Capitalism!

Could '09 Fiscal Stimulus Have Slowed GDP Growth?

Yes.  Scott Sumner via The Monetary Illusion, see here, explains.

Short version.  Essentially, New Keynesian Theory predicts that when the Federal Reserve Bank engages in inflation targeting behavior (which is what it does and what its mandate is) the fiscal policy multiplier is zero.  That is, when the Federal Reserve Bank behaves the way that the Federal Reserve Bank behaves, fiscal policy has zero effect and may have an impact that is worse than what would have occurred had the Federal Reserve Bank been left to utilize all of its available tools. 

Confusing?  Think of it this way: the Fed has tools that are better than the government's.  When the government uses its tools, the Fed puts away theirs, and the economy is the worse for it.

Argentina's Government

This link takes you to an example of how not to govern.

This does not work.  It never has.  Every time it has been tried, terrible results have been recorded in textbooks, documentaries, and academic journals.  It's so ingrained in our national memory that no politician alive in the 1970's will suggest it.

Well...unless....  Look, here is a perfect litmus test for a politician.  If they ever suggest setting price controls on consumer goods then either they are very ignorant or they hope (think) you are.  Yes, yes we already have price controls on labor (minimum wage).  But, at least they haven't told Company X not to charge above $3.00 for eggs...not in the past 30 years anyway.

Why Is Solar Energy Not Saving the Universe (yes the whole universe)?

Invest in solar energy now or solar energy later? 

There are a multitude of issues surrounding this question.  So, I should refine and clarify my question until we are dealing with a clear issue. 

Three questions: (1) Why has the private sector not brought affordable, efficient, reliable solar energy to the market yet?  (2) Is this a market failure?  (3) Is the private sector "failing" in this regard? 

Answers: (2) Pollution could be considered an externality (follow the link if you want to understandify and learnicate thineself on what externalities are in economics).  And, negative externalities are a form of market failure.  No one is paying for the pollution, the producers of pollution do not pass those costs on to consumers so they do not split the costs as they would under something like a carbon tax (carbon taxes often referred to as Pigouvian Taxes, follow this link to learn more).  (3) No.  The private sector is providing energy at the lowest cost to itself and charging a price that allows for the most revenue (at least they are trying).  Which is exactly what the private sector is supposed to do. 

Finally, (1) Why has the private sector not brought affordable, efficient, and reliable solar energy to the market yet?  Because.  Currently, firms have not found solar technology that can provide the same amount of energy at the same costs and make the same amount of money.  More simply, firms cannot provide solar energy to consumers without inccurring costs that are too high to make profit possible.  Conversely, for them to make a profit, they would have to charge such a high price that no one could afford it.

What to do?  Invest in R&D for solar energy.  Charge a carbon tax to make providing energy from fossil fuels more expensive.  I like the former option, understand the attraction to the latter.  But, the absolute worst idea is to try to impose large-scale adoption of CURRENT solar technology.  It's too expensive, too innefficient.  R&D can help the latter, and Pigouvian Taxes (carbon tax) might nullify the impact of the former.

Note: if providing solar is expensive, the government could layout taxes that make providing fossil fuel-based energy more expensive and thus speed the transition to solar and other forms of energy.  Personally, I think natural gas is the best option for now and foreseeable future.  The government needs to loosen restrictions on nat gas, perhpas raise taxes on gasoline to speed nat gas conversions in factories and vehicles, and invest in R&D.

Jobs Report-Name The Movie: "The Young Perish and the Old Linger."

This graph says it all.  Well, not all of it.  Rather, it paints a dismal picture of the nation's current labor demographics.  I'll paste the chart in the post in case the link fails.  The graph shows that the only age group adding jobs consistently since the end of the recession (June '09) has been the 55-69 year old group.  While the young, the semi-young, and the middle-aged have seen their job prospects dimmed considerably.  What's the deal?

Tyler Durden (yes from Fight Club) from the website ZeroHedge attributes this to the devaluation of retirement accounts due to easy monetary policy and the resulting necessity for those age 55+ to reenter the workforce in diminished capacities.  Example: Panera Bread in North OKC now has several baby boomers in its employ, recent hires I believe.  These individuals are not as productive as they were at their original jobs, in their chosen careers and professions.  Yet the labor report from the BLS does not distinguish between fully employed at one's most productive capacity and flipping burgers.  Cheering a rise in non-farm payrolls enjoyed almost exclusively by underemployed baby boomers is...well, it's not cheering.  So don't cheer.

The Knowledge Problem

Here, Hayek points out why decentralized decision making is universally more efficient than centralized (i.e., free markets are more efficient than centrally planned ones).  First, let me point out that the superior efficiency of free markets is not in question.  They are more efficient, end of story.  From a policymaker perspective, some are willing to sacrifice that efficiency in order to gain more equality.  This is accomplished through central planning (government takes taxes and redistributes it to the poor, taking a hefty chunk of it in the process to pay the people who facilitate the endeavor).  Thus, society always faces a tradeoff between efficiency and equality.  If you want more equality, you have to shave some success off of the top and redistribute it to the poor.  If you want more efficiency, you have to let capital flow to its highest return (the rich...who have a knack for taking capital and making more of it).

Back to the subject: Why is there more efficiency in free markets than in centrally planned ones?  It is simple.  Knowledge about the availability and desirability of any good or service is necessarily dispersed throughout the entire population (read: everyone has an idea about what stuff they want).  A central authority could never (ever) hope to have this same level of knowledge.  They would just be guessing (read: the government can guess what you want, or decide what you need, then try to give it to you).  Thus, what type of economic system best utilizes the vast amount of knowledge present at any given time in a population?  The answer: that system which leaves the decision making in the hands of the people with knowledge.  

In Hayek's words: Which of these systems is likely to be more efficient depends mainly on the question under which of them we can expect that fuller use will be made of the existing knowledge. And this, in turn, depends on whether we are more likely to succeed in putting at the disposal of a single central authority all the knowledge which ought to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fit their plans with those of others.

Economist Robert Murphy Gives Hope to...

...anyone who finds Paul Krugman (and his followers on your Facebook friend feed) ridiculous, partisan, and hypocritical.  I'm sure he's a nice guy and such; he has a cat that appears well-fed.

Murphy lays out recent statements from Paul Krugman and Christina Romer where they state that there is no evidence that lower or higher marginal tax rates and corporate tax rates have a positive/negative impact on GDP growth.  Murphy then cites a great deal of evidence, including from Krugman and Romer, in which it is concluded that taxes matter.  That is, lower marginal tax rates and lower corporate tax rates will raise GDP growth while higher marginal tax rates and higher corporate tax rates will lower it.

So, when you and your friends are discussing fiscal stimulus and its merits, be sure to have read the following article.

Robert P. Murphy, What Economic Research Says About Fiscal Austerity and Higher Tax Rates | Library of Economics and Liberty

Is the Invisible Hand Hard to Grasp?

Russ Roberts points out (see link below) that mainline economics seems to be losing out to Keynesian economics in the marketplace for ideas.  He  argues that mainline economics (what Peter Boettke calls the tradition of ideas from Adam Smith, F.A. Hayek, Milton Friedman, and Boettke and Roberts themselves) may be hard to understand if one doesn't observe it in practice and infer its existence that way. 

Further, he points out that economists may have an incentive to provide the economic analysis that the public demands.  After the crisis, people demanded that government do something (according to the government) and so a wave of regulation was unleashed.  Economists (many, but not all) then produced research that showed government intervention works.  We now know just how limited the government's success can be at promoting growth and lowering unemployment.  Perhaps a new flood of research will seek to explain the limited efficacy of government deficit spending and regulation to put GDP growth back on track and the ideas of Friedman, Hayek, Smith, and others will gain traction.

Cafe Hayek — where orders emerge

Who Truly Has a "Faith-Based" Approach to the World?

From Don Boudreaux at George Mason University.  "It is high time that those of us who have a more-realistic and less-romantic understanding of the logic of politics start more forcefully to insist that if anyone in this battle over appropriate fiscal policy is unscientific or faith-based, it is the Keynesians – whose theory of the determinants and role of aggregate demand might or might not be valid, but whose theory of government behavior most certainly amounts to nothing more than praying to the state to behave only nonpolitically and only in accord with the scientific dictates of Keynesian theory.  Such a ‘theory’ of state behavior, of course, is no theory at all; it is merely a naive hope or a faith immune to reason and facts."

Cafe Hayek — where orders emerge

Are Stimulus Multipliers Higher During Times of High Unemployment? Not in the United States.

Key Finding: "No matter how they test, the conclusion is the same. The authors say they "find no evidence that multipliers are higher during periods of slack in quarterly U.S. data from 1890 to 2010."

An argument against government spending over other stimuli in times of recession?

Are Stimulus Multipliers Higher During Times of High Unemployment? Not in the United States.

Women, Liberty, Marketing, and Social Science, Bryan Caplan | EconLog | Library of Economics and Liberty

I've found this to be true.  You?

"To make a long story short: Thinking people tend to have "hard heads" and "hard hearts," while Feeling people have "soft heads" and "soft hearts."  Unsurprisingly, then, Feeling people tend to hold more anti-market views.  I've similarly found strong evidence that males "think more like economists."  This gender belief gap increases with education, consistent with a simple model where male and female students gradually learn more about whatever their personalities incline them to study. "



Women, Liberty, Marketing, and Social Science, Bryan Caplan | EconLog | Library of Economics and Liberty

Cafe Hayek — where orders emerge

Good quote from Adam Smith.,

Cafe Hayek — where orders emerge

The Scooooottish Enlightenment

 Good list of economists and others who carry on the tradition of the Scottish Enlightenment.

Cafe Hayek — where orders emerge

Eurocrisis: Brief Synopsis

Tyler Cowen gives a quick summary of the Euro zone's steps toward and away from progress.

The U.S. is the OPEC of Sugar-OSEC

Don Boudreaux calls out Florida congressman Tom Rooney (R-FL) for arguing both for and against free trade.

Cafe Hayek — where orders emerge

Are We Better Off With GM Still Alive?

Depends on who "we" is. 

From the perspective of a benevolent dictator that is responsible for maximizing the happiness of all citizens the answer is fairly obvious: no.

If I am someone concerned with the happiness of manufacturing employees and am ok with establishing anti-market, anti-competitive, and extremely inefficient policies, then the answer is less obvious: I don't know, depends on what you can do for me.

A friend recently pointed out the upside of the GM bailout. "...instead of getting rid of tons of their employees when technology revolutionized manufacturing, they actually helped them."  The term "they" in this context refers to the architects of TARP, a program initially aimed at financial institutions but was expanded to include GM and perhaps other companies.  

A basic economics course hammers home to students the importance of acknowledging that society faces tradeoffs whenever a decision is made concerning economic policy.  What was the tradeoff with the GM bailout?  

Gains: GM workers benefited.  Their pensions, healthcare, salaries, etc were maintained.  Also, the country didn't have to worry about selling off GM brands to other companies in order to keep beloved brands alive.  You could also argue (though most economists won't) that it's great to keep low-level manufacturing jobs in the United States (it's not).  

Losses: First, we want technological advancement in this country, and in the world.  Even if it means displacement of workers with low tech skills.  Those that lose in this situation can be re-trained, their skills upgraded, etc.  The fact that this process may seem difficult should not lead to the conviction that production processes should never be improved through better use of technology, instead it should serve as an indictment of the lack of the U.S. education system's ability to adapt to needs.  The loss in this situation is that those low-end manufacturing jobs are SUPPOSED to be lost.  Every healthy economy sheds low-end jobs as new technologies emerge the same way that organisms shed deteriorated or damaged cells while replacing them with new and healthy ones.  Propping these jobs up only disguises the need for a more flexible work force and education system.  Further, it disguises the great disservice unions do when protecting their members from market forces.  You can only do it for a little while, eventually someone will have to pay.  In the GM bailout case, it is the taxpayer, which leads to the next loss.

TARP and the GM bailout made it clear that middle class taxpayers located in and around Detroit and that belonged to a union were more important to policymakers than those located elsewhere.  The bailout amounted to a transfer of wealth from taxpayers in the general U.S. to taxpayers working for the UAW union.  Lest you feel sorry for the UAW employees, GM reported that the average wage paid to an employee in 2006 was around $40.00/hr when you include overtime, wage premiums, vacation, and holiday pay.  That wage rate, full time, amounts to around $76,000 per year, which is high enough to put one squarely in the upper-middle class.  

"But", you say, "it acted as a stimulus!!!"  Fine.  It stimulated Detroit and kept GM cars in production.  This argument is tough to make.  First, it assumes that the money that will have to be taken from the taxpayers elsewhere in the country (don't forget, when you spend money, you have to actually collect it at some point) would not have been spent as productively as the government spent it by giving it to a failed automobile manufacturer.  Also, it assumes that the public will be better off having not purchased other cars available for consumption such as Hondas, Toyotas, Nissans, Chevys, and Fords etc.  This is clearly not the case.  The public would probably be better served to, in fact, buy non-GM vehicles.  You may disagree, but at the minimum, it's a wash.  And if one argues that it is better to buy American than foreign vehicles, then I'll save the haranguing you deserve for another post.

Lastly, why would the government want to establish the following precedent: private companies that demonstrate an inability to generate profits will be purchased by the government and have their non-profitable good or service subsidized by the American taxpayer?  They shouldn't want to.  Unless, their motives are incompatible with the principles of free-enterprise.

Can China Destroy Their Own Growth Prospects

I don't know...but that won't stop them from trying.

Recently, China's government has banned large-scale shipping freighters from entering Chinese waters.  Bad idea, for so many reasons.  HT to Don Boudreaux.  Article Here.

Foodstamps Surge By Most In One Year

Zerohedge points out that the delay in foodstamp recipients may have been politically motivated.  In other news, the world exists.

Article Here

The Best Article on Health Care Ever

The article linked to below is the best article on health care ever written, according to some.

John Cochrane's article.

HT: Don Boudreaux of GMU.

Paul Krugman Is Wrong

It's kind of cute, but pretty soon you realize that kitten wants to bite you...and you want it to stop hissing.

Cafe Hayek — where orders emerge