Posts Tagged ‘economic depression’

Quite Different

Thursday, 8 October 2009

Consider two propositions:

  • The first is that markets are smart, to the extent that they cannot be tricked into anything unless one carefully hides most or all of the contrary evidence.
  • The second is that, left unregulated, markets produce some best possible outcomes.
These aren't at all the same proposition. On the one hand, something can be hard to deceive, yet work at purposes contrary to those that one favors. On the other hand, a mechanism can be vulnerable to some sorts of disruption but, in the absence of that disruption, perform some task well. I'm not saying that the propositions are contrary; they could be simultaneously true; none-the-less, they're plainly not identical.

The run-up to the latest economic crisis seems to have been founded in no small part by a confusion of these two distinct propositions. The Bush Administration represented itself — and may well have considered itself — free market, in-so-far as it expected considerable resilience on the part of the market in the face of remarkable levels of state borrowing and considerable other interventions (compassionately conservative or kleptocratic). And Alan Greenspan, who surely considered himself a believer in laissez faire, is these days explaining his optimistic proclamations from before the crisis as stemming from a failure to reälize that investors would not recognize that a boom could not last forever, to which lack of recognition he also attributes the crisis, as if irrational exuberance were simply a Keynesian animal spirit, rather than a product of things such as lending regulations and Federal Reserve interest rate policy.

Meanwhile, many of the Keynesians, socialists, and pragmatic technocrats (long-standing or born-again) are arguing that the fact that the market could be fooled shows that markets aren't clever and that thus various sorts of interventions are needed, as if any defense of free markets must hang upon a belief that markets are simply too clever to be fooled. Left unaddressed is whether the confusion were endogenous or brought on by state intervention, whether those prior interventions that may have been the cause of the confusion produce actual benefits worth the costs of that confusion, and whether more intervention would produce a more clever system or a less clever system.

In fact, there are various long-established free-market schools of thought that attribute economic crises to a propensity of state intervention to fool economic participants. For example, it is difficult to distinguish to what extent interest rates reflect the supply and demand of private savings for future consumption, and to what extent they are an artefact of central bank intervention for other purposes. In the face of Federal Reserve manipulation of interest rates, the market will not be sufficiently smart to see what the price of loanable funds should be, and therefore will almost certainly build too much or too little for the future.

And We All Feel the Claws

Saturday, 28 February 2009

As most or all of you have read or heard by now, the economic news for the the last quarter of 2008 was quite bad

US economy suffers sharp nosedive from the BBC
The US economy shrank by 6.2% in the last three months of 2008, official figures have shown, a far sharper fall than had previously been reported.

Plunging exports and the biggest fall in consumer spending in 28 years dragged the annualised figure down from an earlier estimate of 3.8%.
and the news from the stock market has grown worse
Brutal February for Blue Chips by Peter A. McKay at the Wall Street Journal
The Dow Jones Industrial Average dropped 119.15 points, or 1.7%, to end at 7062.93. The blue-chip benchmark ended down 937.93 points, or 11.72% on the month — the worst percentage drop for February since 1933, when it fell 15.62%. The Dow industrials have fallen six months in a row and are now more than 50% off their record highs hit in October of 2007.

Now the New York Times frets

Sharper Downturn Clouds Obama Spending Plans by Peter S. Goodman
The economy is spiraling down at an accelerating pace, threatening to undermine the Obama administration’s spending plans, which anticipate vigorous rates of growth in years to come.
Of course, if they believed the naïve Keynesian rhetoric that has come back into political fashion, then the claim would be that Obama's aggressive spending plans were insufficiently ambitious.

I'm wondering whether it's merely the so-far unpassed budget that is under threat. As I noted earlier, the stimulus bill is an enormous blow to the economy, and was passed only as a result of some combination of willful blindness, knavish exploitation of a crisis in which politicians did not actually believe, and desire to worsen things on the expectation that even greater expansion of state power could be achieved. In the case of all three of these motivations, one could expect some politicians to now regret what they have done in passing the bill; what seemed like a bearable amount of plunder may now seem like a grave miscalculation. I don't think that it's politically possible that the legislature would overtly repeal the stimulus bill, let alone that the Obama Administration would openly reverse itself. But subsequent legislation might implicitly pare some of the programmes, and a formula might even be found for the Administration to suspend some programmes without legislative action.

Of course, the Administration and the Democrats in Congress know that, if they repealed a significant share of the stimulus bill even obliquely, then their opponents would pounce on how this repeal demonstrated that it were not a stimulus bill. So those who supported the bill may have a tiger by the tail.

Another Liar-in-Chief

Monday, 9 February 2009

Calvin Woodward, at the AP, calls this an overstatement:

Most economists, almost unanimously, recognize that even if philosophically you're wary of government intervening in the economy, when you have the kind of problem you have right now … government is an important element of introducing some additional demand into the economy.
but it goes well beyond mere overstatement. It's an gross lie.

It's bad enough when people use consensus to argue for a proposition that ought instead to be tested by logic applied to brute fact. But this business of using counterfeit consensus is just actively vile.

Tossing the Economy into the Trough

Monday, 9 February 2009

Any time that the state spends money, there is some cost to the economy.

The state can tax, in which case the cost is obvious. But I put obvious in quotation marks here, because people don't seem to think past the fact that money is taken, without much thinking that the value of money per se is its purchasing power.

The state can print money, issuing new currency to fund its expenditures. The cost here comes because

M · ν = pT · q
where M is the total supply of money in an economy system, ν is the average frequency with which a unit of currency changes hands in the system, q is vector of the quantities of goods and services purchased in the system, and p is the corresponding vector of prices. If M is increased, and there isn't some off-setting increase in the elements of q, or a drop in ν, then elements of p must increase. If prices go up, then the purchasing power of the unit of currency goes down. Ceteris paribus, when the state issues new currency, the value of the holdings of currency that people already had is decreased. (There are some other, potentially far more costly effects than the direct loss of purchasing power, but I don't want this entry to mushroom into some huge treatise.)

In many modern states, printing money is made to look like borrowing, whereïn the ostensible borrowing is from a central bank, a special creature of the state, which prints money and uses this to make the loan to the state.

But the state may also more genuinely borrow money (especially when officials of the central bank think this better than printing more) in the financial markets. In this case, borrowing by the state shifts out the demand curve for loanable funds. Unless the supply curve for loanable funds were perfectly elastic, so that any amount of funds would be made available by lenders at the prevailing price — the rate of interest — that price will go up.

When people lose purchasing power to taxation or to an over-all increase in prices, they reduce purchases of goods and of services, and they save less, so that funds for investment are decreased, and hence investment is decreased. When the price of borrowing is increased, people borrow less for consumer purchases and less for investment. So whenever the state spends, no matter whether it taxes, inflates, or borrows, that spending takes a piece of the economy. Whether there is a net cost turns upon whether the activity funded by state spending is somehow more productive than the private activity that it has crowded-out.

As I have explained, state allocation of resources can be more productive only if private provision is hampered by transactions costs, and the effects of those transactions costs are greater than the combined effects of state transactions costs (red tape and all that) and the loss of economic coördination which results from substituting guess-work for market prices.

Okay, so this gets me to these stimulus bills in the United States legislature. Various numbers are associated with various versions, but the bill that left the House of Representatives was for about 800 billion dollars. And various commentators, both conservatives at institutions such as the Wall Street Journal and social democrats (liberals) at institutions such as NPR, have noted that only about one-eighth of the projects in that bill could be reasonably claimed to be stimulus, with the rest just being pork-barrel projects. Regardless of whether we buy-into the Keynesian hopes for about $100,000,000,000, the loss to the economy associated with about $700,000,000,000 in pork will be vastly greater.

It was claimed that a stimulus bill was necessary because the economy is tanking. The word depression is being bandied-about. And, yet, a majority in Congress and the President are pushing what will plainly be a massive hit on the economy.

To explain the behavior of these parties, we could offer various hypotheses. Many politicians are simply great fools; some politicians might believe that we are indeed on the cusp of an economic disaster, but be so greedy for the political gains associated with these projects that they just won't allow themselves to think. Other politicians might not believe the talk of economic crisis, but be knaves who participate in it, creäting a smokescreen behind which to seek much the same gains as are the fools. Finally, some of these politicians might both genuinely believe that the economic crisis is quite dire, and recognize that a stimulus like those proposed will be greatly damaging, but expect that the effects of the bill can be blamed on other things, especially upon what remains of the market economy, so that those effects become an excuse for even greater expansion of state power.

With regard to one particular politician, the President, I don't at all think that he's so great a fool as to misunderstand what a stimulus bill that is about 7/8 pork would do. He knows that he's pushing a hit on the economy. I don't know whether he is amongst the knaves who don't really believe that the economic situation is all that dire, or amongst those who want to engineer a greater crisis in order to have a greater excuse to technocratically restructure the economy. But when the President speaks of recovery as taking years rather than months, I worry that he is not merely lowering expectations to reduce future criticism, but revealing more ambitious plans.