07 Nov 2009

Another Advantage of Mutual Whole Life?

All Posts No Comments

I still have to wrap up some other projects, but soon I plan on going full-steam into my Austrian exposition of Nelson Nash’s “Infinite Banking Concept,” which I’m writing with Carlos Lara. Part of our pitch is going to be that a whole life insurance policy (with a mutual company, not a stock company, and which is properly “loaded” for tax purposes) is an excellent vehicle to serve as your own personal bank not because it is the best “investment” on any individual criterion, but rather because it’s very good on all criteria.

For example, you can definitely find other investments that have a higher rate of return than what you’ll get from socking money into a whole life policy. However, if you use your policy the way Nelson Nash envisions–e.g. by financing your cars through it, and running your accounts receivable through various policies if you have a business–then when all is said and done, your internal rate of return is actually a lot better than what you’d think from just looking at the prospectus.

For a different example, another criterion of the dream investment would be one where you instant access to your money. So probably the ideal thing here is actual cash under your mattress. But whole life is very good in this regard, and in fact is arguably safer than even a checking account.

Why? Because the government can empty out your bank accounts. Just ask Roderick Long. He wrote in July on his blog:

Several months ago, the Alabama Department of Revenue decided I’d underpaid on state taxes from ten years earlier. (I wasn’t aware of having done so, but I don’t have those records any more and so can’t prove otherwise.) After they’d added on interest and late fees, the total due was about $12,000. I submitted a request form to pay it off in installments; they never said yes or no to the request form, but I kept sending in payments and they kept cashing them, which led me to be more sanguine than in retrospect I should have been.

Then suddenly today, without warning or announcement (either from the tax department or from my bank), the tax department completely cleared out my checking account, and my savings account, and my mother’s checking account (I guess because we’re joint on it), leaving me $8000 overdrawn to boot.

I found out the money’d been taken only by checking my balance online today – and I had to go to the bank in person to find out it was a tax levy (the online balance had no information about who’d withdrawn the money).

My college salary doesn’t start up again until September, and I have no relatives from whom to borrow, so here I am with no money (or actually, negative $8000) for food, rent, or bills for the rest of the summer.

I haven’t had a chance to contact either the tax department or a lawyer yet (having spent the afternoon waiting and waiting at my bank), but I’m not exactly optimistic about getting a swift and favourable resolution.

(You can click on the above link to get the latest developments.)

Now it is my understanding that the IRS and the courts cannot seize the cash value of your whole life insurance policies. Perhaps it’s a slight benefit, as in if you withdraw any money then they take it. But my understanding is that they technically can’t just grab it, the way they can take your checking account balance if they think you owe them money.

Can anyone confirm or deny this? As always, I would prefer it if commenters actually knew what they were talking about on something like this.

07 Nov 2009

An Inconsistency in Congress’ Actions

All Posts No Comments

The virtue of the Public Choice school of economics–which basically applies standard economic analysis to political behavior, with the slight change that politicians want to maximize not profits but reelection chances, and bureaucrats want to maximize their budget and power–is that it makes sense out of the world. If you as an economist tried to understand the various policies coming out of DC, your head would explode. I think we should give people like Matt Yglesias a break. Suppose for the sake of argument that he actually believes the ideals he’s espousing, and that he actually believes Ted Kennedy et al. devoted their careers to achieving them. If that’s really how you thought the world worked, you’d go insane.

To give you my favorite illustration: Conservatives love to rant against “dumb government” because it subsidizes tobacco farmers while it taxes the heck out of cigarettes. Well that’s just crazy, right? And it’s true, no dynastic family would ever do that in their realm. (If any historians have counterexamples, I’ll send you a free copy of my Depression book if you don’t embarrass me in the comments.)

But in a political system like the U.S.’s, the policies make perfect sense. There is no single agent “government” with a set of preferences or goals; instead there are thousands of people with political pull who are interacting and need to keep up the illusion of “upholding the Constitution,” “promoting the national interest,” blah blah blah to keep the masses happy. If the politicians “saved money” but cutting out the tobacco subsidies and firing the cigarette excise tax collectors, they wouldn’t be able to pocket the money. No, they’d be out two wonderful programs that delivered them campaign contributions from farmers’ lobbies and for which the mob delivered votes in key districts (because the mob could sell more cigarettes on the black market with the outrageous tax rates).

So let’s look at the recent acts by Congress. On the same day, the greatest deliberative body (a) extended unemployment benefits and (b) extended tax credits for home buyers.

I won’t bore you with the Public Choice analysis; that’s obvious. But I want to go the other way: Suppose you had to come up with an economic theory to explain the two actions. Could you?

I say not. Obviously the average person would say, “Oh they’re helping the unemployed make ends meet, which is good, and they’re stimulating the housing market, which is good.”

But hang on a second. By extending unemployment benefits, the government is paying unsuccessful sellers to help them cope with the fact that they can’t find buyers.

So if that makes economic sense, then the way to “help the housing market” would be to give tax credits to people who have their house on the market but can’t find a willing buyer.

Just think about that for a second. Suppose the government actually said, “If you list your house with a real estate agent–and you can pick any price you want–and you don’t find a buyer, then for every 3 months that this is the case, you can write off $10,000 from your tax bill that year.”

Do you think that would be good for helping the housing market? After all, people who are behind on their mortgages and need to sell their homes could sure use that money! So why don’t the politicians stimulate the economy by doing the above?

07 Nov 2009

Pete Boettke Fulfills My Prophecy

All Posts No Comments

UPDATE: Be sure to read the Sumner/Murphy exchange in the comments. Folks, I may have to put the Google ads back up. This is easily a $19.95 value, yours free if you act now. –RPM

Sometimes I feel like the Barack Obama of econoblogging. I understand all sides in a dispute; I am the aloof Olympian overseer.

Case in point: Paul Krugman was upset at economists who use MV=PY not simply as a tautology, but as a causal economic theory. (I’ve criticized Keynesians who do the same with Y=C+I+G+NX.) Krugman is at his best when he goes off on economists who think that exchange rates don’t affect the trade deficit, because “it’s determined by capital flows.” Anyway, in our current case, Krugman says:

Here’s my problem. Underlying the focus on nominal demand or GDP is some notion that there’s a quantity equation:


where M is the money supply, V the velocity of money, P the price level, Y real GDP. And of course this always holds true, by definition. But the temptation is to take it as a causal relationship — to say that real GDP fell because nominal GDP fell, and that this in turn was caused by either a fall in M or a fall in V; and furthermore that any such decline is a failure of monetary policy, because the central bank should have either prevented the fall in M or increased M enough to offset the fall in V.

Referring to the above, our good friend Scott Sumner said:

The second sentence has to be one of the weirdest things I have ever read by a famous economist. I have no idea the point he is trying to make. It is essentially saying that underlying the statement that A*B is important is the implication that A*B = M*(A*B/M). Okay . . .

OK hang in there folks. I know you want to know when Boettke enters the fray. Patience my friends.

OK so even though in general I loved Scott’s post, I chastised him for saying Krugman was speaking nonsense, when Krugman made a perfectly good point. Here’s what I said:

Scott says that he doesn’t even understand what Krugman is talking about in the beginning, when I for one certainly “got” Krugman’s take on people using MV=PY inappropriately. Not only did I get it, I was nodding my head in agreement.

Then Scott in the comments to my above said:

Thanks Bob, BTW, Krugman seems to have a problem with David using MV=PY inappropriately, but if you read David’s post he never even mention’s MV=PY once. It’s all a figment of Krugman’s imagination. I understand that Krugman doesn’t like MV=PY, but how does that relate to talking about nominal GDP?

OK so then I said in response to that:

Well right, but Krugman is saying that a lot of people go from “We need to boost real GDP!” to “We need to boost NGDP!” to “We need to boost M to offset the fall in V!”

He’s not attacking a straw man, since I think a bunch of Austrians say exactly this.

OK enter Boettke. In commenting on Krugman vs. Sumner, Pete says:

Paul Krugman provides his take on the Beckworth graph showing the collapse of nominal spending and relates it to his 1998 work on Japan. The upshot, monetary policy will not produce the desired effect in our current situation. Scott Sumner responds and continues to push his position that monetary policy has been too restrictive.

I have discussed this issue with Steve and Larry and I keep getting hung up on this idea that monetary policy has been too restrictive. I get the point about if V collapses faster than money supply is expanded, you get Sumner’s position. On the other hand, I don’t get it at a very basic level.

Whoa! Danger danger Will Robinson! Not only did Boettke utter the exact theory that Krugman was attacking–Pete attributed it to Sumner!! And then in the comments to Pete’s post, Scott says:

Peter, Thanks for the link. If we take a public choice view then blah blah blah.

1. Blah.

2. Or blah.

In other words blah blah blah.

(Note I have slightly edited the above.) Scott didn’t devote even a single sentence to saying, “Actually Pete, I’m not sure that you’ve correctly interpreted my theory, since when Krugman said what you just said, I told my readers I didn’t even understand the words comin’ outta his mouth. So please rephrase it in a way that a famous economist would talk, because what you’ve typed above is just plain weird.”


OK the above smarty pants version was written for the 100 or so die-hard econogeeks who spend at least 10% of their lives reading MarginalRevolution et al. Shame on you.

Now for the casual reader, a summary:

(1) I am making fun of Scott Sumner, not Pete Boettke. Krugman’s post was perfectly comprehensible, and moreover he wasn’t attacking a strawman–many economists would boil down Sumner’s own view into the very one that Krugman was attacking.

(2) Krugman’s argument is that it is wrong to view V (“velocity of circulation” or the speed with which an average dollar turns over and thus pushes up prices) as independently determined, so that if prices are falling the Fed can just pump up the money supply to keep the total value of output (measured in dollars) from falling. Krugman’s point is that in a liquidity trap, if the Fed doubles the money supply, then velocity will simply get cut in half. So the Fed can push and push and push, and it won’t prop up aggregate demand (measured in nominal dollars).

(3) I’m not saying I agree with Krugman, I’m just saying it is an interesting thing to consider. The standard explanation for what happened in the early 1930s–an explanation shared by Scott Sumner, Ben Bernanke, (the later) Friedrich Hayek, and many modern Austrians–is that the Fed stupidly allowed the money stock to collapse, which pulled down “MV” and thus pulled down “PY.” Since prices couldn’t fall quickly enough (for various reasons some of which were the fault of Herbert Hoover and unions), that meant real output (Y) had to fall. Now if in, say, 2005 we wanted to test this idea, we might say, “Shucks it’s too bad we couldn’t re-run history. If the Friedman explanation were right, a massive spike in the monetary base would’ve nipped things in the bud. But too bad we’ll never be able to really test it; I bet the Fed would never have the courage to really put the pedal to the medal and increase the monetary base a ludicrous amount and keep M1 from falling in the midst of a huge financial panic. But if the Fed did do that–and then the economy quickly bounced back–that would be proof that Friedman was right. Of course, if the economy continued to flounder, and we ended up with the second Great Depression, then propping up M clearly wasn’t the solution…”

(4) To drive home the point: Scott Sumner can appreciate how annoying it is that Krugman will continue to cling to his doctrine that big fiscal deficits are the way to fix depressions, even as unemployment breaks 10% while the government runs a $1.4 trillion deficit. Yet Scott has no problem looking at what Bernanke has done with the monetary base and saying, “Obviously it’s not enough, because we’re still stuck in a recession.” Again, this doesn’t prove Scott is wrong, but surely he can see the eerie similarity.

07 Nov 2009

WSJ Hearts Mises!

All Posts No Comments

I am stunned. John Cochran (note a different guy from the defender of the EMH!) alerts us to this WSJ op ed championing Ludwig von Mises’ warnings in the 1920s, and saying we face a similar credit bubble today.

I don’t know what role left I have to play. Ron Paul has already said the A-word on Leno, and now Spitznagel informs the WSJ readers about Mises’ heroics in the 1920s. It’s time to work on my music.

06 Nov 2009

Krugman Gains the Upper Hand…And Then Sumner Flips Him

All Posts No Comments

Whoa this was a good exchange. I read Krugman’s blog post on people abusing MV=PY and totally understood where he was coming from. But then I read Scott Sumner and he destroyed Krugman. The only parts I objected to in Scott’s response were:

(1) Scott says that he doesn’t even understand what Krugman is talking about in the beginning, when I for one certainly “got” Krugman’s take on people using MV=PY inappropriately. Not only did I get it, I was nodding my head in agreement.

(2) Scott maintains that the Freako guys were not trying to cast doubt on climate models by bringing up the global cooling scare in the 1970s, when of course that’s what they were doing. (And I don’t necessarily fault them for it, by the way. I just wish they’d stop pretending that that’s not the impression they were trying to convey.)

Anyway if you are not a trained macroeconomist and are lost in the details of this exchange, let me summarize: Krugman keeps pointing to his 1998 work and his “aha!” moment when studying the case of Japan. He keeps telling us (now) that he realized monetary policy doesn’t work in a liquidity trap, and that’s why you need more fiscal stimulus.

But as Scott points out, Krugman is full of it. If you go and actually read the 1998 paper, it’s not an argument for running budget deficits–it’s an argument for promising future inflation! And I actually heard Krugman give a talk at NYU on this very topic. (I don’t remember the exact year, but I think 1999 or 2000.)

And I can confirm that Krugman’s moral was this: He told the Bank of Japan that it could fix its problems by credibly promising to cause future price inflation. Because nominal interest rates were stuck at the 0% lower bound, the “answer” (Krugman said) was to raise the expected future price level, so that the real interest rate could be pushed more and more negative, where it needed to be in order to restore full employment.

I don’t remember Krugman saying one word about budget deficits. Of course he may have discussed them, but that was clearly not the point of the talk. No, the whole point was that the model showed him something he hadn’t thought of: that the monetary authorities had more options at their disposal once the target hit zero, because they could promise to inflate in the future and thereby affect the current expected real interest rate.

And so to repeat, Krugman keeps pointing to this eureka moment as proof that he’s known since 1998 that monetary policy doesn’t work when interest rates hit zero. (!!!!!)

06 Nov 2009

When Propagandists Believed in Capitalism

All Posts No Comments

I don’t remember who wrote it, but someone conjectured that the Soviet Union ultimately collapsed when the ruling members stopped believing in communism. I think future historians will say the same of the United States and its version of capitalism.

Rob Bradley sends this absolutely charming video from 1948. I kept thinking I was going to turn it off in a few seconds, but it kept getting better. If you’re important and/or have a short attention span, just get it going and listen while you do other stuff. I think you’ll be really impressed with the second half in particular, but I encourage you to listen to the whole thing rather than skipping ahead.

06 Nov 2009

What An Annoying Ruling

All Posts No Comments

A reader from the comments of another post alerts us to this story:

In a significant decision today , a judge found Nicholson’s views on the environment were so deeply held that they were entitled to the same protection as religious convictions, and ruled that an employment tribunal should hear his claim that he was sacked because of his beliefs.

The judgment could open the door for people to take their employers to tribunals over their stance on a range of issues, from animal rights to feminism.

Earlier this year, Nicholson, 42, claimed that his beliefs had put him at odds with senior executives at his former employer Grainger, the UK’s largest listed residential property company. When he was made redundant in July last year, he launched his legal action.

He alleged that while the firm had good written policies on the environment it had refused to abide by them, and claimed that when he tried to encourage the company to become more responsible, he was obstructed by his bosses. Dickinson, in particular, had shown “contempt” for his beliefs, Nicholson told the employment appeal tribunal…

This is bad on so many levels. Not only will it fuel ludicrous lawsuits, but it will also become a new talking point on Sean Hannity etc. “Ha! First they threw out Al Gore’s documentary, and now the British courts agree that belief in global warming is a religion.” Argh.

06 Nov 2009

Freaking Out Over Global Warming

All Posts No Comments

I elaborate on my views of the Superfreakonomics spat. This is mostly the same stuff, but I take the time to explain exactly what Levitt and Dubner discussed in case you’re new to “geoengineering”:

[Levitt and Dubner] argue that if global warming really is a threat, then it does not follow that governments need to enforce draconian cuts in carbon dioxide emissions, which would cost many trillions of dollars over the next few decades.

Instead, a “geoengineering” solution could be adopted to keep the earth cool despite increasing concentrations of greenhouse gases in the atmosphere. Perhaps the most fanciful idea is to suspend a hose using helium balloons, in order to pump sulfur dioxide into the stratosphere. This would reflect some of the incoming sunlight and arrest (or even reverse) global warming, just as occurred after the eruption of Mount Pinatubo in 1991. Best of all, this particular approach would only cost about $250 million total — less than what Al Gore’s foundation is spending just to “raise awareness” about climate change.