Monthly Archives: November 2010


4. Here’s Why The Fed Plan Is Failing: We’re All Austrians Now

Amazingly, this article appeared on CNBC and, perhaps more amazingly, provides a pretty good summary of the Austrian theory of the business cycle (ATBC). It’s pretty simple, though, and leaves out a lot of the nuances inherent within the theory. But as far as mainstream exposure goes, it probably doesn’t get any better than this.

3. Europe’s New Contagion Worries

I have to say, this statistic literally shocked me:

Sean Egan, principal at independent debt rating firm Egan-Jones, points out that Ireland’s per capita debt has soared to about 135,000 euro, or about $180,000. That’s roughly five times the per capita debt level in the United States.

I mean, I knew Ireland’s total debt was bad, but putting it in per capita terms just makes it look that much nastier. Yeaaah, no problems here, right? Move along folks, nothing to see…

2. Our Puritanical Progressives

In today’s world it often seems as though political ideologies shift more than Heraclitus’ river. One second conservatives are crying for smaller government and the next they’re calling for more military spending. Liberals advocate marijuana legalization on the grounds that people should be free from legislating morality and then they turn around and advocate banning violent video games because it affects children. George Will gets it mainly correct when he says

The progressives’ agenda for improving everyone else varies but invariably involves the cult of expertise – an unflagging faith in the application of science to social reform.

1. Ireland Should Not Be Bailed Out

Ireland is, indeed, in a precarious situation. Something needs to be done, but not all of the proposed remedies are worth the cost. Some are better than others. Case in point: an IMF/EU bailout is probably worse than the disease. Certainly, it’s a bad deal for Irish citizens. The entire idea of a bailout is being fanatically pushed hard by certain EU members (namely, Germany, the UK, and France) because those three happen to be the largest creditors to Ireland. This isn’t about “saving Ireland” but, rather, about saving banks that voluntarily bought up Irish debt. Ireland should do what Iceland did: reject any bailout and let the chips fall where they will. Incidentally, Iceland is doing much better than Ireland at the moment.



3. Corporate Profits Not Actually At Record High

Matthew Yglesias looks at the claim that corporate profits are at record highs and finds that the claim is not accurate. If one adjusts for inflation corporate profits are still below pre-recession levels. I think this is an important point to remember, if only to quiet the people who keep complaining that “PEOPLE ARE STARVING IN AMERICA WHILE CORPORATE PROFITS ARE AT THEIR HIGHEST LEVEL EVER!!!!” Yeah, that simply isn’t true.

2. Save the Dollar, Not the Fed

Good article that goes through a (very) short history of monetary theory and its relationship to the Federal Reserve. Prior to the 1970s the Fed had one job: price stability. However, with the onset of stagflation the Fed was given a dual mandate of price stability and full employment. Thanks to the “discovery” of the Phillips Curve, which posited an inverse relationship between inflation (which was seen to be caused by demand-side variables rather than primarily monetary policy) and unemployment. This gave the Federal Reserve a sort of theoretical justification for somehow maintaining a balance between skyrocketing prices and recessions. The author rightly points out that the empirical evidence for the Phillips Curve is questionable and, at any rate, the Fed has done an awful job of maintaining anything close to full employment and low inflation. Recent calls to remove the dual mandate and return to the original plan of solely focusing on price stability is misguided, the author claims, because the real problem is that the Fed cannot maintain price stability.

1. The Dual Over the Dual Mandate

This is an interesting article by Peter Schiff, and I think he gets it wrong (surprisingly, because he’s usually very good on monetary policy). He goes through a little history of the Fed just like the article mentioned above, but he comes to the conclusion that we should return to the days when the Fed only had one mandate, which was price stability. Now, I suppose as a policy of second best it would be better if the Fed was simply focusing on prices, but I think the first article gets it right that the Fed cannot achieve this and so we would be better off to simply get rid of the Fed. Schiff himself ends up making that case anyways when he writes

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation.

How does the Fed create inflation? By increasing the quantity of money in the economy. If the Fed’s one tool- monetary policy- creates inflation, then how in the world is the Fed supposed to do anything? Price stability (which isn’t necessarily a good thing in and of itself) would seem to entail a Fed that literally did nothing, which is what Schiff should have advocated.


The Irony of “Buy Nothing Day”

There is an event/group on Facebook calling itself “Buy Nothing Day”, in regards to Black Friday. The idea is to, well, not partake in the rampant consumerism that characterizes the day after Thanksgiving. Of course, as should be obvious, the majority of people participating in this event are leftist college students. They rage against the mindless individualism and greedy consumerism of modern day capitalism. The very idea of spending money on cheap foreign products makes them sick.

So, to combat the capitalist machine, they will all refrain from spending money whilst wearing their Che shirts and waving the Communist Manifesto proudly through the air. The irony, of course, is that these capitalist-hating individuals have implicitly rejected today’s dominant leftist economic theory which states that consumer spending is what drives the economy and leads to our high-standard of living. The typical narrative goes something like this: “Consumer spending makes up 70% of our GDP! The only way to get out of the recession is to increase spending, which puts money into businesses, who then ramp of production, which requires them to hire more workers, and suddenly the economy is back on track!” Now, as Dr. Robert Higgs points out here, consumer spending has not been the problem. Consumer spending only fell a few percentage points since the recession began back in 2008. It’s investment that really took the hit.

In more formal economic terms, many economists today (those calling themselves Keynesians) believe the problem with the economy today is that aggregate demand has fallen and, in order to get the economy back on track, aggregate demand has to be boosted. There are two ways this could be done: Government spending, and consumer spending. If consumers would only go out and began spending once again, businesses would hire more people and the economy would right itself. Unfortunately, this doesn’t happen because consumers fear uncertainty, and so begin saving. This increased savings (non-consumption) further depresses the economy. At this point, government is supposed to pick up the extra slack in the economy and spend enough to get businesses hiring again.

If the Keynesian theory is to be believed, “Buy Nothing Day” can only further deteriorate the state of the economy. At any rate, it certainly won’t help. These people’s decision to not consume is going to contribute to lower wages, more unemployment, and further depressed housing prices. Not good, right?

I would argue, however, that there is nothing economically harmful when it comes to “Buy Nothing Day”. Indeed, I don’t believe the problem is with a lack of aggregate demand. Spending does not drive the economy, savings does. One cannot consume oneself into prosperity. Prosperity and rising living standards require that some people putting aside some consumption today in order to consume more tomorrow. If we imagine a man, alone, on an island with some fruit trees, we know that he can either consumer all of the fruit on the trees, or he can consume some of the fruit and plant more fruit trees for the future. If he consumes all of the fruit today he will certainly be well off for a short period of time. Perhaps until the next evening, or so. But after that he will have nothing left to eat until the trees grow more fruit. Clearly, if this man wants to have something to eat for the future he will engage in some non-consumption in order to consume more later.

To the extent that “Buy Nothing Day” leads to less consumption today (savings) and more consumption later, I think it will be a good thing. I doubt it will have much effect on the economy, but in principle it sounds right. The economy needs more savings to finance greater output in the future. The irony with this whole thing, however, is that the people participating in this event are probably the same people calling on the government to spend more money in order to get us out of the recession. Is spending the problem, or is spending the solution? Which is it, guys?

HOT LINKS 11/22/10…

Now that it is Thanksgiving break I find myself without much to do. So why not try blogging on a regular basis this week? I think I can handle that. I’ll begin this week with some articles I read this morning…

2. Obama Should Cut the Corporate Tax Rate

America has the highest corporate income tax in the world. Is this good for productivity? Not according to the OECD (Organization for Economic Cooperation and Development), which reported last year that the corporate income tax is the most damaging tax for long-run development (this may or may not be the original OECD study, but if not it looks close enough). America’s corporate income tax is 40% (that includes both State and Federal tax rates). The article nicely points out that since capital is relatively mobile, labor is going to end up taking the brunt of corporate tax rates. If you want to increase wages and productivity, lower tax rates.

1. The rapid declawing of the debt-ridden Celtic Tiger should spell the demise of supply-side economics—especially for Congress

Now, I may be misreading this article but it seems to me this fellow is mixing a few different points up. Basically, his main point is that Ireland was the supply-sider’s favorite example of success. Ireland cut its taxes, productivity surged, and everyone seemed happy. That is until it was revealed that it had some serious financial issues to deal with. So far so good. Nothing to quibble with here. So how did lower tax rates lead to Ireland’s financial instability? One would be tempted to say, “because they didn’t cut government spending along with the tax cuts,” but, according to his author, you would be very wrong. No, what led to all the problem’s was the deregulation during the late 90’s and early 2000’s that fueled the housing bubble which eventually collapsed into the world-wide recession we are experiencing today. Here’s where I am confused: What in the hell do lower-tax rates have to do with deregulation? They don’t necessarily imply one another. One can have lower tax rates AND sound regulation. In case the author didn’t notice, Ireland isn’t the only country that experienced a housing bubble, and amongst the countries that did, the regulatory schemes differed at times quite dramatically. The author tries to make the argument that lower tax rates ultimately led to the housing bubble and Ireland’s current financial predicaments. But I see no evidence for that. I haven’t really heard anyone arguing that lower tax rates led to the housing bubble anywhere. Most see it as either a failure of the regulatory systems in various countries, or foreign savings gluts, or central bank mischief, and so forth. Lower tax rates did not cause Ireland’s troubles.


Election Day News and Tidbits…

As usual, it has been nearly forever since I last posted anything. I want to say that in the future I will post more, but I think I will only be deceiving myself. So I will say this: We shall see what happens. For now, here are some general election day reactions from yours truly…

1) It appears as though California’s Proposition 19 is going to fail. Bummer. As far as I’m concerned, the War on Drugs has been a monumental failure of the most epic proportions. Not only does it cost us billions of dollars a year, it diverts law enforcement from actually cracking down on REAL crimes, and it has gotten us to the point where we have the largest prison population on the planet (as a percentage of the population and in the actual amount of bodies in prison). As a country claiming to be the “land of the free”, I find that to be more than a little disturbing. Prop 19, had it passed, would have gone a long way towards eventually getting the entire War on Drugs abolished, or at least incredibly toned down (against soft drugs). California- you disappoint me.

2) Senate Majority Leader Harry Reid is still in office. How dreadfully depressing. It isn’t that I thought Sharon Angle was anything special, it’s just that Reid is one of those obnoxious and established politicians that annoy me so much. I think it would have been healthy to his ego to have gotten the boot from Nevada voters. Next time…next time.

3) The good news: Democrats have lost the House of Representatives. The bad news? Republicans have gained the House of Representatives. I find this to be both depressing and a bit heartwarming at the same time. I dislike both parties about equally, but incumbent parties tend to be more annoying than challenger parties, so it’s always nice to see the smug looks wiped off the faces of the incumbents. Of course, now that the Republicans are back (mostly back, anyways), it will be interesting to see what, if anything, they actually attempt to do.

4)  In the end, the government won this election. It always does, and it probably will continue to do so for a very long time. Not much will change. The governments response to the economy certainly won’t. If things get any worse (and, sadly, I think they might), all those small government loving Republicans will probably end up voting for another stimulus package like they did the first time around.