Tag: economics

Employing the imprisoned

One in 31 adults are under the control of the correctional system (prison, parole, probation) according to a March 2009 Pew Center Report. 1 in every one hundred adults are imprisoned in jail, state prisons, or federal facilities. 25 years ago those under the control of the correctional system was one in 77 adults…. By historical standards the rate of imprisonment in the US is 350+ percent of what it was in 1980. Globally, the US is 3 times higher than the next in line for imprisonment, seven times higher than the median rate for an OCED country, and seventeen times higher than Iceland which has the lowest rate of incarceration.

After reading this, I did a little research and learned that according to the National Institute of Corrections, the cost of imprisoning my father will be right around $500,000 if he serves most of the 15 years he was sentenced. That is just over 40% of the amount he was convicted of not paying in taxes; if one takes into account the amount of taxes he actually did pay over the previous decade, the federal government can expect to be out around 13x more than they believe to have lost on his taxes alone. And that doesn’t even begin to take into account all of the jobs that were lost and the opportunities that are presently being forgone as a result of locking up a proven entrepreneur. I understand the logic of making an example, of course, but I tend to doubt even those who conceptually support the long-term imprisonment of “tax evaders” would conclude that spending at least $13 to chase $1 is an intelligent investment, especially not for a nation in which the debt per taxpayer is already $120,000.

Meanwhile, John Kerry, Tim Geithner and other “public servants” who have never contributed anything in the way of creating jobs or economic activity continue to go about their business of interfering with the economy unmolested. Now, I’m not looking for any justice here nor am I ranting about the US tax or correctional systems; they are what they are and I’m not interested in their idiosyncracies. I am merely observing that the statistics related to them are another obvious sign of the structural precariousness of the current economic system.

Rather than borrowing money to imprison people, wouldn’t it make more sense to hire out minimum-security prisoners on foreign contracts? That’s not all that far off from how the English settled Australia, after all, and surely it would be to everyone’s benefit if the US had talented business executives, computer programmers, technical experts and even movie stars available for overseas hire. Let them remain in exile for the duration of their sentence and have one-quarter of the revenue they generate go towards paying the costs of the correctional system. Another quarter would go towards allowing them to pay off their fines before they are released from the system, and half would be their incentive to perform well.

This would also help mitigate an imminent problem. With the increase in crime and decline in tax payments that have already been observed as a result of the economic contraction, it is very unlikely that the automatic reaction – to imprison all of the new offenders – is going to be an option given the way in which the overloaded correctional system is already helping drive states like California and Illinois into bankruptcy. We know that 1 in 77 is sustainable. But I don’t think either the economy or the nation can hope to survive a ratio of 1 in 25, which at this rate will be reached in early 2014.

Perhaps exile employment contracts sound too exotic and potentially enjoyable to serve as “corrections”. But I don’t think too many people would sign up for running a technology company in Iraq, overseeing mining operations in Afghanistan, or starring in low-budget Venezuelan action-flicks of their own accord. And as the projections indicate, the system is going to be forced to change very, very soon.

WND column

You Were Warned

The ECRI’s Weekly Leading Indicators has now fallen eight consecutive weeks and has been below -10 for two consecutive weeks. … [T]here has never been a WLI plunge in history of this depth and duration, nor any dip at all below -10 that has not been associated with a recession.
– Mike Shedlock, ECRI WLI in Negative Territory, July 31, 2010

The percent change from the preceding year in real GDP was revised down for all 3 years: from 2.1 percent to 1.9 percent for 2007, from an increase of 0.4 percent to 0.0 percent for 2008, and from a decrease of 2.4 percent to a decrease of 2.6 percent for 2009.
– Bureau of Economic Analysis, Revised Estimates: 2007 through First Quarter 2010, July 30, 2010

As the government statisticians revise their statistics downward and the leading indicators suggest that the so-called recovery is nothing more than an artifact of massive federal borrowing and spending, I thought it would be useful to revisit the scenario that I considered to be the most likely when I finished writing “The Return of the Great Depression” thirteen months ago. Given the advantage of one year of hindsight, I see absolutely no reason to change my conclusion regarding the ongoing global economic contraction. “It is not over. It has only begun.”

Mailvox: responding to a liberal

CG asks for help in responding to this, but I think he is probably looking in the wrong place by coming here:

Conservatives have no clue about business. They think that business can sell MORE AND MORE to people who have jobs paying less money, with a collapsing middle class. Who is going to buy stuff after we get through gutting the system and eliminating the buying power of workers in this country? What fuels consumption now that the borrowing binge we’ve been on for thirty years is over. Can consumers borrow their way to prosperity, along with our economy. How do you pay for the $10s of trillions in private debt that has masked a collapsing real economy which used to be fueled by savings and investment?

40 years ago we had a third of the private work force unionized, tariffs to protect domestic industry, 70% marginal rates on income over about 3 million, and were the most prosperous country on earth, the exporter and lender to the world. Now that Reaganomics has worked it’s magic for 30 years, China owns us.

Not sure how you think us running 30-40 billion per month trade and current account deficits will work out long term. Love to hear the theory of how we import our way to prosperity, trading jobs that produce wealth, transform raw materials into valuable to valuable goods, for “service” jobs that add no wealth and don’t sustain any economy that I’ve known of in all of recorded history. How long can we keep sending the rest of the world paper, and they send us oil and TVs and cars, and clothes and electronics, etc. Seem unsustainable to me, but I don’t understand how business works.

This demonstrates why the Democrat/Republican, liberal/conservative poles simply don’t apply to the present economic situation very well. CG’s liberal interlocutor is correct in diagnosing the problem as debt and “free trade”, but he is incorrect in thinking that Reaganomics is to blame for either of them and he is deeply mistaken to think that high marginal tax rates helped produce societal wealth. One doesn’t increase savings and investment through taxation, after all, and while it is absolutely true that consumers can’t borrow their way to prosperity, governments can’t tax-and-spend their way there either, Keynesian arguments to the contrary notwithstanding.

The reason we were the most prosperous country on Earth 40 years ago was very simple and easily proved. The USA was about the only major economy on Earth that had not had its industrial infrastructure completely destroyed by World War II and American industry made an absurd amount of money selling both consumer and capital goods into European and Asian markets that had to rebuild their industrial base. This was the source of our post-1940s economic growth and concomitant wealth. Now that all of our former competitors have rebuilt their economies and numerous other countries have succeeded in developing theirs, it has naturally become much more difficult to maintain our economic primacy vis-a-vis the rest of the world. As I have previously stated, but have yet to conclusively prove, the Ricardian concept of comparative advantage has turned out to be incorrect and therefore American wealth should be expected to decline in both a relative and absolute sense as other countries grow at the expense of American industry and workers in a free trade environment.

It’s not that conservatives have no clue about business, they have no clue about economics. But neither do liberals; the fact that one party is incorrect does not automatically make the other right. The fact that conservative Republicans and liberal Democrats alike supported TARP, the banking bailouts, and the automotive bailouts demonstrates that the intrinsic problem is superpolitical and therefore will not be solved regardless of which political faction ends up temporarily on top.

Not that tape, the other one

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.

Why I am not an economist

“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.

A technocrat doubts the future of technocracy

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.

A bit off

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.”

WND column

Matches for Arsonists

It is of paramount importance to every individual in a modern civilized community that banking credit should have the same solidity as coined money.
– Charles Connant, “Principles of Money and Banking,” 1905

In The Return of the Great Depression, I predicted that “the consensus scenario will gradually transform from Green Shoots into Jobless Recovery, which will remain the mainstream consensus until it begins to become apparent in the autumn of 2010 that even Jobless Recovery is too optimistic.”

It would appear I was somewhat too optimistic myself despite my frequent contentions that we are passing through the early stages of a large-scale economic contraction that will last more than a decade. It is only summer, and yet already the dread “double-dip” term is being regularly bandied about, while the last champion of Neo-Keynesian economics, Paul Krugman, has begun to hedge his bets by complaining that the two previous stimulus packages were too small and talking about “the third depression.”

Depressionistas

HH dives in:

I’m just over halfway through RGD, and I’m really enjoying the read and the information. I’ve just become interested in economics, and I haven’t yet read much from many of the people you discuss in your book, but it blows my mind how Krugman could seriously believe any of what he writes. It would seem more reasonable to think that he has a mental illness or is a sociopath.

And it belatedly occurs to me that perhaps I shouldn’t have sent a copy of RGD to so confirmed a pessimist as Derbyshire:

“The car has already hit the tree and the bumper is already in the process of buckling inward, so there is no time to turn the wheel or fasten seat belts. It is too late to do anything but scream.”

Thus writes Vox Day in his recent book The Return of the Great Depression. Are things really that bad? And going to get that much worse?

I’m betting that they are. That’s a novice bet, as I am not a trained economist. I base it on a complete lack of seriousness among our political classes. It is obvious that our governments, at all levels, are spending far too much; yet there is little evidence of anyone being willing to do anything about it.

I completely understand those who don’t buy into the economic crisis talk; I can remember back in college how Marxists were supposed to have predicted 12 of the last two crises. But this isn’t the usual airy conjecture about the effect of the rise of Japan or the implications of the Chinese currency peg. This is relatively hard economics based on straightforward math. Unless you seriously believe that an economy can support an INFINITE amount of debt, there is a breaking point. Precisely where that is happens to be unknown, but that doesn’t mean the point does not exist.

But it appears, as per Derb, that I am no longer an outlier… alas. It would appear that my days as a rogue contrarian economist defying the staid order of the mainstream Neo-Keynesian orthodoxy in a bold and sexually thrilling manner are at an end.

Day vs Krugman

On Hayek vs Keynes. Krugman redefines the concept of bizarre:

First, Hayek was as bad on the Depression as I thought. The claim that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities” — in 1932! — is bizarre.

Yes, this graph of sovereign defaults from 1921 to 1980 quite clearly shows that there was absolutely no problem with imprudent borrowing and spending by the public authorities.  Here is the list of the 25 sovereign defaults covering the time that Hayek and Keynes were debating; from 1930 to 1934.  Notice that the bulk of them happened to come precisely in 1932.

Mexico, Ecuador, Bolivia, Brazil, Chile, Dominican Republic, Peru, Turkey, Liberia, Austria, Bulgaria, Colombia, Costa Rica, El Salvador, Germany, Greece, Hungary, Nicaragua, Panama, Paraguay, Cuba, Guatemala, Romania, Uruguay, Yugoslavia.

And the Keynesian “solution” to the problem didn’t help much either, since there were 14 more sovereign defaults before WWII ended in 1945:  Colombia, Poland, Brazil, Austria, Czechoslovakia, El Salvador, China, Germany, Austria, Japan, Poland, Turkey, Hungary, Japan.

The only thing that is bizarre here is Paul Krugman’s inability to connect “imprudent borrowing and spending by the public authorities” with historical sovereign defaults. Now consider how much panic has rocked the markets due to two mere threats of sovereign defaults by two very small nations, Dubai and Greece. Think about how many banks failed or were nationalized after the credit crunch of 2008. Then think about the possibility that no less than 25 nations default on their debts before 2014. Do you think that just might, perhaps, have some effect on the international financial system? Krugman’s Keynesian know-it-all act was always ridiculous, but now he’s fast approaching self-parody with his astonishing inability to comprehend that debt really is a problem despite the Keynesian model’s insistence otherwise.