Tag: economics

The New York Times embraces the myth of “the new normal” in an attempt to evade the obvious:

The new normal challenges the optimism that’s been at the root of American success for decades, if not centuries. And if it is here, the new normal could force Democrats and Republicans to rethink their traditional approach to unemployment and other social problems.

Some unusual suspects, like Glenn Hubbard, dean of the Columbia Graduate School of Business and an economic adviser to George W. Bush, are talking about a new, expanded role for the government in addressing the problem. In particular, Mr. Hubbard favors investing more in education to retrain workers whose jobs are never coming back. “If there is a new normal, it’s more about the labor market than G.D.P.,” he said. “We have to help people face a new world.”

For his part, Mr. Gross, also a free-market advocate, believes that it’s time for the government to spend tens of billions on new infrastructure projects to put people to work and stimulate demand.

First, if you believe it is time for the government to spend billions of dollars to put people to work and stimulate demand, you are not a free market advocate. Second, how is spending government money to “stimulate” the economy anything but a traditional approach to unemployment? The problem is debt and adding more public debt to the equation is only going to make matters worse. You would think this would be obvious, given that both Hoover and FDR tried spending billions of dollars to put people to work and what they got was the Great Depression. It is intriguing, but not surprising, to see all of the politicians and media figures so intent on taking the very actions that will cause the outcome they hope to avoid. What is remarkable is that they are doing this with the benefit of hindsight.

The NYT doesn’t know what a real deflationista is:

The split between the chief economists, whose work helps inform trading strategies recommended to investors by their firms, echoes a broader and sometimes fiercer debate among academic economists and commentators about the threat posed by deflation and what the government’s response should be.

According to the deflationistas, as they are nicknamed, a new round of stimulus spending by Washington is urgently required to stave off a Depression-like cycle of falling prices and wages that is difficult to reverse once it is set in motion.

Inflationistas, by contrast, worry more about the effect that additional government borrowing could have on the recovery. With the budget deficit expected to hover around $1 trillion a year for the next decade, they say, interest rates could eventually surge, making borrowing — and goods — more expensive. A double dip, they say, is highly unlikely.

This isn’t a genuine inflation vs deflation debate, it’s merely an intra-Keynesian one that completely misses the points made by the hyperinflationists and the true deflationists alike. A true deflationista is someone like Bob Prechter, who has long predicted that neither fiscal nor monetary policy can possibly prevent deflation brought about by the collapse of credit. The real debate – although it is more a question than a proper debate – is whether the central banks can print money faster than credit collapses in a fractional-reserve, debt-money system.

Given that there is $53 trillion in total credit market debt compared to $8.6 trillion in M2 and the mainstream deflationary fears have been caused by total credit merely remaining flat for the last two years thanks to the heroic debt-creation measures of the Soebarkah administration and the Federal Reserve increasing M2 at an annual rate of 5 percent, the outcome increasingly appears to favor the real deflationist camp.

Paul Krugman attempts to whitewash his record on the failed stimulus program:

Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization: you said this would work, but now that it hasn’t, you’re just saying it wasn’t big enough. The quick answer to that accusation is that people like me said that the stimulus was too small in advance. But the longer answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Brilliant stuff! How does he do it? And now let’s go back to the tape only two months before, to November 8, 2008:

I wrote this morning’s column partly because I had a hunch that the Obama people might be thinking too small on stimulus. Now I have more than a hunch – I’ve heard an unreliable rumor! So let’s talk about stimulus math, as I see it….So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2. When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Now, I may not be a Nobel Prize winner or a professional economist, but even lacking such credentials, I think I can successfully work out that $600 billion is SMALLER than $775 billion. Put not your trust in Keynesians.

“The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business.”
– Ludwig von Mises, Human Action

In other words, if you want to understand what’s actually happening as opposed to learning the latest justifications for more government intervention, you would be wise to find yourself an informed amateur. It wasn’t as if Smith, Ricardo, or Marx had any professional credentials, after all. And consider, for example, that Bruce Bartlett is the first professional economist to finally reach the conclusion that I have been telling everyone for literally years: there is nothing that either the government or the central banks can do to “fix” the financial crisis or the economic contraction.

For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough….

That basically leaves two things that the Fed can do: buy longer term securities and buy very unconventional assets such foreign currency denominated bonds. The first it has already done some of without doing much to get money circulating. The second would put the Fed at war with the Treasury, which jealously guards its dominion over exchange rate policy. It will also raise holy hell with the “strong dollar” crowd and undoubtedly invite foreign retaliation. It’s even possible that China could effectively sterilize the intervention by soaking up all the dollars created by the Fed.

Thus it appears that there is virtually nothing that can be done to stimulate the economy. For various reasons—political, institutional and substantive—there is no prospect of either fiscal or monetary stimulus.

More importantly, it wouldn’t work anyhow! Bartlett, who is correct in discerning that there is no realistic political chance for more fiscal stimulus even though he is incorrect to think it could possibly help, calls for “new thinking” on stimulus. I’d be happier if they’d all just throw up their hands in despair, admit that they have no idea what they’re doing, and stop digging the damn hole deeper.

David Brooks sounds uncharacteristically immoderate:

When historians look back on this period, they will see it as another progressive era. It is not a liberal era — when government intervenes to seize wealth and power and distribute it to the have-nots. It’s not a conservative era, when the governing class concedes that the world is too complicated to be managed from the center. It’s a progressive era, based on the faith in government experts and their ability to use social science analysis to manage complex systems.

This progressive era is being promulgated without much popular support. It’s being led by a large class of educated professionals, who have been trained to do technocratic analysis, who believe that more analysis and rule-writing is the solution to social breakdowns, and who have constructed ever-expanding networks of offices, schools and contracts….

This progressive era amounts to a high-stakes test. If the country remains safe and the health care and financial reforms work, then we will have witnessed a life-altering event. We’ll have received powerful evidence that central regulations can successfully organize fast-moving information-age societies. If the reforms fail — if they kick off devastating unintended consequences or saddle the country with a maze of sclerotic regulations — then the popular backlash will be ferocious.

The so-called “reforms” will fail. The entire Progressive Era dating back to Woodrow Wilson is in the process of coming to an end and there is absolutely no doubt about it. We can be assured they fail, beyond any shadow of a doubt, because centralized planning always fails in the end. The more complicated the latest iterative attempt to repair the incipient failure is, the faster the next failure arrives. The Misean concept of central information deprivation – not to be confused with F.A. von Hayek’s later refinement – first foresaw and explained this certain failure not long after the Progressive era began, in a monograph entitled Economic Calculation In The Socialist Commonwealth, published in 1920.

And yet, 90 years later, the technocrats still believe that this time, they’ll somehow be able to get it right. They won’t. The elites are still caught up in their fantasy that 2+2 can equal 5 if they can only come up with just the right bureaucratic incantation. But they never, ever will. What the technocrats keep failing to understand is that no amount of technological assistance in information gathering can resolve the problem, because in replacing the supply and demand mechanism of the market, the central planners have removed the very engine that produces the necessary information.

Let me explain. A computer can theoretically keep track of how many people wear tennis shoes, their usage patterns, and when those shoes are likely to wear out and require replacement. But what it cannot track or simulate for even a single individual is the marginal utility of a pair of new shoes to that individual in comparison with all of the various competitive options, which, it should be kept in mind, are not limited to footware. Nor can it even begin to calculate the way in which all of the possibilities and preferences of all of the individuals in the economy will interact, thus preventing it from being able to tell the planners how many pairs of tennis shoes or how much electricity must be produced next year.

As I wrote in RGD, the Story of the Pencil only tells half the story. It is a supply-side story that ignores the more important demand-side one, which is the story of the myriad assignments of subjective value assigned to a pencil made by the tens of millions of potential pencil-buyers who could have bought pencils but elected not to buy them at the available price. Until a computer can correctly calculate the statistical probability of events that never happened, technology cannot even begin to help central planners solve the economic calculation problem.

Ireland’s debt is downgraded:

Credit agency Moody’s has downgraded Ireland’s government bond ratings to Aa2, blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio…. The general government debt-to-GDP ratio was at 64 per cent at the end of last year, up from 25 per cent before the financial crisis took hold, and is continuing to rise.

I had Ireland, Spain, and the Baltic countries as the first to be downgraded. Instead, it was Greece, Spain, and Portugal that kicked off the sovereign debt spiral earlier this year. But it was only a matter of time before Ireland joined the party.

For those who are interested, here is a debt specialist’s opinion on what will happen in the Great Depression 2.0 scenario that I have been predicting: “Here is the Really Bad scenario. It’s not a worst possible scenario. It is more like the Long Depression or the Great Depression reoccurring under 2010 conditions. In the Really Bad scenario, 45% of the countries with large outstanding sovereign debts are in default within a 2-3 year period.”