Coyote Blog

Here is what I remember from the late 1980's - just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan's MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called "the lost decade" which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true,

The current debates about China's currency, the trade imbalance, our debt and China's excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping's government-led, growth-oriented reforms—has created the planet's second-largest economy. It's on a clear trajectory to knock America off its perch by 2025....

There is no doubt that China will pass the US in total economic size -- it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China's people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US -- just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don't blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that .... that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, "wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios" and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don't see any way a European debt crash won't have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don't understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today's announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can't print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans .... I don't understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world's patsy is never a bad bet).

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

Holly Fretwell of PERC discusses the huge leap in agricultural yields since WWII

Not only does this mean that we have have billions of people on Earth and not starve, but it also has freed up labor for more productive and value-enhancing activities.

As an aside, remember this chart when global warming alarmists argue the the warming trend of the last 50 years is reducing crop yields.  (If the linked article seems simply bizarre given the chart above, realize the NYT is saying that crop yields are down from what they might have been.  This is the same kind of faulty logic that was used by Obama to credit his stimulus with job gains when in fact the economy was losing jobs.  They posit some unproveable hypothetical, and then say reality diverged from that hypothetical because of whatever factor they are trying to push, whether it be CO2 or stimulus).

The problem with food prices is not production, its the fact that we take such a huge percentage of our food grains and, by government dictat, convert them to automotive fuel.

I hinted at it in my last post, but have addressed it in more depth in my column this week at Forbes.  A brief excerpt:

The theme from all these failures is distorted signals and corrupted communication.  People, no matter how savvy, cannot possibly research every nook and cranny of the economy before making an investment.  They make decisions, therefore, based on signals – prices, interest rates, perceived risks, and the profit history of other similar investments.  If these signals are artificially altered or corrupted, bad decisions that destroy wealth and growth will result.

Which brings me back to education.    I will tell you something almost every business owner knows:  We business owners may whine from time to time that banks won’t lend us money, but what really is in short support are great people.  Nothing has more long-term impact on an economy than amount and types of skills that are sought by future workers.  That is why everyone accepts as a truism that education is critical to economic health.

Unfortunately, there is good evidence that our education policies have already done long-term harm.   The signals we send to kids making their higher education plans have disconnected them from reality in a number of fundamental ways, causing them to make bad decisions for themselves and the broader economy.

Examples follow.  Read it all.

I find the Left's opinions on Greece to be fascinating.  After all, Greece is essentially the logical end result of all of their love for deficit spending, so what kind of cognitive dissonance is necessary to write about Greece on the Left?  This kind:

OK, but they're spending too much money. Surely they know they have to cut back?

Sure, but the deals on offer are pretty unattractive. Europe wants to forgive half of Greece's debt and put them on a brutal austerity plan. The problem is that this is unrealistic. Greece would be broke even if all its debt were forgiven, and if their economy tanks they'll be even broker.

But that's the prospect they're being offered: a little bit of debt forgiveness and a lot of austerity.

Well, them's the breaks.

But it puts Greece into a death spiral. They can't pay their debts, so they cut back, which hurts their economy, which makes them even broker, so they cut back some more, rinse and repeat. There's virtually no hope that they'll recover anytime in the near future. It's just endless pain. What they need is total debt forgiveness and lots of aid going forward.

I certainly agree that Greece is now in a death spiral, but this analysis is just amazing.  The only way for other countries to avoid sharing Greece's fate is to, very simply, spend within their means.  If they do, problem avoided.  If they don't, and get hooked on deficit spending, then Greece is their future, the only question is when.

So what does Drum do?  He calls the spending withing their means strategy "unrealistic" and "brutal austerity."    So he occupies a long post lamenting what a totally SNAFU'd situation Greece is in, but takes off the table the only possible approach for other counties to avoid the same fate.   And in fact advocates a strategy that will push a few others over the cliff sooner, or even cause a few to jump on their own (after all, if the punishment for spending your way into financial disaster is to get, as Drum recommends, all your debt forgiven and years of aid payments, why the hell would anyone want to be fiscally responsible?)

And it is amazing to me that he calls forgiving half their debt, the equivalent in the US of our creditors erasing about $7 trillion, as "a little bit of debt forgiveness" while cutting government spending a few percent of GDP is "a lot of austerity."

His solution, of course, is not for Greece to face up to its problems but to transfer the costs of its irresponsibility to others and then remain nearly perpetually on the dole.

His mistake is to assume Greece faces endless pain.  It does not.  History has shown that countries that are willing to rip off the bandage quickly rather than over a few decades can recover remarkably quickly if sensible policies are put in place.  Heck, the Weimar Republic, which had inflation so bad people got paid 3 times a day so their family could buy something before the money became worthless a few hours later, got its house in order in a matter of months.

I am willing to believe that the initial push into alternative energy subsidies was undertaken with good, honest (though misguided) intentions to change the US energy mix.  But once such a program is begun, it inevitably gets turned into cronyism.

The best example is probably corn ethanol.  A combination of subsidies and mandates have pushed an enormous proportion of our food supply into gas tanks, for little or even negative environmental effect.   Environmentalists and the Left turned against it, but for a few large corporations like ADM, the subsidies have become life and death, and they do anything they have to to get Congress to maintain them.

The best evidence that corn ethanol shifted from a green program to pure cronyism was the imposition of large import tariffs.  The only possible purpose of these tariffs was to enrich farmers and a few manufacturers.  After all, if one really cared any more about getting more ethanol in the fuel supply, one would welcome low cost imports.

Well, the Solyndra debacle has started to make clear that cronyism has taken over solar subsidies as well.  Every day we find yet another high-ranking Obama supporter with his thumb on the scales tilting the DOE funding decision toward Solyndra.

Now we will see the ultimate test:

A group of U.S. solar-panel makers Wednesday called on the federal government to punish Chinese rivals with extra duties for allegedly dumping their products on the U.S. market…

The U.S. makers are asking the Department of Commerce and the International Trade Commission to impose a duty on panels imported from China, a market that totaled $1.6 billion in the first eight months of 2011. SolarWorld accused Chinese manufacturers of selling solar panels at less than half of what the production costs would be in a comparable free-market economy, and is asking for tariffs to make up the difference.

One could argue that this is in direct response to the Solyndra failure.  Solyndra's failure has been blamed on low cost panel manufacturing in China.   Again, if we care just about energy, we should be thrilled about low-cost Chinese solar panels.  If the Chinese government wants to somehow subsidize our consumption of solar panels, great!

Watch this proposal.  Any politician that jumps on this solar tariff bandwagon will be saying "My statements about wanting to see more solar usage is just a bluff, I only really care about subsidizing a few selected businesses."

I have always defended private unions on the ground that workers have a freedom of association just as much as anyone else.  I think the government has tilted the playing field in the union's favor too much, but I will leave that aside for today.  I will also leave aside the problem of public unions, where there is no one really representing the taxpayer on the other side of the table in negotiations (many politicians in union states owe their jobs to union support).

Leave all of that aside.  The economic problem with unions tends to be that they are such a conservative (little c) force in an economy that needs dynamism to grow and expand wealth.  Here is a great example:

The University of California last week tentatively agreed to a deal with UC-AFT that included a new provision barring the system and its campuses from creating online courses or programs that would result in “a change to a term or condition of employment” of any lecturer without first dealing with the union.

Bob Samuels, the president of the union, says this effectively gives the union veto power over any online initiative that might endangers the jobs or work lives of its members. “We feel that we could stop almost any online program through this contract,” Samuels told Inside Higher Ed.

I have said for a long time that negotiations for pay and benefits (in private unions) tend to be the least problematic union activity (different story in public unions, where the relationship to management is not adversarial).  Longer term, union imposed work rules and restrictions tend to be much more costly.  The reason I think is that corporate executives can easily value the difference between various pay and benefits packages, but have a hard time valuing flexibility and dynamism.  If union rules cut off potential future as-yet-unknown growth and cost reduction efforts, the cost of these rules can be huge but equally they can be almost impossible to value (more like options pricing than straight cost-benefit).

Do you remember back in the late 70's, when the economy sucked, and no private entity would fund new technologies like computer startups Apple and Microsoft, so the government had to step in to provide the needed investment?  Yeah, neither do I.

Well, I finished Reamde this weekend.   It was only OK.  It is a straight up modern adventure book, like perhaps a Vince Flynn novel, chasing terrorists around the globe.  I enjoy Stephenson for his big, sometimes outrageous ideas, his witty prose, and his love affair with the geek culture.  Except for the latter, none of this is in evidence in this book.  It is certainly a more popularly accessible book, but that is certainly not what I want from Stephenson.

Cryptonomicon and Snow Crash are among my favorite novels.  One of the reason I liked them were for the prose he brought to bear on even (or especially) trivial topics.  His long passages on eating Cap'n Crunch or getting wisdom teeth removed in Cryptonomicon are classics.   I got very little of this kind of thrill in Reamde, made worse by the fact that there were just too many main characters, none of whom were very well developed for me.

At some points, this book held my attention, and at some points it dragged.  The book in some ways is almost the same structure as a comedic farce -- a whole bunch of characters who are dragged along by events into increasingly unlikely circumstances.   There is no looming event or goal that drives the narrative in a, say, Clancy novel.  Its just a lot of falling into one mess after another.   Its also a bit unseriousness - it feels like the teens in Scooby Doo chasing terrorists.  (One problem is that Stephenson's bad guys are too likable - they are always smart and ironic gentlemanly - so its hard to get as worked up about heading them off as one might in a classic thriller).

Some playwright or critic once wrote (sorry, can't remember the name) that if you put a gun out on the stage in Act 1, someone better use it in Act 3.  (OK, it was Chekov, though why he said "gun" rather than "phaser" is beyond me).  In this book, Stephenson leaves guns unused all over the stage.  In particular, Stephenson comes up with one of his patented interesting-crazy ideas of using an MMRPG to crowd-source security analysis.  I felt sure that in the manhunts that followed, that particular gun would be picked up and used to help drive to the climax, but we never hear of it again.  In fact, we learn a lot of interesting things about this game in the book, which seems to be absolutely central to the plot, but in the end turns out to be entirely peripheral, an early macguffin to kick start the plot.

Another example is the HUGE amounts of the book go to talking about an interesting social realignment happening in the game, to absolutely no end.  OK, so characters have abandoned the good and evil alignments put in by the game masters for a new emergent faction division.  I thought sure we would see some kind of real-world parallel to this happening in the book, or some insight drawn from this that helps solve the real world problem.  Nothing.

Overall, a disappointing book I would not have finished had it not been by Stephenson.

Postscript:  If you become interested in the dynamics of the MMRPG in the book, where there are no character levels (only a skill system) and money and money making is central to the the game, the closest analog I have ever seen is not a fantasy game but EVE Online, a space-based game (also, to a lesser extent, Star Wars Galaxies as well, but that is now defunct).  EVE Online probably has the most interesting economy of any MMRPG I have played and I know they employ an economist who sometimes writes articles about his work.

If I asked you what three major American consumer products saw the largest steady price rises in the last decade (as opposed to price volatility, as we see in commodities like gasoline) one might well answer "housing, medical care, and college tuition."

Two or more of each of these share a number of features in common

• Long, sustained government programs to increase access / ownership / usage
• Substantial portion of pricing paid by third parties.
• Easy to obtain, government subsidized debt financing.

The housing bubble has of course burst.  Obamacare, by further disconnecting individual use from the true costs of the services, will likely push health care costs ever higher.  And then there is the college bubble.  I am a bit late on this, but this is truly a remarkable chart:

I have already heard the leftish talking point on this, which is that this increase in debt is the fault of (surprise!) private lenders and loan originators.   This is a similar argument to the one made in the mortgage bubble, arguing that all the bad loans are the results of unscrupulous private originators and securities packagers.

And certainly there were many private companies originating awful mortgages and selling them to Fannie and Freddie.   But what we forget in hindsight is that the government was begging for them to do so.  Fannie and Freddie had active programs where they were encouraging mortgages with Loan-to-value of 97% or more.  This kind of leverage is absurd, particularly for American-style no-recourse home mortgages.  Sure, it was crazy to write them, but they were getting written only because the government was asking for them to be written and buying them all up.

In fact, in student loans, almost all of this loan growth is eagerly being underwritten by the Feds, not by private lenders.  Note the only consumer credit line really growing below is the "federal government" line (in red), which is primarily being driven by federally backed student loans.

One might argue that this is once again due to private originators going crazy.  But the Feds took over origination of all federal student loans in 2010.  You can see that much of the growth has occurred after the Feds took over origination.  In fact, I think most of us can understand that when the origination decision is shifted from being a business decision to a political decision, student lending standards are certainly not going to get tougher.  We can see that in home lending, where Fannie and Freddie have already returned to most of their worst pre-crash origination standards (here is an example of government promotion of these low down payment programs).

The other day my mother-in-law argued that the student lending business (particularly private lenders) needed reform because some students were being charged exorbitant rates.  Having not been in the market for student loans lately, I wondered if this were the case.  But the first thing that caught my eye was this stat:  The 2-year default rate (not lifetime, but just in the first 2 years) of student loans was 8.8% last year, and 12% if one looks at the first 3 years.  Compare that to credit card default rates which are around 6%.  And recognized that these are apples and oranges, the student loan numbers actually understate lifetime default rates.

Based on that, the interest rate on student loans should be in the twenties.  Against this backdrop, the rates I see online seem like a screaming deal.  Probably too good of a deal.  Which is why so many people are piling into these loans on the explicit promise society has made to them that their college degree will pay off, no matter what the cost.
Beyond the absurd price increases in both public and private education, here is the 900 pound gorilla in the room -- some majors are simply more valuable than others.  A computer programming grad is going to have a lot more earning potential than the average poetry or gender studies major.

What we really need is tiered lending standards based on a student's major.  Banks don't treat the earning potential of a dog-grooming business and a steel mill the same, why treat a mechanical engineering degree the same as a sociology degree?  But, of course, this is never, ever going to happen.

Years ago I had these thoughts along this line, in response to a Michelle Obama rant about the cost of education

This analogy comes to mind:  Let’s say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.  In fact, today, she spends a lot of her time going to others who have bought similar $200,000 educations and urging them not to use those tools productively, just like she did not.

Postscript:  Kids who find they cannot pay their student debts and think bank home foreclosures are the worst thing in the world are in for a rude surprise -- home mortgage default consequences are positively light in this country.  The worst that happens is that you lose the home and take a ding on your credit record.  Student debt follows you for life, with wage garnishments and asset losses.  People walk away from home debt all the time, the same is not true of student debt.

My Forbes column is up this week and it presents some quick reactions to the Obama jobs speech last night.  A brief excerpt:

Overall, I found the package to be an incredible mish-mash of already tried and failed steps to rejuvenate the economy.   Even if I were to buy into the Keynesian stimulus logic, everything in this package is so under-scale as to be rounding errors on the larger economy.  This is basically a smaller version of the last failed stimulus repeated.

This plan is absolutely in the Obama style, offering goodies to many constituencies without a hint of how they will be paid for.  Presidents often offer a chicken in every pot when they are campaigning, but usually are forced into reality once they enter office.  Not Barack Obama.  Time and again, from health care to the most recent budget fight and last night’s speech, Obama wants to be loved for offering perks, and then wants someone else to take the fall for the unpopular steps required to pay for them.  He is like grandma endearing herself to the grandkids by buying them Christmas presents on dad’s maxxed out credit cards, leaving dad to later figure out later how to pay for them or face the ire of the kids by returning the gifts.

My new column is up at Forbes, and discusses why politicians, particularly this administration, think they can allocate capital better than the market

The problem is that this top-down override of market capital allocations is almost certain to destroy wealth, because there are at least two problems with it (beyond the obvious liberty and property rights issues).

First, the decisions are being made by, at most, a few hundred government workers.  There is no possible way these workers can ever gather the knowledge and information posessed by millions of private actors making similar investment decisions.  Like monkeys throwing darts, some of the investments will work out, but on average their success rate has to be far lower than the network of individuals in the broader economy.

Second, and probably more important, government decisions-makers have terrible incentives when making these investments.  Seldom, if ever, are government re-allocations of capital made with an expectation of earning a return.  In fact, many of these programs promote themselves explicitly as shifting capital to investments no rational private investor would touch.  These investments are undertaken because they promote some sexy technology, or create jobs among a favored constituency, or even just because they make for a nice bullet point on a politician’s reelection web site.

Obama’s investment of taxpayer money into Solyndra is a great example.  It is clear little due diligence was completed before the loan guarantees to Solyndra were rushed out the door in 2009 in time to meet Energy Secretary Steven Chu’s artificial target date for the first loan of Obama’s green jobs program.  A good, well-timed sound bite on the evening news was more important that the actual details of the investment.

But, in fact, little due dilligence should have been necessary. ....

here.

It's a wonder how, when over "97 percent to 98 percent" of scientific authorities accepted the Ptolomeic view of the solar system that we ever got past that.  Though I could certainly understand why in the current economy a die-hard Keynesian might be urging an appeal to authority rather than thinking for oneself.

When, by the way, did the children of the sixties not only lose, but reverse their anti-authoritarian streak?

Postscript:  I have always really hated the nose-counting approach to measuring the accuracy of a scientific hypothesis.  If we want to label something as anti-science, how about using straw polls of scientists as a substitute for fact-based arguments?

Yes indeed, the number of people in the newly made-up profession of "climate science" that are allowed by the UN control the content of the IPCC reports and whose funding is dependent on global warming being scary probably is very high.  The number of people in traditional scientific fields like physics, geology, chemistry, oceanography and meteorology who never-the-less study climate related topics that wholeheartedly are all-in for catastrophic man-made global warming theory would be very different

 Decide for yourself - see my video on global warming.  Am I anti-science?

Via Kevin Drum, from Dylan Matthews

Second, the president should do more to help the American worker. He should establish a jobs program. Do the simple math: We are spending more than $110 billion annually in Afghanistan. Stop it. Or scale it back to the sort of covert operations and drone war that is warranted. Savings? Perhaps about $100 billion—per year. Use that money to create up to 5 million jobs at $20,000 each....Just as FDR did during the Great Depression, put these Americans to work in states, counties, schools, parks.

Even Drum considers this unrealistic, though for the wrong reasons (i.e. the evil Republicans in the House would never let us do it).  I have a series of thoughts on this

1. FDR had low paying jobs programs in part because this was the only form of relief -- there was not welfare or food stamps or medicaid or unemployment or EITC or social security.  A $20,000 dig-a-hole-and-then-fill-it-in government make-work job would likely just displace about the same amount of other government transfer payments.  I can't see this doing squat.
2. We are really going to kick-start the consumer market with $20,000 jobs?
3. The Left needs to get its story straight on the stimulative effects of wars.  Democrats blame Bush for the current economy in large part because of his wars, and the author here implies that moving spending out of wars would be a net plus.  But Keynesians believe WWII ended the Great Depression and Krugman wrote just the other day that what we really need is a war with space aliens (I kid you not) to end the Great Recession.  So which is it?

By the way, I think wars are a total economic waste and drag on the nation.  Dedicating scarce resources to blowing stuff up is the worst possible use of capital.  However, diverting this into politically correct, politician-selected make-work projects is not really a lot better.

Via Ed Driscoll, from Richard Cohen in the Washington Post:

The odd thing about the Tea Party is that it uses Washington to attack Washington. This is a version of Hannah Arendt’s observation that totalitarian movements use democratic institutions to destroy democracy. (This is what Islamic radicals will do in Egypt.) Note that the Tea Party is nowhere near a majority — not in the House and not in the Senate. Its followers have only 60 seats in the 435-member House, but in a textbook application of political power they were able to use parliamentary rules to drive the congressional agenda. As we have known since Lenin’s day, a determined minority is hands down better than an irresolute majority.

The Tea Party has recklessly diminished the power and reach of the United States. It has shrunk the government and will, if it can, further deprive it of revenue. The domestic economy will suffer and the gap between rich and poor, the educated and the indolently schooled, will continue to widen. International relations will lack a dominant power able to enforce the rule of law, and the bad guys will be freer to be as bad as they want. Maybe the deficit will be brought under control, but nothing else will. I worry — and I envy (but will not forgive) those who don’t

Yep, those dang totalitarians -- always trying to shrink government and diminish its power and reach.

My column in Forbes is up.  Here is how it starts.  Hit the link to see it all.

We Americans are all being held hostage.  The ransom demand:  Trillions of dollars in new taxes.  The threat:  the shut down of any number of economic activities, from retirement payments to mortgage lending.

Megan McArdle, blogging at the Atlantic Monthly, posted a hypothetical list of what government activities would have to cease if we bumped up against the debt ceiling and 40% of government activity (ie the amount currently funded by deficit spending) had to cease immediately. Here are two examples from her article:

The market for guaranteed student loans plunges into chaos. Hope your kid wasn’t going to college this year!

The mortgage market evaporates. Hope you didn’t need to buy or sell a house!

Terrorists have tried for years to find some way to threaten the whole of America and have, with the exception of 9/11, never really succeeded.  Who knew that all they really needed was not to buy guns and bombs, but to get elected to Congress.   How did we ever get in this position, where a handful of men and women in Washington had the power to hold the entire economy hostage?

 

This is right on the mark

His description of what Keynesians believe is correct. It's why Keynesians, including the President, thought that government spending would stimulate the economy. As Klein points out, "Obama didn't just have a team of Keynesians. He had the Keynesian all-star team."

Right, but then Klein gets it wrong: "The idea [behind Keynesian economics], in other words, is not about whether the government spends money better than individuals."

Yes it is! Obama and Klein think that during a recession, "the financial system scares business and consumers so badly that they hoard money, which worsens the damage to the system." Therefore, the government must take money away from individuals, and spend it elsewhere. Eric Cantor correctly pointed out that the theory is: "government can be counted on to spend more wisely than the people."

Part of the problem here is in nomenclature.  People don't think of saving as spending.  So I will shift a word a bit.  The idea of Keynesian economics is that the government can deploy your money better than individuals can.

The cause of the asset bubble for this argument is almost irrelevant.  Households, finding themselves over-leveraged, want to deleverage by buying fewer things and saving more money.  The Keynesians explicitly wanted to prevent this by taking the money that would have been saved and spending it.  This destroys value in two ways.  As Stossel points out, it shifts money from being deployed with an eye on productivity to being deployed with an eye on politics.  From a value-creation standpoint, this has to destroy value.  In addition, by slowing the process of deleveraging, it slows the recovery, unless individuals in the mean time can be convinced that they really don't need to deleverage.  And is that really the post-bubble message we should be sending out?

One might think a line like about Greek finances was printed just this week

What followed could only be described as a comic progression of populist pandering [and] the spread to the national economy of a series of parasitic labor unions and cabals

But in fact it is describing Greek conditions circa 1944.

A while back I observed that the difference between Greek and US finances is that the US needs to return to a spending level circa 2007, while Greece has no similar default state of relative fiscal sanity it can return to.  This article in Finem Respice reinforces this premise by discussing the absolute insanity of Greek fiscal management before and after and even during WWII, which was characterized by all the exact same problems that have driven the current crisis.  Good background reading.

Greece, then as now, was dominated by an expensive public sector funded insufficiently by a tax system that did not work.  As may happen soon, Greece was not able to borrow, so all they could do was print money and inflation soared.  Only one man was able to stop the inflation, and I won't spoil the ending by the humorous way he did so.

Kevin Drum had a post lamenting that Congress is doing nothing when it could be spending money that would, in his view, stimulate the economy out of a recession.  All well and good, and predictable based on his assumptions.  But he ended with this

We are ruled by charlatans and cowards. Our economy is in the tank, we know what to do about it, and we're just not going to do it. The charlatans prefer instead to stand by and let people suffer because that's politically useful, while the cowards let them get away with it because it's politically risky to fight back. Ugh indeed.

I was horrified by this sort of discourse, and wrote back:

It is so tiring to see both parties ascribing horrible and hostile motivations to their political opponents.  Your last paragraph is just absurd, implying that everyone agrees with your economic prescriptions and that the only reason everyone is not following them is either a) political self-interest or b) loathing for the poor and helpless.

Is it really so hard to understand that well-intentioned, intelligent people who honestly want the economy to get better might disagree with you about the benefits of deficit spending? The literature is at best mixed on this topic and certainly there is nothing about the last stimulus that causes me to become a believer.

Those of us who believe strongly that diverting trillions of dollars of capital from private to public hands (ie from hands focused on productively employing it to hands focused on politically employing it) makes the economy worse by necessity are just as motivated by trying to improve the economy as you.

I really don't understand this absolute insistence on ascribing bad motivations to those with whom one disagrees.  Is it ego, or just insecurity?  If one admits his or her opponents can be smart and well-motivated, it certainly creates an edge of doubt and uncertainty.  Deal with it.  That's healthy.  It keeps us intellectually honest.

The latest stimulus analysis out of the Administration is yet another crock.  It claims 2+ million jobs created, but has absolutely no evidence for this.  All it does is take the same hypothetical Keynesian multipliers it used when it proposed the stimulus, and reapply them.  In other words, the models basically say X jobs should have been created per billion dollars spent, so they run the models that then announce that X jobs must have been created per billion dollars spent.  Surely.  Somewhere.  We swear.

This notion of confirming your original predictive model runs with new runs of the same model is the same kind of BS that has become so popular in climate science.  The fact is, the net effect of the stimulus is almost impossible to measure in a complex economy where so much is changing.  It's possible, perhaps  (though this is surprisingly difficult to do right) to measure each person employed in a stimulus project, but this does not answer the question of how many jobs would have been created if the $800 billion had been left in the hands of private actors rather than spent by the government.

For those on the Left who wish to return to the economic organization of the 1950's, recognize that this era of more uni0ns and a greater dominance of the economy by hard-core manufacturing also had strong social inhibitions to half the adult population working paid jobs.  As women entered the work force in droves in the 1970's to the present, most of the jobs they found were in the new service industries whose displacement of manufacturing you lament.

A picture is worth a thousand words, so here is the Battleship game box my son found in a stack of old games at his grandparents house.   The boys having a blast while the girls are washing the dishes.

Update: More from Matt Welch and Michael Barone.  Money quote:

The ongoing left-of-center brainscrub of its own 20th century anti-authoritarianism remains one of the great curiosities of our time.

Kevin Drum doesn't buy the regime uncertainty argument as a partial explanation of the slow recovery.

Here's what's remarkable: Carter, a law professor at Yale, apparently never once bothered to ask this guy just what regulations he's talking about. Is he concerned with general stuff like the healthcare law? Or something highly specific to his industry? Or what?

Regardless, I've heard this kind of blowhard conversation too often to take it seriously. Sure, it's possible this guy manufactures canisters for nuclear waste or something, and there's a big regulatory change for nuclear waste storage that's been in the works for years and has been causing everyone in the industry heartburn for as long as they can remember. But the simple fact is that regulatory uncertainty is no greater today than it's ever been. Financialuncertainty is high, but the Obama adminstration just hasn't been overhauling regs that affect the cost of new workers any more than usual. The only substantial exception is the new healthcare law, and if you oppose it that's fine. But it was passed over a year ago and its effects are pretty easy to project.

First, the costs of the health care law are NOT easy to project, and are made even harder when your company might or might not get waivers from certain provisions.    Second, he seems to forget cap and trade, first by law and then by executive fiat; the NLRB's new veto power over corporate relocations it exercised with Boeing; the absurdly turbulent tax/regulatory/permitting regime in the energy field, and particularly oil and gas.  How about trillion dollar stimulus projects, that until very recently Obama was still talking about replicating (and Krugman begs for to this day).  I could go on and on.  This is spoke just like a person who never had to run a business.

Further, I wrote this in the comments section:

I think you are both right and wrong.  I am sure the discussion about this is to some extent overblown.  But you are thinking about business and hiring much too narrowly.

You seem to have a mental model of business showing up at the door, and someone turning that business down because they don't want to hire an employee to serve it (or out of sheer petulance because Fox News told them to sit on their hands, lol).  You find it unlikely anyone would refuse the business, and so do I.

But I run a small to medium size business, and a lot of hiring decisions don't work that way.    I do have some situations that fit your model - I have a campground that is really busy this year, so we hired more people to serve the volume.   No problem.

But most of my hiring decisions are effectively investments.  I am going to create a new position, pay money to train that person, and pay their wage for a while in advance of demand.  Or I am going to open a new site or department or location and make a lot of investment, and the return on investment may be very sensitive to small changes in labor or regulatory costs.

For our business, with labor costs over 50% of costs, the issue is definitely labor costs.  Our pre-tax margins are in the 6-7% range.  So if labor costs are 60% of revenues, then a 10% change in labor costs might wipe out the margin entirely, and a much smaller change in costs might flip the investment from making sense to not making sense.

We run a seasonal business with part-time workers who are older and on Medicare.  Regulations about exactly how much we will have to pay under Obamacare have not been written, so we have no idea how much our employment costs will go up in 2014, so we sit and wait.  I have cancelled two planned campground construction projects in the last 6 months because we have no freaking idea if they will make money.

If I am having trouble with just this one law figuring out whether to make investments, what are, say, oil companies doing in evaluating investments when they have absolutely no idea what their taxes will be, whether they will be permitted or not to drill, or whether they will be subject to cap and trade?

One other thought, it strikes me that there is a lot of good scholarship that suggests that the Great Depression was extended by just this kind of regime uncertainty.  Now, of course, the proposed structural changes to the economy being proposed at the time were more radical than anything on the table today.  The National Industrial Recovery Act was essentially an experiment in Mussolini-style economic corporatism, until most of it was struck down by the Supreme Court.   Nothing so radical is being proposed (unless you work in health care).

Look, I know the Left has convinced itself that only consumer demand matters in an economy, but business investment has simply got to matter in a recovery.   If the returns on future investments are harder to predict, and therefore riskier, businesses are going to apply a higher hurdle rate to new investments, meaning they don't stop entirely, but do invest less.

One interesting may to confirm this some day would be to look back and see if larger corporations with political access invested more than smaller ones or ones with less access.  Did GE, who clearly can get whatever it wants right now from the government, invest more than a small company or even than Exxon, which is on the political outs?  If so, this in my mind would confirm the regime uncertainty hypothesis, because it means that the companies doing most of the investing were the ones confident that they could shape the mandates coming out of the government in their favor.

Beyond regime uncertainty, if you want to talk about Obama and the recovery, you have to mention that a trillion dollars was diverted from private hands to public hands.  Does anyone believe that taking a trillion dollars out of whatever investments private actors would have used the money for and diverting most of it to help maintain government payrolls is really the way to increase the strength and productivity of the economy?

My column this week in Forbes is about the declining rate of entrepreneurship and startups in the US.

A recent study by the Beauru of Labor Statistics confirmed a potentially disturbing trend — that the number of new startup businesses in the United States has declined since 2006, and the number of jobs created by those startups has been in decline for over a decade.

This is not just a result of the recent recession.  These declines pre-date the current recession, and besides, startup activity has always held up well in past recessions as unemployed workers try entrepreneurship as a path back to prosperity.

There are likely a myriad of economic and demographic reasons for this decline, but certainly the growth of government power in the economy must be seen as a major contributor.  Government intervention in commerce nearly always favors large companies over small, even if that was not its specific intent, for a couple of reasons:

1. Increasingly complex and pervasive regulations on everything from labor practices to salt content tend to add a compliance cost burden that is more easily born by larger companies
2. Large, entrenched competitors are becoming more facile at manipulating government to create barriers to competition from upstart companies with different business models.

The role of government in throttling entrepreneurship has been evident for years, in the enormous differentials between US and European business startup rates.  Historically, the US has had entrepeneurship rates 3-4 times higher than in the large European industrial countries, due in large part to the barriers these latter countries place in the way of business creation.  But the US, with its current bi-partisan drive towards a corporate state, may soon be engaged in a race to the bottom with these other countries.

I go on to discuss each of these two points in more depth.

Scene 1, History AP:  My son asked me how WWII ended the Depression.  I said that the draft soaked up a lot of excess workers, which reduced unemployment, and British buying for the war helped our economy but that the war generally destroyed rather than created wealth.  He said, "Dad, you can't tell it to me that way.  The guy grading the AP is going to be a Keynesian."  So we talked multipliers and aggregate demand.

Scene 2, Spanish AP:  My son hands me a list of Spanish words he is trying to learn.  They are the Spanish words for things like "social justice,"  "poverty", "exploitation", etc.  I told him it was an odd selection of words.  He said that nearly every Spanish essay in every Spanish textbook he had ever had were about revolution and stopping the rich from exploiting the poor and fighting global warming.  So he wanted to be prepared for a similar topic on the AP.    After the test, I remembered this conversation and asked him what the essay was.  He said the topic was "show why the government of poor countries should give free bicycles to the poor to fight global warming."