Have you heard the new term for bank nationalization? All the cool kids are calling it “pre-privatization.” Oooh, you’re so scared of bank nationalization, what a chicken. Is it because your mommy and daddy warned you about it? I bet they told you to stay away from dope and rock ‘n roll, too.
This is a really neat idea by the New York Times. They got a few big guns to discuss the government’s moves during previous recessions. Unfortunately, the three economists all cling to the Keynesian/monetarist view that government spending and money printing boost the economy, with the only downside being rising prices. (Somebody else, who claims to be an Austrian business cycle theorist, holds the exact same view apparently without realizing that his analysis is identical to that of mainstream, NYT-approved gurus.)
A colleague recently forwarded me an email he had received asking about the broken window fallacy. (If you have never heard this spelled out before, you absolutely must read Hazlitt’s discussion–it’s very short.)
Anyway, the correspondent was puzzled, because if the “flaw” in the broken window fallacy is that the baker would have spent money on, say, a suit, then isn’t that compensated when the glazier goes and buys something? In other words, isn’t Hazlitt just narrowly focusing on the loss in employment and income to the tailor (who would’ve sold a suit to the baker had the hooligan not broken the baker’s window)? Here is my answer:
The issue isn’t one of income or job creation. [Your correspondent] is right; there will be just as much employment and the level of sales will be the same in the aggregate.
The difference is that the community will be one item poorer. So yes, the window glazier can go buy a suit that the baker would originally have purchased, but by the same token the tailor would have bought something with the $$ that the baker would have spent on his suit, if the window had never been broken.
If you picture the two timelines diverging once the hooligan breaks the window, the point is that no matter how much production the spending stream entails, the community will always be materially poorer in the timeline that starts off with one fewer window. Only by assuming that people produce *more* after the kid breaks the window, can the community close the gap in wealth at the starting point.
And Bastiat/Hazlitt’s point is that there’s no reason to assume people would produce more after the window is broken. The baker’s spending doesn’t do it, because he would have spent that $$ on somebody else, and the glazier’s spending doesn’t do it, because the tailor’s spending would have done the same in the original timeline, etc.
The most valuable lesson I learned from the year I spent in Washington (1982-1983, on the staff of the Council of Economic advisers — I was the senior intl economist, the senior domestic economist was a guy named Larry Summers. What ever happened to him?) was the extent to which senior government figures have absolutely no idea what they’re talking about.
So when I read something like this:
“Why should we reward Fannie Mae and Freddie Mac with $200 billion in taxpayer dollars without first reforming these housing entities that were at the heart of the economic meltdown?” House Minority Leader John A. Boehner (R-Ohio) said in a statement.
and people ask what on earth Boehner might mean when he talks about taxpayers “rewarding” institutions that are owned by taxpayers, I go for Occam’s Razor: Boehner doesn’t have some complicated notion in mind, he either doesn’t know that the government took over F&F months ago, or he just doesn’t get this “government-owned” concept. [Emphasis in original]
Huh, that is surprising. But of course, what’s even more surprising is that we taxpayers would shift our funds around in such a pointless fashion. I mean, I didn’t transfer $200 billion from my checking account to my wallet yesterday, so why would I do the same with my Fannie Mae property?
Oh, it’s because F&F are going to buy stuff with our money, or they’re going to guarantee the value of certain assets, using our money as the backstop. That’s why the government is authorizing money in the first place; that’s why they are picking $200 billion and not, say, $200 trillion–even though according to Krugman, the latter number would just be a meaningless accounting trick.
Note that I am not necessarily defending the wisdom and intelligence of John Boehner; his statements are no doubt calculated for political effect.
But what I am saying is that Boehner’s statement is perfectly sensible. It is Krugman (and DeLong) who are falling for the crudest of fallacies when they think the taxpayers can’t possibly lose on agencies that they “own.”
Anyway, I’m a little bearish right now. I want to sell my shares of Fannie and Freddie. Does anyone have the correct broker contact info? I seem to have misplaced the laminated card that Henry Paulson mailed me back in September.
So argue McGrattan and Prescott in this 2003 Fed paper (pdf). Here’s the abstract:
Many stock market analysts think that in 1929, at the time of the crash, stocks were overvalued. Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued. In this paper, we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations. Our estimate is based on values of productive corporate capital, both tangible and intangible, and tax rates on corporate income and distributions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.
Hmm. I think if your model predicts that stocks were undervalued in 1929, then your model is wrong. Forget the fact that the Dow didn’t surpass its 1929 peak until the 1950s (according to Amity Schlaes)–after all, one could plausibly argue that the New Deal and World War II totally changed the underlying fundamentals that prevailed in 1929. Fine.
But still, how do our authors explain the huge rise in the stock market during the late 1920s? In other words, if stocks were undervalued at the 1929 peak, then they must have been ludicrously undervalued in 1927, since I don’t think there were any major changes in the “fundamentals” during the two years.
I haven’t read the paper so maybe they give an answer. They do address the issue of the crash itself–they follow Friedman and blame it on the Fed tightening. I think this theory that the tightwad Fed caused the crash may be Friedman’s worst contribution, surpassing his role in creating tax withholding.
* Here is Nouriel Roubini explaining that laissez-faire capitalism has failed. I’m not sure how the Federal Reserve (which caused the boom) or the trillions in bailouts and other rescue moves (which caused/exacerbated the financial panic) qualifies as laissez-faire. But beyond that quibble, I love how Roubini lists all of the things that can go wrong with more regulation (such as regulatory capture and jurisdictional arbitrage), and basically says, “So the politicians should avoid those pitfalls when saving the world.”
* Have you ever wondered how economies got out of liquidity traps before the advent of wise countercylical fiscal policy? Krugman explains in this post. Apparently what happens is that the capital stock wears out and thus businesses have no choice but to go invest. (BTW Krugman links to this New School outline of Keynesian Business Cycle Theory, which I haven’t read but looks like it might be interesting.)
* Here’s a disgusting story of two Pennsylvania judges who took payoffs from “private” juvenile prison camps–that’s my term, but it’s what they were!–in exchange for finding defendants guilty and shipping them to the companies. (Presumably the companies got paid per “criminal” processed.) I am sure a lot of leftist prisoner advocates are going nuts about this, saying that you can’t bring in the profit motive to something like justice. But on the contrary, this just shows how screwed up the government is. It was the government judges who abused their awesome power over these kids’ lives. To switch contexts, suppose it turns out that the owners of that Georgia peanut butter factory paid off the FDA inspectors to look the other way. Would that prove profits and peanut butter don’t mix, and that the government should nationalize Skippy and Jif along with Bank of America?
* Wintery Knight has an interesting follow-up discussion to my post from last Sunday. I had wondered why Jesus spoke in parables (rather than plainer language), and Wintery Knight discusses God’s “hiddenness” more generally.
Longtime readers know that I care little for the Bureau of Labor Statistics’ “seasonal adjustments” to their data. If you know where to look in their latest report, you’ll see that the unadjusted index of consumer prices rose 0.4% from Dec 08 to Jan 09, which is an annualized increase of 4.9%.
As I said with regard to the PPI numbers yesterday, a single month’s numbers don’t mean all that much. But I think this is the beginning of the Great Reflation of 2009.
I’m starting to notice a pattern… Anyway, gold broke $1,000, though as of this post it’s down to $990. And the S&P 500 right now is down about 1% for the day. It’s down 43 percent from a year ago.
I think the investors of the world are finally starting to read this blog.