Mailvox: context is king

Druidhouse perceives a nonexistent contradiction:

in the interview you say that WWII didn’t get us out of the depression, but rather that the fact that the u.s. was the only manufacturing facility left standing and that europe and the rest of the world were in rubble, thereby giving us a monopoly for a while on manufactured goods. but it was precisely WWII that left Europe’s infrastructure in ruins and america’s unscathed which gave us that monopoly. you are expressing a contradiction. and there’s nothing wrong with my reading comprehension.

I am not expressing a contradiction here. While there is nothing wrong with Druidhouse’s reading comprehension, or more to the point, his listening comprehension, his confusion stems from his ignorance of what “WWII got us out of the depression” means in the economic context.

In that context, which of course is the context in which the Alt Investors interview took place, “WWII got the USA out of the Great Depression” is a Keynesian and Neo-Keynesian argument in which it is asserted that the huge increase in government expenditure involved in the production of war material led to the post-war economic growth. It absolutely does NOT mean that “winning the war and surviving with the only intact industrial infrastructure” led to economic growth.

This should be obvious, since the economists who make the “WWII solution to depression” argument are not advocating World War III and the destruction of the European and Chinese industrial infrastructures, but rather increased government expenditure. It is a particularly stupid argument, of course, since Germany, Japan, Great Britain, and the Soviet Union also vastly increased their defense spending without realizing any post-war economic growth as a result… and it was not even necessary for the USA to enter the war to ensure the destruction of the German, Russian, French, Italian, and British infrastructures.

Interview

Here is the interview with Alt Investors I did yesterday for those who might be interested. There are a few moments with some very bad buzzing on the line that lasts about five seconds each time, so consider yourself warned.

Since there has been an amount of interest in the topics being discussed, I wouldn’t mind having a transcript of it. If anyone is bored enough to type it up, please send it to me and I’ll post it here.

A scientific saint is exposed

English atheists like Stephen Fry and Richard Dawkins like little better than to portray saints of the Catholic Church as being frauds. Which makes it rather satisfying indeed to see that one of the secular saints of the High Church of Atheist Science has been exposed as an unapologetic fraud:

In a surprising justification for duping millions of viewers, the TV star argued that owning up to splicing archive film with real Arctic scenes during the programme would have spoiled the mood. His blunt remarks came as more footage from the series was exposed as a sham.

Speaking after our exclusive story yesterday revealed shots of a polar bear and her newborn cubs were staged in a zoo using fake snow, Sir David, 85, said: “The question is, during the middle of this scene when you are trying to paint what it is like in the middle of winter at the pole, to say ‘Oh, by the way, this was filmed in a zoo’.

“It ruins the atmosphere, and destroys the pleasure of the viewers and destroys the atmosphere you are trying to create.

Ah, I see. “Ruining the atmosphere” is apparently a legitimate basis for deceiving people under the agnostic ethic. Remember that when you’re dealing with an agnostic in the future. If afterwards, she happens to complain that you were not truthful about [insert inconvenient truth here], you can simply explain that you were entirely justified in the deceit because telling him the truth would have ruined the atmosphere and destroyed her pleasure.

It’s rather amazing that the man could have reached 85 years of age without understanding the difference between “documentary” and “dramatic re-enactment”. And it is certainly informative to note that “This type of filming is standard practice across the industry when creating natural history programmes.”

Now, I haven’t had much interest in natural history documentaries – or rather, fakumentaries – since Marlin Perkins stopped ordering poor Jim to molest crocodiles in the river. But this confirms what I have always assumed, which is that they are little more than movies primarily designed for entertainment under the guise of being educational.

Mailvox: this is not the multiplier you’re looking for

Albatross gets caught attempting to pull the old switcheroo:

There are two senses in which the multiplier is used. In one sense, the multiplier is used as a statistic about government spending (i.e. suppose the government spends one dollar more, if GDP increases by 1 dollar, you have a multiplier of one). In this case, you wouldn’t understand my point. In another case, the multiplier refers to a theoretically posited increase in private sector activity because the government enables an “injection” into the economy (this is the sense in which the money multiplier exists). I meant the second sense and most Keynesians mean the second sense. You can’t understand Keynes’s thought experiment vis a vis burying money (since no gov’t money need be spent) unless you understand the injection multiplier as opposed to the statistical multiplier. I can go into further details if you’d like but I this is enough for you to understand why we came to different extensions from your conclusion.

Albatross failed to recognize which multiplier was the subject at hand. The entire 2008-2009 debate over the multiplier, and the context of the ECB study to which the linked article was referring, solely concerned the “fiscal multiplier”, which does not render Albatross’s point difficult to understand so much as entirely irrelevant. For example, here is The Economist’s article on it, to which Paul Krugman subsequently responded in his post entitled “Multiplying Multipliers”.

The debate hinges on the scale of the “fiscal multiplier”. This measure, first formalised in 1931 by Richard Kahn, a student of John Maynard Keynes, captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion.

The size of the multiplier is bound to vary according to economic conditions. For an economy operating at full capacity, the fiscal multiplier should be zero. Since there are no spare resources, any increase in government demand would just replace spending elsewhere. But in a recession, when workers and factories lie idle, a fiscal boost can increase overall demand. And if the initial stimulus triggers a cascade of expenditure among consumers and businesses, the multiplier can be well above one.

The multiplier is also likely to vary according to the type of fiscal action. Government spending on building a bridge may have a bigger multiplier than a tax cut if consumers save a portion of their tax windfall. A tax cut targeted at poorer people may have a bigger impact on spending than one for the affluent, since poorer folk tend to spend a higher share of their income.

Crucially, the overall size of the fiscal multiplier also depends on how people react to higher government borrowing. If the government’s actions bolster confidence and revive animal spirits, the multiplier could rise as demand goes up and private investment is “crowded in”. But if interest rates climb in response to government borrowing then some private investment that would otherwise have occurred could get “crowded out”. And if consumers expect higher future taxes in order to finance new government borrowing, they could spend less today. All that would reduce the fiscal multiplier, potentially to below zero.

However, it must be noted that the notion of potentially reducing the fiscal multiplier below zero is practically – I should not have said theoretically – unthinkable, for the obvious reason that there has never been a time since the original publication of The General Theory that any of the developed economies has come anywhere close to reaching full employment, except for revised definitions of “full employment” that all fell well short of an economy operating at full capacity. No Keynesian or Neo-Keynesian spends any time whatsoever considering theoretical sub-zero stimuli, for the obvious reason that they tend to render the entire Keynesian perspective either unnecessary or counterproductive. The usual Keynesian claim is that fiscal multipliers reliably range from 1.5 to 3x… which has been shown empirically to be untrue.

Furthermore, Albatross not only erroneously attempted to apply the “injection multiplier” to a discussion that explicitly concerned the “fiscal multiplier”, but also defined the injection multiplier incorrectly. The injection multiplier is not “a theoretically posited increase in private sector activity because the government enables an “injection” into the economy” but rather “any injection into the economy via investment capital, government spending or the like [that] will result in a proportional increase in overall income at a national level.” It includes, but is not limited to, the definition he provided.

Returning to the orginal point, it’s not at all surprising that the fiscal multiplier has been determined to reliably be less than one. As I noted in RGD, Robert Barro’s study of federal spending in WWII demonstrated that even in the most commonly cited Keynesian success story, “the estimated multiplier for defense spending is 0.6-0.7”.

John Maynard is still dead

But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:

In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”

Here are some key findings.

We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.

This is contra everything that is ever taught about GDP in mainstream economics. TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.

And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.

Sand in the iron fist

Even a murderous, totalitarian government isn’t enough to maintain complete control sometimes:

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.

The last of Wukan’s dozen party officials fled on Monday after thousands of people blocked armed police from retaking the village, standing firm against tear gas and water cannons.

Since then, the police have retreated to a roadblock, some three miles away, in order to prevent food and water from entering, and villagers from leaving. Wukan’s fishing fleet, its main source of income, has also been stopped from leaving harbour.

The Chinese Communists will win this one of course. But they won’t always win. And they have to win every single time to maintain control. The rebels only have to win once. It is interesting to see how even communist societies have to deal with the realities of socionomic pressure once the credit boom ends.

The most importantest nomination ever!

Ross Douthat considers Ron Paul’s surge in Iowa and is inspired to accomplish the rarely seen double-sellout on principle:

Even as the national party prepares to choose between the former speaker and the former Massachusetts governor, Iowa Republicans may end up choosing between Gingrich and Representative Ron Paul. In every post-Thanksgiving poll but one, Paul has been neck and neck for second place in Iowa. In most of them, he has lagged well behind the soaring speaker, coming in just below 20 percent while Gingrich hovers around 30. But a new Iowa survey, from Public Policy Polling, shows Gingrich leading Paul by just a single point, 22 percent to 21….

Iowa Tea Partiers face a choice. If the town hall crashers and Washington Mall marchers of 2009 settle on a Medicare Part D-supporting, Freddie Mac-advising, Nancy Pelosi-snuggling Washington insider as their not-Romney standard bearer in 2012, then every liberal who ever sneered at the Tea Party will get to say “I told you so.” If Paul wins the caucuses, on the other hand, the movement will keep its honor – but also deliver the Republican nomination gift-wrapped to Mitt Romney.

It’s a stunning achievement. In order to prevent Barack Obama from winning a second term, Republicans must sacrifice principle to pragmatism and nominate the self-styled progressive Republican, Mitt Romney. But in order to prevent Mitt Romney from being nominated as the Republican candidate for president, Tea Party Republicans must sacrifice principle to pragmatism and vote for the Medicare Part D-supporting, Freddie Mac-advising, Nancy Pelosi-snuggling Washington insider, Newt Gingrich.

The problem is that too many Republicans listen to this sort of nonsensical analysis, all of which is intended to accomplish precisely one purpose: convince conservatives to vote against their own principles. Once they have done that, it doesn’t matter who wins; the Bank Party has already won.

There are actually only two distinct candidates in the 2012 election. There is Ron Paul, who represents the U.S. Constitution, and there is Newt Romney O’Bama, who represents the Bank Party. The unprincipled pragmatists always like to claim, in defiance of both mathematics and logic, that a vote for Not-X is a vote for X, and yet, whereas the more salient and material fact of the matter is that a vote for X, Y, or Z is a vote for the set of {X,Y,Z}. There is no substantive difference between Romney, Gingrich, and Obama on any of the major issues presently facing the nation.

I don’t believe Ron Paul can win the Republican nomination for president. But then, I didn’t believe Tim Tebow could lead the Broncos to the top of the AFC West either. Roll Ron roll!

A progressive standard-bearer

His views “are progressive”. That is straight from the man’s mouth. Seriously, even in the eye of the economic hurricane, this is the man that the Republican establishment genuinely prefers to Ron Paul… which should tell you everything you need to know about the Republican Party. If they nominate Newt Romney, there is absolutely no way that any self-respecting conservative or libertarian can belong to or support the party.