Tag: economics

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.

Those who don’t know history

One of the most startling things about reading Rothbard’s An Austrian Perspective on the History of Economic Thought is how old many of the issues presently being discussed today are. Consider the following passage in light of the FOMC meeting today:

Josiah Child’s pamphlet and his testimony before Parliament were centrepieces of the debate swirling around the proposal. Child’s critics pointed out effectively that low interest in a country is the effect of plentiful savings and of prosperity, and not their cause. Thus, Edward Waller, during the House of Commons debate, pointed out that ‘it is with money as it is with other commodities, when they are most plentiful then they are cheapest, so make money [savings] plentiful and the interest will be low’. Colonel Silius Titus pressed on to demonstrate that, since low interest is the consequence and not the cause of wealth, any maximum usury law would be counterproductive: for by outlawing currently legal loans, ‘its effect would be to make usurers call in their loans. Traders would be ruined, and mortgages foreclosed; gentlemen who needed to borrow would be forced to break the law….’

Child feebly replied to his critics that usurers would never not lend their money, that they were forced to take the legal maximum or lump it. On the idea that low interest was an effect not a cause, Child merely recited the previous times that English government had forced interest lower, from 10 to 8 to 6 per cent. Why not then a step further? Child, of course, did not deign to take the scenario further and ask why the state did not have the power to force the interest rate down to zero.

Notice that these critics of artificially low interest rates already knew in 1668 what Ben Bernanke and the Federal Reserve still deny today. Force interest rates too low and the result will not be an increase in loans and subsequent business activity, but a rather reduction in the number of loans, decreasing business activity, and even an increase in the number of mortgage foreclosures.

It’s hardly possible to claim that the outcome was unforeseeable, much less some sort of black swan, when it was foreseen 342 years ago, more than 100 years before Adam Smith published The Wealth of Nations. I cannot recommend APHET enough. It is the absolute gold standard of economic history and I have been astonished how many of the core concepts I was taught were developed decades after Adam Smith actually preceded the man by centuries. And I finally understand why Schumpeter thought rather more highly of Turgot than Smith in his excellent History of Economic Analysis. I haven’t finished APHET yet, but I have already learned more economic history from this monumental two-volume work than I did from the works of Friedman, Schumpeter, and Hayek combined.

In related news, the Federal Reserve announced the following: “The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

And by “exceptionally low”, they actually mean “artificially low”, you understand. It seems relevant to cite the way Rothbard noted that the anticipated bankruptcies and mortgage foreclosures weren’t the only expected result from the forced lowering of the interest rate.

Even more revealing was Child’s reply to the charge of the author of Interest of Money Mistaken that Child was trying to ‘engross all trade into the hands of a few rich merchants who have money enough of their own to trade with, to the excluding of all young men that want it’. Child replied to that shrewd thrust that, on the contrary, his East India Company was not in need of a low rate since it could borrow as much money as it pleased at 4 per cent. But that of course is precisely the point. Sir Josiah Child and his ilk were eager to push down the rate of interest below the free market level in order to create a shortage of credit, and thereby to ration credit to the prime borrowers – to large firms who could afford to pay 4 per cent or less and away from more speculative borrowers. It was precisely because Child knew full well that a forced lowering of interest rates would indeed ‘engross all trade into the hands of a few rich merchants’ that Child and his colleagues were so eager to put this mercantilist measure into effect.

Translation: if you’re concerned about growing income inequality, then you should support higher interest rates, not rates that the central bank has artificially forced down to zero.

WND column

Helicopter Ben’s Last Roll

For the first year after the publication of “The Return of the Great Depression,” there were numerous critics who gleefully cited the media reports of economic recovery. The green shoots that Ben Bernanke’s eagle eye had spotted appeared to have blossomed into genuine economic growth and the National Bureau of Economic Research declared the recession to be officially over in 2009. However, the persistence of high unemployment rates despite the best efforts of the statisticians at the Bureau of Labor Statistics to hide the decline and the growing number of defaulting homeowners tended to belie all of the good news.

Here it comes

You may recall that as I’ve been tracking the debt sectors over the last few years, I have also been repeatedly warning that the federal government would not be able to indefinitely substitute public debt for the contraction in private debt. The gamble that the federal government could fill in the credit gap until private credit began to grow again was a high-risk one that was always likely to fail. The latest Z1 figures, reported yesterday, show that the gamble appears to be in the process of failing; consider the comparison of the growth rates of the largest debt sector, the financial, with the federal sector over the last six quarters:

Federal
+6.12% +4.16% +4.52% +4.08% +2.77% +0.96%

Financial
-4.40% -1.57% -1.99% -1.38% -0.93% -2.08%

This shows that the $4.5 trillion increase in federal debt is now slowing down while the $3.3 trillion decrease in financial debt is beginning to pick up speed again, precisely as I have been predicting. The state and local governments are shedding debt for the first time as well, being down -0.81% and -0.78% in the first two quarters of 2011. The household sector is officially down only $610 billion (4.4%) from the peak, but this is not an accurate number due to the gap between formal defaults and the very large number of informal defaults that have not yet been registered on the books of the mortgage banks.

These unreported defaults are the main reason most of the big banks stocks are trading at half their reported asset values. Everyone knows that somewhere between 35% and 60% of those paper assets no longer have any value. The net is that while total credit market debt outstanding is only down $280 billion from the Q1-2009 peak, the composition of that debt continues to change and there is a credit gap of $16.5 trillion from where the previous 2% average quarterly credit growth would have indicated.

When all these factors are taken together, it amounts to a strong indication are that the economy and the financial system are rapidly approaching another crash in the third and fourth quarters of 2011. There are, of course, other reasons to expect one, such as Greek two-year bonds being at 66.4% compared to 9.5% one year ago. But the Z1 report alone is sufficient to show that something wicked this way comes.

Mailvox: a secret admirer

SH emails to alert us to a magazine cover:

No doubt you have already been alerted to the cover of the US Sept 10-16th edition of the Economist. Is there a closet admirer at the Economist?

I had no idea what he was talking about. It turns out that the current cover of the Economist bears a certain resemblance to an economics book written by some random guy. Coincidence or harbinger of economic apocalypse? You decide.

And speaking of economic apocalypses, I note that Greek two-year bonds are now pushing 60%. That would appear to indicate default before the end of the month. Better check your bank’s exposure to European sovereign debt.

Voxic Shock: Whiskey Zulu India

In which I revisit scenario Whiskey Zulu India with the help of my producer, Vidad. In related news, Greece appears to be in full meltdown. Consider the current yields for the 2-year bond. Today: 55.388%. Last week: 32.766%. Last year: 10.576%. As the Market Ticker has warned, it looks very much as if a Lehman event is on the way.

The fake Dr. Doom

Things must be getting bad. They’re so bad that Nouriel Roubini actually thinks he can risk turning bearish again:

Speaking at the Ambrosetti Forum on the shores of Lake Como, near Milan, Roubini said in an interview: “We are in a worse situation than we were in 2008. This time around we have fiscal austerity and banks that are being cautious.” Roubini, known for his bearish views on the world economy, thinks that there is a 60 percent chance of a second recession imminently.

This guy is a complete fraud. He got lucky once, and ever since has been sticking to the mainstream consensus expectations for fear he’ll be wrong again. If he’s saying “there is a 60 percent chance of a second recession” that really means that the statistical shenanigans that disguise the ongoing 2008 to 2011 depression as a recovery are failing.