Sunday, May 31, 2009


Krugman vs. Murphy on Inflation: Two Men Enter, One Man Leaves

I'm not even going to bother linking to a post; any reader for more than a month knows that I am expecting significant price inflation in 2010, and I think we will see it kicking in later this year. (If people want to link to my specific predictions in the comments, feel free.)

For a while I was mad because I thought Paul Krugman would be able to explain away what happened, in case I am right. But in a recent column Krugman leaves no wiggle room at all. After going through the economic analysis of why there's no inflation risk right now, Krugman says:

All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?

Well, as you may have noticed, economists sometimes disagree. And big disagreements are especially likely in weird times like the present, when many of the normal rules no longer apply.

But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.

So he has no wiggle room at all. If he's accusing the people who predict inflation of doing so just to discredit Obama, then Krugman EITHER

(a) believes there is no intellectually defensible reason to predict high inflation right now, and hence that's why they must be saying it,


(b) knows full well there is a risk of inflation--Krugman is a sharp guy after all--and he is himself engaging in political spin.

So if I'm right and large price inflation comes by the end of 2009, this column alone will prove that Krugman either botched his macroecon big time, or he is a character assassin. We'll let him choose, if and when the time comes.


The Power of Faith

Several years ago--when I was still an atheist--I wrote an article called "Believing Is Seeing." My point was that even something as apparently "objective" as sensory perceptions can differ, based on the mindset of the person interpreting them. For example, in college I had a t-shirt business with my friend, and one of our first major orders for a fraternity got screwed up. We had made t-shirts for their "Delta Tau Delta Ski Weekend" trip, and when the guys were having a snowball fight a bunch of the ink on the shirts started bleeding.

So obviously we hadn't properly "cured" the shirts with the heating element, and of course we went to talk to the guy who handled the activities for the Delts. I was mortified, thinking, "Where did we ever get the idea we could start our own business like this?", and at the end of the conversation I was dead certain the Delt guy said, "We can't do business again with you guys."

In the car ride, my partner said, "Well I'm glad they weren't p*ssed. Assuming we fix all these and there's no more bleeding, we'll get the next order." It soon became clear that he had heard the Delt say, "We CAN do business again with you guys." (He was right.)

I have had tons of experiences like this, and what's really amazing is when I see other people misinterpreting something that is "obvious" to me.

So it is clear that even an atheist who is "rational" and "scientific" (in quotation marks because I'm talking about the atheist who proudly trumpets these terms about himself) can acknowledge somewhat corny things like, "You are your biggest critic" or "You can achieve if you believe."

I'm not going to relay the whole story now, but part of what happened when I went from being a "devout atheist" (the actual term I used) into a born-again Christian, was that at some point when I was still an atheist, I realized just how powerful the power of suggestion was. For the first time, I understood how faith healings "worked." I didn't attribute anything supernatural to it, of course; I thought medical doctors could give a perfectly satisfactory explanation (at least in principle), but that the ignorant rubes would view it as "a miracle."

In particular, at that point I thought the most rational explanation for everything I knew about Jesus of Nazareth--which included the undeniable dedication of his followers--was that he really did heal people, because they actually believed he had that power. (Note that Jesus Himself often acknowledges this when He says, "Your faith has healed you.")

Think of it like this: There are apparently studies showing that if you want to predict which patients will survive a particular surgery, and which won't, what you do isn't to check the medical histories etc. Instead, you ask the people why they are getting the surgery. If someone says, "Because the doctor says I should" or "I want to resolve this one way or the other," then that person is probably not going to make it. But if the person says, "The doctor says if it works, I can golf again" or "I want to see my daughter get her diploma," then those people are much more likely to enjoy a full recovery.

Now then, even a perfectly rational atheist can understand why the above is true. Someone's attitude makes a heck of a lot of difference in what he or she can accomplish. Now: Who is going to be more of an unstoppable force? The person who says, "There is no purpose to evolution, and there is no non-arbitrary sense in which homo sapiens are a 'higher' life form than a bacterium," or the person who says, "The LORD who created the heavens and the earth is about to work a miracle through me"?

Last point: I can imagine all sorts of obvious retorts from my friendly atheist readers. (Remember, I used to think like you, and I would have had a field day with this post too.) But there is a huge difference between someone saying "God told me I needed $6 million in donations or else I was going to die," versus someone actually believing that God had given him instructions. There are plenty of scientists who have falsified their lab reports etc. too; obviously they don't pose any problem for the legitimacy of the scientific method.

Just because there are charlatans who take advantage of naive theists, doesn't (by itself) discredit theism. It is undeniable that some of the most incredible artwork, and even some of the most incredible scientific discoveries, were achieved by people who have been devout believers in God and in fact would attribute their successes to divine inspiration.

Saturday, May 30, 2009


Bruce Bartlett Rips Bush, then Turns Turret Towards Ron Paul

Peter Klein notifies us of this Bruce Bartlett column taking libertarians to task for their narrow focus on economic issues. (I note with irony that Bartlett's two books listed in his bio are Reaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. I haven't read either of them, but I'm guessing they don't deal too much with police brutality or childhood literacy.)

Now fine, maybe there are a lot of libertarians who focus too much on low taxes, and don't worry enough about civil liberties and especially interventionist foreign policy. In fact, I can think of many prominent libertarians who do just this. I won't name names, but a lot of them work for "small government" think tanks.

Yet instead of going after these groups by name, Bartlett decides to target the Campaign for Liberty, the group spawned by the Ron Paul campaign. Now if you wanted to come up with the one libertarian who couldn't be accused of selling out on foreign policy in order to "fit in" with hawkish supply-siders, I would think Ron Paul is probably the name that would come to most people's minds.

For what it's worth, Bartlett doesn't have the audacity to actually say, "Ron Paul talks too much about tax cuts and not enough about civil liberties or bombing innocent people." He focuses his fire on the Campaign for Liberty, linking to their "talking points" for people who call in to talk radio. Here's Bartlett's description of their document:

The reason for this is that most self-described libertarians are primarily motivated by economics. In particular, they don't like paying taxes. They also tend to have an obsession with gold and a distrust of paper money. As a philosophy, their libertarianism doesn't extent much beyond not wanting to pay taxes, being paid in gold and being able to keep all the guns they want. Many are survivalists at heart and would be perfectly content to live in complete isolation on a mountain somewhere, neither taking anything from society nor giving anything.

An example of this type of libertarian thinking can be found on the Web site of a group called the Campaign for Liberty. It pays lip service to the libertarian philosophy on foreign and social policy, but says little about them. The discussion of economic policy, however, is much greater. But its only major proposal is abolition of the income tax. No ideas on how government spending would be cut to make this possible are put forward except to eliminate the congressional pay raise. Perhaps this group really believes that will be enough to abolish the income tax, but I suspect not. Whoever wrote these talking points is simply pandering to the stupid, the ignorant and the unsophisticated.

Those are some seriously strong words he ends with, no? So when I clicked on the actual Talking Points [.pdf], I was getting ready for some cringeworthy list of bullets, designed to appeal to Sean Hannity listeners. I was thinking my job, in responding to Bartlett, would be to find all kinds of other great stuff on the C4L site, the Editor-of-Chief of which is Anthony Gregory, for crying out loud! (Seriously if you know of Anthony's work, Bartlett's charges are even more outrageous.)

But guess what? The list of bullet points that (allegedly) don't list specific cuts, and instead just panders to the stupid and ignorant and unsophisticated--and above all, focuses on economics and avoids foreign policy--has the following excerpts, taken from a 3-page document:

* Campaign for Liberty's mission is to promote and defend the great American principles of individual liberty, constitutional government, sound money, free markets, and a noninterventionist foreign policy, by means of educational and political activity....

* In the United States, many citizens seek to use the government to enrich themselves at their neighbors' expense. This is immoral. We should stop using the government to do things that would be considered morally outrageous if done by a private individual. It is a shame that a Republican administration that was backed by conservatives presided over one of the biggest thefts in history: the bailout of the banks and automotive industry. We have to find our way back to fiscal sanity before we can dream of winning an election.

* Why would we expect a system based on legal theft, as ours is, to be a net benefit to the poor or middle class? Every one of the special benefits that have been enacted by both Republicans and Democrats makes companies less efficient and competitive, and the economy more sluggish. This is exactly what will happen with Bush's bailouts and Obama's social spending....

* We can't expect to have a limited government at home while we have an interventionist foreign policy abroad. The two are intertwined, as the last 8 years have shown us. If we truly want limited government, then we need to stop policing the world.

* Our fighting men and women are stationed on over 700 bases in more than 100 countries. It is time to bring them home to protect our own country instead of focusing on guarding other nations.

* The war on terror has awakened more Americans than ever to the way government exploits fear, and even its own failures, to justify eroding civil liberties. You cannot have limited government at home while having a big-government foreign policy. The Bush Administration and willing conservatives presided over the largest increase in government because they forgot this reality.

* A strong national defense doesn't mean policing the world, launching preemptive war, or having troops stationed on every continent. Those things weaken our national defense by spreading our resources too thin and bankrupting our government at home.

* Hopefully, conservatives will now recognize that government has limits in foreign policy as well as domestic.

* Obama promises to expand the war in Afghanistan. It has been a nation-building disaster for seven years, and I have little hope he will turn it around. He has already begun to show force against Pakistan. So much for the anti-war candidate.

Seriously, am I on crazy pills here?! You're telling me that the above talking points (and go look at the actual document if you want to see the relative proportion given to the various issues) shows that the Campaign For Liberty doesn't list any candidates for how to cut government spending, except congressional pay raises?

Bartlett apparently suffers from the same problem as Andrew Samwick, who demanded that the "Tea Party" protesters come up with specific budget cuts. What Bartlett and Samwick don't realize, is that when someone says, "I'm against government bailouts," that person means, "The government should stop doing that." Or when someone says, "We should bring the troops home," the person means, "We should bring the troops home."

Bartlett (and maybe Samwick, I don't know him that well) is such a policy wonk that I think he expected the C4L talking point to say, "Medicaid expenditure growth should have 0.4 percentage points shaved off for the next three years. This will reduce the expected growth in the national debt by blah blah blah..." Or, "After consultation with the commanders on the ground, the president should begin a gradual, 6-year phase-out of ground troops in Iraq and Afghanistan, freeing up $385 billion through Fiscal Year 2015."

Friday, May 29, 2009


Zeitgeist Addendum

Recently my cousin contacted me out of the blue (I hadn't spoken with him in several years) and said that he had stumbled upon Austrian economics and was now voraciously consuming all kinds of material. We discussed the apathy of the average American--maybe I'll start writing columns about AAA--and how frustrating/depressing/infuriating it was that so much freedom was vanishing with so little fuss.

My cousin asked me to check out Zeitgeist Addendum, since it had some pretty bold claims and he wanted my opinion. (Here it is on Google Videos.) My general reaction is that it was typical of a high-quality leftist critique of modern society: It accurately noted the suffering and injustice of the world--especially endured by the poor--and it understood the depravity of governments, including our own. But unfortunately, it incorrectly generalized and blamed "free trade" and "capitalism" for the evils it correctly linked with the World Bank, IMF, and "right wing" governments.

Before I delve into more specifics, let me offer the following clip that comes in the beginning of the movie. I think it is a perfect summary of what Zeitgeist has to offer:

Money = Debt?

The opening chapter is the movie's strongest. They go through the mechanics of the Federal Reserve System, and they really do a great job showing how insane and evil it is. Despite my serious misgivings with the rest of the movie, this piece on the Fed might make it on net a positive contribution, since I think it will wake up a lot of leftists on just how corrupt our financial system is.

In particular, I finally understood why so many people harp on the notion that with our system, "money is debt," and that the system is thus inherently biased towards more inflation, because the Fed needs to print more money in order for borrowers to pay off the last injection (plus interest). Several times on Free Advice (e.g. here) I have borderline ridiculed such a claim, since it overlooked the fact that even with a fixed money supply in gold coins, you can easily have positive interest rates because the money can change hands during the course of the year. (All that really happens is that you perform a flow of services and work off your debt that way.)

Another problem I have with people calling our current money "debt" is that, if anything, it's the opposite! Under the gold standard, the green pieces of paper issued by the Treasury really were liabilities--they had printed right on them a promise to deliver a certain amount of gold when the bearer turned in the Treasury note:

But under a fiat system, those green pieces of paper mean nothing. As Bill Barnett humorously observed to me on the phone one time, "Bob, on the Fed's books currency is listed as a liability. But if I turn a $100 bill over to the Fed, what do they owe me in return?" I thought for a second before answering, "Umm, a $100 bill?"

Now Zeitgeist did go too far, in my view, by basically saying that interest on loans was per se a bad thing, since it was "obviously" impossible for people collectively to pay back more than they had borrowed in the first place. The movie featured quotes from people suggesting that this way a very efficient way to enslave people, that it was the source of mortgage defaults, etc.

Yet even though I think the movie (or more accurately, documentary, but I don't want to keep typing out that high-falutin' term) painted with too broad a stroke, it did jolt me out of my cynicism to see their point: The way our monetary and banking system is set up right now, when the Fed increases bank reserves through open market operations, the commercial banking system then pyramids much more money creation on top of this through the creation of loans. In other words, in our system, most new money enters not through running the printing press, but rather through private banks deciding to lend money to people that the banks create out of thin air.

It's odd that it took Zeitgeist to get me to focus on this point, since I "knew" it all along. Yet for some reason--perhaps my rejection of the Fed and all its works--I always focused on the central bank's "creating money out of thin air," rather than the much more significant (in terms of the total increase in monetary aggregates like M1) acts of commercial banks doing the same thing.

Creating Money Out of Thin Air

Let me walk through this to make sure we get the point; it's very subtle and, like I said above, even though I "knew" it and had taught it to undergrads, it never really hit me until my cousin told me about this movie.

When a private corporation, let's say IBM, buys a financial asset, it writes a check drawn on its bank account. Let's say IBM buys $1 million in government bonds from the Acme Bond Dealer. So IBM writes a check drawn on its bank, let's say Chase, and gives it to Acme. IBM's balance sheet is unchanged in total size: Its liabilities (and shareholder equity) remain the same, while on the asset side, its checking account goes down by $1 million, while the value of its Treasury bonds go up by $1 million. The opposite happens to Acme's asset-side of the balance sheet.

Of special importance however is that this purchase doesn't affect the total quantity of money held by the public, and so it is neither inflationary nor deflationary per se. In the most obvious case, suppose Acme is also a customer of Chase Bank. Then when the check hits the bank, Chase simply reduces IBM's checking account by $1 million, and increases Acme's by $1 million. Total demand deposits are the same as before the transaction; money has just been swapped for bonds, nothing more.

OK now what happens instead if the Fed decides to buy $1 million in bonds from Acme? Well the Fed writes a check on itself and acquires the bonds. Its balance sheet goes up by $1 million (remember that IBM's didn't budge). Rather than one asset going up, while another going down, what happens to the Fed is that its assets go up by $1 million (the market value of the bonds it bought). There is no finite "checking account" balance that the Fed needs to debit; it can write an infinite amount of checks on itself.

In terms of the accounting, the balance sheet still balances, because on the liabilities side, the Fed adds $1 million to the reserves under the account of Chase. This is because when Acme gets the check from the Fed, it deposits it in its own checking account (Chase Bank), who then clears it with the Fed. So from Chase's point of view, they increase the checking balance of its client, Acme, by $1 million (just as in the IBM scenario), but now, instead of reducing some other client's account by $1 million, instead Chase increases its own "checking account balance" with the Fed by $1 million.

Thus, even at this stage the economy now has $1 million more in money "held by the public"; Acme has $1 million more in its checking account, and no other private person or company has a smaller amount of currency or checking balance.

But we're not done. At any given time, a bank must satisfy reserve requirements, meaning that it must have a certain fraction (let's say 10%) of its outstanding demand deposits, backed up in the form of vault cash or reserves on deposit with the Fed. For example, if Chase's customers added up all of their checking account balances and the grand total were $50 billion (I have no idea what a realistic number would be for this), then Chase would need to hold (let's say) $5 billion as reserves, either in the form of actual currency--green pieces of paper--in the vault, or as part of Chase's own checking account with the Fed itself.

Sooo, now that Chase's reserve balance at the Fed has instantly jumped up by $1 million, it means that Chase is holding "excess reserves," and can increase the total amount of checking account balances held by its customers, by $900,000. (This part always stumped me in the past--why couldn't Chase make new loans of up to $10 million right off the bat? After all, $1 million in reserves can support up to $10 million in expanded checking balances, right? The answer is that when its customers get these new loans, presumably they are going to write checks for much of the principal, which means other banks will "call in" a lot more of this new influx of reserves, than would be true on average for the original situation before the Fed open market operation. In other words, if Chase tried to expand the money supply to the fullest extent in the first step, it would end up being way below its reserve requirements.)

Don't worry, I'm not going to follow it through the next steps, when each subsequent deposit leads to further and further expansions because of new loans by other banks. I just want to point out that Chase bank officials are here creating new money, in a very real sense, and they are doing it by creating the amount of debt owed by the public. What happens to Chase's balance sheet at this stage is similar to, but not the same as, what the Fed does when it creates money out of thin air.

Let's say that Chase exploits its excess reserves by granting a loan to a homebuilder for $900,000, at a 5% annual interest rate. So now on Chase's balance sheet, its liabilities have increased $900,000--it just bumped up the homebuilder's checking account by that amount. The homebuilder can now start paying workers, buying lumber, and buying real estate, writing checks up to $900,000 on this account.

On the asset side, Chase has acquired a "bond" issued by the homebuilder. In other words, in order to get the loan from Chase, the homebuilder has promised a stream of $45,000 annual payments, with the principal to be repaid in x years. (I'm translating the homebuilder's "bond" into something comparable to the Treasury bonds that the Fed buys; you get the idea I hope.)

Now it's crucial to understand the mechanics (and any experts out there, please correct me if I botched the accounting above), but it's also important--once you've mastered what the heck is actually happening--to step back and see the big picture: Just as the Fed writes checks on itself--"creating money out of thin air"--in order to buy debt, so too private commercial banks can write checks on themselves, and thereby create money out of thin air, in order to buy debt. And in practice, the amount of this being performed by the commercial banks is several multiples of what the Fed itself does.

And here's the best part: Ever since that "savior of capitalism," FDR, instituted FDIC, if this house of cards ever collapses, then taxpayers are on the hook to bail out the bankers who mismanaged their portfolios and somehow managed to get wiped out, even though they have the ability to create money out of thin air and lend it on whatever terms they deem safe.

That is breathtaking, when you really comprehend it. Thanks for opening my eyes, Zeitgeist Addendum.

Economic Hitmen, and Then a Bunch of Bunk

The interview with the Confessions of an Economic Hitman guy is also very sobering. I am not bothering to cross-reference his tales with any other "normal" sources, but he tells a very plausible account of how the CIA, IMF, and World Bank muscle financially strapped Third World countries into signing away their lucrative natural resources to multinational companies. When two populist rulers say Go Home Yankee, they coincidentally go down in separate plane crashes.

After those scenes, however, the movie descends into anti-capitalist and anti-religious bunk. I'm not going to bother critiquing it, but let me just give some examples of how silly it is: At one point, the narrator "explains" that Jamaica (I think?) got destroyed by the evil multinational bringing in food that was so cheap it put the locals out of business. Now on the face of it, that's pretty funny: A leftist complaining that the capitalist nations aren't charging poor people higher prices for food.

But beyond the absurdity of it, this charge contradicts the claim made later in the movie, when it says that capitalism is based on scarcity, not abundance. In other words, it's not in the capitalist system's interest to increase production, because then prices (and "hence" profits) go down. So then, what was the story with the evil free trade and Jamaica?


President Obama: "Bob Murphy is a trusted advisor."

Well, he didn't actually say that, but it must be what he's thinking. My argument is bulletproof:

(1) On May 27, EPJ wondered, "What can Geithner say to get China to continue to buy U.S. securities aggressively? Nothing."

(2) In the comments, I used my extensive training in game theory and Walt Disney to explain how the world works:
Actually, if I were Obama I'd call [Geithner] into my office and say, "Tim, I want you to go over there and assure the Chinese that you are very confident US interest rates will rise, and that in your expert opinion, you advise them to stop buying Treasurys."
(3) The next day, May 28, EPJ reported that Geithner's official mission is pretty close:
[Geithner] is also planning to press Beijing to take drastic measures to turn China's economy into one that depends heavily on sales to domestic consumers and less on sales to the U.S. and other foreign markets, according to a senior Treasury Department official.

That means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn't mean starving later.

"The efforts China could take would be efforts to strengthen the comfort that Chinese households have in spending, which largely involves reducing or addressing the reasons why they feel such a great need to save for precautionary purposes," said the senior Treasury official, who briefed reporters Thursday in advance of Mr. Geithner's departure on Saturday.

It is quite obvious that President Obama was notified of my advice, realized its excellence, and--master politician that he is--tweaked it to flatter the Chinese consumer, rather than humiliate the US Treasury. But the actual recommendations are the same.

And hence, if the Chinese rulers are as clever as Obama, they will do the exact opposite of Geithner's recommendations.

OK that's enough engineering of geopolitics for the week. I have a lecture on Saturday I need to prepare.


Schadenfreude in Advertising

On the way from the Dallas-Forth Worth airport to the hotel, I saw a billboard saying:

We didn't.

I couldn't make out the full name of the bank, because some trees blocked the bottom of the billboard. But I think it started with "Washington." I was tempted to do a search for "washington bank bailout" but realized that would probably fry Google's mainframes.


What Will It Take to End the Recession?

Mario Rizzo has (as usual) an interesting post over at ThinkMarkets on the possible end of the present recession. I personally am withholding judgment on whether the "recession is over," as many analysts seem to think. But even if, years from now, the NBER finally decides that yep, the recession lasted from Dec 2007 to May 2009, then I still won't say, "Good thing we had Bernanke at the helm!" As I commented after Mario's post:

What is interesting of course is that every recession in history has always ended. So it is odd when people want to find “the cause” for the recovery this time. (I realize you are aware of this, Mario; I’m just elaborating on your post.)

For example, suppose everybody ends up thinking it was TALF. Well, there was no TALF during the last x recessions (I don’t know how many there were in between the Great Depression and now).

I keep coming back to medical analogies. If a kid gets the flu, and each of his five brothers tries a different remedy–like kicking him in the face, pouring syrup on his toes, and reciting limericks–the kid would eventually get better. Some of his siblings’ remedies did nothing, and some actively prolonged the sickness.

Yet after he eventually gets better, the siblings would argue over whose cure “worked.”


USPS Forever Stamps as Inflation Hedge?

I'm going to be at the Mises Circle in Dallas (or is it Fort Worth?) this weekend, so blogging may be sparse. In the meantime, can somebody convince me why I shouldn't buy $1000 worth of "Forever" stamps from the Post Office?

Absolute worst scenario, Krugman is right--and yes, that would be the worst scenario for me--and we are stuck in Japan mode for a decade. OK no big whoop, I never have to buy stamps during that period. Sure I would regret having sunk so much cash into that many stamps, but if it comes down to it, I could sell them to my neighbors and friends at a slightly reduced price (after explaining my foolishness). You might ask, "How many letters do you plan on mailing?!" but I think I could slap a bunch of them on regular packages too. So instead of paying $4.95 for them to ship a book the next time someone wins a Reader Contest, I can instead buy my own generic envelope and slap a bunch of stamps on it, right?

On the other hand, suppose my predictions about massive price inflation come true. Then I'm sitting pretty because (a) I have completely hedged one of my recurring business expenses and (b) Paul Krugman would have been ridiculously wrong. Those two together might make $8 milk (which you need to buy online because of the price controls) almost tolerable.

The only major flaw I see in this is the possibility that the Post Office doesn't honor pre-2010 Forever stamps at par, because "obviously we need to adjust for the 20% inflation that kicked in." So if we really did get hit with heavy inflation, I might start unloading my Forever stamps (to neighbors etc.) at a nice discount from their point of view, so I lock in most of my gain before the Post Office debases them.

Thursday, May 28, 2009


The Connection Between Government Debt and Price Inflation

Back when I was a college professor, I would always drill home to my students that government budget deficits didn't cause (price) inflation per se. For example, if the country were on a gold standard with 100% reserves in the banking system, then the total quantity of money wouldn't have anything to do with how much the government borrows, just like it isn't affected by how much Microsoft borrows in a given year.

However, in the real world the layman's suspicion is justified. In our wacky system, the Federal Reserve ultimately is responsible for the CPI, in the sense that the Fed exercises a huge influence over the ultimate money supply. But if the government is running massive deficits year after year, this puts tremendous pressure on the Fed to inflate, because it (a) keeps interest rates down, making it cheaper to borrow and (b) reduces the real burden of previously accumulated debt.

But before today, I had never realized just how related the federal debt was to the general purchasing power of the dollar. Tom Singleton emailed me a chart from CaseyResearch, the gist of which I reproduce below using FRED:

In retrospect, I suppose you could argue the causality is the other way around: The Fed inflates for some other reason, which raises prices, which makes the government's appetite for (nominal) debt go up. The chart above wouldn't settle the direction (if any!) of causation. But I think the old-time wisdom is right: When the government runs massive deficits (and surely $1.8 trillion qualifies), just wait for the dollar to plunge.

Wednesday, May 27, 2009


Slope of Yield Curve at Record High

The econogeek blogosphere is abuzz because the slope of the yield curve is at a record high. Here's the chart from Calculated Risk (HT2 Greg Mankiw):

Whenever I see a chart of a spread, especially when it's over a long time frame, I like to see its constituents:

The yield curve holds a revered place in the hearts of many, because it is surprisingly good in forecasting recessions (when it "inverts," meaning when interest rates of shorter maturity rise above interest rates of longer maturity). Notice in the first graph above, that the spread goes negative before each recession. And contrary to an old joke about predicting 8 of the last 3 recessions (or whatever), I'm pretty sure the inverted yield curve is never, or at least rarely, wrong, going back to the 1960s.

When I worked in the financial sector my firm did a research paper on this, and I remember thinking that the academic literature didn't really have a good explanation for this amazing phenomenon. I think the Austrian theory of the business cycle can explain it: The Fed pushes down short rates by inflating the credit markets, and so you get a few years of a boom. But then the Fed gets scared and hikes short rates back up, and you get a recession.

(And it's not really that hiking up short rates "causes a recession." More precisely, when the Fed stumps pumping in funny money, short rates rise and the economy is allowed to cleanse itself of the malinvestments made during the unsustainable boom, a cleansing process that is unfortunately painful and requires workers to change jobs.)

This was actually the topic of Paul Cwik's dissertation [.pdf]. It's been years since I read it, and I honestly can't remember whether I thought he hit it out of the park; he criticized me in a few footnotes and I think I sulked over that instead of his main points.

In our present environment, of course, I think the reason short rates are staying low, while ten-year yields are rising, is that the Fed is still very loose while long-term deficits are making investors worried.


Krugman Contradicts Krugman on California

Earlier this week Paul Krugman's NYT column discussed the sorry state of California finances. According to Krugman, the reason the Golden State is in such a hole these last few years, is because of a tax revolt in 1978:
The seeds of California’s current crisis were planted more than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure that placed the state’s budget in a straitjacket. Property tax rates were capped, and homeowners were shielded from increases in their tax assessments even as the value of their homes rose.

The result was a tax system that is both inequitable and unstable. It’s inequitable because older homeowners often pay far less property tax than their younger neighbors. It’s unstable because limits on property taxation have forced California to rely more heavily than other states on income taxes, which fall steeply during recessions.

For those who don't know about it, Prop. 13 was awesome. (I am well aware of its details because of my time spent working for Arthur Laffer, who at the time was one of its biggest proponents.) By limiting real estate taxes to 1 percent of the assessed value, it overnight cut property taxes by more than half. (!) The ballot initiative's authors were also smart to add in a provision that the assessed value could rise at most by 2 percent per year, unless there were a transfer of ownership. So for people who stayed in their homes, the most their property taxes could rise was 2 percent a year.

In addition, Prop. 13 required that both houses of the state legislature had to get a two-thirds vote in order to pass any further tax hikes. You wouldn't expect something like this to come out of California, now would you? (But then again Ronald Reagan came out of there during the same period.)

OK so now you can see what Krugman is talking about in the block quotation above. But still, what does that have to do with the current crisis? How does California's 11-percent unemployment rate (cited by Krugman early in the article) relate to Prop. 13?
Even more important, however, Proposition 13 made it extremely hard to raise taxes, even in emergencies: no state tax rate may be increased without a two-thirds majority in both houses of the State Legislature. And this provision has interacted disastrously with state political trends.

Isn't that funny? California's economy is in the toilet because its taxes are too low? For what it's worth, the Tax Foundation says that in 2008, California's state and local "burden of taxation" was 6th highest in the nation. (That's somewhat near California's 5th highest unemployment rate; an interesting coincidence.)

But don't worry, the rest of us are safe from California's irrational aversion to taxes:
Will the same thing happen to the nation as a whole?

Last week Bill Gross of Pimco, the giant bond fund, warned that the U.S. government may lose its AAA debt rating in a few years, thanks to the trillions it’s spending to rescue the economy and the banks. Is that a real possibility?

Well, in a rational world Mr. Gross’s warning would make no sense. America’s projected deficits may sound large, yet it would take only a modest tax increase to cover the expected rise in interest payments — and right now American taxes are well below those in most other wealthy countries. The fiscal consequences of the current crisis, in other words, should be manageable.

But that presumes that we’ll be able, as a political matter, to act responsibly. The example of California shows that this is by no means guaranteed....

So will America follow California into ungovernability? Well, California has some special weaknesses that aren’t shared by the federal government. In particular, tax increases at the federal level don’t require a two-thirds majority, and can in some cases bypass the filibuster. So acting responsibly should be easier in Washington than in Sacramento.

Now wait just a second. It sure sounds like Krugman is saying California should raise taxes now, in order to reduce its budget deficit. (Doesn't that sound like what he's saying?)

But in his December 2008 NYT article, Krugman warned the state governors not to worry about reducing their deficits, since that's what Herbert Hoover foolishly did in 1932.

OK OK, maybe Krugman would clarify and say that California is in danger of scaring away potential bondholders, and so it needs to raise taxes not to entirely close the deficit, but just to keep people willing to lend to it.

But no, that doesn't really work either, because in this blog post earlier this month, Krugman explained that if the Chinese decided to stop buying so much Treasury debt (thereby driving up interest rates), that would actually boost the American economy. So if people who lived outside California stopped lending them money (even though the Golden State--heh heh--has a constitutional requirement for a balanced budget), that should boost gross state product, right? (The specific mechanism in the China example was that it would weaken the dollar and thus boost exports. Can anyone translate that into a case where different regions use the same currency? I mean, the choice of currency shouldn't affect the trade flows, right? But then again I am constantly mystified by the results of a Keynesian model.)

The more I try to reconcile these three writings by Krugman, the more I think that he just grabs whatever argument he needs at the time, in order to justify bigger government and redistributionism. I know that sounds petty to say, but really, that's the one common link in just about everything Krugman writes. As Scott Sumner put it recently:
Over the last few months I have had a chance to closely examine many of Krugman’s recent and past writings on fiscal and monetary policy. One thing that I notice is that Krugman is very skilled at making an argument. He can use the same basic model to make either monetary or fiscal policy seem like the only reasonable option. All that is required is that one tweak the assumptions in such a way that the less favored policy seems either undesirable or infeasible.

Tuesday, May 26, 2009


Cost/Benefit of Waxman-Markey: It's Not Pretty

I actually spent a good portion of my holiday weekend researching for / writing this MasterResource post on Waxman-Markey. A juicy part:
Now we see the weakness in [relying on the "social cost of carbon"], when trying to assess the net benefits of unilateral climate policy. Once we take leakage into account, we see that the standard measure of SCC overstates (possibly grossly so) the true costs to society from an additional unit of emissions. In reality, there are two things going on: When a U.S. manufacturer produces more units of a carbon-intensive good, it is true that he emits more carbon dioxide into the atmosphere. This is what the SCC looks at, and judges him accordingly.

However, the U.S. manufacturer also pushes down the world price of the good in question, and that tends to cause other producers to emit less CO2. Thus, there is a positive externality laid on top of the negative externality. The greater the scope for leakage, the greater the positive externality. In the extreme, where U.S. operations would be completely outsourced to China (in terms of carbon emissions, if not output of final goods), then the correctly measured “social cost of carbon” for U.S. operations would be zero, in the context of a unilateral U.S. cap.

And the takehome messages:
(A) If the U.S. implements Waxman-Markey unilaterally, the environmental benefits will be even less than indicated by Chip Knappenberger’s pessimistic analysis.

(B) If the whole world implements Waxman-Markey, then the loss to economic output will far exceed the reduction in expected environmental damages.


Samwick's Juvenile Argument Against the Tea Parties

Editor's Note: In a recent post I summoned the Thundercats and they responded as usual. This post relies on their sleuthing. I'd also like to thank YouTube.--RPM

Andrew Samwick (HT2 Brad DeLong) couldn't take it anymore when the Cato Institute's David Boaz referred to this year's "Tea Parties" as the "revival of a freedom movement." Writes Samwick:
At moments like this, we go back to Milton Friedman's adage, "To spend is to tax." I cannot really come up with a better word than juvenile for the tea parties -- don't protest the taxes unless you can identify the specific cuts in expenditures that you would make to bring the budget into balance. If you think taxes are bad, then you should think deficits are worse, because they raise the taxes of people who were not represented in the decisions to spend the money.

That's the real lesson from the Revolutionary War period that should be drawn. And the danger for the Libertarians is that if they don't put the reduction in expenditures ahead of the reduction in taxes on their agenda, they are destined for another abusive relationship down the road.

Before I proceed to annihilate Samwick, let me offer one caveat: I agree that there probably wouldn't have been these protests had McCain won. It's not because the average Tea Party protester is really a closet racist, a la Janeane Garafola, but rather that I think right-wing radio, Fox News, etc. might not have stoked the flames if their guy won. But I could be wrong.

In any event, what is unambiguous is that the Tea Party-goers were protesting spending. And we don't need to dig up obscure footage from a rally in Montana to make the point; we need only examine the most infamous of all reporting on that day (albeit not the most famous portion). Start the below at 2:30, and just give it 60 seconds. Does that lady sound like a Republican ideologue who loves big spending and low marginal tax rates?

Bob Roddis captured the below stills from other interviews that this same notorious CNN reporter conducted; check out the signs. (And note that the guy who was the subject of her most famous interview has a sign behind him too, which seems just as cognizant of the connection between current spending and future tax burdens on current non-voters.)

Beyond the above evidence, is the simple fact that the original motivation for the Tea Parties was Rick Santelli's rant. And remember, that rant had nothing to do with marginal tax rates, it had to do with the government spending money bailing out people who were behind on their mortgages.

What do you think, Mr. Samwick? Do you have something you'd like to say to the rest of the class?

Monday, May 25, 2009


Oil Prices Are Rigged? It Just Ain't So!

I explain in the latest Freeman. Excerpt:
Even though oil prices have fallen and quieted the price-conspiracy mongers, you can bet that when prices go up again, they will be back in force. It happened last time. For example, in an article for Time last August, Ari Officer and Garrett Hayes ask, “Are Oil Prices Rigged?”. Our cynical authors—who are Stanford graduate students in financial mathematics and materials science/engineering respectively—answer in the affirmative, but their arguments are shockingly ignorant of how markets work.
(I wrote the response shortly after their article first ran last August, but for various reasons it kept getting pushed back until the present issue.) As if to prove the point, I coincidentally was just reading an article a colleague sent me concerning the latest charges of evil oil speculation.


Does Krugman Know How to Balance a Checkbook?

For a while now, it has been clear that Krugman becomes the anti-economist during a liquidity trap. In this strange alternative universe, government projects coming in under budget are bad, protectionism can be good, imposing costly new mandates on business can jumpstart the economy, and a sudden decision by China to invest in euros instead of Treasury debt can make Americans richer at the expense of Europe.

Yet Krugman has outdone even himself in this latest gem:
Of all the things to worry about in today’s world, the prospect of Social Security shortfalls several decades from now doesn’t rank high on the list. But there’s a whole generation of Very Serious People who think that worrying about entitlements is how they demonstrate their seriousness — while, say, worrying about climate change is hippy-dippy. Indeed, we find the same people who declare that to show how responsible we are we must do something about Social Security RIGHT NOW declaring that saving the planet is, you know, expensive, so let’s not.

If you're like me, you have to calm down after the completely unnecessary "you know," intended to convey just how incredibly stupid and shallow Krugman's opponents are.

Stripped to its essence, I believe the following is what Krugman is saying:

(A) Some people are worried that we're going to go broke trying to pay for Social Security, so we'd better scale back our spending or increase its funding.

(B) These same people are saying we don't have the money to spare right now to throw trillions over the next few decades into a completely new program that won't start paying for itself until after 2075 or so.

(C) What a bunch of morons! How could anybody simultaneously believe (A) and (B)?


Pushing the Analysis Deeper on Social Security

I have been feeling quite smug the last few years, since I knew that the projections of the date at which Social Security "runs out of money" were wildly optimistic. The latest projection is 2036, but that relies on the mythical "trust fund." The true crisis point occurs much earlier, when payroll taxes put in less money in a given year than Social Security recipients are due in payouts. At that point, the Social Security Administrator has to start drawing down the "trust fund," which of course is nothing but a pile of IOUs from the Treasury. Thus, taken as a whole, the federal government will have a higher deficit (because of Social Security) starting at that much earlier date, which the latest forecast puts at 2016--a mere seven years away!

But Robert Wenzel does me one better. The actual crunch is already underway, because the annual surpluses from Social Security are shrinking. (We know that they are projected to fully shrink to zero by 2016.) In a sense, it's as if the Social Security program were a separate country that ran enormous trade surpluses with the US every year since the 1930s, and used the proceeds to invest in US Treasurys. But now--just like China--that country is backing away from purchasing ever more federal debt. Other things equal, as the net additions to the trust fund continue to shrink over the next seven years, the pressure will increase on US interest rates.

If you keep going cross-eyed with he Social Security / Treasury distinction, just drop all of that and realize that the government has a certain flow of revenue coming in, due to both income taxation as well as Social Security taxes, er, contributions. On top of that, the government has a certain flow of spending that it has already committed itself to, in the form of Social Security (and Medicare etc.) payments. As the years pass, the promised flow of payments is rising more quickly than the automatic flow of revenues. Hence, other things equal, the federal budget deficit will rise because of these demographic shifts.

I'll conclude by quoting Wenzel:
Currently, Social Security buys approximately 25% all Treasury securities issued. Who is going to make up for that shortfall, especially since Social Security will not only stop buying, but will be a net liquidator? It's not going to be the other major Treasury security player, the Chinese. They are trying to slow their purchases now. So in addition to the Social Security and Medicare crisis for the elderly, this funding crisis will have a major impact on Treasury funding above the 81% increase in Social Security and Medicare that Bartlett has identified.

That light you see at the end of the tunnel is a train heading toward us, soon you will hear it roar.


Awkward Thoughts on Memorial Day

Yesterday in church I was very uncomfortable. Because it was Memorial Day weekend, and because I am in a pretty conservative area (replete with McCain-Palin and "Nobama" bumper stickers), it was not surprising when the pastor took several minutes to talk about military veterans. I am truly not trying to rile up those who think it entirely appropriate to shower praise on people who fought in various wars, but even so I think it is a very dangerous custom we have in this country.

The first thing that struck me as very odd was the video they showed after the "praise and worship" (i.e. the music in the opening) was over. It had a picture of a fluttering American flag and the words scrolled on the screen to tell us that since 1775, some 1.3 million American soldiers had made the ultimate sacrifice for...(pause)...freedom.

But hang on a second. That number includes the military deaths from both sides of the Civil War (or the War Between the States as many prefer to call it). If you want to say 1.3 million Americans made the ultimate sacrifice because they all thought they were fighting for freedom, OK that's more sensible. But it really doesn't make sense to me, to say that both sides of the Civil War were in fact fighting for freedom. When I was in college and had a bunch of free time, I think I dreamed up some scenarios in which you could have two sides of a huge war both be objectively "in the right." But that clearly wasn't what happened in the United States from 1861-1865. You can argue easily enough that both sides were wrong in a given war (or the Civil War in particular), but it's very hard to say both sides were right.

Then the true awkwardness began. The pastor started by asking if anyone in the congregation had served in the war in Afghanistan or Iraq, and a few guys stood up and everyone of course started clapping. But I couldn't do it, because (a) I was reminded that contrary to the pastor's usage and plain common sense, we technically are not "at war" with anybody right now, nor have we been since 1945, and (b) the official reason given for the invasion of Iraq turned out to be, at best, a gigantic string of mistakes, and at worst, outright lies by our political leaders.

I am not going to hold it against an 18-year-old who signed up for the Army and then doesn't desert his buddies even when (in my opinion) it becomes clear that the institution he is serving is being led either by fools or liars. In fact, alongside with Iraqi civilians who have been killed, I think young American soldiers are among the biggest victims of the deception by our political elite regarding Iraq. Yet even so, I'm not going to clap for the people who participated in a struggle of which Pat Tillman commented, "This war is so f---ing illegal." (I am not here getting into the distinction between Afghanistan and Iraq.)

Those who know me personally, know that I am the furthest thing from confrontational. I was not trying to "make a statement" by refraining from applauding, and in fact I did my best to be "looking around" at all the people standing up so that at worst it would simply look as if I were lazy or spacey. And I must admit that I finally did break down and start clapping when the pastor got to World War II, and one or two real old timers slowly stood up. But for those guys, most of us were clapping just because hey, good job for making it out to church and standing up on your own power! (Also, at least a United States base--not part of the actual country, mind you--was attacked before millions of Americans started killing and dying in World War II.)

It is no coincidence that we have all been trained since birth to pay the utmost homage to people who died while carrying out the government's orders to kill other human beings. Yes, ultimately it is the politicians who decide whether to deploy US forces in a truly defensive way, or whether to instead implement what is, for all intents and purposes, a global American empire. The politicians will never relinquish that tool on their own, unless the American public stops blessing it with cheers and tears, and unless millions of young American men (and now women) stop volunteering to kill for the government.

One last point in this Memorial Day essay: Look at the relative amounts of military expenditures by various world powers. Isn't it just possible that, in addition to the thousand-and-one other things about which you know perfectly well that the politicians have lied to you, that they are lying too about the purpose of the American war machine? You know full well that the government squanders hundreds of billions annually on education and social programs, and it doesn't even achieve its ostensible goals with such profligacy. When 19 guys with box cutters can take down the Twin Towers and hit the Pentagon, at what point do Americans stop reflexively "supporting the troops"?

Military Expenditures, 2007


Correcting Quiggan on Austrian Business Cycle Theory

In today's Mises Daily I defend Austria from the Australian. An excerpt:
I am not here to tell you the Mises-Hayek theory of the business cycle is a work of art that has no flaws. If I said that, then I would be living up to Quiggin's caricature. What I will say is that the Austrian explanation of the boom-bust cycle makes more sense than any other explanation I've seen. In particular, most rival schools of thought say that the way to fix an economy plagued by overconsumption and reckless lending is to have the government borrow obscene amounts of money and to have politicians take over financial accounting. And it's the Austrians who allegedly cling to dogma in the face of overwhelming counterevidence?

UPDATE: Quiggan responds on the Mises blog; I give a half-serious answer.

Sunday, May 24, 2009


The Smugness of a Liberal

Sometimes I really am just taken aback by Paul Krugman's condescension. Look at this, from a post called "Gratuitous Ignorance":
The PEN/New York Review panel discussion on the economy is online. I’ll outsource the discussion of what went down to Brad DeLong. Just this to add: it’s bad enough to have people resurrecting 75-year old fallacies about macroeconomics right in the middle of a crisis in which knowledge is our only defense against catastrophe. What’s really bad, however, is when they do so believing that these fallacies are deep insights that have somehow eluded those of us who have, you know, been studying these issues for a while, and saw some (not all) of this crisis in advance.
If you follow the link, you see that Krugman is referring to a panel discussion in which he was a participant. So he's not talking about random people here, he's talking about people he just had a discussion with! (Someone correct me if I'm misunderstanding what happened.)

I think I need to stop this post now, lest I venture into hypocrisy.


An Amazing Chapter from Deuteronomy

In my (intended) nightly reading of a Bible chapter, I was paying extra special attention to the book Deuteronomy. When Jesus was tempted by Satan, His defense consisted of quoting scripture. And every single quotation came from Deuteronomy! (What's really interesting is that the Devil uses scripture too, by quoting from Psalms.) So if (the person I believe was) the Lord incarnate faces off against the Devil himself, and goes into battle armed with just His knowledge of one seems like a good idea to familiarize myself with that book!

Anyway, there certainly were some very powerful passages in Deuteronomy. However, Chapter 30 really jumped out at me. But in particular check it out starting at verse 11:

11 “For this commandment which I command you today is not too mysterious for you, nor is it far off. 12 It is not in heaven, that you should say, ‘Who will ascend into heaven for us and bring it to us, that we may hear it and do it?’ 13 Nor is it beyond the sea, that you should say, ‘Who will go over the sea for us and bring it to us, that we may hear it and do it?’ 14 But the word is very near you, in your mouth and in your heart, that you may do it.

15 “See, I have set before you today life and good, death and evil, 16 in that I command you today to love the LORD your God, to walk in His ways, and to keep His commandments, His statutes, and His judgments, that you may live and multiply; and the LORD your God will bless you in the land which you go to possess. 17 But if your heart turns away so that you do not hear, and are drawn away, and worship other gods and serve them, 18 I announce to you today that you shall surely perish; you shall not prolong your days in the land which you cross over the Jordan to go in and possess. 19 I call heaven and earth as witnesses today against you, that I have set before you life and death, blessing and cursing; therefore choose life, that both you and your descendants may live; 20 that you may love the LORD your God, that you may obey His voice, and that you may cling to Him, for He is your life and the length of your days; and that you may dwell in the land which the LORD swore to your fathers, to Abraham, Isaac, and Jacob, to give them.”
I don't have too much to say, except a Chris Farleyesque "Wow that was awesome."

Saturday, May 23, 2009


Rachel Maddow Actually Gets It Right On Obama's Newly Claimed Powers

This is indeed spooky, and Maddow nails it. (HT2 Chris Brunner.) President Obama wants to lock people up indefinitely against whom we do not have enough evidence to prosecute, but whom we believe pose a threat to society. He doesn't give too many details, but it sounds like he's saying such people could be held for ten years. Spooooo-ky.


Winners and Losers in the Waxman-Markey Stealth Tax

I was the lead author in this IER blog post. The main thing in this one was to explain (to a first approximation) why handing free allowances to emitters will not lower energy prices, but instead represents a simple transfer of wealth from the general public to the emitters. Here's the meat of it:

It’s difficult for some non-economists to understand why handing back allowances to producers wouldn’t significantly alter energy price increases, but the point is crucial so we’ll walk through it: Suppose the government auctioned off 100 percent of the carbon allowances, and the resulting market price for a ton of emissions was (say) $25. If the government spent all of the auction receipts to pay for universal health care, leaving the burden of the cap and trade system to fall entirely on the energy sector, it is clear that prices for consumers would rise. Ultimately, it wouldn’t be the utilities, but rather their customers, who would foot the bill. Because of the cap on emissions, the costs of producing energy rise, and so the price of electricity for consumers rises as well.

Now suppose instead of spending all of the auction revenues on health care, the government chose to give, say, $10 million to every major electricity producer. Would that push down electricity prices? In general the answer is probably “no.” In order to push down prices, more electricity would need to be produced (because consumers would try to buy more after the price cut). But that means firms would have to use some of their $10 million handout to enter the carbon allowance market and buy the rights to emit more CO2, or to invest in a larger capacity for carbon-free generation, in order to ramp up their operations and sell more electricity (at a lower unit price).

But why would firms use their $10 million handouts in this way? If it made sense to buy more carbon permits (at the going price of $25 each), or to invest in a larger carbon-free capacity, the producers could have relied on private sources of capital to make these changes. But the firms chose not to, because on the margin the $25 price for each ton of carbon emissions made it sensible to scale back their operations. This logic doesn’t change just because the government writes them a check for $10 million (unless the subsidy is somehow tied to market share).

Even though it is counterintuitive, the important point is that even if the allowances are handed out for free to utilities, they still see their costs of production go up because of cap and trade. A coal-fired power plant still “loses” $25 per ton of emissions, because it could choose to scale back operations and sell its allowances into the market at $25 each. The logic is inescapable: the consumers will ultimately pay for cap and trade through higher energy (and other) prices. By giving some of the potential auction revenues to individual firms in the form of free allowances, the government doesn’t thereby prevent price hikes, all it does is lay subsidies to these beneficiaries on top of the other effects of Waxman-Markey.

If you want to divorce yourself from the carbon context, just imagine that you run a grocery store that's been losing money for years. No matter how you advertise or try to cut costs, you check the books and realize that you lose money with every item you sell. So you decide to go out of business and stop the bleeding.

Ah, but that very same day you get notified that your rich uncle died, and left you $100,000. Does that mean you now decide to keep the store open?

Of course not, the logic of your decision is still the same. On the margin, you are poorer by staying in business. Obviously the new information makes you richer--$100,000 richer to be precise--but becoming richer doesn't make you more willing to sell grocery items at a loss.

So it's similar with handing out free allowances to emitters. Unless there are strings attached--e.g. if the number of allowances is based on last year's market share of the electricity market or something like that--then generally speaking handing the allowances to producers will just mean a transfer of wealth to them.

Some producers, such as owners of coal-fired power plants, might still be worse off than under the status quo, but the point is that very few of these free allowances are devoted to protecting the general public. This just shows how naive those people were--and I truly am not implicating any of the readers of the this blog--who agitated for either a cap and trade or a carbon tax with dollar-for-dollar cuts in other taxes.


Glenn Beck Whiffs

Folks, I really do like Glenn Beck, especially when he and Stu (sp?) get into an argument over something absurd and spend 20 minutes analyzing it from 18 vantage points. ("In fairness to General Zod, Glenn, Jor El did condemn him to the Phantom Zone, when Krypton wasn't that far from extinction. That was just unnecessary cruelty. So I think we need to think about that, when we discuss waterboarding.")

But anyway Beck was talking about the growing danger of the Fed, and how the people need to make it accountable. He said something like, "I mean, we don't even know what's on its books. All these Treasurys they've been buying from the government? For all we know, we could force them to open their drawers, and find nothing but a bunch of IOUs."

Swing and a miss.


Fed Official: "Don't Monetize the Debt"

So argues Dallas Fed president Richard Fisher in today's WSJ. Apparently the Chinese have been reading my blog (though from my traffic reports, presumably only 0.00001% of them), because the WSJ reports:

[Fisher] has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."

Although Fisher is pretty cool for a Fed official, this part cracked me up:
He surprises me by siding with the deflation hawks. "I don't think that's the risk right now." Why? One factor influencing his view is the Dallas Fed's "trim mean calculation," which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that "the price increases are less and less. Ex-energy, ex-food, ex-tobacco you've got some mild deflation here and no inflation in the [broader] headline index."

I love how Fed officials take out energy and food prices and then talk about what a great job they're doing in stabilizing "the price level."

Friday, May 22, 2009


Is the IPCC Saying What I Think It's Saying?

(UPDATE below.)

Ever since I tackled Joe Romm's argument (in which he is just reproducing the IPCC's own statement) of how "cheap" it will be to stabilize greenhouse gas (GHG) emissions at safe(r) levels, I have been trying to dig up the IPCC's estimates of future GDP losses from climate change in the absence of new government policies.

You see, the trick the IPCC used to downplay the cost of the policies, was to convert large future reductions in the level of GDP (relative to baseline) into a lower annualized growth rate. So for example, the high-end estimates are that GDP in 2050 will be up to 5.5% lower because of policies that governments put in place to curb GHG emissions. But that works out (at the time of the IPCC AR4 report) to only a 0.12% reduction in annual GDP growth, which doesn't seem like a big deal. Who but shareholders of Big Coal would object to that?

So what I wanted to do was the same trick. Even the really scary projections of huge damages from business-as-usual don't kick in until after 2100. So for example, let's say that if we continue on our suicidal path, that global GDP in the year 2150 is 50% lower than it would be, if there were no such thing as the greenhouse effect. (Well, if there were no greenhouse effect we'd all freeze I think, but you get what I'm saying.)

OK now that's pretty severe; I'm considering a scenario where literally half of the entire earth's productive capacity is destroyed because of our destructive emissions. Now it's true, some of the possible damages are unquantifiable; but if we're going to go through the farce of a cost/benefit analysis, then we have to come up with a number. So to repeat, I don't think I'm being a "denier" or a "skeptic" by discussing a case in which half of global GDP gets wiped out by 2150.

Yet using the IPCC trick, that works out to only a 0.5 percentage point reduction in growth rates. For example, if real GDP would have grown at 3% annually in the absence of climate damage from unrestrained emissions, then the "inconvenient truth" of anthropogenic global warming means real GDP will grow only at an annualized rate of 2.5% between now and 2150. Over that course of time, the gap between the two GDP series will have grown to 50%.

So even in this fairly nightmarish scenario, it means that someone who earns $10,000 per year today, would earn "only" $325,000 per year, in 2150. (Actually it's less because of population growth, but you get the idea.) In contrast, were it not for the inconvenient truth of climate change, this representative person would be earning twice as much, i.e. $646,000 per year, in 2150. (My spreadsheet is rounding the numbers.) It is to avoid the nightmare scenario of condemning our great-great-...-great-grandchildren to earning only $325,000 per year, that we must immediately hand over the energy sector to the federal government.


But I digress. As you can see from the discussion above, it would take some pretty fantastic projections of GDP losses in the distant future, in order to make immediate action seem necessary for any cost/benefit test that isn't completely rigged. (By completely rigged, I mean one that says, "The risks of doing nothing are essentially infinite, so any mitigation policy is justified.")

Yet I was having real trouble finding the IPCC's numbers. I know what Nordhaus' DICE model says, but that's because I've been studying his model thoroughly. In contrast, I hadn't examined the Second Working Group report of the AR4; I had focused mainly on WGI's discussion of the physical science of climate change.

But look what I just stumbled upon, from the overall Synthesis of the AR4. This comes from the 3rd last paragraph in the entire summary [.pdf]. Is this saying what I think it's saying? Seriously, those of you who are big fans of the IPCC--or at least, who think that the "deniers" and "skeptics" are making mountains out of molehills--please explain the following paragraph.
Limited and early analytical results from integrated analyses of the costs and benefits of mitigation indicate that they are broadly comparable in magnitude, but do not as yet permit an unambiguous determination of an emissions pathway or stabilisation level where benefits exceed costs.

I think we can all see now why Joe Romm et al. are taking such pains to ridicule the very notion of applying a cost/benefit test to climate policies.

UPDATE: OK I think that the IPCC statement really is poorly worded. I just waded through Chapter 3 of the AR4 Working Group III book, and I didn't see anything about comparing abatement costs with the benefits of avoided climate damage. (Nordhaus does this very clearly in his book discussion [.pdf] of the latest DICE model results.) What I did see was a discussion showing that the range of estimated prices for carbon emissions (under various policies like cap and trade) roughly overlapped with the estimated values of the "social cost" of carbon emissions.

I'll post more on this stuff later in the week, but for now let me just say that this isn't at all what the quotation above is saying. In the absence of enforcement costs and other frictions, the optimal policy would set the price of emitting a ton of carbon equal to its social cost. But even though this would equate the (marginal private) cost with the (marginal social) benefit, it's not true to say the "costs and benefits" of this policy are the same. On the contrary, there would be large net benefits because emitters would scale back their output of GHGs to the socially optimal point.

Rereading the IPCC quotation, I am still not sure what's going on. Surely they wouldn't have let some non-economist write the summary, right? And yet, they are clearly saying that the policies don't yield net benefits. Hmmmm.


The Tea Parties Weren't Protesting Higher Spending?!

Brad DeLong links (with apparent approval) to Andrew Samwick's criticism of the "Tea Party" protestors. Here's Samwick:
At moments like this, we go back to Milton Friedman's adage, "To spend is to tax." I cannot really come up with a better word than juvenile for the tea parties -- don't protest the taxes unless you can identify the specific cuts in expenditures that you would make to bring the budget into balance. If you think taxes are bad, then you should think deficits are worse, because they raise the taxes of people who were not represented in the decisions to spend the money.

That's the real lesson from the Revolutionary War period that should be drawn. And the danger for the Libertarians is that if they don't put the reduction in expenditures ahead of the reduction in taxes on their agenda, they are destined for another abusive relationship down the road.
This is rich. First and foremost, the Tea Party protests were complaining about spending, not taxes. Samwick wants them to identify "the specific cuts in expenditures"? Did he read their signs--the ones that said "End the Bailouts" and "Let Wall Street Fail"? Do Samwick and DeLong not remember the inventor of the idea? It was Rick Santelli, who was protesting not marginal tax rate hikes, but bailouts for people who couldn't make their mortgage payments!

If my only points were the above, I wouldn't have even blinked when reading DeLong's post, quoting Samwick. But what makes this amazing is that I recall quite vividly some very smug reporter interviewing some hickish guy at one of the Tea Parties. The reporter (I think a woman but not sure) said something like, "How can you call this a tax protest when the president is going to cut most people's taxes?" And the guy was momentarily stumped, but then he said, "It's the spending! Those taxes will go up to pay for all this!" (BTW I may be botching the letter of these quotes, but this was 100% the spirit of the exchange.) I think I may have seen this clip during Daily Show mocking, or perhaps Rachael Maddow / Keith Olbermann. Those are the only things I ever watch (in brief snippets over the Internet; I don't have a mind-destroying box in my house). But the tenor was definitely, "Ha ha look at these racist idiots. When faced with the undeniable fact that their taxes are going down, they grasp at the straw of some hypothetical connection between current spending and future taxes."

And now they are being mocked for the exact opposite reason.

Reader Contest: If anyone can find either (a) the video that I am referring to above or (b) Brad DeLong linking with approval to anyone making the same point, I will send him or her a signed copy of my new book. (I have to get rid of these things somehow.)


Freedom Fest: I'll See You in Vegas

It is confirmed: I am speaking at this year's Freedom Fest on Saturday July 11. Here is the tentative schedule [.pdf]; other stuff might change but Mark Skousen assures me my time slot will not.

Note that if you buy a signed copy of my book, it doesn't have to stay in Vegas.


President Nationalizes More Companies

You thought I was talking about Obama, right? Nope, this time I was talking about Hugo Chavez. According to CNBC, such moves are to "spread socialism" when they are conducted by foreign leaders.

Now you might say, "C'mon, Chavez openly boasts of the benefits of socialism, unlike Obama who gives lip service to capitalism. So the CNBC article isn't treating the two differently."

Really? The article also tells us, "Chavez's government has nationalized major steel, cement, electricity, telecommunications and oil projects since 2006 in a bid to expand the reach of the state."

I seriously doubt Chavez told his subjects, "I am doing this to expand the reach of the state." I bet he justifies it instead through reducing reliance on foreign imports, protecting the country from speculators, blah blah blah.

Has anyone seen a CNBC article talk about the TARP-to-common-stock flip as a "bid by Obama to expand the reach of the state"? It clearly is, just as clearly as what Chavez is doing.

But no, whether it's torturing prisoners or nationalizing companies, things are far less sinister when done by American officials. When it comes to our own government, the absolute worst that can ever happen is that they screw up, and end up hurting the very people they were so desperately trying to help.

Thursday, May 21, 2009


Elizabeth Edwards: President of United Health Care Made Almost $3 Billion a Few Years Ago

Check out the clip below of Elizabeth Edwards on the Daily Show. Start it around the 3:00 mark. She is a policy fellow at the Center for American Progress, where she works on health care reform. In the clip, she says that a few years ago, the president of United Health Care earned so much money, that it worked out to 1 out of every 700 dollars spent in the country on health care. The audience gasped.

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So I turned to my trusty Google, and found that in 2005, health care expenditures in the US were "almost" $2 trillion. So if the president of United Health Care pulled down 1/7ooth of that, he earned about $2.9 billion. Really?

Presumably Mrs. Edwards can come up with some subset of health care expenditures to make her claim accurate. But you know, I'm not sure how. I tried googling "elizabeth edwards president united health care" thinking that somebody would have justified / blew up her absurd claim. This site deals with it, and says "Indeed..." and goes on to point out that some CEOs made upwards of $11 million each.

Soooo, do these writers think that total health care expenditures in any recent year were only $11 million x 700 = $7.7 billion? Off the top of my head, that sounds more like what Americans spend on over the counter medicines, not "health care" in general.

It seems like the policy fellows at Center for American Progress need a remedial course in arithmetic.


Glenn Greenwald Asks: "Is there anything the Right isn't afraid of?"

This was an aspect of the debate over Guantanamo prisoners that I hadn't considered:

The "debate" over all the bad and scary things that will happen if Obama closes Guantanamo and we then incarcerate those detainees in American prisons is so painfully stupid even by the standards of our political discourse that it's hard to put into words...
And the money quote:
Rather than scoff at the inane fear-mongering or point out simple facts to reveal its idiocy, Democratic "leaders" such as Harry Reid echo the right-wing fears in order to prove how Serious and Tough they are -- in our political debates, the more frightened one is, the more Serious and Tough one is -- and/or because they are genuinely frightened of being called mean names by Sean Hannity ("Harry Reid isn't as scared of this as I am, which shows that he's weak");

I listen to portions of Rush, Hannity, and Glenn Beck probably 4 times a week, and I don't think I have ever heard any of them even once give even a nod to the possibility that any of the people being held at "Club Gitmo" might be innocent. It would be unfair to say, "Apparently they think that just because some Marines grabbed a guy, he therefore is a terrorist," because their train of thought never even gets in the same ZIP code as that type of thought. It's possible that it never even occurred to them to wonder.


EDF Summarizes Bastiat in One Picture

Dan Kish sends along this handsome graphic from the Environmental Defense Fund:

They should put this on the paper placemats at Cracker Barrel and ask, "Kids, can you find millions of things missing in the above picture?"


Human Events Review of the PIG to the Great Depression (and some other books too)

Elizabeth Kantor offers her readers some choice book reviews, including:

As we wait on tenterhooks to learn whether Washington’s feckless and free-spending politicians will manage to turn this recession into a Greater Depression (or possibly a Weimar-style hyperinflation), or if we’ll escape with only a few years of Carter-era stagflation, it’s a good time to take a new look at lessons from the financial crises of the past. Robert Murphy has a warning for the Obama Administration: Don’t try another New Deal -- or we may end up with another Great Depression.

The Great Depression and the New Deal make a perfect topic for the Politically Incorrect Guide series. It’s difficult to think of another historical period that’s more misunderstood and mistaught. If Americans know anything about the period, they “know” that FDR’s radical interventions in the economy pulled us out of the Depression. And yet, as Murphy demonstrates, the Depression is called Great precisely because it lasted longer than any other depression in American history -- thanks to Roosevelt’s unprecedented attempts to resolve it by government action.

The Politically Incorrect Guide to the [Great Depression and the New Deal] is worth reading for the period quotations alone. Murphy quotes Lionel Robbins, a 1934 economist whose critique of government policies in response to the 1929 crash would seem to apply today: “We prefer the lingering disease … the efforts of central banks and governments have been directed to propping up bad business positions.” Hoover and Roosevelt wouldn’t follow Andrew Mellon’s excellent advice, and neither did Bush nor will Obama, but it’s good to be reminded that clear-thinking people then, as now, saw that necessary bankruptcies, not bailouts, are the way forward to a healthy economy: “It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”

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