Economics

[Crafty_Dog]

Doug:

I have seen this point made in various studies over the years.  It is a very good one and one that I had forgotten.

[Crafty_Dog]

OK freemarketeers, analyze this:

China is doing moon shots. Yes, that’s plural. When I say “moon shots” I mean big, multibillion-dollar, 25-year-horizon, game-changing investments. China has at least four going now: one is building a network of ultramodern airports; another is building a web of high-speed trains connecting major cities; a third is in bioscience, where the Beijing Genomics Institute this year ordered 128 DNA sequencers — from America — giving China the largest number in the world in one institute to launch its own stem cell/genetic engineering industry; and, finally, Beijing just announced that it was providing $15 billion in seed money for the country’s leading auto and battery companies to create an electric car industry, starting in 20 pilot cities. In essence, China Inc. just named its dream team of 16-state-owned enterprises to move China off oil and into the next industrial growth engine: electric cars.

 
Josh Haner/The New York Times
Thomas L. Friedman
Go to Columnist Page ».Not to worry. America today also has its own multibillion-dollar, 25-year-horizon, game-changing moon shot: fixing Afghanistan.

This contrast is not good. I was recently at a Washington Nationals baseball game. While waiting for a hot dog, I overheard the conversation behind me. A management consultant for a big national firm was telling his colleagues that his job was to “market products to the Department of Homeland Security.” I thought to myself: “Oh, my! Inventing studies about terrorist threats and selling them to the U.S. government, is that an industry now?”

We’re out of balance — the balance between security and prosperity. We need to be in a race with China, not just Al Qaeda. Let’s start with electric cars.

The electric car industry is pivotal for three reasons, argues Shai Agassi, the C.E.O. of Better Place, a global electric car company that next year will begin operating national electric car networks in Israel and Denmark. First, the auto industry was the foundation for America’s manufacturing middle class. Second, the country that replaces gasoline-powered vehicles with electric-powered vehicles — in an age of steadily rising oil prices and steadily falling battery prices — will have a huge cost advantage and independence from imported oil. Third, electric cars are full of power electronics and software. “Think of the applications industry that will be spun out from electric cars,” says Agassi. It will be the iPhone on steroids.

Europe is using $7-a-gallon gasoline to stimulate the market for electric cars; China is using $5-a-gallon and naming electric cars as one of the industrial pillars for its five-year growth plan. And America? President Obama has directed stimulus money at electric cars, but he is unwilling to do the one thing that would create the sustained consumer pull required to grow an electric car industry here: raise taxes on gasoline. Price matters. Sure, the Moore’s Law of electric cars — “the cost per mile of the electric car battery will be cut in half every 18 months” — will steadily drive the cost down, says Agassi, but only once we get scale production going. U.S. companies can do that on their own or in collaboration with Chinese ones. But God save us if we don’t do it at all.

Two weeks ago, I visited the Coda Automotive battery facility in Tianjin, China — a joint venture between U.S. innovators and investors, China’s Lishen battery company and China National Offshore Oil Company. Yes, China’s oil company is using profits to develop batteries.

Kevin Czinger, Coda’s C.E.O., who drove me around Manhattan in his company’s soon-to-be-in-production electric car last week, laid out what is going on. The backbone of the modern U.S. economy was locally made cars powered by locally produced oil. It started us on a huge growth spurt. In recent decades, though, that industry was supplanted by foreign-made cars run on foreign oil, so “now every time we buy a car we’re exporting $15,000 of capital, paying for it with borrowed money and running it on foreign energy sources,” says Czinger. “We’ve gone from autos being a middle-class-making-machine to a middle-class-destroying-machine.” A U.S. electric car/battery industry would reverse that.

The Coda, 14,000 of which will be on the road in California over the next year and can travel 100 miles on one overnight charge, is a combination of Chinese-made batteries and complex American-system electronics — all final-assembled in Oakland (price: $37,000). It is a win-win start-up for both countries.

If we both now create the market incentives for consumers to buy electric cars, and the plug-in infrastructure for people to drive them everywhere, it will be a win-win moon shot for both countries. The electric car industry will flourish in the U.S. and China, and together we’ll tackle the next challenge: using auto battery innovations to build big storage batteries for wind and solar. However, if only China puts the gasoline prices and infrastructure in place, the industry will gravitate there. It will be a moon shot for them, a hobby for us, and you’ll import your new electric car from China just like you’re now importing your oil from Saudi Arabia.

[G M]

China is also planning on building hundreds of state of the art nuke plants to create the electricity for all those green cars. Something you won't see any green advocates allowing CONUS anytime soon, something Thomas Friedman neglects to mention.

[G M]

http://www.wired.com/wired/archive/12.09/china.html

Let a Thousand Reactors Bloom
Explosive growth has made the People's Republic of China the most power-hungry nation on earth. Get ready for the mass-produced, meltdown-proof future of nuclear energy.
By Spencer Reiss

China is staring at the dark side of double-digit growth. Blackouts roll and factory lights flicker, the grid sucked dry by a decade of breakneck industrialization. Oil and natural gas are running low, and belching power plants are burning through coal faster than creaky old railroads can deliver it. Global warming? The most populous nation on earth ranks number two in the world - at least the Kyoto treaty isn't binding in developing countries. Air pollution? The World Bank says the People's Republic is home to 16 of the planet's 20 worst cities. Wind, solar, biomass - the country is grasping at every energy alternative within reach, even flooding a million people out of their ancestral homes with the world's biggest hydroelectric project. Meanwhile, the government's plan for holding onto power boils down to a car for every bicycle and air-conditioning for a billion-odd potential dissidents.


What's an energy-starved autocracy to do?

Go nuclear.

While the West frets about how to keep its sushi cool, hot tubs warm, and Hummers humming without poisoning the planet, the cold-eyed bureaucrats running the People's Republic of China have launched a nuclear binge right out of That '70s Show. Late last year, China announced plans to build 30 new reactors - enough to generate twice the capacity of the gargantuan Three Gorges Dam - by 2020. And even that won't be enough. The Future of Nuclear Power, a 2003 study by a blue-ribbon commission headed by former CIA director John Deutch, concludes that by 2050 the PRC could require the equivalent of 200 full-scale nuke plants. A team of Chinese scientists advising the Beijing leadership puts the figure even higher: 300 gigawatts of nuclear output, not much less than the 350 gigawatts produced worldwide today.

To meet that growing demand, China's leaders are pursuing two strategies. They're turning to established nuke plant makers like AECL, Framatome, Mitsubishi, and Westinghouse, which supplied key technology for China's nine existing atomic power facilities. But they're also pursuing a second, more audacious course. Physicists and engineers at Beijing's Tsinghua University have made the first great leap forward in a quarter century, building a new nuclear power facility that promises to be a better way to harness the atom: a pebble-bed reactor. A reactor small enough to be assembled from mass-produced parts and cheap enough for customers without billion-dollar bank accounts. A reactor whose safety is a matter of physics, not operator skill or reinforced concrete. And, for a bona fide fairy-tale ending, the pot of gold at the end of the rainbow is labeled hydrogen.

[Crafty_Dog]

Electricity has often been an infrastructure investment that fits within free market concepts, but a goodly part of what Friedman advocates does not.  What he advocates is , , , well I suppose fascism would not be far off the mark; it certainly is state directed.  We see what economic clusterfcuks such an approach here in the US can produce.  Will it be different for the Chinese?

(IIRC we have a thread on nuclear power.  Any info about the pebble bed reactor would be a good fit there, hint hint.)

[Crafty_Dog]

NEWCASTLE, South Africa — The sheriff arrived at the factory here to shut it down, part of a national enforcement drive against clothing manufacturers who violate the minimum wage. But women working on the factory floor — the supposed beneficiaries of the crackdown — clambered atop cutting tables and ironing boards to raise anguished cries against it.


Thoko Zwane, 43, who has worked in factories since she was 15, lost her job in Newcastle when a Chinese-run factory closed in 2004. More than a third of South Africans are jobless.

“Why? Why?” shouted Nokuthula Masango, 25, after the authorities carted away bolts of gaily colored fabric.

She made just $36 a week, $21 less than the minimum wage, but needed the meager pay to help support a large extended family that includes her five unemployed siblings and their children.

The women’s spontaneous protest is just one sign of how acute South Africa’s long-running unemployment crisis has become. With their own industry in ruinous decline, the victim of low-wage competition from China, and too few unskilled jobs being created in South Africa, the women feared being out of work more than getting stuck in poorly paid jobs.

In the 16 years since the end of apartheid, South Africa has followed the prescriptions of the West, opening its market-based economy to trade, while keeping inflation and public debt in check. It has won praise for its efforts, and the economy has grown, but not nearly fast enough to end an intractable unemployment crisis.

For over a decade, the jobless rate has been among the highest in the world, fueling crime, inequality and social unrest in the continent’s richest nation. The global economic downturn has made the problem much worse, wiping out more than a million jobs. Over a third of South Africa’s workforce is now idle. And 16 years after Nelson Mandela led the country to black majority rule, more than half of blacks ages 15 to 34 are without work — triple the level for whites.

“The numbers are mind-boggling,” said James Levinsohn, a Yale University economist.

As the debate about unemployment intensifies, the government’s failure to produce a plan 16 months after President Jacob Zuma took office promising decent jobs has led analysts to question his leadership, though he has promised to act soon.

Experts debate the causes of the country’s gravest economic problem, with some contending that higher wages negotiated by politically powerful trade unions have suppressed job growth.

But most agree that the roots of the crisis lie deeper, in an apartheid past that consigned blacks to inferior schools, drove many from their land, homes and businesses and forced millions into segregated townships and rural areas where they remain cut off from the engines of the economy.

Then with the advent of democracy in 1994, the African National Congress-led government had to simultaneously rebuild an economy staggered by sanctions and prepare a disadvantaged black majority to compete in a rapidly globalizing world.

Further complicating matters, just as poorly educated blacks surged into the labor force, the economy was shifting to more skills-intensive sectors like retail and financial services, while agriculture and mining, which had historically offered opportunities for common laborers, were in decline.

The country’s leaders invested heavily in schools, hoping the next generation would overcome the country’s racist legacy, but the failures of the post-apartheid education system have left many poor blacks unable to compete in an economy where accountants, engineers and managers are in high demand. The shortage of skilled workers has constrained companies’ ability to expand, economists say, and in some cases, professionals from other African countries have taken the jobs.

The fall of tariff barriers since 1994 has also exposed industries like garment manufacturing to low-wage competition from Asia. As Chinese-made clothing has flooded the domestic market, the number of garment workers employed in South Africa has plummeted to 60,000 from 150,000 in 1996. If the more than 300 factories violating minimum wages ultimately close down, 20,000 more jobs could vanish.

“We’re at a crossroads,” said Leon Deetlefs, national compliance manager for the bargaining council of union and employer representatives that sets minimum wages for the garment manufacturing industry. “There are a huge number of workers who stand to lose their jobs.”

Last year, as South Africa’s economy contracted amid the global financial crisis, unions negotiated wage increases that averaged 9.3 percent. The International Monetary Fund hypothesized in a report last week that companies were unable to pass on higher labor costs during the country’s recession and laid off workers instead, contributing to job losses that were among the highest seen in the G20 industrialized nations.

Mr. Zuma promised last week at a national gathering of the governing party in Durban that the cabinet would act soon.

But it remains unclear how decisively he can move. His party, the African National Congress, conceded in a report last week that its alliance remained divided over what should be done. Eight months ago, Mr. Zuma proposed a wage subsidy to encourage the hiring of young, inexperienced workers. But it ran into vociferous opposition from Cosatu, the two-million-member trade union federation that is part of the governing alliance, which contended that it would displace established workers. The plan has stalled.

While officials wrangle, the unemployment crisis festers in places like Newcastle. During the rowdy protests at the factory last month, the police warned that the situation could turn violent, according to Mr. Deetlefs, the bargaining council official. The sheriff withdrew. The factory closed.

===============

Page 2 of 2)



But broader resistance from Newcastle factory owners and concerns about large job losses led to a monthlong moratorium on factory shutdowns after 26 were closed nationally. Officials from the government and the bargaining council are now pushing offending factories to come up with plans to pay minimum wage.


The shuttered factory here has since reopened. When the clock strikes five, thousands of black women still pour from the factories here and line up at bus stands for the ride back to their townships. But workers fear the reprieve will not last.

Newcastle’s garment industry is a product of apartheid’s social engineering. The apartheid state sought to keep most blacks from moving to dynamic big cities reserved for whites by offering large subsidies to light industry to locate on the borderlands of rural areas.

The Taiwanese began opening clothing factories here in the 1980s. And since the end of apartheid, entrepreneurs from mainland China have joined them. Some of the more successful Chinese factory owners drive BMWs and Mercedes Benzes, but others operate on a shoestring. All say they must be allowed to pay wages on a lower scale to stay in business.

At the Wintong factory, proprietors Ting Ting Zhu and her husband, Hui Cong Shi, who are saving to put their only child through college, say they start a machinist at $36 a week, far less than the minimum wage. They themselves live in a single room in their red brick factory.

The women who work for them, also striving for their families, have seen their industry wither. Some 7,000 people in Newcastle have lost their jobs in recent years as three large factories went out of business. Emily Mbongwa, 52, was one of the casualties. She lost her job in 2004. She never found another one.

“The factory passed away,” she explained sadly, as if describing a death in the family.

During the apartheid years, Ms. Mbongwa, who never learned to read or write, worked as a maid in the home of a white Afrikaaner family, rising at 6 a.m. to make breakfast and finishing at 9 p.m. after the dinner dishes were done. She tended the family’s two boys, but when they got to be 9 or 10 years old, they started called her derogatory names for a black woman.

After the family moved away, she went to work at a garment factory, where she said she was treated with respect. The hours there were shorter, the pay better and she started a small business selling shoes to other workers. She eventually earned enough to build her home.

Now, she is back to where she started, surviving by looking after other women’s children. She charges $14 a month for each of the five children she watches from 6 a.m. to 6 p.m., five days a week. One recent morning, a woman arrived and passed her baby through the back door to Miss Mbongwa, who was wearing a loose house dress and black wool cap.

Holding the baby on her lap, she said wistfully, “Long ago, there was a lot more work in Newcastle.”

[DougMacG]

"OK freemarketeers, analyze this [Tom Friedman/NY Times]:

To my thinking, Friedman is always answering the wrong question, in this case - what should we do next assuming we are also a centrally planned economy with no constitutional restriction on having the government participate in our private economy?

The electric car is an interesting idea, a partial solution at best to something.  Private transportation is only a part of oil use.  All-electric cars will address only a small part of private transportation needs.  For propulsion for small distances it has limitations, but also people look to their vehicle to supply heat and defrost capabilities, in some areas air conditioning is a requirement.  Go home, Tom Friedman, and try running your most efficient air conditioner or small furnace with a battery.

I am all for electric cars, supplied by the private sector and chosen by the consumer.  I could not possibly accomplish all my current transport needs however with one.  What Friedman of course is proposing is a mandate, not a choice, made by explicitly destroying our alternatives, namely tax the fuck out of gasoline until people will quit using it and buy into the preferred system.  Missing in his logic string besides the tromp on our freedoms is that the destruction of our current system of transport and livelihood would not likely leave us in an economic position to purchase in large numbers the overpriced, under-performing, more desirable alternative.

Comparing our security needs and decisions to a centrally planned dive into one element of technology innovation is a straw man argument.  Our technology investment is not in Afghanistan and we did not create all our security needs, our enemies helped with that.  In our economy the wars in 2 countries would be  barely more than a rounding error if those were our only wasteful and unproductive public policies.  If we want more investment in technology, our current system as I understand it provides that we get out of the way and let the private sector filled with free people making free choices do it.

Friedman has an often expressed envy of the totalitarians and rule by the elite though I'm sure he would keep our democratic system and just wish us to choose collectively more central planning and the government interventions by the elites that are obviously so preferable to him than economic freedoms and decentralized choices.

From this 3-time Pulitzer winner I ask, where is the data to support the premise that central planning with massive interventions is more efficient or that a dynamic and free economy?  Where is the data to support his contention that a free and unplanned economy cannot innovate fast enough on its own?  Absent from anything I have read by him and absent from our experience in a world of data.

FYI to Friedman, we ARE taxing gasoline - heavily.  Besides federal and state fuel taxes, the main tax on fuel is the regulation that  prevents it from being sufficiently produced domestically and competitively distributed. Meanwhile we are NOT upgrading our electrical capabilities to take on the transportation sector.  That is an area where public policy could actually have gotten ahead of the game, but didn't.  FYI further, electric cars are not necessarily the only or best alternative to gasoline and diesel fuels.  I would refer you to CNG (compressed natural gas) as a very real and plentiful domestic source, but still inferior to a gallon of gas in its energy content and transportability.

Mostly what I would say to Friedman is that a free people operating in free market will out-perform his central planned system.  We should go through every tax, regulation, employment law and spending item on the books and see what we can pare down until we unleash a level of creativity, expansion, innovation and production that will blow the lid off the Chinese, rule by the elite, system.

[DougMacG]

I should add to my previous, that if China can actually for once develop the very best technology for anything such as electric storage and propulsion, maybe we should copy and freely reproduce it here for less until they begin complying with international patent, trademark and copyright laws.

[Crafty_Dog]

Paul Krugman details how and why that is.
October 2, 2010, 9:33 AM
How The Other Half Thinks

Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ. It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or even use models at all. Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been.

So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we’re seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications.

Oh, and the Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean.

Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.

You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks:

After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates

and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on.

Meanwhile, you can see the high-inflation prediction in pieces by Meltzer andLaffer — with the latter helpfully titled, “Get Ready for Inflation and Higher Interest Rates”.

While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.

So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.

The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.

[G M]

If government spending is the solution, then create a government job that pays a million dollars a year for every unemployed person! Bingo, problem solved. Hey, it's worked out well for Zimbabwe.

[Crafty_Dog]

Duh.  Of course.

But what of the predictions of inflation and high interest rates from some on our side that have come to naught?   How do we explain that?

[G M]

Because most US consumers are desperately trying to pay down debt rather than purchase goods as they watch their retirements and home values implode. There is a contraction in normal economic activity due to the atypical situation we find ourselves in today, thus we won't see the classical inflationary pattern right now.

[DougMacG]

I wanted to answer Krugman point by point but by the 6th or 8th paragraph I realized he so far had nothing of substance.  Marc your paraphrase was much more to the point:

"what of the predictions of inflation and high interest rates from some on our side that have come to naught?   How do we explain that?"

In Krugman's words,"So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.  The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down."

1) "So, how has it turned out?"  Is that where we are?  We have the final score from this debacle? That was the policy and here is the result?  There is no ticking time bomb left out there to decimate our economy as we know it?  What an insincere idiot.  Has he seen THIS? http://www.usdebtclock.org/  Instead of arguing about timeframes, let's call this moment of looking at the results so far HALFTIME, not game over.  I will concede to him that price increases SO FAR are within normal and reasonable levels.

2) Inflation is not price increases.  Inflation is about the currency, more dollars relative to the amount of goods and services in the economy.  We have more dollars, an increasing money supply by any measure and we have stagnancy in production of goods in services.  Price increases are a lagging consequence of that, ALL OTHER THINGS BEING EQUAL, that can spiral and build for quite a while after the dollar/monetary inflation.

3) All other things being equal is the little qualifier that economists forget to put at the end of EVERY sentence because it starts to sound repetitive, not because it isn't necessary to make the sentence true.

4) As GM already put it, consumer demand is down, unemployment is up.  The stagnation in the economy and the soft demand delays the price increases.  THAT DOES NOT MEAN THAT THERE ARE NOT MORE DOLLARS / FEWER GOODS and that inflation of our currency has not already occurred.

5) Krugman hit one point right.  Supply side economists and other responsible economists have been warning about inflation for about 28 years since it eased last time, not just during the Pelosi-Obama stimulus bailout era.  Warning about inflation is what they do and we keep watch over (like guarding the border and warning about invasion). Study the WSJ editorials for that entire time, since the Carter era inflation eased and worry is what they do. I had a short, cordial argument with Scott Grannis about that which I will replay in another post, but our inflation, at a few percent per year, is pretty good IMO under the circumstances of the other factors running out of control in the mis-management of our economy and in a situation where any deflation is far more dangerous than a point or two of inflation.  

6) That Krugman is right (IMO) about that historical observation (economists warning about inflation for 28 years that didn't come) does not make him right now.  Crazy price increases may be coming.  Recall that the Carter inflation had roots back far before Carter.  It was Friday the 13th in Aug 1971 when Nixon and 15 advisers at Camp David decided a PRICE WAGE FREEZE was necessary and preferable to a free economy due to unacceptable, out of control inflation. 7% then and double that by the end of the decade.  The damage to our currency preceded that, back to the mid to late '60s and resulted in the dollar erosion of the '70s and all the economic carnage of 1981-82, so don't tell me the final chapter of this round is already written and scored!  http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_nixongold.html

7) Interest rates, Krugman again: "the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates"

Prof. K, the U.S. economy with U.S. deficits IS NOT A CLOSED SYSTEM.  We are not selling all of our borrowings within our economy and (again) it is not with all other things remaining equal.  Increases in borrowings are measured or judged against other things least of important of all is what was your previous debt level IF that level was not already dangerously high.  If a sober person has a sip of beer, he/she may be fine and live happily ever after whereas a person alreadyintoxicated slams a pitcher of margaritas and dies of alcohol poisoning.  A Nobel Peace Laureate seriously does not see that distinction??  

In the 1980s debt went up, but revenues doubled and GDP more than doubled and the world economy followed suit with economic growth.  In 2010, debt levels are already out of sight, debt is doubling but GDP and revenues have shrunk and stagnated.  Again, Prize winning Prof, YOU SEE NO DISTINCTION??  I don't believe you.

Interest rates are partly market driven and partly manipulated by the Fed.  The deficits are being partly monetized and partly borrowed.  As a government, we pay our bills first with printed money and then sell back 'treasuries' not in the exact amounts or the exact timings of the expenditures, but ease them into the (global) market.  If those were forced on the market in real time, and could only be bought with existing funds from within the stagnated US economy, the good Prof thinks the interest rates today would still be low - where they are today?? Bullshit. (Is there a nicer way of saying that?)  A smart guy like that, there is no way he believes that! Instead we have foreigners holding our debt and buying our assets, and that has no gathering negative consequence?

8.) Fact is about borrowing, it depends on a) how able you are to afford the burden of the debt and b) how productive was the use of the funds you borrowed.  If a business borrows at 5% and generates an internal rate of return at 10% with that money and can afford the cash flow burden of the payments and the interest, maybe no one is hurt and something of value is gained.  If a young family borrows within their means to buy a house with a mortgage, they may pay 3-fold with interest for the house still within their means but they have a house to live in with the kids growing up instead of buying it for cash at the end of their life (for 3 times more) and living in a swamp or cave in the meantime.  Reagan's debt bought us, for one thing, an end to the cold war and jumpstarted economic growth to the tune of a quarter century of unprecedented economic expansion.  Obama's stimulus debt is maybe 7% on infrastructure and 93% pissed away in the wind by most measures. Krugman argues only size of the stimulus, not use. (Perhaps he is compensating for something?) When it is done we are where we were, actually worse off, and owing a trillion and a half a year more, plus interest burden forever.

9) When you live beyond your means now, you will live beneath your means later.  Crafty, your kids' share of debt and mine is supposedly 121k each per taxpayer right now.  Let's assume that the more productive half of taxpayers pay double that and assume our kids end up in that more productive half, so double that.  Depending on their age now and their age when they start being productive, I would say double it again, maybe more, AND THEN ADD INTEREST FOREVER TO IT.  Let's say they marry, so for 2 productive people that is roughly a MILLION DOLLAR MORTGAGE in today's dollars BEFORE INTEREST and BEFORE THEY GET A HOUSE and another mortgage or pay a penny on a student loan.  No problem Prof. K.(??)  I notice that Krugman has no kids. http://en.wikipedia.org/wiki/Paul_Krugman

10) Krugman thought the stimulus was too small.  We have $4 T in expenses, 2.5 T in revenues, 1.5 T in new deficits/yr, new debt AND HE THINKS THE STIMULUS IS TOO SMALL!

11) That was so far was in answer to his straw man argument, NOT why supply-siders think Keynesian economics is dead.

12) Keynesian Economics has a few central threads running through it.  One is the Phillips curve, that there is a tradeoff between inflation and unemployment.  High unemployment or a soft economy brings low inflation and low unemployment brings with it a high demand and higher inflation.  That inverse relationship was proven false.  Two examples: The Jimmy Carter malaise stagflation of the late 1970s had both high inflation and high unemployment.  Then the two pronged fix for that cured both and we had low unemployment and low inflation running simultaneously for years.  I doubt Keynes if alive today would want his name on that false theory.

13) The second aspect and central theme of Keynesian thought is that an interventionist government, by adjusting the economy these so-called stimuli, larger and smaller deficits, can ease the pain of the natural business cycles when we move too far to one side or the other of the already proven false Phillips Curve.  Again proven false by Krugman's own policy, the current stimulus.  He says it didn't work because it was too small by half.  But it didn't stimulate us half way to where we want to be either!  That is because a shortage of government spending had nothing to do with what was wrong with the economy.  One of the problems was too much debt, not helped by more debt.  Another problem is/was too big a load the public sector was putting on the private economy with taxes, spending and excess regulations, also not helped by doubling the wasteful spending and cranking up other burdens like healthcare.  None of our current  problem has anything to do with natural business cycles.  So none of his prescription, doubled or not, makes any sense.  This downturn was 100% caused by failed public policies and no proposal of Krugman's seeks to redress any of them.

[G M]

I should just let Doug answer these questions.

[Crafty_Dog]

Good discussion.

In particular I like the point that the US is not a closed economy.

I would also like to draw attention to the issue of velocity.  Let us start with the basic tautological equation
MV=PQ
Money times Velocity equals Price time Quantity.

With the bursting of the bubble, the desire to pay off debt has led to a dramatic decline in velocity.  As long as this is the case, the dramatic increase in Money is offset. 

It seems to me that at some point however, just as the bubble in housing had a rather sudden and ferocious reversal, we may well see a similar reversal from a high propensity to save (which makes sense in a low inflation environment with overtones of deflation) to a high propensity to spend before the money is worth less i.e. an increase in Velocity.

[Body-by-Guinness]

BOURGEOIS DIGNITY: A REVOLUTION IN RHETORIC


by DEIRDRE MCCLOSKEY
LEAD ESSAY
October 4th, 2010
A big change in the common opinion about markets and innovation, I claim, caused the Industrial Revolution, and then the modern world. The change occurred during the seventeenth and eighteenth centuries in northwestern Europe. More or less suddenly the Dutch and British and then the Americans and the French began talking about the middle class, high or low — the “bourgeoisie” — as though it were dignified and free. The result was modern economic growth.

That is, ideas, or “rhetoric,” enriched us.[1] The cause, in other words, was language, that most human of our accomplishments. The cause was not in the first instance an economic/material change — not the rise of this or that class, or the flourishing of this or that trade, or the exploitation of this or that group. To put the claim another way, our enrichment was not a matter of Prudence Only, which after all is a virtue possessed by rats and grass, too. A change in rhetoric about prudence, and about the other and peculiarly human virtues, exercised in a commercial society, started the material and spiritual progress. Since then the bourgeois rhetoric has been alleviating poverty worldwide, and enlarging the spiritual scope of human life. The outcome has falsified the old prediction from the left that markets and innovation would make the working class miserable, or from the right that the material gains from industrialization would be offset by moral corruption.

In other words, I argue that depending exclusively on materialism to explain the modern world, whether right-wing economics or left-wing historical materialism, is mistaken. The two books to follow will make the positive case for a rhetorical, or ideological, cause of our greatly enlarged human scope. In my current project, the case is negative. The usual and materialist economic histories do not seem to work. Bourgeois dignity and liberty might.

Such a theme is old-fashioned, as old as eighteenth-century political theory. Or it is new-fashioned, as new as twenty-first-century studies of discourse. Either way, it challenges the usual notions about “capitalism.” Most people harbor beliefs about the origins of the modern economy that historical and economic science have shown to be mistaken. People believe, for example, that imperialism explains European riches. Or they believe that markets and greed arrived recently. Or they believe that “capitalism” required a new class or a new self-consciousness about one’s class (as against a new rhetoric about what an old class did). Or they believe that economic events must be explained “ultimately,” and every single time, by material interests. Or they believe that it was trade unions and government protections that have elevated the working class. None of these is correct, as I hope to persuade you. The correct explanation is ideas.

I’ve tried to write a book engaging the educated reader. But the argument has to use the findings of economic and historical specialists, and to get down into some of the details of their arguments. I tell the story of modern economic growth, summarizing what we have thought we knew from 1776 to the present about the nature and causes of the wealth of nations — how we got refrigerators and college degrees and secret ballots. The book tests the traditional stories against the actually-happened, setting aside the stories that in light of the recent findings of scientific history don’t seem to work very well. A surprisingly large number of the stories don’t. Not Karl Marx and his classes. Not Max Weber and his Protestants. Not Fernand Braudel and his Mafia-style capitalists. Not Douglass North and his institutions. Not the mathematical theories of endogenous growth and its capital accumulation. Not the left-wing’s theory of working-class struggle, or the right-wing’s theory of spiritual decline.

Yet the conclusion is in the end positive. As the political scientist John Mueller put it, capitalism — or as I prefer to call it, “innovation” — is like Ralph’s Grocery in Garrison Keillor’s self-effacing little Minnesota town of Lake Wobegon: “pretty good.”[2] Something that’s pretty good, after all, is pretty good. Not perfect, not a utopia, but probably worth keeping in view of the worse alternatives so easily fallen into. Innovation backed by liberal economic ideas has made billions of poor people pretty well off, without hurting other people.[3] By now the pretty good innovation has helped quite a few people even in China and India. Let’s keep it.

The Big Economic Story of our times has not been the Great Recession of 2007–2009, unpleasant though it was. And the important moral is not the one that was drawn in the journals of opinion during 2009 — about how very rotten the Great Recession shows economics to be, and especially an economics of free markets. Failure to predict recessions is not what is wrong with economics, whether free-market economics or not. Such prediction is anyway impossible: if economists were so smart as to be able to predict recessions they would be rich. They’re not.[4] No science can predict its own future, which is what predicting business cycles entails. Economists are among the molecules their theory of cycles is supposed to predict. No can do — not in a society in which the molecules are watching and arbitraging.

The important flaw in economics, I argue here, is not its mathematical and necessarily mistaken theory of future business cycles, but its materialist and unnecessarily mistaken theory of past growth. The Big Economic Story of our own times is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes. As the economic historian Joel Mokyr put it recently in the opening sentence of one of his luminous books, “economic change in all periods depends, more than most economists think, on what people believe.”[5] The Big Story of the past two hundred years is the innovation after 1700 or 1800 around the North Sea, and recently in once poor places like Taiwan or Ireland, and most noticeably now in the world’s biggest tyranny and the world’s biggest democracy. It has given many formerly poor and ignorant people the scope to flourish. And contrary to the usual declarations of the economists since Adam Smith or Karl Marx, the Biggest Economic Story was not caused by trade or investment or exploitation. It was caused by ideas. The idea of bourgeois dignity and liberty led to a rise of real income per head in 2010 prices from about $3 a day in 1800 worldwide to over $100 in places that have accepted the Bourgeois Deal and its creative destruction.

Innovation backed by ideology, then, promises in time to give pretty good lives to us all. Left and right tend to dismiss the other’s ideology as “faith.” The usage devalues faith, a noble virtue required for physics as much as for philosophy, and not necessarily irrational. But maybe both sides are correct. A socialist maintains her faith in governmental planning despite the evidence that it doesn’t work to the benefit of the poor. A conservative maintains his faith that what’s good for the military-industrial complex is good for the country despite the evidence that it impoverishes and coarsens the people.

I claim that a true liberalism, what Adam Smith called “the obvious and simple system of natural liberty,” contrary to both the socialist and conservative ideologue, has the historical evidence on its side. Despite the elements of regulation and corporatism defacing it (and the welfare programs improving it), it has worked pretty well for the poor and for the people for two centuries. I reckon we should keep it — though tending better to its ethics.

When bourgeois virtues do not thrive, and especially when they are not admired by other classes and by their governments and by the bourgeoisie itself, the results are sad. As the economists Virgil Storr and Peter Boettke note about the Bahamas, “Virtually all models of success to be found in the Bahamas’ economic past have to be characterized as piratical,” with the result that entrepreneurs there “pursue ‘rents’ rather than [productive] profits.”[6] It hasn’t worked very well to depend on a piratical greed, which is to say a self-interested prudence without the balance of other virtues such as justice (except, to speak of the actual history of piracy, democratic justice on shipboard among the pirates themselves). Contrary to a widespread opinion on left and right, such piratical Prudence Only is not characteristically bourgeois. Bernard Mandeville and Ivan Boesky got it wrong. Prudence is not the only virtue of an innovative society. People (not to speak of grass and bacteria and rats) have always been prudent, and there have always been greedy people among them unwilling to balance prudence with other virtues. What changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.

Yet innovation, even in a proper system of the virtues, has continued to be scorned by many of our opinion makers now for a century and a half, from Thomas Carlyle to Naomi Klein. At the behest of such a clerisy we can if we wish repeat the nationalist and socialist horrors of the mid-twentieth century. If we imagine only the disruptions of a pastoral ideal, and reject the gains from innovation, we can stay poor shepherds and dirt farmers, with little scope for intellectual and spiritual growth. If we worship hierarchy and violence and the nation, we can hand our lives over to the military-industrial complex. If we abandon economic principles in our worrying about the environment, we can revert to $3 a day, and live in huts on a hillock in the woods by Walden Pond, depending on our friends in town to supply us with nails and books. Now in the early twenty-first century we can even if we wish add for good measure an antibourgeois religiosity, as new as airplanes crashing into the World Trade Center and as old as the socialist reading of the Sermon on the Mount.

But I suggest that we don’t. I suggest instead that we recoup the bourgeois virtues, which have given us the scope, in von Humboldt’s words, to develop the highest and most harmonious of our powers to a complete and consistent whole. We will need to abandon the materialist premise that reshuffling and efficiency, or an exploitation of the poor, made the modern world. And we will need to make a new science of history and the economy, a humanistic one that acknowledges number and word, interest and rhetoric, behavior and meaning.

—-

Notes
[1] Since the seventeenth century the word rhetoric has often been misunderstood as lies or bloviation. I use it in its ancient sense, “the means of [unforced] persuasion,” which includes logic and metaphor, fact and story. Modern pragmatics, criticism, and social psychology have largely been a reinvention of ancient rhetoric, how words matter. If any of that strikes you as crazy or indefensible, you may wish to consult McCloskey 1985a (1998), 1990, 1994c.
[2] Mueller 1999.
[3] I will use the word liberal throughout not in its confused and twentieth-century American sense (“left-wing”) but in its older and still European sense of “devoted to liberty, especially political and economic liberty.” It is part of my argument that the American sense can be corrosive of true liberalism. (But so can neoconservatism.)
[4] McCloskey 1990.
[5] Mokyr 2010, p. 1.
[6] Boettke and Storr 2002, pp. 180–181. Compare Storr 2006.

References
Boettke, Peter J., and Virgil Henry Storr. 2002. “Post Classical Political Economy.” American Journal of Economics and Sociology 61 (1): 161–191.
Storr, Virgil. 2006. “Weber’s Spirit of Capitalism and the Bahamas’ Junkanoo Ethic.” Review of Austrian Economics 19 (4): 289–309.
Mueller, John. 1999. Capitalism, Democracy, and Ralph’s Pretty Good Grocery. Princeton: Princeton University Press.
Mokyr, Joel. 2010. The Enlightened Economy: An Economic History of Britain 1700–1850. London: Penguin Press; New Haven: Yale University Press.
McCloskey, Deirdre N. 1985a. The Rhetoric of Economics. Madison: University of Wisconsin Press. 2nd rev. ed., 1998.
McCloskey, Deirdre N. 1990. If You’re So Smart: The Narrative of Economic Expertise. Chicago: University of Chicago Press.
McCloskey, Deirdre N. 1994c. Knowledge and Persuasion in Economics. Cambridge: Cambridge University Press.

http://www.cato-unbound.org/2010/10/04/deirdre-mccloskey/bourgeois-dignity-a-revolution-in-rhetoric/

[DougMacG]

"...the point that the US is not a closed economy"

Bloomberg yesterday: "International ownership of U.S. municipal bonds jumped 37 percent in the first half of the year from the end of 2009 to $83 billion, a Sept. 17 Federal Reserve report shows."

Besides the international ownership, Krugman conveniently omitted the fact that states and municipalities (and businesses and homebuyers and students) also need room left in the credit markets after the feds buy and steal all of the available funds.

Bloomberg again: "Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico"  
----------

Crafty: "MV=PQ".  Velocity of money is fascinating to me.  As you point out in the equation, it has equal importance with the supply of money.  I would point out in return that these are imperfectly measured measures, but extremely important concepts.  People's eyes tend to gloss over when you discuss velocity of money.  If a dollar changes hands fourteen times in a day or fourteen hundred times, is it still one dollar? lol.

It's hard to cut and paste economic discussions without the charts, but here is a little discussion on the topic from a capital advisory group that reinforces the same point that Crafty just made:
-------------------
http://disciplinedinvesting.blogspot.com/2009/01/money-supply-causing-concern-with.html

Having an understanding of the Quantity Theory of Money (QTM) will provide one with an understanding why some strategist are concerned about future inflation. The factor in the QTM that is holding back inflation at the moment is the fact the "velocity" of money has declined substantially. So what is the Quantity Theory of Money?

The QTM is based:  "directly on the changes brought about by an increase in the money supply. The quantity theory of money states that the value of money is based on the amount of money in the economy. Thus, according to the quantity theory of money, when the Fed increases the money supply, the value of money falls and the price level increases."
-----
http://seekingalpha.com/article/222555-money-supply-velocity-and-economic-growth

A great deal has been written recently about the fact that the Fed's effort to provide for more liquidity in the financial system has really not produced much growth as bank's are holding the liquidity in excess reserves (click on chart to enlarge).

The importance of this has to do with the Quantity Theory of Money (QTM) which describes the interplay of nominal GDP, money supply and velocity.

Recently though, the velocity of M2 and the YOY percentage change are showing increases. As the below charts do show (click on each to enlarge), it is not uncommon for velocity to take some time to pick up following an economic recession.

The relationship between velocity, the money supply, the price level, and output is represented by the equation:

    * M * V = P * Y where
    * M is the money supply,
    * V is the velocity,
    * P is the price level, and
    * Y is the quantity of output.
    * P * Y, the price level multiplied by the quantity of output, gives the nominal GDP.

This equation can thus be rearranged as V = (nominal GDP) / M. Conceptually, this equation means that for a given level of nominal GDP, a smaller money supply will result in money needing to change hands more quickly to facilitate the total purchases, which causes increased velocity. In the QTM, velocity is assumed to be constant in the short run since it is not easy to manipulate. If the above equation holds and output is not quickly changed, prices will rise. Additionally, a rise in prices multiplied by an unchanged output will result in higher GDP. The question is whether or not there is demand for the output.

We do believe the consumer demand side of the equation is being restrained for a number of reasons, the uncertain regulatory environment, consumer deleveraging and high unemployment to name just a few. We are cautiously optimistic that higher velocity is being realized and will lead to higher nominal GDP via an upward pressure on prices.

[Crafty_Dog]

Krugman and the ‘Other Half’
October 5th, 2010 | Author: Pater Tenebrarum

 

Paul Krugman – one of the few 'didn't see the bust coming' economists who actually admitted to the complete failure of mainstream economists to make any correct predictions when it would actually have been important to make them – recently ruminated from his perch at the NYT about what he calls the 'other half' – meaning all economists who are not immediately identifiable as members of the Keynesian creed.

 

You probably won't be surprised to learn that he once again fails to even mention the Austrians, as though they didn't exist. Krugman has along history of simply ignoring Austrian critiques of his writings, which has raised considerable suspicion that he avoids them for lack of cogent arguments.

Not least thanks to the internet, subjectivist economics has luckily been rescued from obscurity, after having been almost successfully buried by decades of propaganda.  Propaganda spouted in the main by intellectuals in the service of statism, of which Krugman is one of the more prominent nowadays.

Keynes, whose theories Krugman finds so convincing, wrote what governments wanted to hear: namely that the free market could not be trusted and required constant intervention by the state to function 'properly'.  Keynes' major work on economics – the 'General Theory' – is in the main a collection of self-contradictory mumbo-jumbo that has been expertly picked apart by Austrians, most effectively by Henry Hazlitt in 'The Failure of the New Economics', where Keynes' work is refuted almost line by line.

Keynes is in essence an apologist for inflationism, and nothing of what he wrote was really new – it was a warmed-over brew of  'underconsumption' and pro-inflationism theories previously propounded by a plethora of other writers. These theories didn't magically become more correct when restated by Keynes.

Our current predicament – an economic bust so severe that one must look back to the pre- World War 2 period to find something comparable – is in the main the end result of governments hewing to Keynesian economics and variants thereof for many decades.

The compatibility of the Keynesian system with statism has been confirmed by the man himself, who wrote in the preface to the German edition of the 'General Theory':

 

“The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.”
 

 

At the time Keynes probably deemed totalitarianism sufficientlyde rigeur in Germany that he could afford to tell the truth.

Krugman's blog entry begins with:

 

“Ezra Klein has written in, asking for a post laying out the difference between the more or less Keynesian model Brad DeLong and I work with and the models others have been using – and how their predictions differ.”
 

 

Given that the Austrians who actually do have a consistent record of  correct predictions aren't even mentioned – who cares?

 

“It’s a good request, although the truth is that the other side in this debate doesn’t necessarily agree on a single model, or evenuse models at all.”
 

 

Anyone who doesn't 'use models' in the social science of economics is denounced by Krugman in his back-link as  'thinking in slogans' – as opposed to those who by 'thinking in models' allegedly hew to the scientific method. The main problem with this is that all these models are a waste of time and effort. They can make no correct predictions and are not even accuratedescriptions of economic phenomena. As Murray Rothbard notes in the preface to 'Theory and History' by Ludwig von Mises:

 

“Is the fact of human purposive action "verifiable?" Is it "empirical?" Yes, but certainly not in the precise, or quantitative way that the imitators of physics are used to. The empiricism is broad and qualitative, stemming from the essence of human experience; it has nothing to do with statistics or historical events. Furthermore, it is dependent on the fact that we are all human beings and can therefore use this knowledge to apply it to others of the same species. Still less is the axiom of purposive action "falsifiable." It is so evident, once mentioned and considered, that it clearly forms the very marrow of our experience in the world.

It is just as well that economic theory does not need "testing," for it is impossible to test it in any way by checking its propositions against homogeneous bits of uniform events. For there are no such events. The use of statistics and quantitative data may try to mask this fact, but their seeming precision is only grounded on historical events that are not homogeneous in any sense. Each historical event is a complex, unique resultant of many causal factors. Since it is unique, it cannot be used for a positivistic test, and since it is unique it cannot be combined with other events in the form of statistical correlations and achieve any meaningful result. In analyzing the business cycle, for example, it is not legitimate to treat each cycle as strictly homogeneous to every other, and therefore to add, multiply, manipulate, and correlate data.”
 

 

In short, there is really no use for mathematical models in economics. Meanwhile, Krugman's charge that anyone eschewing the use of models is 'thinking in slogans' is pure polemic. The Austrian method is deductive, logical and coherent. Keynes' followers have constructed 'models' based on his writings, but his writings are neither logical nor coherent (if you don't believe us, read his tome and contrast it with , say, 'Human Action' and its clarity of prose and inescapable logic).

Krugman continues:

 

“Still, I think it is possible to describe the general views of the other guys — and to see how off their predictions have been.”
 

 

They haven't been better or worse than his own, depending on what time frame and specific topic one considers.

 

“So: first of all, the other side in this debate generally adheres, more or less, to something like what Keynes called the “classical theory” of employment, in which employment and output are basically determined by the supply side. Casey Mulligan has been most explicit here, coming up with increasingly, um, creative stories about how what we're seeing is a choice by workers to work less; but the whole Kocherlakota structural unemployment thing is similar in its implications.”
 

 

Now, from what little we know, Mulligan (a Chicago University economics professor)  got some things right and some not. In fact, he immediately shot back by listing his correct predictionson his blog. Of course he also once denied that there was actually a housing bubble , which is patently absurd. As to Kocherlakota, for once we agreed with a Fed bureaucrat when he mentioned that the unemployment problem can not be solved by easing monetary policy further because after the bust there isinter alia a mismatch between the skills many of the unemployed workers possess and the skills the market demands. One of the reasons for high unemployment after a boom inevitably gives way to a bust is that the economy's production structure must adjust to the economic reality the bust reveals – and so must workers.

A case in point is that after so much capital has been malinvested in the housing sector due to businessmen erring about the future demand for homes on account of artificially low interest rates, there is now far less demand for construction workers than there used to be. Those who lost their employment in this sector need to do something else and  that requires different skills. It takes time to learn what they are and to acquire them. Mind, this is not the only reason for high unemployment during the bust phase, but it is a noteworthy factor.

Krugman continues:

 

“Oh, and the Cochrane-Fama thing about how a dollar of government spending necessarily displaces a dollar of private spending is basically a classical view, although there doesn’t seem to be a model behind it, just a misunderstanding of what accounting identities mean.”
 

 

No model behind it! The horror! Fama is of course most famous for the 'efficient market hypothesis' – which essentially denies that Warren Buffett or any other successful trader or investor can possibly even exist. However, the fact that the government possesses no resources of its own suggests ipso facto that the money it spends must be taken from the private sector (whether by taxation, borrowing or inflation).  This means that every dollar employed in government spending/consumption is definitely missing from the private sector.

Furthermore, Ricardian equivalence (yes, a 'classical view') suggests that there is no difference between spending financed by higher taxation or spending by borrowing, since economic actors know enough to expect higher taxes later if government spending is financed by borrowing and will adjust their behavior accordingly. Funny enough, Casey Mulligan has published a paperthat shows that the 'Keynesian multiplier' of government spending is an illusion( we haven't read it, but in essence he seems to be beating them with their own model). This is by the way not the first mainstream study coming to this conclusion – Robert Barro of Harvard has been saying the same – he rightly dubs the government's stimulus policies 'voodoo economics'.

Krugman reveals one of the  problems of his approach when he refers to the 'accounting identities' so beloved by the 'modelers'. If purposeful human action could be reduced to accounting identities it would really be easy. However, these tautologies are meaningless in real life. To quote Patrick Barron: C+I+G = Baloney.

Krugman again:

 

“Once you have a more or less classical view of unemployment, you naturally have the classical theory of the interest rate, in which it’s all about supply and demand for funds, and something like a quantity theory of money, in which increases in the monetary base lead, in a fairly short time, to equal proportional rises in the price level. This led to the prediction that large fiscal deficits would lead to soaring interest rates, and that the large rise in the monetary base due to Fed expansion would lead to high inflation.”
 

 

According to Ludwig von Mises the natural, or originary interest rate is really nothing but an expression of time preference. It is a price ratio between the value of a present versus the value of a future good. The market interest rate meanwhile – to quote Hans-Hermann Hoppe (in 'The Misesian Case Against Keynes') is

 

“[…] the aggregate sum of all individual time-preference rates, reflecting, so to speak, the social rate of time preference and equilibrating social savings (i.e., the supply of present goods offered for exchange against future goods) and social investment (i.e., the demand for present goods capable of yielding future returns).”
 

 

As Hoppe further notes in explicating Mises' theory of interest (which is contrary to the Keynesian view of the interest rate as a purely monetary phenomenon):

 

“While interest (time preference) thus has a direct praxeological relationship to employment and social income, it has nothing whatsoever to do with money. To be sure, a money economy also includes a monetary expression for the social rate of time preference. Yet this does not change the fact that interest and money are systematically independent and unrelated and that interest is essentially a "real," not a monetary phenomenon.”
 

 

With regards to the 'quantity theory of money' we hold with Hayek's bon-mot that 'one of the greatest misfortunes would be if people ceased to believe in the quantity theory of money – except if they were to take it literally'. In the video below Hayek criticizes Milton Friedman as an 'apostle of macro-economics' who is in 'one respect still a Keynesian' and notes his disagreement  with Friedman's contention that there is a demonstrable and measurable direct relationship between the general price level and the total quantity of money.

 

[Crafty_Dog]

We have in the past often mentioned that an increase in the money supply – also known as inflation – percolates through the economy over time and unevenly, and that a rise in the general level of prices is merely one of its eventual effects, and not necessarily the most important or most damaging one. We actually know of no-one off the cuff who ever asserted that an 'increase in the monetary base would lead to an equal proportionate rise in the price level in a fairly short time' as Krugman asserts.

Krugman then criticizes the view of economic historian Niall Fergusson, a vocal and well-known critic of deficit spending, as well as the remarks of Allan Meltzer and Arthur Laffer, all of whom predicted that higher interest rates and a considerable rise in prices would eventually result from too loose monetary policy and large deficit spending:

 

“You can see the classical theory of interest and the soaring-rate prediction clearly in Niall Ferguson’s remarks:

'After all, $1.75 trillion is an awful lot of freshly minted treasuries to land on the bond market at a time of recession, and I still don’t quite know who is going to buy them … I predict, in the weeks and months ahead, a very painful tug-of-war between our monetary policy and our fiscal policy as the markets realize just what a vast quantity of bonds are going to have to be absorbed by the financial system this year. That will tend to drive the price of the bonds down, and drive up interest rates', and, of course, in many WSJ op-eds, in analyses from Morgan Stanley, and so on. Meanwhile, you can see the high-inflation prediction in pieces by Meltzer and Laffer — with the latter helpfully titled, “Get Ready for Inflation and Higher Interest Rates”.
 

 

Note here that Meltzer explicitly closes his remarks by noting that there is a big difference between the near term effects and the long range effects of monetary policy – in other words, the fact that the easily discernible effects of soaring interest rates and rising prices have not yet arrived is not necessarily proof that they never will. Of course in Keynes' world, 'we're all dead in the long run' anyway. Unfortunately the current bust shows that the long run has a nasty habit of catching up with us now and then.

Krugman takes a position akin to that of a stock market trader who buys the Nasdaq at 5,000 points in the year 2000, while declaring 'it hasn't crashed yet – and that means it never will.'

 

“While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk.”
 

 

To this it must be noted that Krugman regards 'inflation' as a synonym for 'rising prices' – this is to say he semantically confuses cause and effect. This misuse of terms is nowadays so widespread that even dictionaries provide 'rising prices' as the definition of inflation.

There is of course no 'paradox of thrift' (thrift, i.e. saving, can not ever be 'paradoxical' given that it is the sine qua nonprecondition for genuine economic growth and wealth creation) and the concept of the 'liquidity trap' is equally misguided. It is true that the demand for cash balances has been rising and that the household savings rate has increased, but this is not a negative event, it is a necessary precondition for healing the boom-distorted economy. In fact, a rise in the demand for money has no bearing on real consumption and investment, it merely has an effect on money prices.

Deflation meanwhile is not a risk, it would actually be a desirable outcome. At the very least it would stop further malinvestment in its tracks as no new bubble activities could be started if a genuine deflation of the money supply were to occur, i.e. if deposit liabilities previously created from thin air were to vanish due to a net repayment of credit to the fractionally reserved banking system.

Krugman neglects to consider that the problem is not the bust but the preceding boom – it was during the boom when malinvestment and consumption of capital occurred on a grand scale, whereas the bust is the economy's attempt to heal itself from these distortions.

Krugman continues:

 

“So, how has it turned out? The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” which proves nothing — especially because if you took a Keynesian view seriously, it suggested even given what we knew in early 2009 that the stimulus was much too small to restore full employment.”
 

 

When pointing to the fact that interest rates on US government debt have not risen in spite of soaring deficit spending and inflation , Krugman neglects the often asymmetric nature of such events. Greek bond yields were barely different from German bond yields until they weren't anymore and it happened very quickly and 'unexpectedly', as the market reassessed the prospects of the Greek state's ability to ever pay back its debts. Now don't get us wrong – we were bullish on US government bonds as well , mainly because we expected that the market would not doubt the US government's solvency for some time and because we thought that in view of private sector defaults and deleveraging, more and more funds would be directed toward this perceived 'safest debtor'.

This will eventually change if the government's profligacy is not stopped. As to deflation, none has occurred as of yet: money TMS has increased by about 27% since the onset of the crisis  in August 2008, which is a huge amount of inflation in a very short time. That this has happened in spite of private sector deleveraging is testament to the effectiveness of the government's inflationary efforts so far.

The claim that 'the stimulus was too small' is a typical Keynesian excuse, always invoked when the Keynesian deficit spending recipe fails. Consider here for a moment that under the Obama administration, the US budget deficit has so far been the highest ever in peace time, whether measured in monetary terms or relative to economic output. How much more would have been enough?

Robert Murphy has recently noted that Krugman's case for deficit spending not only fails theoretically, but clearly also failsempirically.

Says Murphy:

 

“And of course, today's Keynesians point to our current economy as "proof" of how good massive deficits are. Why, thisshould have been the Second Great Depression, but thanks to Obama's willingness to spend — in contrast to Herbert Hoover — we are only suffering through the Great Recession. Phew! Do you notice the pattern? The anti-Keynesians point to actual success stories as evidence of the potency of their policies. The Keynesians, in contrast, point to awful economies and claim that they'd be even worse were it not for the Keynesian "medicine."”
 

 

Krugman closes by saying:

 

“The point is that recent events have actually amounted to a fairly clear test of Keynesian versus classical economics — and Keynesian economics won, hands down.”
 

 

Krugman mentions quite a few Chicago School proponents in his article at first. These he later conflates with 'classical' economists. His main bone of contention with the Chicago School seems to be that it is not enamored with monetary inflation and casts doubt on the efficacy of deficit spending. The Austrians are in the same boat with regards to these things, but curiously remain unmentioned – presumably due to their refusal to employ 'models'.

While Krugman concentrates  on the alleged predictive powers of Keynesianism – which were so sorely absent when it would have really mattered – Keynesian economics is certainly at the root of our predicament and continues to be practiced regardless of a still growing and quite large body of damning empirical evidence against it (leaving aside its theoretical flaws for the moment).

In that sense it has surely 'won', as its acceptance as a viable body of ideas to 'guide economic policy' curiously continues in spite of its evident failure. Its precepts to combat recession haveinter alia been tried in spades and in vain in Japan for over two decades, with the well-known outcome of seemingly never-ending economic stagnation (Krugman would argue that they 'didn't spend enough').

 


--------------------------------------------------------------------------------

 



This is the kind of victory that reminds one fatally of Pyrrhus of Epirus, who commented on his battlefield successes against the Romans: “If we are victorious in one more battle with the Romans, we shall be utterly ruined."

[G M]

Paul Krugman is the very embodiment of intellectual dishonesty.

[DougMacG]

"Paul Krugman is the very embodiment of intellectual dishonesty."

I seriously would like to someday read whatever he once wrote in the past that earned him the clout he seems to carry.  He is the front man for the NY Times editorial thought on (distorted) economics and they are the blueprint for the editorials for our paper, the Red Star-Tribune and so many other echo chambers across the country.  I so far haven't found any depth that goes beyond a Joe Biden level analysis or Bill Clinton level honesty.  You would think he would run and hide facing these results from his policies.

Crafty, I like very much the lengthy Tenebrarum piece.  He touched on enough of my points to wonder if he reads the DB forum.     I would like to come back to some important points he adds to the discussion but have no time right now.

[Crafty_Dog]

Heh heh 

Something I do from time to time is take a look at the read/post ratio i.e. how many reads on there for every post?  30-50 is very common, but some threads seem to generate more than that; there are a few that have over 100 reads per post.

Although I sometimes wonder who our lurkers are I ALWAYS appreciate each and every one of us who comes to play and by so doing make this the forum that it is.

[G M]

Smartest martial arts board on the planet!

[Freki]

Amen!!

[DougMacG]

Tenebrarum correctly points out that an economic bust brings with it new realities.

"A case in point is that after so much capital has been malinvested in the housing sector due to businessmen erring about the future demand for homes on account of artificially low interest rates, there is now far less demand for construction workers than there used to be. Those who lost their employment in this sector need to do something else and  that requires different skills. It takes time to learn what they are and to acquire them."

A VERY important point.  The politics of usual is how can we get unemployed auto workers back to making bad cars, how can we get hard working home builders back to building huge, beautiful homes of the wrong size in the wrong place for the demographics of today and the future, and how can we make unemployed workers more comfortable unemployed and less likely to ever adapt to new economic realities.
-----
I love his rip on economic models.  Economic models "can make no correct predictions and are not even accurate descriptions of economic phenomena."

Basically what you have are poorly measured phenomena put into highly complex mathematical equations spitting out nonsense because of the inaccuracies and what I wrote earlier, not all other factors are ever held constant.
---

To me it boils down simply to choices between to pro-growth and anti-growth policies.  Our best CBO and OMB forecasters were wrong to the tune of hundreds of billions of dollars recently underestimating the the economic energy unleashed by slight improvements with pro-growth policies and worng to the tune of TRILLIONS of dollars of wealth destruction that resulted from anti-growth policies. 

When we as a nation decided to change course in Nov 2006, we had 50 consecutive growth and 4.6% unemployment, along with some some false positives, like unrealistic, unsustainable values on housing.  The electoral choice was in denial to the reality that growth comes crashing down with in an anti-growth climate.  Now we have some version of bust and we get to pick up the pieces from here.  We don't get to go back.  Not with trillions of printed dollars dropped from airplanes, and not from pretending to go back to that time.  I don't ever care to read or argue out the details of a model with a 400 page mathematical analysis of the implications of a bunch of bad policies that we know inhibit growth, risk taking, hiring or profit making.  We only need to choose again now going forward a set of policies favorable to economic growth, including a friendly but necessary regulatory environment, an efficient but necessary non-punishing tax system, law and order, level playing fields, a healthy environment for investment and risk taking, clear sets of rules with long term predictable continuity, with no accommodation for those who covet, badmouth, punish or curtail legal, successful, productive activities.

As a famous radio host use to say: 'Now go do the right thing'.

[DougMacG]

Continuing a thought going back to Crafty's mention that MV=PQ. (or MV=PY: money supply, velocity, price level and real output)  Among many poorly measured and poorly defined terms in economics, inflation is often described as:

'More money chasing fewer goods.'   (http://internationalecon.com/Finance/Fch40/F40-14.php)

Note that the verb 'chase' is your velocity.  We have more money, we have static output, but we also have no chase (velocity), so we do not yet have general price level increases.  Money is largely sitting idle on the sidelines, waiting.

If/when economic activity picks up again, the reality of an increased money supply will multiply with new velocity, at least back to normal or historic levels, and could very easily result in spiraling price level increases *** depending on changes in all other variables.  That is the fear of all economists except Krugman who already knows the results of these policies.

Milton Friedman's license plate: http://gribeco.free.fr/article.php3?id_article=12

[Crafty_Dog]

That license plate is very funny.

Mine is "TAOJONZ"

[DougMacG]

For those with an interest,  here is a brief powerpoint presentation for free worth thousands in tuition:

http://www.auburn.edu/~garriro/mvpq1.ppt

[Body-by-Guinness]

Another perspective on polymath Deirdre McClokey's work, and essay derived from her first book which I posted earlier.

Don’t Dismiss the Materialist Explanation
by Matt Ridley
The first volume of Deirdre McCloskey’s quartet The Bourgeois Virtues, so enthralled me that my copy is littered with enthusiastic marginalia. I had never read something that combined such apothegmatic writing with such perceptive ideas — at least not in the field of economics. The skewering of the clerisy’s hypocrisy was especially delicious.

I look forward immensely to the second volume. To judge by McCloskey’s target essay there is much that will once again have me writing “yes!” in the margins. But there is also something here that troubles me, that has me fearing I may occasionally scribble “No!” Maybe I am too much of a materialist to take the final step she urges. Maybe I am reading too much into brief hints. But I fear she has fallen among thieves; I hope I am wrong.

Start with the bits I agree with. “Innovation backed by liberal economic ideas has made billions of poor people pretty well off, without hurting other people…Let’s keep it.” Yes!

“A true liberalism, what Adam Smith called ‘the obvious and simple system of natural liberty,’ contrary to both the socialist and conservative ideologues, has the historical evidence on its side.” Yes!

So let’s agree that absolutely key to the economic success of the last 200 years is that people are free to innovate in an undirected way. What I cannot bring myself to agree with is that this was an idea that had to be invented. I cannot agree that “what changed around 1700 was the valuation of economic and intellectual novelties within a system of all the virtues.”

Because, let us face the fact squarely, bursts of innovation — bush fires, I call them — have been happening in some place or other for hundreds of thousands of years. Britain’s industrial miracle was preceded by Holland’s, which was preceded by Italy’s, China’s, Greece’s, India’s, Phoenicia’s, Sumer’s. And before that there was the Neolithic revolution of 10,000 years ago, the Upper Paleolithic Revolution of 40,000, the Blombos explosion of 70,000, and the Pinnacle Point one of 160,000. It defies Occam’s Razor to argue that there was something utterly, qualitatively different about the mindset of the innovator then than now. I daresay that is not what McCloskey means, but I think she is drifting in that direction, if only unintentionally.

Apart from anything else, my suspicions are always aroused by claims that human nature suddenly came up with a new feature at a certain point in history. This was a common habit of Marxist anthropologists, for example, when they distinguished pre-industrial economies based on “reciprocity” from modern economies based on markets. Stephen Shennan has satirized the attitude thus: “We engage in exchanges to make some sort of profit; they do so in order to cement social relationships; we trade commodities; they give gifts.” Like Shennan, I think this is patronizing bunk. So I am not happy conceding that eighteenth-century Englishman were the first people to value novelty or see the world in scientific terms or whatever.

I would argue forcefully that the record shows quite clearly that the thing that always causes innovation is trade, because it encourages specialization. When networks of exchanging human beings grow dense enough, technology advances. That explanation works at every point in history and prehistory, too. It explains not only the great leaps forward, but also why technology went backwards in Tasmania when it became an island; it explains why China’s great boom petered out when it became an autarkic autarchy under the Ming. And so on.

So why did every one of these booms come to naught, whereas the one that began in 1700 is still transforming lives, if, as I say, the human nature that it requires is always there? Surely, there is clue in the same paragraph of McCloskey’s essay where she identifies what happened around 1700. She talks of the piratical economy of the Bahamas. Dead right. Piracy, or predation, or parasitism, or plunder — this is what prevented or brought to an end every other boom. What kept France from being an economic superpower? Pirates: tax farmers, kings, armies, emperors, officials. What finished Holland’s golden age? War: endless, exhausting, life-sapping, liberty-killing war. Louis XIV was a pirate, and so was Alexander, and the first Ming emperor.

I am saying that there have always been liberals, who want to be free to trade in ideas as well as things, and there have always been predators, who want to extract rents by force if necessary. The grand theme of history is how the crushing dominance of the latter has repeatedly stifled the former. As Joel Mokyr puts it: “Prosperity and success led to the emergence of predators and parasites in various forms and guises who eventually slaughtered the geese that laid the golden eggs.” The wonder of the last 200 years is not the outbreak of liberalism, but the fact that it has so far fought off the rent-seeking predators by the skin of its teeth: the continuing triumph of the Bourgeoisie.

It has been a close-run thing. Napoleon, Hitler, Stalin, and Mao came close to handing the world economy to rentier pirates. On local scales and much less effectually, Peron and Nehru, Khomeini and Putin have tended in the same direction. Perhaps even Nixon did too. And Blair.

But we have seen just how quickly the innovation machine whirs back into action when you liberalize: that is the story of the booms sparked by Deng Xiaoping, Manmohan Singh, Ludwig Erhard, Sir John Cowperthwaite (the founder of Hong Kong’s liberal economy), and Ronald Reagan. Surely McCloskey does not disagree with this. If all she is saying is that those with liberal ideas got the upper hand at the start of the Industrial Revolution, then I am with her, but this was hardly the only time in history this happened.

But if she is saying, as I fear, something much more Mokyrian, then I am worried. As I see it, Joel Mokyr (whom I greatly admire) argues in his book The Gifts of Athena that although the Scientific Revolution did not start the Industrial Revolution, nonetheless the broadening of the epistemic base of knowledge — the sharing and generalization of understanding — allowed a host of new applications of knowledge, which escaped diminishing returns and enabled the Industrial Revolution to continue indefinitely. I am unconvinced by this. It seems to me to put the philosophical cart before the technological horse: to this day thinkers follow rather than precede doers in the innovation story. From cotton weaving to software, the innovative industries have been ones barely influenced by natural philosophers. Examination of any innovation usually leads to the conclusion that theory played second fiddle to practice.

Likewise, I think McCloskey risks getting cause and symptom confused. I agree with her that one of the glories of the modern age is its liberal tolerance, its virtue and its rhetoric. But I think these are products of an innovation-rich society as much as they are its enabler. To keep the pirates at bay, it is necessary to sustain tolerance and the bourgeois virtues. But is that sufficient? I do not think so.

So the thing that made the Industrial Revolution unique, that was different about the British bush fire of 200 years ago, was that it did not stop. It continues to spread to this day. And what was the cause of that? My answer is a single word, and McCloskey rejects it in a single word: coal. I am sorry, but the more I study the Industrial Revolution’s failure to peter out, the more convinced I become that energy is crucial.

Hear me out. Or rather, hear out Robert Allen, professor of economic history at Oxford, whose new book The British Industrial Revolution in Global Perspective, is a tour de force.

The point about fossil fuels is not that they produce special energy. Joules are joules. With suitable machinery, there is nothing that coal can do that wood, wind or water cannot. Nor is it that the British discovered coal and everybody else missed it. This is not a discovery-push story but a demand-pull one.

The point is that fossil fuels were the only power source that did not show diminishing returns. In sharp contrast to wood, water and wind, the more you mined them the cheaper they became. Energy amplifies human work, and Britain found itself able to amplify the productivity of its labor long after its population and its technology would have exhausted all other sources of power. Fossil fuels therefore kept the innovation machine running so that profits from commerce just kept ahead of profits from piracy.

Coal did not start Britain’s boom any more than it started Holland’s or ancient Greece’s. As Allen tells the story, Britain’s success in the 1700s was caused by London, and London’s success was caused by trade. Like Tyre, Athens, Venice and Amsterdam, London did exchange and specialization with the world, got rich and — thanks to the Reformation and the Glorious Revolution — kept the pirates (chiefs, priests, and thieves) at bay. That drove up its wages, which spurred on labor-saving innovation in machinery.

“The coal trade took off,” says Allen, “when London got big enough to drive the price of wood fuel high enough to make it profitable to mine coal in Northumberland and ship it to London.” That mining then created abundant cheap energy in northern districts, which rewarded inventors of steam engines. (Declaration of interest here: My ancestor was a Newcastle coal trader who installed and improved some of the first steam engines.) The result was that Britain’s boom in living standards did not run out of steam in 1800 when it had dammed every Pennine stream and felled every Cumbrian forest. Instead Britain went on to be the world’s workshop, and by 1830 it was consuming coal equivalent to wood from an impossible 15 million acres of forest.

Not only did this coal get cheaper and cheaper the more that was mined, but machines grew more and more effective at turning its heat into work. “The cheap energy economy,” says Allen, “was the foundation of Britain’s economic success.” As Gregory Clark has reminded us, it was only in the nineteenth century, when fossil fuels amplified human labor, that wages really began to rise. The rest of the world then borrowed this innovation — fossil energy — and its ability to produce increasing returns through new technology. Today the average citizen of planet earth uses fossil energy equivalent to having 150 slaves working continuous eight-hour shifts on his or her behalf. That is why we are all so rich and that is why per capita economic growth turned upwards so sharply after 1800.

As I say, a materialist explanation.

http://www.cato-unbound.org/2010/10/08/matt-ridley/dont-dismiss-the-materialist-explanation/

[Crafty_Dog]

"apothegmatic"?   Anyone have the URL of a good dictionary?

Matt Ridley is an interesting guy with a very strong background in evolutionary biology/psychology see e.g. "The Red Queen" (an excellent discussion of the Darwinian logic and consequences of the existence of sex to reproduce) and "Nature via Nurture" which sits still unread on my shelf.

[DougMacG]

I know of no lookup better than google. 

ap·o·thegm also ap·o·phthegm  (p-thm)
n.
A terse, witty, instructive saying; a maxim.
[Greek apophthegma, from apophthengesthai, to speak plainly : apo-, intensive pref.; see apo- + phthengesthai, phtheg-, to speak.]
apo·theg·matic (-thg-mtk), apo·theg·mati·cal (--kl) adj.
apo·theg·mati·cal·ly adv.

http://www.thefreedictionary.com/Apothegmatic

I always say if none of your friends has ever used it in a sentence, it doesn't belong on the scrabble board.

[DougMacG]

His columns come out so often I should try to ignore ridiculous points, but knowing that:

"non-defense discretionary funding has increased by 57 percent since Obama took office"
http://www.house.gov/budget_republicans/press/2007/pr20091218yearend.pdf
(and remember, spending was outrageous under Bush)

or as Krugman put it yesterday: "the big government expansion everyone talks about never happened."
http://www.nytimes.com/2010/10/11/opinion/11krugman.html?_r=1

Besides ignoring the 57% increase, Krugman says: "Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it."

But Pelosi-Obama-Care coming already IS a job killer.  So is Cap-Trade pending though without being passed.  It inserts risk, cost and uncertainty into business expansion and investment decisions.

Current budget is roughly 2.5 trillion revenues in with $4 trillion out in federal government spending alone: a trillion and a half a year of deficit spending. Krugman says: "the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need."  What would a large stimulus be to Krugman? 2.5 trillion revenues with $5 or 6 trillion in spending??

[Crafty_Dog]

Buttonwood

Losing confidence

Looking at the dollar in the old-fashioned way

Jul 22nd 2010

WHEN the Bretton Woods system was cracking in the early 1970s the price of a troy
ounce of gold, in dollar terms, was raised in two steps from $35 to $42.22. This
was, in effect, a devaluation of the dollar.

The authorities then still thought it worth expressing the shift in terms of
bullion, rather than against another currency like the Japanese yen or French franc.
In the 1930s Franklin Roosevelt had a specific policy of devaluing the dollar
against gold, pushing the price from $20.67 to $35 in the belief this would push
commodity prices (and thus farm incomes) higher and reduce the burden of debt
service.

Nowadays the price of gold is set by the market rather than by official diktat. When
explaining shifts in the bullion market people tend to think in terms of supply and
demand. Perhaps, however, they should view gold-price movements in terms of
investors’ confidence in the dollar, and in paper money in general.

After gold was set loose in 1973 its price rose at a rapid rate for the rest of the
decade, peaking at $850 an ounce in 1980. In other words the dollar had lost around
90% of its value since the demise of Bretton Woods. The 1970s was a period when
economic policy in the developed world seemed to be in disarray, with inflation and
unemployment high, and confidence in central bankers low.

The appointment of Paul Volcker as chairman of the Federal Reserve in 1979 appeared
to be a turning-point. He broke the inflationary spiral in the early 1980s, albeit
at the cost of a double-dip recession. From 1982 onwards developed economies seemed
to enter the “great moderation”: inflation was low or falling, and recessions were
rare and mild. The authorities developed the knack of delivering stability with
paper money, thanks to independent central banks committed to a low inflation
target. Gold fell from $850 to $253 by 1999. With confidence in economic policy
restored, the dollar was revalued by 236% over almost two decades.

By the late 1990s, however, belief in the eternal wisdom of central bankers was
nearing its peak: “Maestro”, Bob Woodward’s portrait of Alan Greenspan, came out in
2000. The dotcom and housing bubbles led to a reappraisal of Mr Greenspan’s career.
Many commentators now feel he paid too little attention to credit growth and asset
prices. As Charles Dumas of Lombard Street Research tartly remarks, Mr Greenspan
displayed “asymmetric ignorance”. He claimed not to know when asset prices were in a
bubble but he did always claim to know when falling asset prices were likely to
cause havoc. Investors were given a one-way bet.

http://www.economist.com/sites/default/files/images/images-magazine/2010/30/fn/201030fnc871.gif

The credit crunch also laid bare a conflict in central banking that goes back to the
days of the gold standard. As well as safeguarding the value of the currency,
central banks act as lenders of last resort. When push comes to shove the latter
duty seems to outweigh the former, and the bankers turn on the monetary taps. The
result has been a loss of confidence in the dollar. Gold’s rise since 1999 in effect
means a near-80% devaluation of the dollar over the past decade (see chart).

What is striking about the history of the past 40 years is that these three swings
in the value of the dollar (ranging from a rise of 236% to a fall of 90%) are huge
by previous standards. But they have not been noticed because the dollar is now
compared with other paper currencies—like the euro and yuan—where shifts have been
nothing like as extreme.

This raises a further puzzle. One reason why countries tried so hard to maintain the
gold standard and the Bretton Woods system was to reassure creditors that they would
be repaid in sound money. Since 1971 most countries have had the right to repay
creditors in money they could print at will. The likes of America and Britain are
now perceived as “lucky” because they, unlike Greece, can devalue their currencies
and default in real terms.

That prospect did alarm creditors in the 1980s when the real yields on government
debt shot up. But it does not seem to now. America and Britain are paying only
3-3.5% to borrow for ten years. That may be because deflation seems the more
immediate threat. It may be because bond markets are now dominated by other central
banks, which are more interested in managing exchange rates than in raising returns.
But it is not stable to combine low yields, high deficits and governments that are
happy to see their currencies depreciate. Something has to give.

[Crafty_Dog]

http://mises.org/daily/4536

[G M]

http://mises.org/daily/4536

11. Obamacare

[Freki]

I liked that one

I wonder what  the ingredients were in the magic powder?

[Crafty_Dog]

FASB Surrenders - America Wins To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/7/2011


If an accounting rule falls down and decays in the woods, and the business punditry and politicians completely ignore it, does it still have an impact on the economy?

The answer is YES. Especially when that rule is Mark-To-Market Accounting – aka: Fair Value Accounting. Everyone should breathe a huge sigh of relief…we are.
 
The Financial Accounting Standards Board (FASB) wanted to broaden the reach of its fair value accounting rules. Somehow it believes that marking everything to market (even when that market is illiquid) will somehow make the world a better and safer place. So, even after almost destroying the economy in 2008, FASB was pushing to have banks mark their loans – yes their loans – to a bid in the market place.
 
The good news, which went virtually un-reported on January 25, 2011, was that FASB surrendered on fair value accounting for loans. In the face of overwhelming opposition, banks will be allowed to carry loans on their books at amortized cost, reflecting cash flow (payments), as well as reasonable estimates of likely loan losses.
 
This decision is a huge win for the markets and the economy. Like the sword of Damacles, mark-to-market accounting has been hanging over the head of the economy. As long as it could be broadened, or brought back in the form it took in 2008, the risk of turning the next recession into a panic or even a depression was very real.
 
Most people don’t know this, but mark-to-market accounting played a role in the Great Depression. According to Milton Friedman (in his book The Great Contraction), fair value accounting was the predominant force for bank closures in the early stages of the Depression. These bank failures fed on themselves making the Depression worse.
 
In 1938, Franklin Roosevelt ended mark-to-market accounting and the economy recovered. There is absolutely no academic research on the role of MTM accounting in the Great Depression, but the more we study the issue the more convinced we become that it played a major role in that fiasco and the recovery from it.
 
One reason that its role is ignored is that government wants the story of economic crisis to be a simple one that blames business and praises government (or at least blames government for something that requires more government). Conventional wisdom blames a bubble in the stock market, greedy business people and a lack of government oversight for the Great Depression. This story-line led to the creation of the SEC and many other government agencies, programs and regulations.
 
Nothing has changed. Back in 2009, Congress passed the Dodd-Frank financial regulation bill based on a flimsy theory of the crisis’s causes even before the report from The Financial Crisis Inquiry Commission. But that report would not have changed much policy anyway. On January 24, 2011 – the same week as FASB’s surrender - the FCIC said that the debacle was caused by a combination of stupid and unscrupulous business practices mixed with lax oversight by regulators. No surprise there.
 
Clearly, some people in the private sector made mistakes in assessing the riskiness of loans. That’s easy to see in hindsight. But, government’s role was much more detrimental than this, but was totally ignored by the FCIC majority.
 
A dissenting opinion was penned by Peter Wallison. He blames Fannie Mae, Freddie Mac, the Community Reinvestment Act, and mark-to-market accounting for creating the crisis. We completely agree, but we would also add the policy of 1% interest rates by Alan Greenspan to the list.  If the federal funds rate would have been left at 3.5% or above, the bubble in housing would have likely never existed or would have been much, much smaller.
 
It was on March 9, 2009 that Barney Frank’s committee announced a hearing on fair value accounting. FASB was brought to the table and forced to correct its misguided rule. The stock market bottomed on that day and has virtually doubled since then. The recession was not ended by stimulus, TARP, regulations, PPIP, or any of the other alphabet soup government programs. It was ended by the correction of mark-to-market accounting. The risk of another Depression ended on that day and the economy and market have done nothing but move higher ever since.
 
With FASB finally giving in on the issue for good, the future looks a lot brighter than most people suspect. The accounting rule fell, it has been ignored by most, but the impact of that fall is very good for America.

[JDN]

How the middle class became the underclass


The average American's income has not changed much, while the richest 5% of Americans have seen their earnings surge. This chart includes capital gains.

By Annalyn Censky, staff reporterFebruary 16, 2011: 9:28 AM ET


NEW YORK (CNNMoney) -- Are you better off than your parents?

Probably not if you're in the middle class.

Incomes for 90% of Americans have been stuck in neutral, and it's not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed.

In 1988, the income of an average American taxpayer was $33,400, adjusted for inflation. Fast forward 20 years, and not much had changed: The average income was still just $33,000 in 2008, according to IRS data.

Meanwhile, the richest 1% of Americans -- those making $380,000 or more -- have seen their incomes grow 33% over the last 20 years, leaving average Americans in the dust.

Experts point to some of the usual suspects -- like technology and globalization -- to explain the widening gap between the haves and have-nots.

But there's more to the story.

A real drag on the middle class
One major pull on the working man was the decline of unions and other labor protections, said Bill Rodgers, a former chief economist for the Labor Department, now a professor at Rutgers University.

Because of deals struck through collective bargaining, union workers have traditionally earned 15% to 20% more than their non-union counterparts, Rodgers said.

But union membership has declined rapidly over the past 30 years. In 1983, union workers made up about 20% of the workforce. In 2010, they represented less than 12%.

"The erosion of collective bargaining is a key factor to explain why low-wage workers and middle income workers have seen their wages not stay up with inflation," Rodgers said.

Without collective bargaining pushing up wages, especially for blue-collar work -- average incomes have stagnated.


International competition is another factor. While globalization has lifted millions out of poverty in developing nations, it hasn't exactly been a win for middle class workers in the U.S.

Factory workers have seen many of their jobs shipped to other countries where labor is cheaper, putting more downward pressure on American wages.

"As we became more connected to China, that poses the question of whether our wages are being set in Beijing," Rodgers said.

Finding it harder to compete with cheaper manufacturing costs abroad, the U.S. has emerged as primarily a services-producing economy. That trend has created a cultural shift in the job skills American employers are looking for.

Whereas 50 years earlier, there were plenty of blue collar opportunities for workers who had only high school diploma, now employers seek "soft skills" that are typically honed in college, Rodgers said.

A boon for the rich
While average folks were losing ground in the economy, the wealthiest were capitalizing on some of those same factors, and driving an even bigger wedge between themselves and the rest of America.

For example, though globalization has been a drag on labor, it's been a major win for corporations who've used new global channels to reduce costs and boost profits. In addition, new markets around the world have created even greater demand for their products.

"With a global economy, people who have extraordinary skills... whether they be in financial services, technology, entertainment or media, have a bigger place to play and be rewarded from," said Alan Johnson, a Wall Street compensation consultant.

As a result, the disparity between the wages for college educated workers versus high school grads has widened significantly since the 1980s.

In 1980, workers with a high school diploma earned about 71% of what college-educated workers made. In 2010, that number fell to 55%.

Another driver of the rich: The stock market.

The S&P 500 has gained more than 1,300% since 1970. While that's helped the American economy grow, the benefits have been disproportionately reaped by the wealthy.

And public policy of the past few decades has only encouraged the trend.


The 1980s was a period of anti-regulation, presided over by President Reagan, who loosened rules governing banks and thrifts.

A major game changer came during the Clinton era, when barriers between commercial and investment banks, enacted during the post-Depression era, were removed.

In 2000, President Bush also weakened the government's oversight of complex securities, allowing financial innovations to take off, creating unprecedented amounts of wealth both for the overall economy, and for those directly involved in the financial sector.

Tax cuts enacted during the Bush administration and extended under Obama were also a major windfall for the nation's richest.

And as then-Federal Reserve chairman Alan Greenspan brought interest rates down to new lows during the decade, the housing market experienced explosive growth.

"We were all drinking the Kool-aid, Greenspan was tending bar, Bernanke and the academic establishment were supplying the liquor," Deutsche Bank managing director Ajay Kapur wrote in a research report in 2009.

But the story didn't end well. Eventually, it all came crashing down, resulting in the worst economic slump since the Great Depression.

With the unemployment rate still excessively high and the real estate market showing few signs of rebounding, the American middle class is still reeling from the effects of the Great Recession.

Meanwhile, as corporate profits come roaring back and the stock market charges ahead, the wealthiest people continue to eclipse their middle-class counterparts.

"I think it's a terrible dilemma, because what we're obviously heading toward is some kind of class warfare," Johnson said.

[G M]

Ohhh, Class warfare!

That's the path to prosperity!

I bet the unions helped the great state of Michigan!

[DougMacG]

JDN, Thanks for sharing. IMO that is the worst kind of economic journalism that I know of.  They throw a very limited amount of economic generalizations out there - with partial true, to see how many false inferences they can get the reader to make.  Since they make no economic study themselves, they really just are a reader who also fell for false inferences off of someone else's distorted study.  I have written extensively about this in the past and will be happy to take it up again (but not today). 

A few quick observations:

When they say one group is "stuck in neutral", what percentage of their readers stop to think on their own that is not 'a group' but an ever changing composition where the vast majority have extreme income mobility?  http://www.ustreas.gov/press/releases/hp673.htm   http://www.house.gov/jec/middle/mobility/mobility.htm  http://online.wsj.com/article/SB117988547410811664.html

When they say that one other group benefited more (the rich), I wonder how many draw the intended inference that group was taking winnings that otherwise would have gone to the middle class?  Total falsehood, just not explicitly stated in the article.  Imagine the plunge the middle class would  take if not for the risk investment made by others.  See Republic of the Congo for one example. Instead it is inferred that the middle class are perfectly justified in taking up "warfare" against those who are more productive in this economy than themselves.  Or did I read that wrong?

Here's one of my favorite of the loser arguments: "the wealthiest people continue to eclipse their middle-class counterparts."

If an economic study were to link income to height, weight, age, religion, race, hair color, eye color, marital status or left handedness to income - that would be newsworthy. Instead the disparity alarmists link income disparity to people making more money - am I the only one to see a redundancy in that?  Teams that score more goals than their opponents are winning the most games, the best fighters keep winning fights, it is wettest out on rainy days...

They compare group to group over an extended time period but don't ever disclose that the results measured later are NOT the people from the original group, no matter what time frame is chosen.

In America, no one is branded middle class or any other class.  You can join any class you want to and people do exactly that every day.  You can also move BACKWARDS in income as you enjoy some of your previous years' accomplishments.

Questions: How can we manage or minimize disparity while maximizes wealth creation, revenues to the Treasury, economic growth employment, etc.?  We can't.  Reminds me of the Fed dual mission.  We need to encourage money making, open up opportunities, prohibit unfair roadblocks, and let people run with it.

What is the correct or optimum level of disparity? Zero? Some reasonable multiple between richest and poorest?  High growth requires high disparity.  Do the disparity alarmists oppose high growth?  In many cases, yes.

Where in the following did God get it wrong regarding disparity and class warfare- (King James version) Deuteronomy 5:21: Neither shalt thou desire thy neighbour's wife, neither shalt thou covet thy neighbour's house, his field, or his manservant, or his maidservant, his ox, or his ass, or any [thing] that [is] thy neighbour's.

[Crafty_Dog]

AMEN!!!

[Crafty_Dog]

It is a truth universally acknowledged that education is the key to economic success. Everyone knows that the jobs of the future will require ever higher levels of skill. That’s why, in an appearance Friday with former Florida Gov. Jeb Bush, President Obama declared that “If we want more good news on the jobs front then we’ve got to make more investments in education.”

But what everyone knows is wrong.

The day after the Obama-Bush event, The Times published an article about the growing use of software to perform legal research. Computers, it turns out, can quickly analyze millions of documents, cheaply performing a task that used to require armies of lawyers and paralegals. In this case, then, technological progress is actually reducing the demand for highly educated workers.

And legal research isn’t an isolated example. As the article points out, software has also been replacing engineers in such tasks as chip design. More broadly, the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.

The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill, but by “hollowing out”: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs — the kinds of jobs we count on to support a strong middle class — have lagged behind. And the hole in the middle has been getting wider: many of the high-wage occupations that grew rapidly in the 1990s have seen much slower growth recently, even as growth in low-wage employment has accelerated.

Why is this happening? The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information — loosely speaking, that computers help those who work with their minds, while hurting those who work with their hands.

Some years ago, however, the economists David Autor, Frank Levy and Richard Murnane argued that this was the wrong way to think about it. Computers, they pointed out, excel at routine tasks, “cognitive and manual tasks that can be accomplished by following explicit rules.” Therefore, any routine task — a category that includes many white-collar, nonmanual jobs — is in the firing line. Conversely, jobs that can’t be carried out by following explicit rules — a category that includes many kinds of manual labor, from truck drivers to janitors — will tend to grow even in the face of technological progress.

And here’s the thing: Most of the manual labor still being done in our economy seems to be of the kind that’s hard to automate. Notably, with production workers in manufacturing down to about 6 percent of U.S. employment, there aren’t many assembly-line jobs left to lose. Meanwhile, quite a lot of white-collar work currently carried out by well-educated, relatively well-paid workers may soon be computerized. Roombas are cute, but robot janitors are a long way off; computerized legal research and computer-aided medical diagnosis are already here.

And then there’s globalization. Once, only manufacturing workers needed to worry about competition from overseas, but the combination of computers and telecommunications has made it possible to provide many services at long range. And research by my Princeton colleagues Alan Blinder and Alan Krueger suggests that high-wage jobs performed by highly educated workers are, if anything, more “offshorable” than jobs done by low-paid, less-educated workers. If they’re right, growing international trade in services will further hollow out the U.S. job market.

So what does all this say about policy?

Yes, we need to fix American education. In particular, the inequalities Americans face at the starting line — bright children from poor families are less likely to finish college than much less able children of the affluent — aren’t just an outrage; they represent a huge waste of the nation’s human potential.

But there are things education can’t do. In particular, the notion that putting more kids through college can restore the middle-class society we used to have is wishful thinking. It’s no longer true that having a college degree guarantees that you’ll get a good job, and it’s becoming less true with each passing decade.

So if we want a society of broadly shared prosperity, education isn’t the answer — we’ll have to go about building that society directly. We need to restore the bargaining power that labor has lost over the last 30 years, so that ordinary workers as well as superstars have the power to bargain for good wages. We need to guarantee the essentials, above all health care, to every citizen.

What we can’t do is get where we need to go just by giving workers college degrees, which may be no more than tickets to jobs that don’t exist or don’t pay middle-class wages.

[Crafty_Dog]

An internet friend writes:

I have a couple of thoughts on the subject of books, and how to more quickly gain exposure to the Austrian ideas.


First of all, probably the most important thing to grasp is the fundamental difference between Misean thought and the currently dominant neo-classical economists. The mainstream has tried to turn economics into an empirical science like physics. They believe they can observe the economic world, craft hypotheses to explain the observed phenomena, and then test those hypotheses by measuring how well they can forecast future events. Many people seem to think Popper's ideas about "falsification" are relevant for economic science. For economics and other social sciences, however, Mises argued that empiricism is an impossible process. Controlled experimentation is impossible in this realm, but more importantly man's actions are not determined by invariant physical facts -- as are the actions and reactions of inanimate objects.


Mises offered a completely different method of constructing economic science, a method that was employed and articulated by a number of great economists before Mises' time -- but one that Mises himself developed more fully and explicitly than anybody before him. So here is my suggestion for getting this idea painlessly and quickly: read Robert P. Murphy's new book "Lessons for the Young Economist". Murphy wrote this book for high school and even younger people, but I have read it cover to cover and it is not a baby's book. He keeps the vocabulary at an appropriate level, but that is a good thing; when reading Mises I find myself looking up word definitions several times per page. This book can be read very quickly, and in my opinion, presents the key ideas faithfully and very well.


I will attach the ePub to this email, but you can also download it and several other formats from the link above. If this doesn't appeal to you, there are other options, but I sincerely feel that reading this simple work quickly might be the most painless way to get the most important and fundamental concepts. Economics is a much simpler discipline than the high priests in the Fed would have us believe.


Tom

[G M]

http://jammiewearingfool.blogspot.com/2011/04/leftwing-drone-cites-nobel-prize.html

He's earned it.

[Crafty_Dog]

Keynes vs. Hayek
 
Round One
http://www.youtube.com/watch?v=d0nERTFo-Sk

Round Two (this is the current one)
http://www.youtube.com/watch?v=GTQnarzmTOc

[DougMacG]

Crafty, very impressive.  The Keynes character is very persuasive, except for the fact that he is proven wrong at every turn.  Glen Beck was just talking on radio yesterday about working on a project to reach out to young people.  Do we really have to put it to music to get them to pay attention?  Same type of video  could be done with depictions of the two main candidates and their arguments in 2012, not much different than the economic argument.

GM, refreshing to see people across the heartland know Krugman is a political hack and Nobel has lost some of its shine.  I would someday like to read the serious work Krugman did before becoming a cartoon character at the NY Times.

He literally was calling for a doubling of the stimulus (deficit) at the time that all the trillions so far were proven to be failed policy, both economically and politically.
-------

We are borrowing $188 million per hour (plus future interest costs), fact checked at Huff Post: http://www.huffingtonpost.com/social/projustice/white-house-deficit-talks_n_851198_85116795.html.  Out of 300 million people and the 50% rule (only 50% will be contributing/producing), that is a dollar an hour per person round the clock. 

Can't we make a case to any young person that while they were out playing, while they were at prom, while they were in math class, while they were on spring break, while they were burning a joint or playing a video game, while they were at soccer practice, while they were hanging with friends and while they were sleeping in ...  the advocates of our current policies were and still are piling up another dollar of debt, every hour, in their name, for everyone,  accumulating interest.

Why isn't that reason enough to advance the idea of smaller government?  What part of generational theft don't they get??

[AndrewBole]

uh ohhh, let the hounds loose !!!

The Triumphant Return of John Maynard Keynes
Joseph E. Stiglitz

http://www.project-syndicate.org/commentary/stiglitz107/English

NEW YORK – We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.


 

[G M]

Hard to know how to address this, as for academics they don't care if it works or not in practice, they want to know if it works in theory. 

[DougMacG]

When I read that last night (Stiglitz) I did not notice the date, Dec. 2008, and kept wondering when and where I have heard the before - "We are all Keynesians now".  I knew it was right before some major policy blunders were about to occur.

I will be happy to return to this later to answer this demand side only thinking point by point, but we didn't just "shun" Keynsianism for three decades, it proved itself WRONG 3 decades ago, and again.

[DougMacG]

Where do you start and where do you end with Keynesian thinking?  Let's see, savings is bad, deficits are good.  Unearned money falling to people is good, increasing the incentives to not produce is inconsequential.  Temporary is permanent and permanent is temporary.  And Obama is another market fundamentalist, lol, I fell off my chair on that one.  Assuming Prof. Stiglitz stands by his '08 analysis, we now have at least 3 Nobel winners favoring interventionism over markets with this guy, Krugman and Obama.  Sounds to me like written from the George Orwell Chair of economics over at Columbia.  I noticed that he didn't get his co-worker Robert Mundell, a Nobel winner with a different view, to sign on with this piece.

Keynes own works do not contemplate conditions like we have today.  Would he really give a 'tax cut' further to the poor in a place where the lower 51% already are at zero or lower?  What is the capability of the government to inject fiscal stimulus further when we are already printing 200 million an hour?  Keynes contemplated THAT?  What is the capability of the central bank to inject further monetary stimulus when real interest rates are already NEGATIVE?

If fiscal stimulus is the Keynes answer, but we are already at a trillion a year, do another trillion a year, for how long, then what?  How do you withdraw temporary spending in today's political scheme?? I guess we will see. Keynes died in 1946.  It is crazy to think we know what his view would be now with 65 years of new data.

I did not see from Stiglitz and have not ever seen elsewhere anything to show that this situation was the failure of a free market.  Quite the opposite.  I know people make that statement, but the failure and breakdowns always happen in the most intervened of all markets already, today it is healthcare, banking, energy, housing, higher education and manufacturing.  Government is the largest force in all the problem sectors.

The trade off between unemployment and inflation was proven false during the stagflation of the Jimmy Carter years when both worsened simultaneously, and proven false again when both were cured nearly simultaneously.  That was why Keynesianism was 'shunned' 3 decades ago.

If the problem isn't a nail, the answer isn't always a hammer...

The problem is whole plethora of screwed up incentives, roadblocks and uncertainties for potential producers in the economy in every direction that they turn.  What good does turn on another faucet do when we face all these other hurdles.  

What collapsed in 2008 was an unsustainable imbalance propped up by a series of misguided government policies.  The worst was the inducements and covering of financial institutions to make housing loans based on criteria other than creditworthyness and likelihood of paying back.  When it collapsed it took down housing and banking in a free fall.  End of housing value meant end of construction and the loss of jobs feeds back into more houses lost and banks in jeopardy.  Who knew? True that both parties favored the initial government intervention to stop the free fall of the consequences of our previous failed government interventions, but the larger question remains:  What have we learned and what do we do now?  

The answer is real, pro-growth policies, aka supply side economics, the exact opposite mindset from the elite interventionists who failed us, IMHO.