Tag: economics

Not quite nobody

I believe I have pointed the connection between reduced government spending and reduced GDP on occasion as well:

The entire premise of the alleged “recovery”, in the words of Ben Bernanke, has been about pumping asset prices. But they won’t remain “pumped” when we take our medicine. They’ll go down.

A lot.

How much? Oh that’s easy – we know for a fact what the minimum contraction will be. It’s right here: That’s about 12% of GDP or about $1.8 trillion dollars. Why? Because GDP is simply defined as “C + I + G + (x – i)”, and “G” is government spending. Decrease it by that 12% of GDP and GDP falls by (at least) 12%. This is simple math – subtraction.

Yes, we need to do this. Yes, people will raise hell. But it will make, at least for a short time, unemployment worse and pain will increase among Americans. We will not buy those iPhones and cable TV and nights out at the bistro, and the follow-on effects cannot be avoided.

The problem with everyone pontificating on this is that nobody – other than I – is talking about what happens when, not if, we take our medicine. See, we must at some point. But as the chart makes clear up above we’ve been in an economic Depression we have refused to admit to for the last three years, just as someone on a monstrous multi-year bender will refuse to admit they’re addicted to some substance.

Of course, Karl is leaving out the so-called “multiplier effect”, for the very good reason that it does not exist despite the Keynesian myth-making. This is probably just as well because if it did, GDP would decrease even more than the 12% contraction in G(overnment spending).

In RGD, I anticipated that the decline in GDP would ultimately approach 35%: Utilizing total credit market debt as a proxy for the relative size of the contractions, I estimate that Great Depression 2.0 will be approximately one-third worse than the Great Depression. This indicates a 35 percent decline in real GDP over a five-year period, indicating a nadir of 9,455 sometime between the end of 2012 and the middle of 2013.

Now, obviously the time frames are off given the reckless decision by the Washington elite to stave off the inevitable declines in total debt outstanding and GDP by the gargantuan increase in Federal borrowing and spending over the last three years. But, once those efforts end, whenever that might be, there is no question that a statistically visible contraction will begin. It is mathematically assured. In light of Karl Denninger’s 12% figure, I think it may be worth noting that the contraction of private debt already amounts to 9.7% of its Q3-2008 peak.

The danger of Wikipedia

The nice thing about Wikipedia is that you can always find a quote for every subject. The dangerous thing about it is that you can easily find yourself applying such quotes incorrectly when you clearly don’t know a damn thing about the subject:

The easy thing now might be to proclaim that debt is evil and ask everyone — consumers, the federal government, state governments — to get thrifty. The pithiest version of that strategy comes from Andrew W. Mellon, the Treasury secretary when the Depression began: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” Mellon said, according to his boss, President Herbert Hoover. “It will purge the rottenness out of the system.”

History, however, has a different verdict. If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day.

The minor point that David Leonhardt omitted from his article is the small fact that Hoover didn’t listen to Mellon. Mellon’s strategy was never enacted. Hoover overrode the objections of his “liquidationist” Secretary of the Treasury and embarked upon a spending program that was increased faster, in percent of GDP, than anything that FDR subsequently did. The failure of Herbert Hoover was not a failure of austerity, it was the same failure of Keynesian interventionism that FDR repeated.

There are 112 comments from the educated readers of the New York Times following the article. Not a single one points out this fundamental error. So, it appears that the old adage about those who refuse to learn from history are doomed to repeat it is more than a little applicable to the present situation.

Cackling while Rome drowns

Miss Coulter appears to be under the extraordinary impression that preemptive surrender is a brilliant political tactic:

Sen. Mitch McConnell, R-Ky., has checkmated the Democrats. He has proposed a bill that will allow Obama to raise the debt ceiling three times, up to $2.4 trillion, over the next 18 months, but only provided Obama proposes equivalent cuts in spending each time. Finally, the Democrats will be forced to pony up spending cuts – or default on the debt and crash the economy.

Contrary to some hysterical Republicans, McConnell’s bill does not forfeit any of Congress’ authority: The House and Senate will still have to decide whether to accept Obama’s proposed cuts when they write their appropriations bills.

But we will finally get some proposed cuts to federal programs from Obama, and not more nonsense about theoretical savings from “investing” in our children’s future with additional spending on Pell grants and prenatal counseling.

McConnell’s deal cleanly takes the debt-ceiling issue off the Republicans’ back and puts it on the president’s back. Either the Democrats tell us what they’ll cut or they’ll have to admit: “We will never cut anything. Everything Ann Coulter says about us is true!”

McConnell’s “schooling” of Obama on the debt ceiling is an epic one and ranks with Chamberlain’s schooling of Hitler at Munich and King Guy’s schooling of Saladin at the Horns of Hattin. Ann has clearly been spending far too much time orbiting around the New York-Washington axis as she has clearly failed to recognize how Americans who are paying attention to the issue, particularly Tea Party Republicans, are going to view the raising of the debt ceiling, not once, not twice, but three times in advance, with about the same degree of favor as neocons would view the US Air Force giving three SLBM-equipped nuclear submarines to Iran.

The idea that anything negative is going to be blamed on the president by his de facto press agency is completely absurd. If recent articles are any indication, they’ll probably just keep blaming Bush and the people who get their news from the news will believe it. It is astonishing that a media star such as Coulter still doesn’t understand that it doesn’t matter what actually happens, because the narrative remains.

Coulter also demonstrates that she knows literally nothing about economics. A failure to raise the debt ceiling will not cause default but it will crash the economy. Spending cuts will also crash the economy. This is because the private economy has already crashed and all that is preventing this from being completely apparent to everyone is all the government spending, 43% of which is presently borrowed.

As I pointed out two years ago in RGD, this crash isn’t something that can be avoided. It was inevitable. It was eminently predictable and it was, in fact, predicted by numerous economic observers. Raising the debt ceiling will only make things worse by digging the hole yet deeper and allowing the extension of the extend-and-pretend strategy. But the strategy is not only logically absurd, we have 21 years of empirical evidence demonstrating that it hasn’t worked in Japan and are now approaching three years of showing that it hasn’t worked in Europe or the USA.

This is why the political considerations to which Coulter is appealing are not only incorrect – and they are incorrect as the public rejects a debt-ceiling increase by 58 to 36 percent, including 38 percent of Democrats – more importantly, they are irrelevant. The only responsible thing, the only relevant thing, that the House Republicans can do is to refuse to accept any deal that raises the debt ceiling for any reason. The economy will crash, this is certain, but the vital point is that until it does, absolutely none of the necessary restructuring can begin to take place.

Checking the metric

After publishing RGD in 2009, I was asked to list some of the metrics that would indicate that I was wrong about the USA having entered the Great Depression 2.0. One of the more important ones was an increase in state and local tax revenues. So, it was interesting to read this report from the U.S. Census, which tracks annual state government tax collections.

State government tax collections totaled $704.6 billion in fiscal year 2010, down 2.0 percent from the $718.9 billion collected in fiscal year 2009. Although 2010 total state revenue figures have yet to be released, in 2009 total state tax collection accounted for 64.0 percent of the total state government revenue.

In 2010, 11 states reported a positive increase over the previous year’s total tax collections, up from five states in 2009. The reasons for each state’s year-to-year increases vary. For example, in the case of North Dakota, increased tax revenue was largely due to strength in severance tax revenues, which are taxes imposed for the extraction of natural resources. However, North Carolina’s revenue increase was largely driven by sales and gross receipts tax.

Four states experienced a decrease of 10.0 percent or greater in year-to-year tax collections. Prior to 2009, no state had year-to-year tax revenue declines of this magnitude since 2002.

That this is somewhat of a positive spin on the situation is readily apparent when one looks at the actual data. Although overall state tax revenue is only down 2 percent in 2010, it’s now down 10.21 percent from its 2008 peak and is lower than it was in 2007 or 2006. The comparison of the eleven states with positive growth in tax revenues to the four states with revenue contractions of more than 10 percent is simply bizarre; a more relevant one would be to point out that 39 states had declining revenues in 2010.

Also, five of those eleven states with tax revenue growth had growth of less than one percent. In the case of Maine, it was only 0.03%. One cannot reasonably say that the state economies were improving in 2010, only that they declined at a slower rate than in 2009.

Keep in mind that this slower rate of contraction took place despite the benefit of the enormous stimulus package, much of which, as we know from Paul Krugman’s past recommendationscurrent complaints, went to the state governments. Now that the spending orgy has, at least temporarily, come to an end, we would anticipate that state tax revenues will again decline at an increasing rate in 2011. I can’t confirm that, though, because the monthly Iowa tax report that I use as a rough proxy is inconclusive; in April it looked like 2011 tax receipts would be down, while in May they look very positive.

Regardless, by the state tax metric, the central thesis of RGD still appears to be sound.

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.