Tag: economics

Kaus on Krugman

And by on Krugman, I mean in the sense of a prison rape:

Paul Krugman now says that some kinds of Keynesian stimulus spending just aren’t as effective as other kinds. Specifically, he suggests, aid to state and local governments (to enable them to keep government workers in their jobs) is a sort of second-class stimulus:

So what happened to the stimulus? Much of it consisted of tax cuts, not spending. Most of the rest consisted either of aid to distressed families or aid to hard-pressed state and local governments. This aid may have mitigated the slump, but it wasn’t the kind of job-creation program we could and should have had.

Hmm. That’s not what I remember him saying back in 2009. In 2009, if I remember right, job-preserving aid to state and local governments was almost the most important thing in the world. Let’s see … searching … searching … Sorry I’m a little rusty … searching … whoops, hit the Times paywall … searching … ah, yes:

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high.

It’s always the same with Keynesian cultists. They hold to the faith that government stimulus works even though the economic logic dictates that it can’t. And when it doesn’t work, it must not have been big enough. And when it is shown that the stimulus was bigger than they recommended, then it just wasn’t the right kind. And when it is shown that it was the kind that they recommended, well… we’ll just have to wait for Krugman’s latest epicyclistic excuse.

Even the bad news errs to the upside

Jammie Wearing Fool points out that last week’s terrible jobs number is even worse than advertised:

Now for the really bad news: that 18,000 gain announced by the government yesterday isn’t real. For one thing, the number of jobs increased in June only because the Labor Department simultaneously revised downward the number of jobs that existed in this country during May. It’s like moving the fences at Citi Field so the Mets players can hit more home runs. It might make Jose Reyes feel better, but it doesn’t actually make him more powerful. Without the fence-moving operation in the May employment report, the June number — yesterday’s number — would have shown a decline of 26,000 jobs.

Then there’s another problem with June’s employment report. Included in the 18,000 headline number is a guesstimate that 131,000 jobs were created by newly formed — and, therefore, invisible — companies. If you want to send your resume to one of these companies, don’t bother. They probably don’t exist, and neither do the jobs the government thinks they are creating. These figments of the imagination of the Labor Department’s computers will probably disappear when the numbers are checked early next year.

The USA is looking more and more like the old Soviet Union, where the workers pretended to work and the government pretended to pay them. The downward revision game is a pretty transparent one, but it’s been around for a while. Play it right and you can always report rising numbers despite a declining trend.

In support of free trade

If you can’t trust Obama’s top economic adviser, who can you trust?

The U.S. economy is not facing a double-dip recession, but weak job growth is “a call to arms” for policymakers to take steps to reinvigorate the private sector, a top White House adviser said on Friday.

“This is not a double dip,” Council of Economic Advisers Chairman Austan Goolsbee told Reuters Insider after the government report showed the economy created only 18,000 jobs in June. “This is a reflection and reiteration that the growth rate slowed at the beginning of this year. This should be a call to action,” he added. “We need to take bipartisan action to help the private sector stand up and start growing, hiring and investing,” Goolsbee said.

He cited steps from passing free trade agreements to securing a deal on long-term deficit reduction.

So, the USA is not presently in an economic contraction, it is not facing one, and free trade boosts economic growth and jobs. I’m curious to know how many free traders don’t find support from this corner to be just a little worrisome.

Keynesian macroeconomics do not work

The brilliant economists at Harvard finally figure out the obvious:

Breaking with current economic orthodoxy, Robert Barro, Paul M Warburg Professor of Economics at Harvard University, said large spending plans should be undertaken only if they can be justified financially on their own merits. Any other spending plans end up costing the country even more than the initial outlay as interest on the debt has to be paid and the deficit cleared.

“In the long run you have got to pay for it. The medium and long-run effect is definitely negative. You can’t just keep borrowing forever. Eventually taxes are going to be higher, and that has a negative effect,” he said.

“The lesson is you want government spending only if the programmes are really worth it in terms of the usual rate of return calculations. The usual kind of calculation, not some Keynesian thing. The fact that it really is worth it to have highways and education. Classic public finance, that’s not macroeconomics.”

Turning to the $600bn (£373bn) to $800bn US package, he added it was “mainly a waste of money”. Stimulus programmes, he said, offer little more than “rearranging the timing” of economic growth. “Possibly you could make an argument that it’s worth it. But it’s going to be a negative-sum thing overall, so you have to think it’s a big benefit for boosting the recovery.”

What a pity the USA and other nations will have to go through not one, but two Great Depressions over 80 years before the empirical evidence is deemed sufficient to support what Austrians like Mises and Hayek were saying in the 1930s.

The logic supporting Keynes’s General Theory was always wrong. Its application and subsequent quantification utilizing Samuelsonian metrics was therefore always bound to be wrong as well. Modern science demonstrated the importance of empirical evidence to confirm that the logic is relevant, but if the logic is demonstrably flawed from the start, there is no need to gather the empirical evidence in order to support that conclusion.

The benefits of free trade

Do let’s hear more about how wonderful free trade is and what an intrinsic benefit it must be to everyone:

Last year, the U.S. Navy bought 59,000 microchips for use in everything from missiles to transponders and all of them turned out to be counterfeits from China. Wired reports the chips weren’t only low-quality fakes, they had been made with a “back-door” and could have been remotely shut down at any time. If left undiscovered the result could have rendered useless U.S. missiles and killed the signal from aircraft that tells everyone whether it’s friend or foe.

Apparently foreign chip makers are often better at making cheap microchips and U.S. defense contractors are loathe to pass up the better deal.

The important lesson here is that economics are not and cannot be the sole factor taken into consideration when one is contemplating the pros and cons of free trade. The fact that there is no blanket economic justification for free trade is an entirely separate matter.

HT: The Market Ticker

Inflationistas

I have a request for you all, particularly Nate. I’ve been working again on my next inflation video and in doing so ave assembled a surprising collection of competing inflation definitions from the monetarist economists. So, given this imprecision, I would like to know precisely what your definitions of inflation are. I’d like two things for each definition, the description and the statistical metric.

For example, you might describe inflation as an increase in the money supply and define the statistical metric as being M1. Or M2. Or M2 less Eurodollars, whatever. The reason for this request is that I intend to address the common monetarist conceptions of inflation as well as the more technical ones; there isn’t much point in disproving the significance of velocity when no one of a nominally monetarist position is taking it into account in the first place.

Keynesian reductio ad absurdum

Courtesy of the Secretary of the Treasury:

Treasury Secretary Timothy Geithner told the House Small Business Committee on Wednesday that the Obama administration believes taxes on small business must increase so the administration does not have to “shrink the overall size of government programs.”

The administration’s plan to raise the tax rate on small businesses is part of its plan to raise taxes on all Americans who make more than $250,000 per year—including businesses that file taxes the same way individuals and families do.

Believe it or not, Geithner’s position makes an amount of sense so long as you accept a failed economic model and then misapply it. After all, if economic growth is equal to the rate of increase of C+I+G and G is supplying all the GDP growth, then obviously everything that feeds G should take absolute priority over that which sustains C or I.

What is lost from C or I will be more than made up for by G, therefore higher rates of taxation that permit higher levels of G should be considered pro-growth policies. QED.

The WSJ salutes Keynes

There was a time, as a boy, that I read the Wall Street Journal and marveled at its apparent erudition. Now, I can seldom read a single article without rolling my eyes. But this pro-Keynesian article by Alan Blinder is remarkable for its cluelessness.

The generic conservative view that government is “too big” in some abstract sense leads to a strong predisposition against spending. OK. But the question remains: How can the government destroy jobs by either hiring people directly or buying things from private companies? For example, how is it that public purchases of computers destroy jobs but private purchases of computers create them?

One possible answer is that the taxes necessary to pay for the government spending destroy more jobs than the spending creates. That’s a logical possibility, although it would require extremely inept choices of how to spend the money and how to raise the revenue. But tax-financed spending is not what’s at issue today. The current debate is about deficit spending: raising spending without raising taxes.

For example, the large fiscal stimulus enacted in 2009 was not “paid for.” Yet it has been claimed that it created essentially no jobs. Really? With spending under the Recovery Act exceeding $600 billion (and tax cuts exceeding $200 billion), that would be quite a trick. How in the world could all that spending, accompanied by tax cuts, fail to raise employment? In fact, according to Congressional Budget Office estimates, the stimulus’s effect on employment in 2010 was at least 1.3 million net new jobs, and perhaps as many as 3.3 million.

A second job-destroying mechanism operates through higher interest rates. When the government borrows to finance spending, that pushes interest rates up, which dissuades some businesses from investing. Thus falling private investment destroys jobs just as rising government spending is creating them.

There are times when this “crowding-out” argument is relevant. But not today. The Federal Reserve has been holding interest rates at ultra-low levels for several years, and will continue to do so. If interest rates don’t rise, you don’t get crowding out.

I’m not in the mood to rip Blinder’s article apart; I’ve still got the third section of Hazlitt’s Chapter 11 to complete. But a one word rebuttal should suffice: malinvestment. My main object with regards to this post is to point out the sheer chicanery Blinder uses in making one of his points. He claims that there can be no “crowding out” if interest rates don’t rise; since the Fed has kept interest rates low, then government borrowing must not be having any effect on private borrowing.

But don’t you think it’s just a little strange to appeal to a supposedly causal factor rather than simply looking at the relevant metric? Which is to say, the amount of government borrowing compared to private borrowing. As it happens the Q1-11 Z1 report on total debt was released two weeks ago and the chart below shows exactly what has happened since 2005.

In 2005, government debt accounted for 16% of all debt, (11.6% Federal). In 2011, it accounts for 23% of total credit market debt, which has declined about $280 billion since its peak of Q3-08. In that time, household sector debt has fallen from 28% to 25% and the financial sector has reduced its debt from 32% to 27%. This would appear to show the very “crowding out” that Blinder claims cannot be possible due to the low interest rates.

But the key word is “appear”. It doesn’t actually show any crowding out, because Blinder’s entire economic model is incorrect. What it actually shows is the expected contraction of the private sector due to the ongoing economic depression as well as the utterly futile attempt of the Federal Reserve and the federal government to do exactly what Blinder wants them to do more of, which is to fill in the gap created by the private contraction. This is why the GDP numbers have held up despite all of the obvious signs of severe economic contraction; it is also why the Congress is going to raise the debt ceiling no matter what the Red Faction members say.

The problem is that it only digs the hole deeper. What we are seeing is the transformation of a mixed economy into a fully centralized command economy, where all of the economic production and consumption is directed by the State. The good news, or at least what will have to pass for the good news, is that the system will collapse of its own weight long before the red line reaches 100. But there is almost no chance that the economic interventionists will succeed and that yellow and blue lines will reverse course. They are unlikely to do anything but head downward at a faster weight, since they have already realized significant losses that have not yet been accounted for.

Just based on a very rough off-the-top-of-my-head calculation, both the blue and yellow lines would be down around 20% already if the housing market debacle was being realistically reported. To put it in perspective, if total credit market debt had been expanding at the rate it was expanding from 2005 to 2009, it would stand at $62.6 trillion, $10 trillion more than it is today. This indicates a total private debt-demand shortfall of around $14 trillion – or an entire year’s worth of GDP consumption.

Unpossible!

This would appear to be a timely article. However, this piece on prospective profit repatriation in the NYT must be a shameless lie. It’s simply not possible for there to be vast dollar balances sitting there in overseas accounts, remaining unused. After all, as we learned from Henry Hazlitt, “Because we have permitted the British to sell more to us, they are now able to buy more from us. They are, in fact, eventually forced to buy more from us if their dollar balances are not to remain perpetually unused. So as a result of letting in more British goods, we must export more American goods.”

Some of the nation’s largest corporations have amassed vast profits outside the country and are pressing Congress and the Obama administration for a tax break to bring the money home. Apple has $12 billion waiting offshore, Google has $17 billion and Microsoft, $29 billion…. “For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas.

We must, must we? Note that these are nominally American organizations that are doing precisely what the free trade champion claims that the British ones could not do. Furthermore, note that these offshore funds are not the result of imports, but rather exports. So, in addition to the loss of jobs due to imports, we’re actually seeing them lost – or at least delayed – due to supposedly beneficial exports.

This is a negative aspect of free trade that I do not believe was ever anticipated by either its historical advocates or its critics. And it underlines Ian Fletcher’s point that there are problems with free trade that go very far beyond simple matters of conventional protectionism and tariffs.

It is remarkable to see the likes of Rogers claim that each billion brought back would create 15,000 jobs, given his apparent failure to notice that if that were true, exporting that billion must have already cost a similar number of jobs. Of course, he’s incorrect about the relationship between repatriated profits and jobs, since the 2005 tax incentive that brought $312 billion back into the USA did not generate between 4,680,000 and 6,420,000 new jobs. What actually happened is that total employment increased to 2,383,000 in 2006, just barely more than the 2,268,000 increase in the year that preceded the repatriation program.

Note to the intrepid free trade advocates: This is the sort of post where it is perfectly appropriate for you to trot out your boilerplate arguments in support of free trade as if no one who studies economics has ever heard them before. They’re not necessarily going to be any more convincing than they were when you were erroneously presenting them as if they had anything at all to do with the arguments that Henry Hazlitt made in Chapter 11 of Economics in One Lesson, but they will at least be potentially relevant here.

This should not, however, be interpreted as an indication that I am inclined to pay any more attention to them now than I did previously.

Mailvox: a free trader defends Hazlitt

Much to his credit, Jake sets aside his “nations don’t exist” position long enough to attempt a courageous defense of the second aspect of Hazlitt’s case for free trade, which consists of an argument against using a tariff to establish a new industry. I have to commend Jake for taking the time to put in this effort, as I vastly prefer to see those who disagree with me honestly attempt straightforward defenses of their positions than to watch them skulk away in stubborn silence. Quotes from my post are in bold while Jake’s words are italicized.

1. The tariff grants $5 in domestic benefit for a domestic cost of $4.25.

It’s all the same. The $0.75 spent abroad is going to wind up buying American exports sooner or later. The only alternative is that they take the $0.75 and bury it, burn it, or otherwise not “cash in” their claim on American goods or resources. This “worse case” scenario amounts essentially to our trade partner “giving” the USA sweaters for nothing but green pieces of paper. Hardly a calamity for the US. I think this is what is happening to account for the oft-mentioned “trade deficit”, basically we’re importing cars, electronics, oil, food, etc and paying nothing but paper money for them. We’ve gotten away with this for a long time because of the Dollar’s status as the world’s reserve currency, foreign nations want dollars not only, or even primarily, for the American goods they can buy, but because every dollar they hold is a base on which they could pyramid more fiat money of their own. I agree this is a bad thing (long-term) and represents a serious disadvantage to domestic manufacturers, but the problem is the monetary policy, not trade. And cutting foreign trade won’t fix our problem or raise our living standards.

It’s not all the same. Jake has made the same error here that Hazlitt made in his primary argument, specifically errors #3 and 4. It’s not just a long-term issue, it is an immediate and more pressing short-term issue as well. Since it is a fact that the money may not come back to the United States for at least 35 years, the purported exports simply do not exist and their benefits cannot be assumed during the expected career of the average worker. And frankly, it should be deeply embarrassing for anyone with Austrian pretensions (referring to Hazlitt here, not Jake), to fail to recognize the massive importance of the TIME ELEMENT in economic transactions.

2. By positing a 50,000 loss of jobs in other industries, Hazlitt is assuming that labor productivity is the same in all domestic industries…. And more importantly, there is no reason to assume that the loss of domestic consumption could not be replaced with foreign consumption.

If exports are going to increase to offset the reduction in domestic demand brought about by a tariff increasing prices then we’re still going to be importing something in exchange the exports. We have to remember that a tariff on imports also harms exporting industries as they find it harder to sell their goods abroad. Also, even if domestic industries can find new markets abroad to offset reduced domestic consumption it will obviously be at a lower profit (else why wouldn’t have have already been exporting in larger quantities?).

Jake repeats his first error here and compounds it by committing new ones. It is totally incorrect to assume that all import tariffs are met with an immediate and equal response with tariffs on exports from other nations. The USA is not about to slap a tariff on Saudi oil simply because the Saudis decide to tax the import of American automobiles. This is the result of either willful theoretical blindness or complete ignorance of the existing and easily verified difference in tariff rates that now exist between countries. Nor must the exports necessarily be at a lower profit, for as Adam Smith pointed out, manufacturers first attempt to sell domestically because it is easier, not because it is more profitable.

3. It is incorrect to state that “the new tariff on sweaters would not raise American wages”

Well it’ll certainly raise wages in the sweater industry, but I don’t think that’s what Hazlitt is getting at here. Rather, he’s saying it will also lower wages in other industries that are harmed by the tariff either through reduced domestic demand for their products or reduced international demand caused by the reduction in trade a tariff brings. My reading of Hazlitt was that wages in the protected sector would rise (obviously) at the expense of wages in all other areas and general living standards. All we can say about the impact of the tariff on net is that because we’re reducing the division of labor and specialization we’d expect a negative net result.

Of course that’s what Hazlitt is saying. But both Jake and Hazlitt are incorrect, because the domestic division of labor is not being reduced, it is being expanded. Jake didn’t even address the point I made about higher wages in the new industry necessarily driving average wages higher. Even if we accept Hazlitt’s incorrect assumptions about jobs being lost, he is simply incoherent on the issue. If 50k sweater jobs replace 50k non-sweater jobs and the new sweater jobs have higher wages than the jobs they replace, average wages will obviously rise.

4. It is simply false to claim that “tariffs reduce wages”…. Even if he was correct and 50,000 jobs in the sweater industry were exchanged for 50,000 jobs outside it, the order in which those jobs would necessarily be gained and lost means that wages would go up.

But I think there would be a reduction in other industries as I discuss above. As well as a increase in the cost of living, which translates into a reduction in real wages.

Jake thinks wrong, as I show above. Moreover, he erroneously concludes that a second order effect must outweigh a first order effect.

5. The fact that American sweater manufacturing is less efficient than English sweater manufacturing does not mean that it is less efficient than any other American industry.

If it were true that American sweater manufacturing could be more efficient than alternative uses of capital within the US (even given still more efficient international production) then why would the tariff be needed? Wouldn’t entrepreneurs freely choose to divert capital from the less efficient US industries into sweater manufacturing if this were the case?

Because the relevant comparison is between the various efficiencies between the sweater-making industries and not between the efficiencies of the various domestic industries. It’s also useful to remember that entrepreneurs seldom operate outside their areas of expertise. It doesn’t matter how much more profitable it might be to make wireless tablets than tablecloths, as the average textile manufacturer is not going to start trying to compete with Apple simply because the profit margin is better in the tablet industry.

6. There is no paradox. Hazlitt’s assertion that a tariff “must” reduce real wages is simply incorrect and he repeats his error about assuming that production in the sweater industry will be less efficient than in other domestic industries on the basis of its inefficiency in comparison with English sweater manufacturing.”

Hazltt doesn’t say there’s a paradox, he says: “Only minds corrupted by generations of misleading propaganda can regard this conclusion as paradoxical.”

He DOES say that the tariff will divert resources into less productive ends and there I think he is right regardless of your assertion to the contrary. As I said in response to 5. If more efficient/productive uses of capital were available we wouldn’t need a tariff to get capital moving towards those uses, it’d happen spontaneously. This is (obviously) not to say that conditions under a free-market represent the perfect allocation of resources, but that it does continuously trend in that direction and that there is no alternative source of information on which one can argue that the market outcome is, in fact, sub optimal. In other words, if the market says the best use of resources is to import British sweaters and export grains, cars and technology then that may not be the absolute optimum perfect approach, but it is the best approach anyone has at that point been able to find, and those who say they know a better way, but require coercion and taxation to get there, are probably self-serving.

Very well, I accept that I should have simply pointed out that there is no paradox and no one actually believes there is a paradox. Hazlitt has erected a straw man. But Jake is still wrong as the spontaneous movement of capital he posits isn’t going to happen because the fact that American sweater-making might be more efficient than American widget-assembling is irrelevant so long as American sweaters can’t effectively compete on price with imported English sweaters. He is merely repeating his earlier error in point 5. Moreover, he doesn’t even attempt to defend Hazlitt’s erroneous statement that a tariff must reduce real wages.

As for the accusation that anyone who doubts that the international free market is the best approach anyone has been able to find is “probably self-serving”, that is simply an invalid ad hominem argument that is irrelevant, and in my case, incorrect. I absolutely benefit from the present US free trade regime and am nevertheless presenting an intellectual case that would be to my material detriment if it were to be adopted as US trade policy. As always, the facts are what they are and the truth is what it is regardless of whatever anyone happens to believe them to be. While there are many genuine reasons to be deeply concerned about the ability of any government to implement restrictions on free trade in a manner that is a net benefit to the entire nation, this does not change the fact that the foundations of international free trade ideology are riddled with flawed assumptions and false logic.