness, then, that I must side with Brad DeLong. (My endowment of honor is second only to Optimus Prime's.) When Greg Mankiw politely disagreed with Fama (by conceding the possibility of short-run Keynesian effects), claiming that Fama was wed more strongly than him (Mankiw) to a classical model, Brad DeLong was outraged:
No, Greg. It's not an endorsement of any model. It's just a mistake. Fama mistakes the NIPA savings-investment accounting identity for a behavioral relationship that constrains the behavior of investment: when the government deficit goes up, Fama says, private investment must go down by the same amount.

When the government deficit goes up, private savings could go up by more--and private investment could increase. Private savings could go up by less--and private investment would fall by less than the rise in the government deficit. Private savings could remain unchanged. Or private savings could fall. Determining which of these is most likely to happen would require a model of the economy of some sort--and Fama does not have one: all he has is an accounting identity that he does not understand.

To this, Mankiw gave the cool cat reply:
This post reflects a fundamental difference between Brad's approach to the world and mine. When I read others' work, I try to read between the lines and put it in the best possible light. In particular, when I read the work of an economist as distinguished as Eugene Fama, I am reluctant to jump to the conclusion that I am vastly smarter than he is.

But as I say, as hilarious as this is (for those of us who are not members of the Brad DeLong fan club), I think DeLong is right in his analysis, though not his manners perhaps. I basically had the same reaction when a guy at National Review took the opposite tack, and argued that accounting identities proved that the government needed to run a deficit in order to allow private households to save. (If you aren't familiar with that one, you should check it out. I had forgotten how nuts the guy was, and I am still amazed "conservative" NR ran the piece.)

Friday, January 16, 2009



* Here is David Henderson's funny disassembly of Peggy Noonan's Obagaga.

* In bad news for David and others who advance the savings glut hypothesis, Chinese bankers call them gangsters. (HT2 Tim Swanson)

* Peter Schiff rips stimulus.

* John Whitehead uncovers some apparent math mistakes in the job creation calculations for the Obama-Biden stimulus plan.


Romanian Interview on Financial Crisis

Available here, though I think they misquoted me.

Thursday, January 15, 2009


Filling the Holes in Krugman's Analysis

You may be getting sick of Krugman-bashing, and in fact so am I. (My next Mises Daily will be a critique of Robert Lucas.) Yet I couldn't let this one go:
So what I've come to realize is that in these last few months Krugman has implemented his own private-sector stimulus plan. He has been working furiously, cranking out fallacious articles and blog posts, which then provide work for people like Bill Anderson and me, as well as thousands of other bloggers who still can't understand why it's bad for families to save more. A clever chap, this Dr. Krugman, no?

Today my make-work will fill in two holes in a recent Krugman blog post. The first flaw is his belief that output generates employment (rather than vice versa), and the second is his belief that government spending is a measure of real output.


Two-Minute Hate on Brad DeLong's Discussion of Modern vs. Classical Liberalism


Wow, this guy is by far my favorite to read in order to wake up in the morning. I will come back and update this post, but for now just enjoy DeLong's explanation of why classical liberalism (today we'd call it soft libertarianism) failed.

UPDATE: I don't have too much to say, but I promised to come back to this. I will focus on just two issues:

It is not completely true that it is from the self-interest and not the benevolence of the butcher that we expect our meat. Self-interest, yes, but benevolence too: a truly self-interested butcher would not trade you his meat for your money but instead slaughter you and sell you as long pig. So this opens up a gap between the libertarian view and the world.

That said, and modulus this basic human--well, call it "sympathy" as Adam Smith did--modern liberal economists were very happy for a long time with classical liberalism.

Do you see what DeLong has done here?! He first distorts Adam Smith's position, then he follows with a false claim, and finally he "fixes" it by reiterating what Smith's position really was all along--and he doesn't even bat an eye when using Smith's own term to do the heavy lifting in the statement of Smith's original position!!

Yes it IS true, Prof. DeLong, that we can't expect mere benevolence to motivate the butcher to give us meat. Nobody would devote much of his waking day to preparing fine cuts of meat for others, unless there were something in it for him. However, if you want to understand why most butchers ALSO wouldn't slaughter people for the chance of turning a few extra bucks (let's put aside issues of retribution), then you can certainly bring up the fact that people have a default sympathy for each other. What I have said is completely compatible with Adam Smith's writings.
The modern Ametican liberal economist's view of libertarianism is much the same: libertarianism is false in theory, but it is very much worth figuring out a set of limited, strategic interventions that will make the libertarian promises roughly true in practice.

As I said over at MR, here DeLong is saying something akin to, "Protestantism is wrong, but the Pope can approximate it."

Wednesday, January 14, 2009


Wenzel vs. Murphy

Over at his blog, Robert Wenzel recently made the "Case for Optimism (Sort of)," in which he predicted that Bernanke's showers would soon bring apparent growth back to the traditional indicators. Wenzel's momma didn't raise no fool; he isn't saying this will be a good thing, since he shares my concerns about price inflation in the medium-term.

Even so, I disagree with even the case for short-term optimism. In the comments I wrote:
Well good, since you and I normally enthusiastically agree with each other, I'm glad we finally have a way to separate the man from the boy. I think the economy over the next 3 years is going to be absolutely awful. The government has literally taken over large chunks of the financial sector, and now the Fed is engaging in discretionary injections of hundreds of billions of dollars to specific firms. The gross federal debt already went up by over $1 trillion in 2008, and we've got an incoming president who openly called for wealth redistribution and just nominated an explicit socialist to oversee the nation's energy markets.

And you're saying what again? "Sure, but Bernanke is flooding the system with a bunch of paper money." :)

In a follow-up post Wenzel clarified:
I think what is going on is that I am being a little more specific than Murphy. That is why I put "recovery" in quotes. The "recovery" will show up in the numbers most watch, such as a reversal in the downward trend in unemployment and an uptick in GDP, while brewing underneath will be a vast inflationary fury that will ultimately cause major, major havoc for the economy,---inflationary havoc, not recessionary havoc....So Bob, over to you. Let's see how close, or far apart, we are. What do you see happening to unemployment over the next 6 to 12 months?

Now folks, this is not based on a formal study or anything like that, but here goes: I would be very surprised if there is net job creation in the private sector in the next six months. Unfortunately, it would be tricky to do this right, since we can quibble about whether a new job making solar panels is really "private sector" if it's dependent on massive subsidies. So fine, let's just keep it simple and say that I predict the official unemployment rate in both 6 months and 12 months will be higher than it is right now.

Also, I predict that there will be no net growth in real GDP during 2009.

Finally, I predict that--barring some major methodological change that any neutral observer would agree is completely BS--the CPI (urban one) will rise at least 8% over the course of 2009.

Go ahead, Mr. Wenzel.


IER's Green Jobs Critique Now Available

The suspense is over! IER's new study (by Robert Michaels and me) looks at four of the leading "green jobs" studies and finds serious flaws. We are not delving into the climate issues on this one, and so our critique alone doesn't prove that a cap & trade etc. are bad ideas. However, just glance through this thing. I think Bob and I found some serious shortcomings in these analyses. And again, this isn't a critique of Pelosi's offhand remarks, we are here analyzing the official reports put out by PhDs from left-leaning think tanks. (They are the Sith to our Jedi, if you will. Except there are hundreds of them and only two of us. I will now discontinue this analogy.)

Far cooler than our analysis is the cover graphic our man Andrew G. (not sure if he wants his full name published for fear of Greenpeace retaliation) whipped up:


Potpourri: 1/3 Information, 2/3 Narcissism

* Blackadder recommended this Russ Roberts podcast with card-carrying Keynesian Steve Fazzari. I highly recommend it as well. Fazzari is so confident that he tripped up Roberts at one point (and I confess, I was momentarily befuddled as well). Roberts didn't go in for the kill, either because he didn't want to make the guy uncomfortable or because it's a lot easier to look 3 moves ahead in the comfort of my kitchen while I'm listening to the show. In some forum I will pick Fazzari's arguments apart, but here's a hint: He is inconsistent in what he holds constant in his discussion of an increase in saving (by the family who had been dining out) and an increase in borrowing (by the stimulating government). That's the whole trick. If he had been consistent, then either (a) the government stimulus wouldn't increase total income either, or (b) the family's decision to save wouldn't decrease total income.

* The Atlanta-Journal Constitution ran my op ed on the problems with stimulus. ("You mean the #22 ranked AJC?" Yeah, that one.) I am quite frankly (pleasantly) shocked at how little they changed it. Really, look at how "abstract" they left it. I think this financial crisis is so bad that people are willing to really think hard about economics.

* Now we know why John Stossel is so well-informed.

Tuesday, January 13, 2009


Praise for My Piece on "Depression Economics"

My recent piece on Krugman/Thoma's "the normal rules don't apply in a depression"-argument is getting a lot of commentary, as these things go. Mario Rizzo gives it a plug, and David Henderson wrote a very nice post today over at EconLog. My favorite line: "But you can unbundle Murphy's package." To learn the context of that (complete) quotation, you will have to read the post.


Bloomberg Story on IER "Green Jobs" Critique

Here is a Bloomberg story about our forthcoming report on Green Jobs. (I will post the link tomorrow when it's available.) If you want to learn who funds the Center for American Progress, you will need to do your own research.


Bernanke Gets a C- For His Answer on the Austrian School

This is pretty funny. Reader Zach Kurtz alerted me to this Q&A where a Human Events guy (at around 2:05) asks Bernanke why they are pursuing Keynesian remedies, rather than Austrian ones. And like an undergrad who didn't study for the test, Bernanke just mentions that the Austrians believed in the aggregation of information (he means Hayek's point that prices communicate dispersed information so everybody correctly takes into account the system-wide scarcity), but he totally dodges the actual question. And like a really bad student, he rambles on and on instead of admitting he can't (or won't) answer the question. I had to turn the thing off at the 6:00 mark.

Monday, January 12, 2009


Skirting Regulations in Nigeria

Here is an interesting story:
Police in Nigeria have arrested scores of motorcycle taxi riders with dried fruit shells, paint pots or pieces of rubber tire tied to their heads with string to avoid a new law requiring them to wear helmets.

The regulations have caused chaos around Africa's most populous nation, with motorcyclists complaining helmets are too expensive and some passengers refusing to wear them fearing they will catch skin disease or be put under a black magic spell.

I was very excited about the dumb paternalism when I thought it was all about cost, but the last part there took the wind out of my sails.


Idle Resources: Does "Depression Economics" Change the Rules?

I argue "no" at This article is on the long side, but I really thought it important to carefully pick apart the claim that tradeoffs disappear when there are unemployed workers and other resources lying around. An excerpt:
Although Krugman and Thoma have made the only rhetorical move left to salvage their disastrous recommendations, their claim is wrong: the normal rules of scarcity do still apply, even in the middle of a depression. No matter the scenario, government spending channels resources away from the private sector. Even if the project employs workers who were previously unemployed, this still retards the genuine, private-sector recovery from the slump, because that is one less worker available to be hired by an entrepreneur.

If the government wants the economy to recover as quickly as possible, the solution is simple: cut spending, cut taxes, stop inflating the money supply, and stop changing the rules every three days. But this solution won't be adopted, since it doesn't allow the politicians to pose as generous saviors.


Of Flat Taxes and Idols

(As happened last week, this week my Sunday "religious" post is spilling over into Monday morning.)

I have nothing too profound to report today. In my reading of Exodus I came across three items that I hadn't noticed before:

(1) In Exodus 30:11-16, God shows that He is no proponent of progressive taxation:
11 Then the LORD spoke to Moses, saying: 12 “When you take the census of the children of Israel for their number, then every man shall give a ransom for himself to the LORD, when you number them, that there may be no plague among them when you number them. 13 This is what everyone among those who are numbered shall give: half a shekel according to the shekel of the sanctuary (a shekel is twenty gerahs). The half-shekel shall be an offering to the LORD. 14 Everyone included among those who are numbered, from twenty years old and above, shall give an offering to the LORD. 15 The rich shall not give more and the poor shall not give less than half a shekel, when you give an offering to the LORD, to make atonement for yourselves. 16 And you shall take the atonement money of the children of Israel, and shall appoint it for the service of the tabernacle of meeting, that it may be a memorial for the children of Israel before the LORD, to make atonement for yourselves.”

(2) In the famous scene where the Israelites ask Aaron to make a golden calf, it's not so much that they all of a sudden decide to become pagans:
1 Now when the people saw that Moses delayed coming down from the mountain, the people gathered together to Aaron, and said to him, “Come, make us gods that shall go before us; for as for this Moses, the man who brought us up out of the land of Egypt, we do not know what has become of him.”

That seemed interesting to me, that it was Moses' unexpectedly long session with God that prompted their construction of an idol. They wouldn't have chosen a gold object over the Lord right while He's parting the Red Sea, for example, but if they haven't heard from Him (or His messenger) in a while, then all bets are off.

(3) Another interesting aspect to the golden calf episode: When the Israelites start worshipping it, they say: “This is your god, O Israel, that brought you out of the land of Egypt!”

When I read that, I was flabbergasted. After all, it's one thing to discard your old friend for a new, flashier one. But this was much worse; it would be as if you started telling stories about how your (new) friend saved your life when you were 7 years old and drowning in the pool, even though it really had been your old (and now discarded) friend who did it!

But then I realized that maybe what the Israelites were doing (in their own minds) was building something tangible to focus their praise of the true God, since their previous symbol (Moses) was AWOL. Obviously I am at the mercy of the translators, but from this particular rendition it seems that the Israelites' sin may have been more understandable than I remember when hearing this story as a child. (Unfortunately, a lot of the "shocking" things I'm reading in the Old Testament don't seem like such a big deal, this time around. Uh oh.)

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