Tuesday, December 23, 2008

Follow-up on Mike's jobs post.

The emphasis on jobs is, as you say, disheartening, particularly since the Big 2 bailout was often pushed in almost exclusively employment-related terms.

I think Arnold Kling has pointed this out several times, but it's disingenuous completely predictable that politicians talk about jobs like unequivocal benefits.   If I had a task that needed done and I thought to myself, "This is going to need such and such materials and two helpers," then those helpers are costs, same as the materials.  Bragging about how many jobs your program is going to create is simultaneously to flaunt how much it's going to cost.  Assuming the job isn't all that necessary, it's a bizarrely masochistic form of welfare, where money is given to individuals for doing stuff that no one wants done.  What people don't seem to appreciate about the dig-a-hole-and-fill-it example is that it's not only wasteful, but it's actually kind of evil from a utilitarian perspective--it makes everyone worse off because, presumably, the guy digging would rather be doing something else.

Which has always made me think this green jobs strategy (which pales in comparison to the newer, incredible mayors-of-the-world-unite in the largest-cash-grab-the-world-has-ever-seen strategy, coming early 2009) is closer to Bastiat's broken window fallacy.

In related news, Greg Mankiw has an excellent post in which he merely copies and pastes a letter he received from a reader familiar with government bureaucracy. Excellent excerpt:
To make a long story short, you cannot juice up a government agency's budget by tens of billions (or in the case of the stimulus package, hundreds of billions) and expect them to be able to process the paperwork to contract it out, much less oversee the projects or even choose them with any kind of hope for success. It's like trying to feed a Pomeranian a 25 lb turkey. It's madness.
What gets lost in the nearly-incomprehensible size of these "stimulus" packages is the likelihood that they will be badly, badly mismanaged. America needs James Q. Wilson now more than ever (though if my POL113 students are any indication, they wouldn't read him anyway) for the simple but irrevocable fact that bureaucracies operate according to perverse and often inscrutable incentives. This was my primary empirical-theoretical (not normative) beef with Mike's support for what would become TARP--that despite the enormity of the problem, the solution was not a feasible one based purely on the sorts of institutional incentives that original $700 billion had to make its way through. The news appearing daily about bureaucratic mismanagement and companies quickly and surely finding their way around compensation limits is not in the least surprising--this was always the way this had to go. If Washington was filled with sharks (lobbyists, rent-seekers, money-starved executive bureaucracies) before, we've quite wittingly dumped unprecedented amounts of blood into the water. Expected and realized results: more sharks (hello GM, Chrysler, Ah-nuld, state of New York, America's governors and mayors, etc.).

Actually, the sharks point is different. Regardless of lobbying influences, the point here is that these bureaucracies are operating, presumably, at something near their funds-allocating capacity. Allocating money, believe it or not, requires time and manpower in terms of deciding where money is going to go and how it's going to be spent. What gatekeeping and oversight that these agencies previously managed is going to go directly out the window when their budgets and handout-seekers quintuple. Look for corruption on a scale we haven't previously imagined.

Monday, December 22, 2008

From the Office of Monitoring the President Elect....


Above is a link to the transcript of Mr. Obama's Friday press conference. I wanted to highlight a few fundamentally flawed positions taken in the speech.

Whenever I've been asked how I measure the strength of the American economy, my answer is simple: jobs and wages. I know we will be headed in the right direction again when we are creating jobs instead of losing them, and when Americans are gaining ground in terms of their incomes instead of treading water or falling behind.

This is a clear misunderstanding of measuring economic strength. Jobs are supplied by owners of capital who see a way to use the labor of others (human capital) to create wealth for themselves. Economic Strength is measured by productivity growth, which is wealth creation for human capital. It is easy to attain full employment; consider that when every citizen lives on the farm and scratches the ground for a living, unemployment is zero (remember that unemployment measures only those looking for work who can't find it.) We can argue about whether or not growth in wealth is the best way to measure economic strength, or personal well-being, but job growth in a vacuum is meaningless. Ditto wage growth, unless we are talking about real wage growth, which is, again, related to productivity growth.

with the goal of creating two-and- a-half million new jobs and strengthening our economy for the future

See above for the jobs part. Strengthening the economy is indeed a good policy, if we are talking about policy which encourages productivity growth.

Whether it's creating green jobs

Lots of problems here. Green jobs seem to me to be a meaningless distinction. If people demand alternative enery, technology will be created to supply it, with concomitant jobs, assuming it can be done profitably. As I've discussed earlier, if environmental externalities need to be internalized, raise the final price with taxes, a la the Pigou Club as Greg Mankiw has discussed at length (as long as tax proceeds are actually spent on remediation). Capital creates jobs, not the other way around, and new speculative capital needs a high return to be invested.

that pay well and can't be outsourced,

Don Boudreaux has an excellent podcast about globalization and free trade over at econtalk.org, and reminds us that an outsourced job is an unambiguous positive (at least longer term). Cheaper production of the same goods creates wealth for consumers and producers, and signals to suppliers of labor that they can and should try their hand at something more productive

or raising the minimum wage in California

Why won't minimum wage mythology die? It is a clear negative for unskilled workers and restricts the demand for labor at a price where it may very well be willingly supplied.

protecting workers' rights, from organizing to collective bargaining, from keeping our workplaces safe to making our unions strong. Standing up for our workers means putting them back to work and fueling economic growth.

Capital puts workers back to work, capital which sees ways in which labor can be employed to create profits. Not governments. Also, unemployment is low both relative to history and the rest of the world. I have no problem with collective bargaining, as long as it doesn't become government-supported collective strong arming, which it does.

Doing so will not only help meet our energy challenges by building more efficient cars, buses and subways or making Americans safer by rebuilding our crumbling roads and bridges, it will create millions of new jobs in the process.

Again with the jobs. If we need new infrastructure, give capital the appropriate incentives and property rights to provide it, and it will be supplied.

When contemplating this world view, remember Say's Law, which, although somewhat flawed, has enormous truth and insight. I will be discussing this in detail in my next deflation post, but Say's Law says that supply creates its own demand, i.e. productivity is wealth, and money is simply a way of distributing productivity. This is why policies such as paying people to dig holes and fill them in again have negative real value, not zero value. Zero product is created, but the money supply is enlarged, which ultimately causes inflation.

Thursday, December 18, 2008

Money Delusions Part I - Some Groundwork

Brandon asks where deflation will hit him the hardest. It is a great question, as the negative effects of a general deflation are not immediately apparent. Let me first restate the issue. What we are worried about is not "a modest deflationary trend in the real cost of goods". What we are worried about is a modest or immodest deflationary trend in the nominal cost of goods. Real general deflation can only be caused by increases in productivity due to technology or a permanent increase in the velocity of money that increases capacity utilization. This kind of deflation happens all the time, and it is almost unconditionally good. It increases real wealth. In addition, he correctly points out that real deflation (price declines in excess of the general price decline) in many specific goods, especially claims on productive assets, is wonderful for those of us who don't own as many of them as we would like to own eventually in order to maximize our future wealth (assuming these prices are mean-reverting). The rest of this post will deal with the problems that stem from general deflation in the nominal cost of goods.

The place to start is the macroeconomic equation of exchange. This is a tautology which states: M*V=P*Q. In words, the money supply times the velocity of money is equal to the general price level times the quantity of goods and services produced. For a given time period, each side of this equation represents the gross domestic product for the economy being analyzed. If you state this as a difference equation, you get dM*dV=dP*dQ, or the change in the money supply times the change in the velocity of money is equal to the change in the price level times the change in production (i.e. the change in GDP.) The great macroeconomic debates tend to range around whether and how these four variables change over time, and to what degree government can and/or should try to influence specific components.

Let's define and analyze these various components a little further. The first is M, or money supply. In order to think about money supply we need to define money first. Money is a technological innovation that allows for the conversion of an individual's productivity into a highly transportable and fungible form. It is an abstraction that allows the division of labor to become much more specialized and efficient than that which a barter system would ever produce. It is generally agreed that good money satisfies three conditions: it functions as a medium of exchange (it is accepted as payment for goods, services, and debts), it serves as a unit of account, and it is a store of value. As an aside, I think that the store of value attribute of "moneyness" becomes less and less important as information and transaction costs converge to zero. This is why I find concepts such as a "gold standard" of money to be unnecessarily restrictive. What is key is the free convertibility of fiat money into any commodity such that, if you like, you can put yourself on a gold standard or an oil standard or even a "stock standard" or a "house standard" or whatever you think will protect your purchasing power better than the full faith and credit of Uncle Sam. The price of any one good, even gold, is far too vulnerable to exogenous changes in demand and supply to base a currency system on its immutable price in said currency.

Now that we've defined money, we can talk about money supply. In the U.S., the supply of money denominated in dollars is controlled by the Federal Reserve using two basic tools. The first is the creation of physical currency, and the second is the establishment of a required reserve rate for lenders. I've inserted a few money supply pictures below. The first is the monetary base, commonly referred to as M0, which is physical currency and bank reserves. This is commonly referred to as "high powered money" because it has not yet been leveraged through our fractional-reserve banking system.

Note the fairly steady rise in reserves over time (I'm sure this would be pretty linear on a logarithmic scale) and the huge spike in just the past few months. The second picture is that of various other monetary aggregates that are officially measured. You should note that the bulk of the money supply is created by the banking system through loans. The amount of lending capacity is theoretically limited by the required reserve ratio of Federal Reserve member banks, currently set at 10%. This means that every dollar of currency and reserves created by the Federal Reserve has the theoretical potential to become 10 dollars of money supply. The broadest measure of the money supply currently compiled by the Federal Reserve is known as M2, which is currency+reserves+checking accounts+travelers checks+savings accounts+CDs under $100,000. The Federal Reseve stopped compiling M3 data a few years ago because it was very expensive to do so, and they felt that it conveyed little information beyond M2. You can see that M2 tends to be roughly 7-8 times the size of the currency base, and M3 tended to be roughly 10 times the currency base, indicating that the system generally creates about as much money as is statutorily allowed.

The next component of the equation of exchange is the velocity of money. This is simply a measure of the number of times that the money supply turns over for a given period. It is computed by dividing GDP by the monetary base. In the picture below, the monetary base is M2 from the above picture, and it shows that the velocity of money has had a mean of 1.67 over the past 100 years, and has ranged from a low of 1.15 to a high of 2.12.

The third component of the equation of exchange is the price level. It isn't really useful to think of the price of the "average good produced" by an economy since goods have such wide variation in value, so in practice we try to measure the change in the price level of a representative basket of goods over time. This is complicated because consumer preferences, technology, and quality of goods produced are all constantly changing, but economists have developed some fairly sophisticated methods to correct for these things. It is extremely important for whomever is responsible for managing the money supply to have a good handle on how the general price level is changing over time.

The final component of the equation of exchange is Q, or the quantity of production. Once again, it makes very little sense to think of the units of "product" produced because goods are so variable, so we tend to think of product in terms of dollars (which brings price level into the equation by definition). GDP is typically broken down into the following: GDP = Consumption + Investment + Government Spending + Net Exports. Note that we are only trying to measure the value of final goods produced, not every intermediate step in the chain of production. When we are trying to measure how real GDP (total productivity) has changed over time, we scale our nominal GDP number by our best estimate of the change in the price level over the given time period. Below is a graph of real and nominal GDP over time.

In the next post we'll be looking at the evolution of various schools of macro-economic thought through the lens of the equation of exchange. The elasticities of the four inputs to the equation will be key to the deflation discussion, along with increasing financial intermediation in directing productive activity, inter-temporal effects, the role of expectations in decision making, the danger of aggregating individual choices into something we call "demand" and a particular focus on the role of money as a unit of account.

Sunday, December 14, 2008

Barney Frank makes me hate Massachusetts even more than I already do, which is saying something.

Unwittingly caught the 60 Minutes piece on Barney Frank tonight.  If you caught it, you may have noticed how flabbergastingly often your jaw dropped onto the carpet.  From the transcript on the 60 Minutes website:

Barney Frank has been called the "smartest guy in Congress," which is lucky for us since he works on some of the thorniest issues around.

I have literally never heard Barney Frank described this way, and at no point did 60 Minutes attempt to explain why we should consider this boorish turd any smarter than the rest of Congress.  Also, is the "smartest guy in Congress" just Lesley Stahl's super-coy attempt at an insult?

"But I wonder why? Because when these companies finally get into bankruptcy they can do the tough things that they can't otherwise do," correspondent Lesley Stahl asks.

"There's only one thing you can do in bankruptcy: break your word, break your deals. It allows you to say to the small businesses, who have been catering lunches for you, 'Sorry, we're not paying you.' It allows you to go to the workers and say, 'Sorry, we're not paying you,'" Rep. Frank says.

Hear that auto companies?? Don't try taking the easy way out--we're on to you!

Again though, this is par for this piece--a perspective I've literally never heard before.  Chapter 11 just gets you out of every legal obligation you have? That's literally the "only one thing" that happens in Chapter 11? Does Barney Frank realize that there are, like, econ and finance professors who access and opine on the "internet," and that regular old people can "google" things like "chapter 11" and figure out whether or not they're essentially get-out-of-jail-free cards? And if this is what bankruptcy is like, then why aren't the Big 3, currently hemorrhaging debt like some third-world government, why aren't they filing like right freaking now?

"What about the idea that in capitalism, if a company doesn't cut it, they die?" Stahl asks.

"That's what Herbert Hoover said. And Franklin Roosevelt said no," Frank says.

"It's what Darwin said," Stahl points out.

"Yes, it's true," Frank acknowledges. "And Darwin was a very good biologist. I don't think he was much of an economist."

In Frank's defense, Stahl is, and has proven relentlessly to be, a complete simpleton who probably shouldn't be on TV as much as she is.  But, yes, according to this exchange, FDR alone stood against the united if unlikely axis of Herbert Hoover and Charles Darwin.  Hoover, I've heard, signed Smoot-Hawley only after considering a few of the early passages in Origin of the Species.

"What we're now faced is with all the taxpayers having to prop up companies that made terrible decisions consistently," Stahl remarks.

"No, we're not propping up companies," Frank insists. "That's your mistake. We're propping up individuals. The world doesn't consist of companies. The world are people. The country is people."

I've been sitting here for a few minutes trying to come up with something witty to say about this.  Nothing's coming to mind.  I'm sure this is philosophically invidious in some way, and that it somehow demonstrates a dangerous and misleading way of thinking.  But I can't get past how indelibly retarded it is.

"You know, there's a theory out there that you, the congressman, had this public spanking of these [car-company CEOs] in order to cover yourselves,” Stahl asks but then Frank interrupts:

"That's the kind of argument that people who do not have any idea what they're talking about like to make.”

"Are you telling me I don't know what I'm talking about?" Stahl asks.

"By making that argument, yes," the congressman says.

This is the closest we're ever going to see to Lesley Stahl speaking truth to power.  And that's about the reaction you'd expect power to have.  Frank's arrogance is as pathetic as it is utterly incommensurable with his actual fluency in subjects like economics.

By the way, you'll have to watch the clip to see it, but Stahl literally makes a pouty-face after her second line there. 

"Television is apparently the enemy of nuance. But nuance is essential for a thoughtful discussion," Frank told her.

Like discussions about Calvin Coolidge and the principles of evolutionary biology.

The relationship between Frank and Paulson has soured lately, since Paulson hasn’t spent any of the rescue money to help struggling homeowners. "Secretary Paulson is refusing to use that money that Congress voted to reduce foreclosures. The bill says he’s supposed to. He won’t do that," Frank says.

"You wrote the bill," Stahl points out. "You’re, quote, 'the smartest man in Congress.' How did it happen that you wrote a bill that the secretary of treasury has the power not to fulfill in the way you wanted it fulfilled?"

"Because there’s a metaphor that works here: you cannot push on a string. There’s no Constitutional way to force them to do things," Frank says.

"But didn’t you write the bill in a way that allows him to do this? And you could have written it differently," Stahl remarks.

"No. There’s no way you can force people to do things," Frank says.

This is my favorite exchange, I think.  Stahl brings another sharp comment, but I suppose she's probably just trying to lead him along.  It's my favorite exchange, of course, because what Frank says is demonstrably false.  Why "demonstrably"? Because it says so in the first two articles of the Constitution, the very document Frank references here.  One of the reasons behind the great expansion of the executive bureaucracy (a bureaucracy Hank Paulon works in) is that the legislature has, over the past 100 years or so, delegated far more discretion to the executive branch in terms of how laws and programs are enacted.  So, while one might argue that TARP doesn't have the teeth to give the legislature direct oversight over Paulson, to say that it couldn't be written that way is a blatant lie.  Then again, maybe Congress's smartest man doesn't know the rules.  Either is reprehensible.

Then again, Frank's pretending to care for the rules is even more disingenuous.  Fifty bonus points if you can find in TARP anything about giving cash to auto companies, which is exactly what Frank is exhorting Paulson to do. 

But to recap, TARP is a)unenforceable and b)not broad enough to combat the whole problem.  Frank designed TARP.  Frank is Congress's smartest man.  My eye is bulging from my skull.

But there are those who argue that reducing foreclosures would reward and encourage delinquencies. "You have the guy who’s working three jobs so he can pay off his mortgage; you have a guy who’s delinquent. He gets help, this other guy doesn’t get help. So isn’t there an unfairness…," Stahl points out.

"Yes, there is," Frank acknowledges.

"That you're setting up? And why shouldn't the guy over here who's been paying off his mortgage," Stahl asks. "Why doesn't he deliberately stop paying it."

"Let me give you another unfairness. I wanna see what you think about this. What about someone who's been working hard, 40 hours a week, maybe with some overtime, and goin' to work every day. And then his neighbor loses his job. The neighbor starts getting unemployment insurance. The neighbor who lost his job is getting money for nothing, from the government. There's some unfairness there," Frank argues.


Frank, who composes letters by Dictaphone - not e-mail, and doesn't even use a computer, delved into the intricacies of modern banking, becoming the authority on all things Wall Street.

Who constructed these sentences?!? Are they being ironic? Who in the right mind would call Frank "an" authority on Wall Street, let alone "the" authority? And how is all this accomplished without a computer? Would you trust your accountant if he didn't use a computer? Of course not.  And here's Barney Frank throwing around billions and billions and billions of other people's money and he doesn't use an effing computer.

"The problem in politics is this: you don't get any credit for disaster averted. Going to the voters and saying, 'Boy, things really suck. But you know what? If it wasn't for me, they would suck worse.' That is not a platform on which anybody has ever gotten elected in the history of the world."

Yes, Barney, the problem is that politicians don't get nearly enough credit.  You spend other people's money for a living, taking photos over shaking hands every time you come up with a new and incompetent way of pissing away money you never earned.  What a reprehensible turd you are.

Note: didn't Bush win in 2004 on this platform?


Friday, December 12, 2008

Still coming soon..

TARP money will be used to float automakers until new administration / Congress is ready to revisit. I expect headlines imminently to that effect. Read Don Boudreaux's editorial in yesterday's WSJ as to why this is a bad idea.

Wednesday, December 10, 2008

Coming Soon...

This has been making the rounds, but I want to make sure it finds its way here at some point. I'd give a hat tip or credit, but I'm not sure where it should go. I first saw it, I suppose, on Will Wilkinson's facebook page.

Non-sequitur of the day.

The Turner household has had a longstanding moratorium on Burger King (somewhat tyrannically imposed by one member who, she claims, "doesn't really care for their fries"), but this Turner has always thought of them as sensationalist marketing gone very right.  Their bits with a masked and footballing Burger King were the most forgivable of the endlessly-recycled commercials during the 2005-7 football seasons, and their recent "Whopper Virgins" campaign is pretty cute, I suppose.

Cute, did I say? I meant offensive.  People are creating a fuss over this apparently imperialistic/cruel/wasteful exercise, but the WTF-prize goes to Sharon Akabas, who, unsurprisingly, hails from Columbia University.

"It's outrageous," said Sharon Akabas of the Institute of Human Nutrition at Columbia University. "What's next? Are we going to start taking guns out to some of these remote places and ask them which one they like better?"

Ignore for a moment the typically offensive implication that these places are filled with noble savages, childlike innocents whose fall from grace can only begin with the introduction of guns by Westerners (a la Steinbeck's The Pearl), and just focus on that remarkable leap of association.  Yes, Akabas, Whoppers and guns are, despite some cosmetic differences, basically the same thing. 

See the rest of the articles for some equally (and, by even these standards, remarkably flimsy) arguments against the King's capitalistic plague, most of which amount to: how dare Burger King spend its money instead of...giving it to me?!?


I highly recommend checking out Russ Roberts's EconTalk podcast over at
http://www.econtalk.org/. He is a faculty member of George Mason University and the podcast is brought to you by the Library of Economics and Liberty. He also blogs here with Don Boudreaux, who is the Economics Department Chair at George Mason University. Don has put together a great department of Libertarian Economists, and many of the blogs I follow are written by faculty of said University (Brandon T put me on to many of these).

Still working on my deflation post. The scope keeps widening on me and I seem to need to research every sentance to make sure I get the logical steps right.