OK I'm getting bugged clicking on the same old list. I need to find a new place where the kids are hip.

Regular Free Advice readers have a good sense of my tastes, sense of humor, and so forth. If you could name just one blog that you think I should be checking daily, what is it?

I'm so conservative I probably wouldn't have risked it all on the Daily Double... Duh.



(Every econoblogger is featuring this, but I think I saw it first from Boettke. And this is the reference in my post title. UPDATE: I just noticed a mistake at around 4:22 in the Cheers clip. Amateurs.)

Jeff Hummel passes along this op ed by William Shugart on daylight saving:

Although daylight-saving time was sold politically as an energy-conservation measure, it does no such thing. Studies conducted in Indiana prior to 2006, when that state operated under three different time regimes, show either no difference in energy consumption or a small increase in power usage during the months after clocks were moved one hour ahead.
...
Yet the costs of switching between daylight-saving and standard time go far beyond the hassles of “losing” an hour in the springtime and “gaining” it back in the fall.
...
A Swedish study...reports increases in the incidence of myocardial infarction (heart attack) after the beginning of daylight-saving time and the subsequent return to standard time. Depending on whether the shift occurred in the fall or spring, men and women were found to vary in the extent to which their heart attack risks were increased, but the study's authors concluded from the clinical evidence that time change triggered more myocardial infarctions in the two groups overall than they would have suffered otherwise.
...
It would be cold comfort were only a small fraction of the population subject to the untoward health consequences of time shifting. That is because, as the Swedish study notes, more than 1.5 billion people around the globe are exposed to the transitions demanded of them at the beginning and ending of daylight-saving time. Many of the companies located overseas that provide technical support or other services to U.S. businesses operate on New York time. Workers in Manila, Mumbai and elsewhere therefore must adjust their clocks twice a year even if their own nations have not officially adopted the institution of what in some places is called summer time.
...
Adding to the bill, some students of daylight-saving time suggest that accidents involving pedestrians spike immediately after the return to standard time as well, because drivers have not yet adjusted to commuting home in the dark.

There are few, if any, measurable benefits from switching to daylight-saving time in the spring and back to standard time at the end of October. But time shifting imposes some very real costs.

Those costs, we now suspect, are not limited to feeling out of sorts temporarily or investing effort in adjusting clocks rather than doing something more enjoyable or productive. The twice-a-year ritual of time travel actually kills.

I cannot prove it, and I suspect no one ever will, but I think the primary reason for the "daylight saving" nonsense is that it reinforces the notion that the State is omnipotent.

"We are the government. We certify your birth, marriage, and death. Any amount of the paycheck with your name on it, that you get to keep, is a 'tax expenditure' on our part. If you fail to pay sufficient property taxes--the amount being decided by us, not you--then we take our rightful property away from you. We are the State. You don't even know what time it is until we tell you."

When I give a talk somewhere, I don't want to carry a bunch of books on me, so I just buy some directly from the publisher and have them shipped to the site. Of course I err on the side of optimism (better to come back with extra books rather than turn people away empty-handed), which means that over time I accumulate a bunch of inventory.

Consequently, while supplies last, I will sign and ship either of my Politically Incorrect Guides (see links in the left margin) for $15 plus shipping. Note that that's only a buck more than Amazon charges for the Great Depression book, and my signature has gotta be worth at least $2.50.

Like I said, this is "while supplies last," since I'm just trying to clean out my inventory, rather than start a side business exploiting my author's discount. If you are interested, send me an email with "PIG Order" in the subject line, and I'll let you know if I still have any in stock. (I have a lot more Depression ones than Capitalism ones.)

Makes a great holiday gift!

In preparation for an op ed, I spent a half hour Saturday morning playing with the interactive map at the most transparent administration in history's Recovery.org website. As of Halloween, here are some of the regional breakdowns in terms of stimulus money awarded, received, and jobs saved (according to the recipients). Of course these figures of jobs saved are themselves bogus, but even on their own terms:

Region.....Awarded...Received...Jobs
======================================
D.C........$2.8b.....$209m......2,274
Idaho......$1.2b.....$246m......2,103
Texas......$10.7b....$1.8b......19,572


If you use trusty division, you find that the District of Columbia has "created or saved" jobs at a cost of $1.2 million per job (using the Awarded figure) or $92k using the Received figure.

Idaho takes the cake (at least of the states I checked) on the Received end, where each job created or saved cost $117k of stimulus awards actually received.

Oops. I went off the handle on Tyler Cowen and Bryan Caplan because of their over-the-top denunciations of Michael Chabon's decision to get his son circumcised. In particular, I couldn't believe Bryan described reading the section as seeing "the face of evil."

Well, I just read the relevant chapter last night, and yeah, I see what Bryan is saying. Chabon and his wife really do think it is nothing but pointless genital mutilation deriving from an absurd tradition, and basically (my interpretation) Chabon goes ahead with it because his self-loathing doesn't give him the confidence to take a stand.

(BTW I really like the first four chapters of the book so far. I think Chabon has the amazing ability of grabbing on to an insight about society and then really drawing out its implications with an incredible but not affected vocabulary.)

I guess the next time I want to mock GMU professors, I should study this and this.*


* In case you're clicking those links past Halloween 2009, I should explain that the site Cheeptalk is "dressing up" as MarginalRevolution. If my rudimentary understanding of the intertubes is right, in the future when they republish their site, the above posts will have the same content but will no longer look like MR.

I'm sure this is quite dated but if you don't have a TV, it's new to you too... (HT2 Thinklings)

Krugman had been bashing gold for a while, so I rushed to its defense. Wherever there is a commodity in distress, I'll be there.

I'm not going to get the wording exactly right, but at the bottom of the hour the AM news break featured a reporter saying something like this:

A new study shows that women in Tennessee are having a hard time getting insurance because...they're women. The study put out by Blah Blah Blah found that women in the 25-xx age bracket who don't smoke, pay higher health insurance premiums than men in the same age bracket who do smoke. The higher premiums mean that many women simply go without health insurance.

The study also found that men are affected too. In the 55 and older age bracket, men pay higher health insurance premiums than women with the same medical history.

Did you like the part I put in bold as much as I did? Both men and women are charged discriminatory insurance premiums because of their sex. Incredible!

Either that, or there's some reason that women in their late 20s tend to have higher medical bills than men of the same age. I can't think of any biological difference though that could explain this discrepancy. And as for the men, I'm puzzled too. It's not like they die earlier than women.

As is my wont, I was listening to Rush Limbaugh today as I ate my Arby's sandwich. (I always get the Market Fresh ones; my body is a temple.) He was complaining about some news story in which the Obama administration's claimed 30,000 jobs "created or saved" by some stimulus spending turned out to be inflated by at least 5,000. (I think the GAO did an audit of the claim, but I could be mistaken.)

So then Rush starts wondering aloud how many jobs he could have created with a trillion dollars. (His answer was two: He'd pay himself all but $100,000, and then hire an assistant.)

This got me thinking: How many people are unemployed right now? The BLS says 15.1 million. I know that's a bogus figure, but I'm just making a point here. (In any event the number would have been lower back in January when they were debating the stimulus.)

If the government had taken the $787 billion "stimulus" package and just written checks to all 15.1 million of the officially unemployed, that works out to $52,000 per person. So the government could have literally provided every single one of them a nicely paying job for a full year. The official unemployment rate right now would be 0%, instead of 9.8%.

I'm actually not criticizing the government right here. Instead, my target is Paul Krugman. How in the heck can he have such a messed up system, where he thinks $787 billion is woefully inadequate to restore full employment? I'm not relying on any multipliers in the above--I just showed you could overnight restore full employment by spending $787 billion.

Am I missing something here? I know, I know, in the world of the Keynesian model and Okun's Law, blah blah blah. Part of my point is that that analysis can't possibly be right. Why would it take a lot more money to "restore full employment" than it would take to restore full employment?

Author Michael Chabon has apparently written a horrifying work of nonfiction. Here's Tyler Cowen's blurb about the book: "I ended up enjoying this more than I do his trendy fiction. This supposed paean to family life collapses quickly into narcissism, but that's in fact what makes it work. I was surprised but not shocked by the part where he deliberately tortures his infant son."

Hmm that's a rather surprising statement, don't you think? Maybe Chabon had to do it to avoid even more torture by the FDIC?

Anyway Bryan Caplan is even more appalled: "It was only when I was reading Michael Chabon's latest, Manhood for Amateurs, that I saw the face of evil..."

You know what they're talking about, right? Chabon had his kid circumcised. And rather than doing it without a moment's thought, he reflected upon it a lot, and then did it anyway.

Full disclosure: My wife and I decided not to get our son circumcised, for the obvious reasons that any decent GMU professor could give.

Another disclosure: As all who saw that B-movie from 2001 know, I am circumcised. I don't consider my Catholic parents sadistic religious torturers.

Final disclosure: The above statement is obviously a joke. That movie was an artistic masterpiece.

...or something like that. I have a similar tale involving a ladder, near-death, and utter stupidity.

My last year at NYU, I lived upstairs in my grandma's house in Copiague. I was out late drinking and being a hooligan (as all economics PhD students do) and then had to ride the Long Island Railroad for 2 hours to get home. Consequently it had to be at least 3 am when I walked up to my grandma's front door.

Alas, my uncle also lived there, and when he had gotten back from his night shift, he had locked not only the main door, but the outer screen door as well. (He didn't realize I was still out.) I only had a key to the main door.

So not wanting to wake anybody at 3 am or whatever time it was, I decided to be a ninja. My uncle's day job was owning a roofing company, so he had a bunch of ladders in the back yard, and there was a deck off the second-floor bedroom where I stayed.

So I put the ladder in place, and then start climbing. However, the grass was dewy and I was wearing sandals. (It was the summer I think when this happened.) I get up to the top, and I just have to climb over the rail of the deck. So I grab one of the little slats (leading from the floor of the deck up to the chest-level handrail) with my left hand, the main handrail with my right hand, and I get ready to really heave my manly self up and over.

But just as I'm giving it the old grad-school try, the whole left slat comes out. So I'm standing on top of the ladder, staring at this thing in my hand, completely unconnected to the deck that I just ripped it from. I must have panicked since that was the last thing in the world I was expecting to happen, and then my feet slid forward a tiny bit but enough for me to fall.

I don't know if I can really describe it in a blog post, but realize that the ladder was still propped up against the second-story deck at an angle, and I had been standing on the 3rd or so rung from the top of the ladder. So my whole body just scooted forward an inch or so, allowing me to fall straight down about three feet until my butt hit a ladder rung.

Then the whole ladder came down, and me with it. As I was falling I must have slowed things down by grabbing for the deck, because later on I noticed my right forearm was all scraped.

After the huge crash, I was on the ground sitting on the ladder. Not only was I unscathed (except for my forearm), but my bad back was totally cured.

It wasn't until the next day that it really struck me how lucky I was. My legs were intertwined in the rungs of the ladder as I was falling. I could have easily snapped an ankle or worse.

As a religious person I have no problem saying angels saved me. If you prefer, you can thank a statistically improbably original configuration of molecules.

The 3q GDP numbers are out, and Robert Wenzel lets his readers know who the better economic forecaster is:

Gross domestic product grew at a 3.5 percent annual rate in 3Q.

This does not surprise me. In fact, I have a bet with Bob Murphy, made in January, that it would. This is what I wrote in January when most economists were saying that the GDP wouldn't turn positive until 2010:

...my whole point right along has been that the government will maneuver to make the official data look good. The real economy will be a mess.

Murphy predicts that there will be no net growth in real GDP during 2009. Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009

So there you have it, GDP is up and the economy is a mess. Again, I issue the challenge to find me any other economist that said the economy would be up AND a mess.

Now that was very considerate of Wenzel to open up the quote from his January post with an ellipsis. Wouldn't want to tax his busy readers with irrelevant details. But since Free Advice readers are not day traders making split second decisions, I will give you the full quote and you can see where Wenzel decided to pick it up in the excerpt above:

Bob Murphy has responded to my latest comments regarding our differing views on the direction of the economy.

I continue to believe that Bernanke's huge money drops will impact the economy to the degree that the official unemployment rate in 12 months will be lower than it is right now. Murphy expects the exact opposite. I note that Murphy expects some of the positive employment to come from the flaky government "stimulus" programs. I concur that it is questionable that the private sector employment label should be applied, if, say, it is "...a new job making solar panels...if it's dependent on massive subsidies." But, my whole point right along has been that the government will maneuver to make the official data look good. The real economy will be a mess.

Murphy predicts that there will be no net growth in real GDP during 2009. Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009.

So to summarize:

(1) Wenzel predicted in early January that Bernanke's huge money drops would mean lower unemployment in 12 months than at the time, contradicting my prediction of higher unemployment in 12 months. Then Wenzel went on to disagree with my prediction of negative GDP growth for 2009 as a whole.

(2) Three months after Wenzel wrote that, Bernanke stopped pumping in new money. The reason I know this is that Wenzel hasn't shut up about it since that time. (And good for him, because it's important and he was the first person who made me realize that "inflating Bernanke" was no longer our situation.)

(3) Unemployment has continually risen.

(4) Official 3Q GDP is in fact positive. However, if I'm reading these figures right--and I confess I might not be--it's not even close that total real GDP in 2009 will be lower than in 2008. Furthermore, 4q GDP would have to be 5% higher than 3Q GDP (when they are at annualized rates) in order for 2009 GDP to be higher than 4 x 4Q 2008 GDP. (Again, I might be getting mixed up; it's tricky to do these calculations with annualized quarterly figures.) So assuming I set that calculation up correctly, I still think I'm on track to having a correct GDP call, and Wenzel is on track to being wrong.

(5) Wenzel quotes the one part of his January post where we discussed GDP growth, and leads his readers to believe he blew me up. He leaves out the part where the whole premise of his prediction was Bernanke's money growth (which was choked off back in March) and he leaves out the first bone of contention he picked with me, namely the unemployment rate, which is surely a much more important element of the "official data" that you would think the government would manipulate to keep the masses happy.

Conclusion: I pick on Wenzel a lot because the lad has promise. (In contrast, I pick on Paul Krugman a lot because his work is evil and everyone reads him.) I also am very conscious of the ability of economic forecasters to give a very selective interpretation of their previous writings, in order to paint a flattering picture of their prowess to their readers.

Let me be clear, I totally missed the ball on price inflation in 2009. Part of what happened is that I (and I think Wenzel) assumed back in January that Bernanke was going to keep the monetary floodgates open. Had that happened, I think my price inflation call would have come true, while it's possible that official GDP stats would have upset me, if only because it gives the BLS statisticians more to play with when prices are rising across the board.

In my new post at MasterResource, I give the background on Superfreakonomics and then defend Levitt from Brad DeLong's claims that his views are "just not economics." An excerpt:

DeLong is right, what Levitt said is “not economics.” Rather, it’s a historical claim. Maybe it’s right, maybe it’s wrong, but DeLong can’t trump it by citing a tautology from microeconomics. I am sure that Levitt would concede the narrow point, that if governments around the world instituted a massive carbon tax, and enforced it with draconian penalties for evasion, then global emissions would indeed fall quickly.

But one of Levitt’s main points is that governments around the world are not going to do this, that it is naive to expect them to sacrifice their own economies when (in Levitt’s opinion) the climate science is not nearly certain enough to justify this painful step. Levitt is making a prediction–based on his interpretation of history–that if manmade global warming really does require drastic measures in the next few decades, that the response will involve various forms of geoengineering, which (Levitt predicts) will cost a tiny fraction of what the carbon mitigation proposals would require. To repeat, I’m not saying I necessarily endorse Levitt’s glib proclamations on these points, but DeLong is wrong for dismissing them as somehow “not economics.”

This morning I had an email from Steve Landsburg in my inbox. I thought that he was either inviting me to co-author a book with him, or wanted to tell me he was using my PIG to Capitalism as the main textbook in his graduate classes.

Turns out it was an automatic message letting me know about his new blog. The top post right now showcases a ludicrous excerpt from Richard Dawkins, which I reproduce below, followed by Landsburg's response. (And yes, I know there are plenty of evangelicals who say similarly ridiculous things about evolution. But Dawkins is supposed to be the expert who knows what he's talking about.)

[Dawkins:] Where does [Darwinian evolution] leave God? The kindest thing to say is that it leaves him with nothing to do, and no achievements that might attract our praise, our worship or our fear. Evolution is God’s redundancy notice, his pink slip. But we have to go further. A complex creative intelligence with nothing to do is not just redundant. A divine designer is all but ruled out by the consideration that he must be at least as complex as the entities he was wheeled out to explain. God is not dead. He was never alive in the first place.

[Landsburg:] But Darwinian evolution can’t replace God, because Darwinian evolution (at best) explains life, and explaining life was never the hard part. The Big Question is not: Why is there life? The Big Question is: Why is there anything? Explaining life does not count as explaining the Universe.

From then on, I don't agree with Landsburg's overall conclusion, since he too is an atheist it seems.

I would have to think about it more, but it's possible Landsburg is making the same type of mistake Dawkins is. In other words, Dawkins knows a heck of a lot about the workings of evolution, and somehow concludes that the process rules out God. Landsburg, in contrast, is actually more of a mathematician than an economist (I'm not knocking him--someone at the U of R told me he just teaches the math classes), and he ends up concluding that the existence of mathematics makes God unnecessary.

Thus far I haven't heard Paul Krugman say that comparative advantage proves Jesus couldn't have been perfect and hence wasn't God, but it wouldn't shock me at this point.

I decided to check in on Patri Friedman and The Seasteading Institute. I'm very excited for them to actually get a floating residence up and running in international waters. I think the oceans will be the frontier of the 21st century.

Anyway here is their one-year report [.pdf] from last April. They opened up shop in April 2008 largely fueled by a $500,000 grant from Peter Thiel. Friedman predicts that within 5 years there will be at least 10--and possibly hundreds of--full-time residents on "Ephemerisle."

Since I'm really hoping that this thing pans out, I read the opening letter from Friedman looking for concrete achievements. Besides media hits, new donors, etc. (all crucial of course), he reported:

On the technical front, we have finished and applied for a patent our first seasteading 368K ft^2 spar platform resort for 200 guests at a cost of about $300 per square foot. This confirms our initial thesis that new land can be built for less than the cost of Silicon Valley estate. In addition, the community has experimented with smaller structure designs.

Let's just hope they applied for the patent in self-defense. I don't know that I could live on a floating anarchist utopia that was propped up by IP laws.

Aristos passes on this neat trick:

(1) Go to Google.

(2) Type in "Location of Chuck Norris"

(3) Click "I'm Feeling Lucky."

Now my question for the internet geeks in the crowd: Did it take a while for this page to become the top hit and for the joke to work? Or were there just not that many hits in the first place for "location of Chuck Norris"?

Many states have "three strikes" laws, where you have to do serve huge mandatory prison sentences once you're convicted of your third felony. The rationale for such a rule is obvious: "Liberal activist judges" weren't obeying the law, and were letting repeat offenders back on the streets after a slap on the wrist. Lock those rapists and murderers up and throw away the key! And pass me the red meat.

The problem is that there are all sorts of felonious crimes that really aren't so awful in the grand scheme of things. For example, some kids brought in smoke bombs for high school graduation and that was one strike right there.

NPR is doing a series on California's "three strikes" rule, passed fifteen years ago. (My understanding is that California is the only state in which the "third strike" need not be violent. However, I believe that in all the states, the first two strikes need not be violent.) Anyway, check out this case:

[Sue Reams'] son Shane is in prison, doing 25 years to life for being with a friend when the friend sold $20 worth of cocaine to an undercover cop.

"They considered my son the lookout," Reams says.

And that was Shane's third strike. He's one of 3,000 people doing 25 years to life for nonviolent crimes, such as shoplifting, auto theft or possessing small amounts of drugs. And each of those prisoners costs the state more than $48,000 a year.

Shane's third strike came about partly because of a decision his mother made years before when she noticed some things missing from her house — her husband's antique model cars, money, jewelry.

She figured that Shane took the stuff to get money for drugs. He'd had a problem with that since his teens. And Reams tried to deal with it by practicing tough love.

"Tough love tells you that you take a stand," she says. "So I, I took a stand."

And she called the police. Shane had also stolen some stuff from a neighbor's house and Reams persuaded her neighbor to press charges as well. Then she gave Shane the news.

"And I said, 'You need to turn yourself in, maybe you'll get a drug program. You need a drug program,' " she says. "I drove him to the Irvine Police Department and he went in and told them what he had done."

But instead of getting a drug program, Shane was charged with two counts of residential burglary. He did some time in prison. And years later, when he got picked up on that drug charge, the burglary convictions counted as his first two strikes.

"I'm angry with myself," Reams says. "I feel terribly guilty. I guess that's why I've worked so long to try and change the law."

If you go read the story, you can see the viewpoint of the people who support the law, including the guy whose daughter was shot and killed by a repeat offender, and who made a deathbed promise to her that he would do everything he could to change the system and make sure her fate didn't happen to other kids.

This is just another classic example of why GOVERNMENT MONOPOLIES ARE AWFUL. The government doesn't keep murderers and child molesters locked up, and then to "fix" that mistake the government gives minor criminals sentences of 25-to-life.

We wouldn't dream of letting the government run restaurants or computer companies. So why do we trust them with protecting society from violent criminals?

If you are open-minded but can't imagine any other way, try this [.pdf].

I realize most of you have already heard about this, but in case it's news to you: Try to decipher the hidden message in Ahnold's veto letter.

=================================
To the Members of the California State Assembly:

I am returning Assembly Bill 1176 without my signature.

For some time now I have lamented the fact that major issues are overlooked while many
unnecessary bills come to me for consideration. Water reform, prison reform, and health
care are major issues my Administration has brought to the table, but the Legislature just
kicks the can down the alley.

Yet another legislative year has come and gone without the major reforms Californians
overwhelmingly deserve. In light of this, and after careful consideration, I believe it is
unnecessary to sign this measure at this time.

Sincerely,

Arnold Schwarzenegger
=================================

If you can't figure it out, read this.

Full details here. An excerpt:

Prizes:

* The overall winner of the Essay Contest will receive a cash prize of $5000.
* Two additional prizes of $1000 each will be given to outstanding essays written by junior faculty, graduate students, or policy writers.
* Three additional prizes of $500 each will be given to outstanding essays written by undergraduate students.

Deadline: November 24, 2009

Essay Topics:

* “Money and the Free Society: Can Money Exist Outside of the State?”
* “The Ethical Implications of Monetary Manipulation”
* “Monetary Policy and the Rule of Law in the United States”

I'm sure you are wondering about the following two issues:

(1) No I will not be entering.

(2) No I don't think the prizes will be paid in sound money.

Since I'm so busy lately I have switched to just reproducing things I write for work. Lower overhead means lower costs; I pass the savings on to you.

I was giving someone a quick reaction to the EPA's analysis of S. 1733, the Senate version (sponsored by Barbara Boxer and John Kerry) of cap-and-trade. (It is companion to the Waxman-Markey bill passed the day Michael Jackson died.)

I just love how I don't need to go to the Heritage Foundation to make my points; I can comb through the government analyses to show that the impacts are much higher than the media is reporting:

My understanding is that the EPA did not do a separate economic
analysis of S. 1733, because its cap-and-trade provisions are so
similar to H.R. 2454. One important difference is that the Senate bill
would require a bigger cut in emissions by 2020 (20% cut versus 17%
cut in House bill), but from 2030-2050 the emission targets are the
same. So that means the economic impacts from the Senate bill would be
higher in the early stages.

Since the EPA is using the same economic impact estimates, I'll just
repeat what we have said about the EPA (and CBO) analyses of HR 2454:

* The low dollar amounts per year ("postage stamp per day") are
reported only for the early years, like 2020, when the emission
cutbacks aren't too severe. When it comes to the impact in 2050, the
figures usually switch to % losses in "household purchasing power,"
because if they showed the absolute dollar loss, it would sound far
from negligible. For example, in Table 4 (page 17) of the EPA analysis [.pdf]
of S. 1733, they reproduce their cost impact for HR 2454. The
"undiscounted household consumption loss" for the year 2050 is
reported as a range of $2.50 - $3.52 per day. (That's an expensive
postage stamp.) Taking the midpoint, that works out to almost $1100
per year in forfeited household consumption. But I have never heard
such a figure being reported in the media as the "EPA estimate of the
impact of Waxman-Markey." They report the yearly figures for the year
2020, when the Waxman-Markey cut is 17%, and don't report the gross
dollar amount for the year 2050, when the emission cut is 83%.

Don't worry, kids, Big Ben constantly assures us he has all the tools he needs to withdraw any excess liquidity when the time is right. And if you can't trust the Federal Reserve chairman, who(m) can you trust?

From Krugman, who is quoting from here:

In January 2009 Ecuador announced a series of stiff import restrictions on 630 tariff lines, affecting 8.7 percent of its ‘tariff universe’ and 23 percent of the volume of imports. Duties were raised on 369 tariff lines and quota restrictions imposed on 271 others for a one-year period. They cover products ranging from processed foods and shoes to cars, mobile phones and sunglasses, as well as many other goods that can be manufactured in Ecuador.

Ecuador insisted that the measures it proposed were necessary to balance its widening current account deficit.

I don't get it. If Ecuador had its own currency with a peg to the USD, then I would understand. But Krugman claims--and my trusty research assistant Google verified--that Ecuador literally uses the USD as its currency.

So what does it mean to say they "had" to impose tariffs to fix a current account deficit? Isn't the fix automatic, namely that Ecuadorans stop spending as much when they run low on dollar bills?

I'm not being facetious, I really want someone to explain this to me. I've asked three economists on email so far, and I'm reminded of a Beatles song.

UPDATE below...

In response to this op ed, another love letter:

I have to remind you of a famous quote I will paraphrase for you, "just because you think something you write is a fact, doesn't make it a fact". In your column titled "Is the Recession Really Ending?" You do exactly what every right wing hate and failure talker on AM radio and Fox News does to discredit President Obama. You make up things that support your phony conclusions and attribute them to the people you are criticizing.

First your unemployment numbers: Now where and when exactly did the Obama team warn that if the government did nothing unemployment would rise to 9% or if the stimulus passed this would not happen? That's like quoting anonymous sources and is total BS.

Yes unemployment is close to 10%, but there is real factual evidence that the early stages of the stimulus package just starting to work is creating jobs and most important saving jobs. And the "Obama team" including the President has said many times that the full effect of the stimulus won't be visible until sometime in 2010. One can only guess what the unemployment rate would be had Tarp and the stimulus not happened, probably nearing the Great Depression numbers of 20 to 25%.

Your words "A simple look at the facts suggests that the interventions have been abject failures..."

The only thing simple in this statement is your analysis of what happened! I guess a global credit crunch, global stock markets dropping up to 40%, financial panic, and potential failures of worldwide and domestic, multi-billion dollar companies such as AIG, Citi bank, and Fannie and Freddie, saved by TARP and Obama's federal intervention were just figments of the world's imagination. And your so called free- market approach, which I guess meant stay the course (since you never define it) would have corrected this crisis better then the emergency government interventions around the world that a consensus of economists (many nobel prize winners) agreed
worked and kept us out of a severe depression.

It's interesting that you never even mention the rebound of the US stock market to over 10,000 last week. Had the government done nothing to restore confidence and prop up the banks, and did as you suggest let the market run free ( which got us into the mess, a de-regulated market that is), we'd be looking at a Dow Jones average of around 2k or 3k, unemployment of about 25% and breadlines.

I think you owe the Union Tribune, and it's readers a column either apologizing for your short memory of the crisis and Monday morning quarterbacking, or a better attempt defending and most important of all DEFINING a free-market approach and how that would have saved the economy.

I'll be looking for it. regards, [Bob Murphy fan] san diego

I first sent a response saying that I couldn't find the original paper, but sent a link to the graph from somebody's website. Then I managed to dig it up and sent this email to my fan:

Found it, bottom of page 4:

http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf

I realize there are plenty of people on talk radio etc. who would be upset if Obama rescued a kitten from a burning building. ("That's something Karl Marx would have done! He liked cats too!") But if I may be so bold, you are overreacting yourself. You confidently accused me of making up things when I wasn't.

Bob Murphy

UPDATE: Here is the guy's full response to my email above. (Then he sent me another email asking me about other things I had refused to answer.) It's good to see that I am changing minds.

It said without the stimulus unemployment would be 8.8% in Q4 2010! That does not support your accusations in your attack piece.

What about "abject failure" and defining somewhere a free market solution? Sorry, but you write from the Glen Beck school of journalism. regards, [name]

A team effort but I had a lot to do with this new IER blog post, regarding CBO Director Elmendorf's recent testimony on the economic impacts of carbon dioxide legislation.

Some of the points will be familiar to long-time readers, but one new thing I verified--after emailing with a CBO economist--is that the distinction between "household purchasing power" and "GDP" is very slippery:

After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:

In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.

This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.

Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”

Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.

Stephan Kinsella passes along this incredibly unexpected video. In the midst of a pretty funny clip, Alan King reads from the obituary of Ludwig von Mises (around 3:00).



Of course, King is committing a basic fallacy in trying to prove that women live longer than men, but I think he probably knows this.

This is a neat game show clip I picked up from Scott Sumner. I will post my commentary (from Scott's thread) as the first comment here. You should watch the clip first.

William Barnett--who's not the Fed-watching William Barnett of Loyola College, I checked--calls for an audit of the Fed in the NY Times (HT2 Jeff Hummel). Barnett made me feel less of an idiot when he wrote:

Consider the data the Fed presented last year on nonborrowed reserves. Nonborrowed reserves are total bank reserves minus money borrowed by banks and held as reserves. Clearly, the money borrowed cannot exceed the total reserves, so nonborrowed reserves should not be negative. Yet for a few months last year, the Fed reported banks’ nonborrowed reserves at billions of dollars below zero. In its calculations of nonborrowed reserves, the Fed included in borrowed reserves new forms of bank borrowing not being held as reserves. Such incompetent accounting would not survive an unconstrained, fully informed audit.

Phew! That screwed with some of your heads' too, right? I mean, even if the Fed held 100% borrowed reserves, then "nonborrowed reserves" should have been zero, not negative. Here's the chart:



What I don't know is if the rapid "improvement" was due merely to injections of new reserves, or if the Fed changed its bookkeeping too.

Another interesting point:

The information the Fed releases on bank deposits is similarly biased and contaminates data on the money supply and thereby on the liquidity of the economy produced by Federal Reserve policy. In order to evade reserve requirements, which mandate that a certain fraction of deposits be held in reserve and not lent out, many banks sweep much of their checking account deposits into shadow money-market-deposit savings accounts before reporting those deposits to the Fed. Since such accounts have no reserve requirements, this allows the banks to decrease the amount of total reserves they’re required to have. But the liquidity provided to the economy from checking accounts is the pre-sweeps amount, not the reported post-sweeps amount.

This was something we had to deal with at Laffer Investments; i.e. we would report to clients on the "sweep-adjusted" M1.

In normal times, I wouldn't think it was that big a deal, if you were just interested in rates of growth. But these aren't normal times. If banks are now less (more) willing to sweep checking deposits into money market accounts, then that means the reported growth in M1 is higher (lower) than it actually appears. I'm not saying banks are less willing to do so, but they might be, in which case the stagnant monetary aggregates are actually concealing a shrinking money stock held by the public. It is entirely possible that looking at FRED for the M1 and M2 updates isn't a great way to understand what's really happening with the money supply.

Like I've said in the past, any of you sugar daddies who want to pony up the $$ for me to take a month and get to the bottom of all this, please feel free to email me.

The translucent von Pepe sends this link. The video is 9:52 long, and when I clicked it, I thought I'd just watch a few seconds. I kept thinking that until about 6:00, when I realized I was going to just watch the whole thing.

My op ed in the San Diego Union-Tribune generated some hate mail. The best was this:

Mr. Murphy, in your article published in the San Diego Union Sunday Oct. 25,2009 the first conclusion you come to is that the Obama economic stimulus was a failure and you use the predictions of the administration to support this conclusion. Predictions of anyone do not substantiate anything other that the predictions were wrong. Your second point was that TARP was not needed because business loan activity decreased after Oct 2008 when the rescue was initiated. Oct. 2008 was when the banking almost came to a complete halt whether tarp was introduced or not, so it seem obvious that loan activity would decline, that fact doesn't tell us anything about TARP. I think you come to your conclusions from a dogma and no real interest in the truth. Any small understanding of the great depression will give you actual facts of what government intervention does. I get tired of reading editorials in the Union Tribune with no real facts to support the opinion.

I put the bold in the above. What's funny is that in my op ed, I pointed out:

(1) After passage of the Obama stimulus package, unemployment is now higher than they predicted (a) with the stimulus and even (b) without the stimulus. In other words, we are now in a situation that is even worse than what Obama's economic team used to scare people into supporting the stimulus.

(2) Even though TARP was pushed through with the promise of getting banks lending again, lending was at an all-time high when TARP was passed, and since has plummeted 12% in less than a year.

I didn't mention this in the op ed, but since he brought it up:

(3) As far as the Great Depression goes, we see that the period of the greatest federal intervention into the US economy (at least during peacetime) was also by far the worst economic performance in US history.

So my question is this: What would the empirical evidence have to look like, in order for my pessimism about government intervention to be well-founded, rather than dogmatic?

And notice that for my correspondent, he uses a priori theory to explain away the ostensible failure of the stimulus and TARP. He relies on the trusty counterfactual: Even though the objective measures got worse after his programs passed, nonetheless he is confident that things would have been even worse had the government done nothing.

Maybe the guy is right; I'm certainly not knocking a priori theory in economics. But it's a bit absurd for him to criticize me for clinging to dogma in this case.

My answer is "no" in the San Diego Union-Tribune. I've gotten some hate mail on this one. My favorite so far was a guy telling me to read up on the Great Depression so I'd see the beneficial effects of government intervention. An excerpt:

The government and media analysts should stop talking as if the “success” of these programs [TARP and Obama stimulus] is self-evident. A simple look at the facts suggests that the interventions have been abject failures. Instead of cheerleading a bogus rescue, media analysts should tackle the obvious question: If this weak performance doesn't cause proponents of massive deficit spending and corporate handouts to doubt themselves, what would?

Would a more free-market approach have yielded better results? Americans don't know because neither the Bush nor Obama administrations considered that option. The next administration to tackle a recession should look to the market more than intervention. There is still time for the Obama administration, because the current recession, contrary to news reports, may not be over after all.

Last week I noted that Solomon's son tried to exact higher taxes from the Israelites, leading them to revolt and split the kingdom in two.

From there it was all downhill. The two Books of Kings just chronicle successor after successor who was even worse than the last guy. And I don't mean they cheat on their wives and start wars; I'm talking about building shrines to pagan gods. Yikes.

(Incidentally, this is part of the reason for my prediction of a very bad decade for the US. In politics, things often cycle lower and lower. I remember when a lot of conservatives and libertarians thought Bill Clinton was just about the worst president imaginable. Still think so, guys? And after Republicans have festered during the Obama Administration, can you imagine how reckless they will be when their guy finally gets back in the White House? It's not going to be pretty. George W. Bush may look like a camp counselor in comparison.)

Left to their own devices, the Israelites probably would have imploded. But there was always a prophet who would emerge from obscurity to tell the king what was up. Now you ask, "Well why would these awful kings give a flip what some self-righteous guy said to them? How many divisions did Elijah have?"

You don't need earthly force when you are communicating the word of the Lord: "1 And Elijah the Tishbite, of the inhabitants of Gilead, said to Ahab, “As the LORD God of Israel lives, before whom I stand, there shall not be dew nor rain these years, except at my word.”" (1 Kings 17:1)

So Elijah is not too popular right about then, and the Lord tells him to get out of there pronto. He also tells Elijah where to camp so that he can drink from a brook, and reassures him that ravens will bring him bread and meat.

Later on, Elijah comes back to meet the king and remind everyone who brought their forefathers out of Egypt. If you don't believe all this stuff, just appreciate it as a good story. This is pretty cool:

 ¹ And it came to pass after many days that the word of the LORD came to Elijah, in the third year, saying, “Go, present yourself to Ahab, and I will send rain on the earth.”
² So Elijah went to present himself to Ahab; and there was a severe famine in Samaria. (1 Kings 18:1-2, New King James Version)
...
¹⁷ Then it happened, when Ahab saw Elijah, that Ahab said to him, “Is that you, O troubler of Israel?”
¹⁸ And he answered, “I have not troubled Israel, but you and your father’s house have, in that you have forsaken the commandments of the LORD and have followed the Baals. ¹⁹ Now therefore, send and gather all Israel to me on Mount Carmel, the four hundred and fifty prophets of Baal, and the four hundred prophets of Asherah, who eat at Jezebel’s table.”   
²⁰ So Ahab sent for all the children of Israel, and gathered the prophets together on Mount Carmel. ²¹ And Elijah came to all the people, and said, “How long will you falter between two opinions? If the LORD is God, follow Him; but if Baal, follow him.” But the people answered him not a word. ²² Then Elijah said to the people, “I alone am left a prophet of the LORD; but Baal’s prophets are four hundred and fifty men. ²³ Therefore let them give us two bulls; and let them choose one bull for themselves, cut it in pieces, and lay it on the wood, but put no fire under it; and I will prepare the other bull, and lay it on the wood, but put no fire under it. ²⁴ Then you call on the name of your gods, and I will call on the name of the LORD; and the God who answers by fire, He is God.”
So all the people answered and said, “It is well spoken.”
²⁵ Now Elijah said to the prophets of Baal, “Choose one bull for yourselves and prepare it first, for you are many; and call on the name of your god, but put no fire under it.”
²⁶ So they took the bull which was given them, and they prepared it, and called on the name of Baal from morning even till noon, saying, “O Baal, hear us!” But there was no voice; no one answered. Then they leaped about the altar which they had made.
²⁷ And so it was, at noon, that Elijah mocked them and said, “Cry aloud, for he is a god; either he is meditating, or he is busy, or he is on a journey, or perhaps he is sleeping and must be awakened.” ²⁸ So they cried aloud, and cut themselves, as was their custom, with knives and lances, until the blood gushed out on them. ²⁹ And when midday was past, they prophesied until the time of the offering of the evening sacrifice. But there was no voice; no one answered, no one paid attention.
³⁰ Then Elijah said to all the people, “Come near to me.” So all the people came near to him. And he repaired the altar of the LORD that was broken down. ³¹ And Elijah took twelve stones, according to the number of the tribes of the sons of Jacob, to whom the word of the LORD had come, saying, “Israel shall be your name.” ³² Then with the stones he built an altar in the name of the LORD; and he made a trench around the altar large enough to hold two seahs of seed. ³³ And he put the wood in order, cut the bull in pieces, and laid it on the wood, and said, “Fill four waterpots with water, and pour it on the burnt sacrifice and on the wood.” ³⁴ Then he said, “Do it a second time,” and they did it a second time; and he said, “Do it a third time,” and they did it a third time. ³⁵ So the water ran all around the altar; and he also filled the trench with water.
³⁶ And it came to pass, at the time of the offering of the evening sacrifice, that Elijah the prophet came near and said, “LORD God of Abraham, Isaac, and Israel, let it be known this day that You are God in Israel and I am Your servant, and that I have done all these things at Your word. ³⁷ Hear me, O LORD, hear me, that this people may know that You are the LORD God, and that You have turned their hearts back to You again.”
³⁸ Then the fire of the LORD fell and consumed the burnt sacrifice, and the wood and the stones and the dust, and it licked up the water that was in the trench. ³⁹ Now when all the people saw it, they fell on their faces; and they said, “The LORD, He is God! The LORD, He is God!”
⁴⁰ And Elijah said to them, “Seize the prophets of Baal! Do not let one of them escape!” So they seized them; and Elijah brought them down to the Brook Kishon and executed them there.   
⁴¹ Then Elijah said to Ahab, “Go up, eat and drink; for there is the sound of abundance of rain.” ⁴² So Ahab went up to eat and drink. And Elijah went up to the top of Carmel; then he bowed down on the ground, and put his face between his knees, ⁴³ and said to his servant, “Go up now, look toward the sea.”
So he went up and looked, and said, “There is nothing.” And seven times he said, “Go again.”
⁴⁴ Then it came to pass the seventh time, that he said, “There is a cloud, as small as a man’s hand, rising out of the sea!” So he said, “Go up, say to Ahab, ‘Prepare your chariot, and go down before the rain stops you.’”
⁴⁵ Now it happened in the meantime that the sky became black with clouds and wind, and there was a heavy rain. So Ahab rode away and went to Jezreel. (1 Kings 18:17-45, New King James Version)

If you think Elijah was a formidable figure, just wait till we meet Elisha.

From an email I wrote to a group of colleagues who were arguing over whether it was really true that fossil fuel use only had negative externalities. (One of the guys was arguing that cheap energy confers benefits on society, just as surely as an opera house.)

Sorry I'm late replying to this; swamped with work. Consumer surplus
refers to the benefit consumers get from the availability of certain
markets, because presumably you keep buying units until the marginal
benefit of the next unit is lower than the unit price. So the idea is
that you gain a surplus on each of the inframarginal units. A lot of
people don't see how a voluntary trade makes both people better off.
If a gallon of gas has a price of $2.50, then the consumer buys it and
at best is "even" because he swapped out $2.50 in cash for something
that is "worth" $2.50. But obviously that is wrong.

A positive externality means your actions shower benefits on other
people who aren't in the actual market transaction. Textbook examples
are things like schooling and vaccination. An individual presumably
decides to learn to read, and get vaccinated (or at least his parents
force him to do these things) because the personal benefits outweigh
the personal costs. But it's in my interest if other people become
literate and vaccinate themselves. (Let's stipulate that we're talking
about an effective vaccine. I know a lot of people don't like the H1N1
vaccine.)

The problem with externalities is that if you push it, just about
every action you take has a million positive and a million negative
externalities. E.g. if I put on smelly socks before going to work,
that's a negative externality and the government ought to fine me, in
principle. Oh but maybe the odor causes others to think about
workplace odor, causing 5 people to use anti-perspirant who otherwise
wouldn't have. Thus my wearing of smelly socks confers a positive
externality, and the government should subsidize me, in principle.

So [Mr. Colleague] is definitely right that there are positive externalities
from fossil fuel use, if only because I can dream up positive
externalities from any activity X.

Wow I'm sorry that I missed this, loyal readers. I really need to stop outsourcing my financial news gathering to places like CNBC. It was only after watching a video interview with "special master for executive compensation" (that's actually his title, which is hardly less worrisome than "pay czar") Ken Feinberg that I realized his "90% pay cuts" actually are only pro rated to November and December. (I believe Tokyo Tom in the comments of my knee jerk post was trying to point this out, when he said the decision wasn't a clawback.) Furthermore, as Feinberg says in the video, everything is back on the table starting in January 2010. (However, some news reports have Feinberg saying the rules will be in place for 2010. The only thing worse than having a pay czar chop your pay by 90%, is not knowing if the pay czar will chop your pay by 90%.)

Don't get me wrong, I still stand by the general theme of my first reaction: This is a horrible precedent, and will make it all the easier for the government to regulate all financial compensation packages down the road, so long as it gives some bogus finding of "systemic risk."

But once again I was snookered by the progressive rhetoric, in contrast to the corporatist reality: Thus far 25x7 = 175 people have had two months' of their salaries altered, after living large on the taxpayer's dime the first ten months of the year.

This is the real danger of listening to Rush Limbaugh et al.: It's not that it will turn you into a racist, but rather that it will make you actually believe the progressive rhetoric coming out of the White House. For example, Rush actually think Obama is getting ready to pull all the US troops out of Afghanistan. Riiiight.

Incidentally, I noticed at least three humongous lies in the short Feinberg video linked above. For example, he says there are no plans to move beyond this, and yet I have heard audio--on Rush's show I believe--where Feinberg says his next task is to figure out the compensation for the #26 - #100 people in each of these companies. He also says that neither the White House nor the Treasury exerted any input at all into his decisions. Well (a) that's obviously a lie and (b) it would be absurd if they didn't! Do we really want to believe that Obama would allow one guy unfettered power over seven huge companies?!

Silas Barta has a good takedown of this goofy blog post from an economics professor, Daniel Hamermesh, and his attempt to impart the lessons of economics to his students:

Each year in my 500-student principles class I gather a group of eight students and tell them that I will auction a $20 bill to the highest bidder. If two or more students bid the same thing, the difference between $20 and their joint bid will be divided among the winning bidders. They can collude to fix the price just like oligopolists who violate antitrust laws, but they must mark down their bids in secret.

Today seven of the students stuck to the collusive agreement, and each bid $.01. They figured they would split the $20 eight ways, netting $2.49 each. Ashley, bless her heart, broke the agreement, bid $0.05, and collected $19.95. The other 7 students booed her, but I got the class to join me in applauding her, as she was the only one who understood the game.

No one disputes that the collusive agreement does not constitute a Nash equilibrium. No one disputes that, with no other mechanisms in place, it might be naive to assume that everyone would follow through with an agreement, especially as the number of players increased.

But so what? The parts I put in bold above do not follow from pure game theoretic considerations. There is nothing that says we ought to bless or congratulate others for playing a narrowly defined best response; indeed, if you want to go that route, we should be chastising her because it's in each of our narrow self-interest to make everyone else feel guilty for defecting in cases like this. So this professor can't have it both ways: He wants to be "non-selfish" by congratulating someone else for something that doesn't help him personally, and yet the very thing he is congratulating is the student's unwillingness to be so gracious herself.

I realize I may sound wishy washy and anti-rigorous here; let me assure the casual reader that I "get" game theory. It was my field (analogous to a major) at NYU, the program of which was renowned for its bona fides in this area. The professor telling the above anecdote fits the stereotype that other social scientists have of economists. Economists defend themselves and say, "Hey, our discipline doesn't tell people to be selfish; we just view the world as it is, not as the sociologists want it to be." But no, Hamermesh just gave the game away. He was applauding a student for reneging on an agreement in order to benefit herself and screw over her classmates. Moreover, he implies that the other students were stupid and that's the only reason they too didn't try to stab each other in the back. It wasn't that they were naive or too trustworthy; nope, they must not have understood the game.

For what it's worth, I too used a technique similar to this, when I taught cartels in microeconomics. I would show the class $50 in cash, and say:

OK everyone, I want you to take out a small slip of paper, and put your name on one side. Then on the other side, without letting anyone else see, write a "C" or "D." Then fold it up, and I'll collect them. Then I'll go through and show the class the letters one at a time. After it's all done, here's what I'll do: If there are all Cs, then you all split the money evenly. [There would normally be about 20 kids in the room.] If there is one D, that person gets $40 him or herself, and everyone else gets nothing. If there are two Ds, they each get $15 and everyone else gets nothing. If there are 3 Ds, they each get $8. Finally, if there are 4 or more Ds, nobody gets anything. I'm going to leave the room for 10 minutes and let you discuss it, and then when I come back I want you to write your answer. Don't write your answer until I come back. Last thing, I won't ever reveal who the people writing 'D' were. I will pay them outside of class.

What's interesting is that I almost never had to pay any money; in fact I think maybe I never paid any, but I'm not sure. However, after a few semesters of this pattern, I switched it up and used bonus points on the next exam as the reward. The payoff structure was the same: It was weakly dominant (note not strictly dominant, and hence this actually wasn't a true prisoner's dilemma) to write a D, because there were scenarios where that would garner you more bonus points, and it would never hurt you to write D. And yet just about always, everyone in the class wrote C when it was points, not money. Presumably this was due to (a) kids felt worse about stealing points from their friends, and (b) the football players threatened to literally beat up defectors when there were exam points on the line.

Anyway, my problem isn't with Hamermash's use of a game to keep the class interested. My problem is with him applauding students for defecting, and telling them that's the right thing to do. Does Hamermash leave a tip in a restaurant when he's on a road trip at a place he's not likely to visit again within a year? If so, what a moron! He clearly doesn't understand the rules of restaurant pricing.

(For more on the problems with typical popularizing of game theory, see my article complaining about Hal Varian's discussion of the movie A Beautiful Mind.)

UPDATE: I used to put this as a bonus question on the next exam, so I'll do it here as well, inasmuch as there are some serious econ geeks who frequent these pages: There actually exists a Nash equilibrium in which I pay out money, given the rules described above. So if a class of students had realized it and assigned people the various strategies to play, it would be self-enforcing, at least if we assume that each kid only cares about maximizing how much money he or she gets from me. What is the equilibrium?

I hate to see what he writes on Halloween:

WHISTLING PAST THE GRAVEYARD

Some good news from Wall Street:

The improvement in sentiment in Wall Street may be traced almost directly to the encouraging reports which the financial community is receiving from the leading industries of the country, according to investment trust executives. They say that the current rise in security prices is firmly grounded on the improvement in business conditions that began in December.

New York Times
February 14, 1930

Two months later the Dow hit a level it would not see again for about 25 years. Happy Valentine’s Day, pal.

In the Crash of 1929, the Dow lost 48% of its value. Six months later it rallied back 48% (because this was from a starting point half as high, this meant it got back 52% of the loss from the Crash). In 2007 – 2009, the Dow lost 54% of its value. It has now rallied back 54%, or in other words, it has regained 45% of this loss in value.

Japan has gone through a similar process of dealing with an exploded real estate bubble. The Nikkei hit a peak of about 39,000 in 1989. It has moved downwards in a sawtooth pattern for the past 20 years, with big rallies in 95 – 96, 98 – 99 and 03 – 07. Today, 20 years after its peak, the Nikkei is at about 10,000.
...
It...seems slightly surreal to me to read newspaper trend stores about people getting bored with the incredible austerity of the past, oh, 10 months. Similarly, political debates around cap-and-trade, health care, entitlements, the $100 billion of new schools spending in the stimulus bill with no obvious prospects for improving reading or math skills, and so on that causally describe reducing U.S. economic output or efficiency in support of some lofty goal strike me as entirely detached from the reality of how harsh the real choices in front of us are likely to be.

In case my recent apologetic post on price inflation left some readers without a rudder, let me be clear: Even though I jumped the gun on my prediction of sharp price increases, I still think: (a) The real economy is going to be in the toilet for years, and (b) We are going to see the worst price inflation in US history. I am open to the possibility that (b) is wrong, but I am as confident in (a) as I could be for a general macroeconomic prediction.

Consequently, I personally am using the extra breathing room as a gift. I am currently carrying a lot more credit card debt than I'd like, and--given my views--I really need to redouble my efforts to get serious and start hacking it away.

If I'm right and we are now in the third bubble of the 2000s--first dot-com, then housing market, now US Treasurys--the eventual bust will be worse, the longer the delusion persists. But on the bright side, it gives those of us who see it coming, longer to protect our own households.

When trying to time a bubble, it's much better to err on the side of leaving too soon.

A few months ago, Glenn Beck confidently stated that Thomas Paine was an atheist. No, he was a Deist. It's true that in The Age of Reason Paine was very harsh on the Christian God, but Paine was so offended because he thought the Christian worldview mocked the grandeur of the true Creator of the universe. Does this sound like a quote from an atheist?

But in Deism our reason and our belief become happily united. The wonderful structure of the universe, and everything we behold in the system of the creation, prove to us, far better than books can do, the existence of a God, and at the same time proclaim His attributes.

It is by the exercise of our reason that we are enabled to contemplate God in His works, and imitate Him in His ways. When we see His care and goodness extended over all His creatures, it teaches us our duty toward each other, while it calls forth our gratitude to Him. It is by forgetting God in His works, and running after the books of pretended revelation, that man has wandered from the straight path of duty and happiness, and become by turns the victim of doubt and the dupe of delusion.

Except in the first article in the Christian creed, that of believing in God, there is not an article in it but fills the mind with doubt as to the truth of it, the instant man begins to think. Now every article in a creed that is necessary to the happiness and salvation of man, ought to be as evident to the reason and comprehension of man as the first article is, for God has not given us reason for the purpose of confounding us, but that we should use it for our own happiness and His glory.

I was going to let this one go, except that Glenn Beck doubled down the other day and went on at length with his sidekick along the lines of, "Now look, I'm not saying we all have to agree with everything about the Founding Fathers. For example, Thomas Paine was an atheist. OK, I'm not, I believe in God, but I still think he was right in his description of A-mer-ica." (Not an exact quote but definitely the spirit of what Beck said.)

Tell you what, Mr. Beck, you don't know the first thing about Thomas Paine, even though you tell your listeners how avid a historian you are when it comes to the colonial period. I would also venture to say that Thomas Paine knew the Christian Bible better than you (or me); he wrote the first part of Age of Reason from his French prison cell from memory, when he was on the guillotine death row for the shocking crime of saying they shouldn't kill the deposed king, Louis XVI. (If you don't know what I'm talking about, readers, you should read up on Thomas Paine. He was so freaking cool.)

OK, then just the other day I heard an ad from the Heritage Foundation during Rush Limbaugh's show. Again, not an exact quote, but it went something like this: First the narrator read a really cool quote, one that makes you want to throw a Nobama! sticker on your bumper. Then the narrator says, "That was Samuel Adams, one of the patriots who founded our country. And Sam Adams' weapon was the Constitution. Join the Heritage Foundation today, and receive a free pocket copy of the U.S. Constitution--the liberals in DC don't want you to know what it says."

So that sounded a little fishy to me. All the "patriotic" stuff Sam Adams did (and which the British people would rightly have classified as terrorist acts of insurgency) happened before the Constitution was ratified. So I was pretty sure the people who wrote that Heritage ad were bluffing. I checked Wikipedia to see how bad it was, and yep, it's pretty bad:

Shays's Rebellion contributed to the belief that the Articles of Confederation needed to be revised. In 1787, delegates to the Philadelphia Convention, instead of revising the Articles, created a new United States Constitution with a much stronger national government. When the Constitution was sent to the states for ratification, Adams expressed his displeasure. "I confess," he wrote to Richard Henry Lee in 1787, "as I enter the Building I stumble at the Threshold. I meet with a National Government, instead of a Federal Union of States."[195] Adams was one of those derisively labeled "Anti-Federalists" by proponents of the new Constitution, who called themselves "Federalists".[196] Adams was elected to the Massachusetts ratifying convention, which met in January 1788. Despite his reservations, Adams rarely spoke at the convention, and listened carefully to the arguments rather than raising objections.[197] Adams and John Hancock, who had reconciled, finally agreed to give their support for the Constitution, with the proviso that some amendments be added later.[198] Even with the support of Hancock and Adams, the Massachusetts convention narrowly ratified the Constitution by a vote of 187 to 168.[199]
...
Concerned about the new Constitution, Adams made an attempt to reenter national politics. He allowed his name to be put forth as a candidate for the United States House of Representatives in the December 1788 election, but lost to Fisher Ames, apparently because Ames was a stronger supporter of the Constitution, a more popular position.[202] Despite his defeat, Adams continued to work for amendments to the Constitution, a movement that ultimately resulted in the addition of a Bill of Rights in 1791.[203] With these amendments, and the possibility of more, Adams subsequently became a firm supporter of the Constitution.

What do you think, kids? Were the Heritage scriptwriters aware of all the above? Did Glenn Beck know full well the nuances of Thomas Paine's position on the existence of God? I must confess I am skeptical.

I've actually been working this week--my psyche has yet to adjust to the discomfort--and somehow this post by Steve Horwitz slipped through the cracks. For non-Austrian readers, some quick context:

(1) Many, perhaps most, economists today would say something like, "We know that the Fed made a terrible mistake in the early 1930s, by standing back and letting the money supply fall by 1/3 as panicked depositors withdrew their money from the banking system. The huge deflationary force added insult to injury after the stock market had already crashed, and is why the Great Depression was so awful. Had not Bernanke flooded the system with new money last fall, unemployment would be much higher today than it is."

(2) In response, many Austrian economists who consider themselves followers of Murray Rothbard say, "That's nuts. Printing up green pieces of paper doesn't make us richer. The economy needed to undergo serious rearrangement of resources after the popping of the artificial bubble in 1929. The reason unemployment went so high in the 1930s wasn't because of the Fed's unwillingness to print up dollar bills. As proof, look at the depression of 1920-1921, when there was a more severe collapse in the monetary base and price deflation was even more severe." (I discuss this in great length in my book, but if you are a cheapskate Tom Woods has a good article on it. UPDATE: Tom says this article is a better one to learn about the 1920-1921 experience.)

(3) Steve Horwitz and some other Austrians--typically those who consider themselves followers of Hayek and Kirzner, more than of Rothbard, though the classification is not perfect--disagree. They agree that the Fed screws up things when it prints new money and fuels an artificial boom, but they think the Fed is just committing the opposite mistake if it sits back and does nothing, when the public's demand to hold money increases during a financial panic. Thus, Horwitz and some other big guns in the Austrian camp agree with Milton Friedman that the Fed's timidity in the early 1930s contributed to the severity of the Great Depression, and they agree that Bernanke was correct to increase the monetary base last year (though of course they need not, and don't in practice, agree with how Bernanke chose to get new reserves into the system, namely through bailouts of insolvent financial institutions).

OK now that you've got the context, check out Horwitz's post. He takes the 1920-1921 trump card head-on and argues that it would have been even less painful if the Fed had done what he recommends. In other words, the 1930s was the worst ever, because you had Hoover's New Deal-lite combined with dumb deflationary Fed policy. The 1920-1921 depression was better than that, but it was still really bad, because you had Harding's laissez-faire policies combined with dumb deflationary Fed policy.

If I had to give a reaction on the spot, I'd say that I disagree with Horwitz. In particular, I think part of why there was a depression in 1920-1921 was that the huge WW1 bubble was popped, since the Fed had become alarmed by the 20% price inflation. So if that's right, I don't see how you could have had the corrective readjustment of resources, without most of the pain that they did in fact experience. Ditto for the fiscal policies: I think there had to be a period of "idle resources" as the US economy reconfigured itself from the arsenal of democracy back into the engine of consumerism.

It's true, I think if Ron Paul had been elected president and did everything Joe Salerno advised, that there would have been a very severe recession but it would have bottomed out within, say, 6 months. So it does surprise me that the 1920-1921 depression lasted longer than that. Thus, Horwitz could be right.

Last point: Let's not forget that we're talking about 1920 here. It's not as if laid off munitions workers could hop on Monster.com, sublet their apartment on Craig's List, and then rent a one-way U-Haul to where the new jobs were. I really have no idea how long a massive "free market recession" should have lasted back then, or how high unemployment "should" have been.

Wow, I finally got around to watching the below video that Tom posted a few days ago. You know how normally, if you watch a political discussion on TV the spectrum of the debate is, "Should we steal 50% of taxpayers' money, or just 48%?"

Well a similar thing happened on this program, except the spectrum was more like, "Should I be an anarchist because of bold assertions about the nature of government, or should I be an anarchist because of the study of history?"

I can't believe this was on PBS.



BTW Tom, I noticed that he called you an economist and you just nodded. I won't tell anyone, don't worry.

More fun tax facts: Massachusetts also has a tax on marijuana, but it has yet to collect any revenue from it. On the other hand, in Fiscal Year 2008, the state made almost $39 million from unredeemed deposits on bottles. See pages 26-27 of this pdf.

During my research for a PRI paper on state tax policies, I came across this interesting nugget (see page 13 of this pdf):

CONTROLLED SUBSTANCES TAX
A tax is levied on marijuana and controlled substances which creates an economic burden on drug dealers. Payment of the tax is indicated by the affixing of stamps to the marijuana or controlled substance. The tax is due and payable immediately upon acquisition or possession of the drug in Connecticut by a dealer.

Revenue
FY 2005-06 $90,329
2006-07 40,851
2007-08 61,262

Basis and Rate
$3.50 per gram of marijuana;
$200 per gram of controlled substance; and
$2,000 per 50-dosage unit of controlled substance not sold by weight.

The part I put in bold just cracks me up. Note that for the other sections, they don't say things like, "The Business Entity Tax places a burden on those selling goods in Connecticut."

Matt Yglesias is astounded at the ignorance of Mary Landrieu, Democratic senator from Louisiana, because she said, "I’m not for a government-run, national, taxpayer-subsidized plan, and never will be." Yglesias sets her straight:

The larger issue here, I think, is that unlike these programs the “public option” wouldn’t be a taxpayer-subsidized program. It would be a government-run health insurance plan that people could buy.

Interestingly, my colleague Zaid Jilani observed the other day that Landrieu has been attributing the popularity of the program to the fact that people like the idea of “free health care”...

When I first read these remarks, I thought Landrieu was saying that the public was misunderstanding the proposal. She thought people thought the public option meant bigger subsidies for them and didn’t understand what the proposal really is. Now that I’ve read her latest remarks, however, I think maybe she doesn’t understand what’s being proposed and thinks that liberals are proposing to create an additional spending commitment. In reality, adding a public option would make the Finance bill cheaper and not involve any additional taxpayer subsidies.

OK don't tell MY (yes his initials are almost as unfortunate as mine: BM), but I don't think I understand the legislation then either. (This is not surprising, inasmuch as an illustrious blogger recently told me I don't know how to read.)

I realize the government lies all the time, that proponents of legislation make all kinds of wishful assumptions, etc. etc. Let's put all those things aside. Are you telling me that official "progressive" proposal is that the government is going to offer a health insurance plan with no use of taxpayer funds whatsoever? Surely Yglesias must be misunderstanding, right?

If that is the claim, then why all the politics and debate? There's nothing to stop Harry Reid and Nancy Pelosi from incorporating a business, taking in premium payments, and paying claims when people file them, according to the contractual specifications.

Seriously, what the heck is going on here? I want to know: (a) Does Yglesias really think a bunch of DC politicians can run a business more profitably than people in the private sector, if they can't draw on tax dollars, and (b) Is that what the official claim is, that half the blogosphere is supporting?

I'm hoping I'm misunderstanding, and Yglesias is saying something like, "With all of the savings that reform will generate, even the injection of tax dollars into the public option will still yield a deficit-neutral outcome." If he's just saying that, OK, I think he's naive and wrong, but I get how he could be thinking that. Yet his critique of Landrieu, at face value, suggests the bolder claim, that the "public option" really won't rely on taxpayer dollars at all.

For a while I've thought Austrian economics just needs a new name. Arnold Kling got way more thoughtful reaction to his "recalculation argument" against stimulus spending, even though (as he himself acknowledged when he first unveiled it) his story and Austrian business cycle theory are almost identical once the bust ensues. So it seemed that the very name "Austrian business cycle theory" was an albatross around the neck of the particular set of ideas. (That, and the fact that some of the Austrians pushing it are fairly annoying.)

And then Stephan Kinsella relays this anecdote about Tom Woods' debate with ING Chairman Tom McInerney (HT2 Bob Roddis):

McInerney had mentioned that Bernanke was a diligent and knowledgeable student of the Great Depression. So, when it came time for the Q&A, one audience member asked Woods to briefly explain the Austrian view of Great Depression and how it might differ from Bernanke's view. After Woods did this, McIerney took the stage, and as if he were about to unload a devastating blow against Woods, said to him, "this might seem like a bit of an attack. Don't take it too personally." And then.... he began to rant about ... the relatively small size of the country of Austria. I kid you not.

Some audience members began to laugh; others cringed, as McInerney dug his hole deeper while under the illusion that he was unleashing a deadly zinger. Woods kept trying to stage whisper that Austria had nothing to do with the school of Austrian economics, but McInerney, undeterred, plowed on. Thus, when Woods took the stage he said, "this might seem like an attack, but don't take it too personally..." And then Woods commented that we may as well say we shouldn't listen to Milton Friedman, since the GDP of Chicago is pretty low.

It's even worse than the above suggests. Someone in the comments of Stephan's post said:

I was there as well and unfortunately there was no video camera that i am aware of, so no video. But the above story is 100% true; one could feel the collective cringe when McInerney was spouting off about Austria. And it wasnt short. He spent a good 5-7minutes in his diatribe, trying to get audience participation by asking "Does anyone know the GDP of france...How about Italy....and austria...." It was very sad because people were snickering and he had no idea it was at him.

So that settles it, we need a new name. I suggest "reality-based economics." Who could possibly oppose that?*

* Yes I am kidding.

CNBC reprints a NYT article:

Responding to the growing furor over the paychecks of executives at companies that received billions of dollars in the government’s financial rescue, the Obama administration will order the companies that received the most aid to deeply slash the compensation to their highest paid executives, an official involved in the decision said on Wednesday.

Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the annual salaries of their 25 best-paid executives by an average of about 90 percent from last year. Their total compensation — including bonuses and retirement contributions — will drop, on average, by about 50 percent. The companies are Citigroup..., Bank of America..., American International Group..., General Motors, Chrysler and the financing arms of the two automakers.

I don't have the time to look into this more carefully, but I'm really hoping that the "pay czar" is only overriding compensation packages at companies that still have tax money (as opposed to ones that paid it back).

Regardless of the legal niceties, this is a very bad development. Now the unruly masses get a taste of seeing the noble DC crusaders pushing back against the corporate fat cats. Hip hip hooray! People not profits!

Oh one question: Where does the clawed back money go? I'm assuming it goes to the corporate shareholders, and not (say) a fund for baby formula for the homeless.