Tag: economics

The incompetence of the elite

Lest you think the people of the West are being governed by their betters. It’s gotten to the point that we need a new word to collectively describe the increasingly inept oligocracy. I suggest “an incompetence of politicians”:

Her rapid rise to become the youngest minister in government has taken some colleagues by surprise. Now extraordinary claims are circulating at Westminster that Chloe Smith was appointed because David Cameron was confused about her credentials. Miss Smith, who became the youngest MP in Parliament when she won the Norwich North by-election in 2009, was promoted last weekend to become Economic Secretary to the Treasury in the mini reshuffle that followed Liam Fox’s resignation….

After Mr Cameron told Miss Smith he would like to offer her the post, she is said to have replied: ‘Well, thank you Prime Minister. . .It would be an honour, but the Treasury…it’s a little daunting…’

The Prime Minister allegedly responded: ‘Not daunting surely for someone who was a chartered accountant?’

The confusion may have arisen because the MP, an English literature graduate, worked for accountancy firm Deloitte before entering politics, but as a consultant not an accountant. The confusion may have arisen because the MP, an English literature graduate, worked for accountancy firm Deloitte before entering politics, but as a consultant not an accountant The Norwich North MP is then said to have admitted: ‘Er, well, actually Prime Minister, I wasn’t an accountant. I was a management consultant in an accountancy firm.’

Mr Cameron apparently then said ‘never mind’ and welcomed Miss Smith aboard.

So chartered accountants are supermen? What? Anyhow, it can be little surprise that the economies of the West are sinking into a slough of debt and contraction when they are overseen by such a group of astonishingly corrupt and incompetent individuals. Now, I’m not a credentialist by any means, but even I would say it is going a just a bit too far in the other direction when, in a time of very dangerous economic and financial crisis, the Economic Secretary to the Treasury is a young woman with a degree in English Literature.

That being said, she’d be hard pressed to do worse than Gordon Brown did as Chancellor of the Exchequer. Or, for that matter, as Paul Krugman would if given half the chance.

Check on three

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.

US economy: the policy solution series

For two or three years now, people have been after me to provide a series of recommendations for how the USA can get out of its negative economic trajectory and return to genuine economic growth. I resisted this idea because I see absolutely no chance whatsoever that anyone who matters is going to listen to me or that creating a list of policy measures will serve to do anything except inspire a copious amount of criticism from those who don’t understand the issues at hand.

However, after three years of seeing the financial and political powers-that-be repeatedly make the same mistakes again and again, I figure that it can’t hurt to suggest a series of political policies that would not necessarily fix anything in the short term, but would permit the USA to survive the global economic depression intact as a functioning political and economic entity… not that this is necessarily desirable. Just to be clear, I have zero expectations of anyone of any significance paying attention to these policy prescriptions and I remain entirely confident that the politicians and bankers will continue to make things worse and the USA will cease to exist in its present form by 2033.

So, over the next few days I will begin by posting my diagnosis of the more problematic aspects of the situation, followed by my recommendations for addressing those problems.

Notes on the European economy

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.

Dancing around the D-word

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.

The age of debt and deceit

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”.

Krugman the caterer

Paul Krugman’s column sometimes makes me think of a slow-pitch softball pitcher nonsensically called up to the big leagues:

Politicians who always cater to wealthy business interests say that economic recovery requires catering to wealthy business interests. Who could have imagined it?

That’s true. And there is even a corresponding truth. Economists who always cater to banks and government say that economic recovery requires more bank credit and more spending by government. Who could imagine that either?

A silver lining in the economic cloud

The consequences of the global depression aren’t all bad; more women might actually stay home to raise their children. But once it becomes clear that a working mother doesn’t actually make any net profit from her job, it should be readily apparent that she is only “working” in order to socialize and avoid the harder work of raising her children:

Every day, dozens of middle-class mothers decide they cannot afford to return to work after having a baby. It’s not because they believe a woman’s place is in the home — many love their jobs and want to return to well-paid careers — but because it’s cheaper to stay at home.

In the past 12 months, on average, household bills have soared by 20 pc, National Insurance has risen by £70 a year, £545 in child tax credits has been taken away, and child benefit was frozen. Childcare costs have rocketed, too. According to children’s charity the Daycare Trust, parents pay 25 per cent more to send a two-year-old child to nursery than five years ago.

And the situation is going to get worse. From next year many families earning more than £25,000 will be stripped of even more child tax credits because of Government cuts. And from January 1, 2013, any household with a higher-rate taxpayer paying 40 per cent tax will lose child benefit worth £1,752 a year.

Figures Aviva has compiled for Money Mail show the cost of childcare is already so high that a mother of two children earning £25,000 a year — and with a husband earning £43,000, just over the higher tax threshold — would have just £300 left a month once childcare and the commuting costs have been taken into account.

And after child benefit is stripped away next year for families with a higher-rate earner she will have just £153 a month left from a month of full-time work — a figure which will drop further if childcare costs and fuel prices keep rising. Her husband’s salary must cover all bills, housing costs, clothes and food and savings.

This article highlights something I pointed out some years ago, which is that about half the female participation in the workforce is detrimental to society. It lowers wages, it harms the development of children, it decreases the quality of marriage, it increases infidelity and divorce, and it reduces workplace productivity. And all for nothing. There are no positive societal consequences from the increased involvement of women in the workforce; many suffer and no one benefits except for four relatively small groups.

1. Daycare providers. An industry exists where one wasn’t required before.

2. Corporations. The increased supply of labor has pushed media male wages down to a level last seen in 1968.

3. Divorce lawyers. “Compared to non-working women, those with a full-time job have a 29 per cent higher odds of divorce.”

4. Retired old men. In 1950, 45.8 percent of men over 65 worked. In 2000, 17.5 percent did. In 1950, 86.9 percent of men 55-64 worked. In 2000, 67.3 percent did. Young mothers are leaving their children in daycare and working in order to pay for old men to play golf. This is not the most sustainable of societies, and as Instapundit likes to say, that which cannot continue won’t.

There are exceptions to every rule and about 30 percent of women have always worked. But society needs middle class young women to marry, stay home, and raise children. It doesn’t need them making Powerpoint demonstrations and having affairs with the married sales manager.

Immigration is good for jobs!

Yeah, not so much:

“Of jobs created in Texas since 2007, 81 percent were taken by newly arrived immigrant workers (legal and illegal),” says the report from the Center for Immigration Studies, a group that advocates reduced levels of both legal and illegal immigration. The report estimates that about 40 percent of the new jobs were taken by illegal immigrants, while 40 percent were taken by legal immigrants. The vast majority of both groups, legal and illegal, were not American citizens.

It never ceases to amaze me how politicians and economists alike insist on demonstrating that they don’t understand Economics 101. What happens when you increase the supply of labor while demand is flat-to-negative? The price goes down. Great for corporations, not so great for actual people who need to support their families. Immigration, legal and illegal, is a major part of why so many Americans are out of work while corporate profits are doing very well despite the depression.

The devolution of economics

It’s not just scientists convinced of the universal superiority of their method who are deluded. Tim Price cites an amusing example of the extraordinary arrogance of economists:

“Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem. “One of my favourite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart ?” I responded something to the effect of, “Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century.” To which you replied, “But is he smart like us?”

The thing is, most economists are extremely intelligent, particularly the more influential ones. One of the remarkable things about Rothbard’s history of economic thought is the way most – not some, most – of the significant economic theoreticians prior to the academic professionalization of the field had extremely successful careers in business, politics, or the Church. And their theoretical influence in most cases cannot be a considered a consequence of their societal success, because their theoretical writings tended to precede their obtainment of societally significant positions. The publications were, in fact, not infrequently the reason for their appointment to such positions.

The ironic thing is that the credentialization of the field has tended to reduce the power and influence of even the most intelligent economists, dumb down the general consensus, and permit the elevation of the less gifted at the expense of the more talented. One could not go so far as to say that Mises and Rothbard wasted their many decades in an unappreciative academy, given their massive literary output, but they were certainly far less materially influential than the economic theoreticians of yore who were elected to Parliament, handed control of monopolies like the East India Company, appointed Controller General of Finances by foreign countries, or given a royal charter to establish a central bank.

Now, one cannot read the heavily credentialed Paul Krugman on a regular basis without noticing that his arrogance is not supported by the intelligence of his political commentary, the accuracy of his economic predictions, or even the breadth of his theoretical knowledge. The decline of economics is especially apparent when one realizes that many of his arguments were anticipated and rebutted by men like John Locke in the 17th century.

Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government’s changing the definition of a foot or a yard. Locke put it dramatically: ‘one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches…’.

“Furthermore, government, the supported guarantor of contracts, thereby leads in contract-breaking: The reason why it should not be changed is this: because the public authority is guarantee for the performance of all legal contracts. But men are absolved from the performance of their legal contracts, if the quantity of silver under settled and legal denominations be altered… the landlord here and creditor are each defrauded of twenty percent of what they contracted for and is their due…”

This is precisely what Karl Denninger keeps banging on about at the Market Ticker when he points out how the Federal Reserve’s low inflation targets are in blatant contradiction to their charter to maintain price stability. As for Walras, whose neoclassical general-equilibrium theory is still in the process of being methodically dismantled and rubbished along with other classical fossils such as Ricardian free trade theory, the flaws in his perspective were presaged in Richard Cantillon’s Essay on the Nature of Trade in General, published in 1730.

There is no question that economists are highly intelligent. It requires a high degree of intelligence in order to produce such a vast and convincing body of literature rationalizing politically useful concepts that have been known to be false for more than 300 years.