Tag: economics

Some of my 2011 economic predictions are bang on the trend, but may not happen as described by the end of the year. Specifically 8 and 9.

8. There will be a serious Euro crisis, most likely brought about by a sovereign default or a nation announcing it will be leaving the Euro. Italy is the most likely candidate.

Political and economic crisis in Italy spurred fears of a split in the euro zone with borrowing costs for Europe’s third biggest economy near unsustainable levels and the bloc unable to afford a bailout.

Yeah, that doesn’t look too bad at the moment. Greek is already in technical default with the 2-year bond up to 108% and the one-year at 222%. Double your money! The big banks simply don’t want to call it that because doing so will trigger all the credit default swaps that are hanging over their heads. And Italy will pull out of the Euro sooner or later, but not necessarily by December 31st.

9. One U.S. state and at least three major cities (100k population plus) will attempt to file for bankruptcy or federal bailout. (It’s unclear if states can file for bankruptcy and public employee unions will oppose the city filings.)

Alabama’s Jefferson County filed for bankruptcy court protection on Wednesday in the biggest municipal bankruptcy in U.S. history. Commissioners for the county, which is home to Birmingham, the state’s biggest city and economic powerhouse, voted 4-1 to declare bankruptcy after meeting behind closed doors for two days in a last ditch-attempt to restructure its debt out of court.

Harrisburg also filed for bankruptcy this year and I thought it counted until I learned it’s only got a population of 50,000. You’d think I would have remembered that since I went to college about an hour away… of course, I never, ever went there, which probably should have been my first clue. I’d count Jefferson County and its 658,466 population but not Harrisburg. The big question, of course, is the state of Illinois. That’s the state I expect to declare bankruptcy first.

It does, however, look as if the blog will just barely make it to the predicted 2,750,000 for the year, up 16% from last year’s 2,370,028. On the other hand, the number of bank failures has decreased significantly in 2011, at this rate it may not even break 100.

I’ve been hearing from a few people here and there that they would be interested in seeing me write a basic economics textbook that could be used as a homeschooling resource. I have to admit that while the idea is of some interest to me, it isn’t something that I’ve ever contemplated too seriously in the past because most textbooks are written by academics with PhDs who sell them to captive college audiences. And, of course, there is no shortage of them, so why would the world need another one?

On the other hand, a look at Greg Mankiw’s textbook, which is used at Harvard where he teaches, offers a very strong counterpoint to that argument. Consider what he declares to be the Ten Principles of Economics in his textbook entitled Principles of Economics:

1. People Face Tradeoffs.
2. The Cost of Something Is What You Give Up to Get It
3. Rational People Think at the Margin
4. People Respond to Incentives
5. Trade Can Make Everyone Better Off
6. Markets Are Usually a Good Way to Organize Economic Activity
7. Governments Can Sometimes Improve Market Outcomes
8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
9. Prices Rise When the Government Prints Too Much Money
10. Society Faces a Short-Run Trade-off between Inflation and Unemployment

Reading this, my first thought is that it is no wonder some of his students walked out of his class. My second one is that it is no mystery why Mankiw failed to see the 2008 crisis developing and still fails to recognize the current economic depression. My third thought is that perhaps a text on basic economic principles and history is in order after all.

When I look at Mankiw’s principles, I see two reasonably solid ones, (1,2), four that are obviously incorrect or incomplete to the point of being misleading, (3,5,7,10), and four that are merely irrelevant due to being incomplete. (4,6,8,9).

Anyhow, I have to finish the current novel first, which will be sometime next summer, but it’s not too early to start taking notes and looking at the deficiencies of current textbooks. So, the two things I’d be interested in knowing is how many people might be interested in an electronic econ textbook priced around $4.99 and what areas merit being covered. For example, Felsenburgh suggested that a proper economics education should begin with the School of Salamanca, but that is obviously insane to anyone who has actually read Rothbard’s History of Economic Thought. I don’t think even homeschooled students would be able to stay focused on an economics course that begins with a diverse group of people predominantly grouped together on the basis of their arguments for the legitimacy of usury.

This isn’t to say that the Salamancans aren’t important or denigrate their contributions to economic thought, only that they are not exactly the ideal point of entry to the field.

Harvard students walk out of Greg Mankiw’s basis economics class:

Today, we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.

As Harvard undergraduates, we enrolled in Economics 10 hoping to gain a broad and introductory foundation of economic theory that would assist us in our various intellectual pursuits and diverse disciplines, which range from Economics, to Government, to Environmental Sciences and Public Policy, and beyond. Instead, we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.

A legitimate academic study of economics must include a critical discussion of both the benefits and flaws of different economic simplifying models. As your class does not include primary sources and rarely features articles from academic journals, we have very little access to alternative approaches to economics. There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory.

On the one hand, this protest makes no sense. They’ll get no shortage of Keynesianism from Mankiw, even if most of the explicit Keynesianism won’t be provided until a subsequent macro class rather than in what is Harvard’s equivalent of Econ 101. But whether you prefer to describe Mankiw as a neoclassical or a monetarist, he’s still a Samuelsonian attempting to manage the economy in macroeconomics terms. He’s a Keynesian heretic, and would be better described as a quasi-Keynesian than an anti-Keynesian, Steve Keen’s opinion on the correct categorizations notwithstanding.

On the other, they’re absolutely right. Contra most academic programs, including the one in which I received my degree, Adam Smith is neither basic or fundamental. A proper education in economics should begin with Cantillon and Turgot.

It’s mathematically guaranteed, given the total failure of the supposedly responsible party, the Republicans, to even openly discuss the fiscal realities, much less address them. The Market Ticker walks through the numbers:

NOW we need to cut the federal budget not with a knife or a scalpel, but a chainsaw. Bachmann has said “43%.” There were gasps when she uttered those words. Sorry, that’s not enough. (Take your heart medication before continuing folks.)

Here’s the math.

Last year (Calendar 2010) we ran a 12% of GDP deficit, $1.7 trillion. This year we are tracking to run about $1.4, but we have three months left. If history repeats as to size it’ll come in around $1.4 trillion, which is approximately 9% of GDP. This is within the rough range of 9-12% of the last three years. The last year of Bush’s Presidency we ran somewhat over 9% of GDP. Obama has run 11 and 12%, respectively, and this will be ~9-10%, so there’s no change in that regard.

But withdrawing the deficit spending is not enough because the withdrawal of that money, when it runs through the economy, then produces a (gross) reduction in tax receipts. Figure 1/3rd of that deficit spending ultimately returns to the government in the form of taxes in some form or fashion by the time all of the “turns” those funds made in the economy (e.g. from company making the presidential limo to the folks making the alternator to the folks making the copper wire to the mine pulling the copper out of the ground), and subtract that off as well.

So now we need to reduce spending not by $1,700 billion but that plus about another $500 billion for the tax impact, for a total of $2.2 trillion out of $3.7 trillion spent. About $500 billion of our spending at present is interest so this means we have: $3.7 – $2.2 – $0.5 = $1 trillion in total actual federal spending available to us out of an original $3.7 trillion.

One can – and I will – take exception to the estimate of $800 billion for the net revenue consequences from what economists describe as “the multiplier effect”, but the more important point is that changing government spending patterns will have an effect on the economy. It is as foolish to apply a static government spending cut model as it is to apply a static tax revenue model. Now, we can come up with a total range of estimates by utilizing the very high multiplier of optimistic Obama administration economists, who assumed it to be 1.6, then comparing that to the actual Four Wars multiplier of Robert Barro, which worked out to 0.8.

At present, federal tax revenues are $2.3 trillion. This means tax revenues/GDP are 2.3/15.0, or 15.3 percent. For the maximum range, we’ll ignore the BEA’s estimate of G and go with the actual amount of federal spending, which is $3.7 trillion. The range of multiplier effects means that the net contribution of that government spending to the economy is somewhere between $5.92 trillion (Obama) and $2.86 trillion (Barrow). Applying the Tax/GDP ratio indicates a TOTAL tax benefit of between $906 billion and $453 billion from ALL $3.7 trillion in government spending, which means that Karl’s estimate of $800 billion in lost taxes from the aforementioned 1.7 billion reduction is almost surely too high, even before we notice that the 0.8 multiplier means that reducing government spending would tend to increase GDP and therefore tax revenues by a factor of 1.25.

So, in order to obtain the most conservative estimate of the tax effect, we have to multiply (1.25 x 1.7 trillion) x .153. This would indicate a benefit of $325 billion to GDP from the reduction in spending rather than an additional loss. On the other side, (1.6 x 1.7 trillion) x .153 means a maximum tax revenue loss of $416 billion.

I’m not sure where Karl got his interest figure, (it looks like he used the 2015 estimate), but the reported interest on the national debt is $240 billion for 2011. So, in order to prevent the debt situation from expanding, and depending upon which economist you trust concerning the multiplier effect, federal spending must be reduced to somewhere between $2,085 trillion on the high end and $1.344 trillion on the low end. And here are the current big-ticket items:

$761 billion – Social Security
$468 billion – Medicare
$269 billion – Medicaid
$598 billion – Unemployment/Welfare
$679 billion – Department of Defense + Foreign Wars

So, this is why the Tea Party and the Republican Party cannot possibly salvage the situation They’re not proposing the end of ANY of these major programs even though the nation can only afford to keep two of them, three in the unlikely event that both Defense and Social Security are entirely junked. Since that’s not going to happen, given the way in which the incompetence of politicians presently inhabiting Washington aren’t willing to even consider such drastic action, the financial collapse of the US federal government is assured.

Because I harbor Austrian School inclinations and the propensity for government malinvestment is obvious, I think the higher figure based on Barro’s multiplier is the more relevant one. It’s hardly a surprise that the Keynesian model would make government spending look more desirable and cuts to that spending more horrific, and obviously the administration economists were incorrect about that 1.6x multiplier given the failure of their $787 billion stimulus plan. But I found it to be interesting to discover that the $2.085 trillion figure works out to a 43.6% required reduction in federal spending, which tends to suggest that Michele Bachmann’s economists are utilizing an equation similar to the one that I have worked out here. Perhaps old Crazy Eyes really does read Mises at the beach.

From my 2011 economic predictions: The 2011 federal deficit will exceed the projected $1.27 trillion despite the Republican House majority. This will likely be the result of emergency spending required for an economic or military crisis.

Treasury announces 2011 deficit is second highest in history. The U.S budget deficit for fiscal year 2011 is $1.299 trillion, the second largest shortfall in history.

I’m only surprised that they exceeded it by so little. Imagine how big the deficit would be if the new military crisis was war with China instead of Uganda.

Three observations from conversations I had over the last few days.

Spain: The sort of clean-cut pretty college-age girls who a few years ago would be seen working at Estee Lauder counters, at high-end restaurants, and as models or shot girls can now be seen working the suburban streets as prostitutes during the day. According to my Spanish taxi driver, the basic hourly rates haven’t changed, but both the quality and the quantity of the labor available has significantly increased. This suggests that the rates for the previous supply of street hookers have dropped dramatically.

Switzerland: In speaking to a Swiss friend, I learned that car examinations, which are required every two years for older cars, now have a waiting list of up to eighteen months. This waiting list was nonexistent two years ago. The delay indicates that increasing numbers of Swiss are keeping their old cars rather than turning them in as soon as the lease is expired, as had been their previous custom.

Germany: A police acquaintance from the gym returned from Oktoberfest in Stuttgart last week. After hastening to assure me that his interest in such matters was purely professional, he told me that he was astonished by the youth, beauty, and low rates of the nightclub girls, who apparently now go for 30 Euros, down from 70 Euros for less attractive women two years ago.

Lest the obvious escape one, these are all very bad economic signals. In a growing economy, the street whores are toothless old crack addicts working the bus stops at night and the few pretty young girls who aren’t working in some easy retail job are very expensive escorts.

1. “The average rate on a 30-year fixed mortgage has fallen below 4 percent for the first time in history. For the lucky few with good jobs and stable finances, it’s a rare opportunity to save potentially thousands of dollars each year. For most people, it’s a tease and a reminder of how weak their own financial situation is.”

2. “The American dream of homeownership has felt its biggest drop since the Great Depression, according to new 2010 census figures released Thursday. The analysis by the Census Bureau found the homeownership rate fell to 65.1 percent last year. While that level remains the second highest decennial rate, analysts say the U.S. may never return to its mid-decade housing boom peak in which nearly 70 percent of occupied households were owned by their residents.”

3. “Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession. Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead. Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster. “This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.””

Of course, more quantitative easing isn’t the right thing to do if the desire is to see the global economy return to real economic growth in the shortest possible period of time. Expanding the money supply, however one wants to label it, is the precisely wrong thing thing to do and is an action driven by the banking industry’s allegiance to a false economic model because the correct action will significantly increase the likelihood of widespread bank failure. But if one simply goes back to basic economic theory 101, it’s not hard to see why neither Bank of England’s current action nor the Federal Reserve’s previous actions can possibly work. Since it is the price of money, the Law of Supply and Demand dictates that historically low interest rates mean there is either (a) insufficient demand for money or (b) an excess supply of money.

How, one wonders, can increasing the supply of money be expected to either (a) increase the insufficient demand for money or (b) reduce the excess supply of it?

Both the Federal Reserve and the Bank of England would do much better to reduce the money supply, raise interest rates to 20 percent, and make it profitable to save and loan money again. The reason they don’t is that thanks to the Wall Street Casino, many banks are now net borrowers rather than creditors; remember that the financial institutions owe 27 percent of all U.S. debt. That is why there is simply no way out of the financial crisis without shutting down the banks.

There is Paper Money, there is Fool’s Gold, and then there are macroeconomic statistics, which make the previous two look reliable:

The nation’s economy is managing to grow modestly, reports Monday showed, despite high U.S. unemployment and growing alarm about Europe’s debt crisis.

The nation’s economy is not growing. There is now a near-complete disconnect between the map and the territory. The debt-deflation monster has barely begun to tear apart the economy and already the BEA has devolved into a bizarre Orwellian MinEcon. This was inevitable, given the way Keynesians turned “animal spirits”, or as they are now known, “consumer confidence” into a fetish that articulated a concept of lying one’s way into prosperity.

No doubt future generations will look on the period from 1950 to 2010 as an age lost to deception, where growth was believed to be the result of debt and deceit, national prosperity the result of outsourcing jobs, and industrial growth through free trade. The observable fact is that there is another word for a “service economy” and that is “an unproductive economy with high unemployment”.