25 Dec 2009

I Told You Guys That Krugman Was Misleading the Children

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Jeff Tucker passed along a very critical comment from reddit on my recent article accusing Krugman of making a basic mistake on trade theory. Here’s the opening salvo:

Has this author ever even taken macroeconomics in college? This crap was on my freakin midterm; Krugman is 100% right. Increasing or decreasing the amount of trade we do via protectionism or trade liberalization only changes the volume of trade, but not the balance of trade, ergo it doesn’t affect short run GDP. That’s what Krugman is saying, and it’s extremely obvious to anyone who knows that NX = Savings – Investment. Maybe if the author actually went over NX = S – I, he’d realize why what he’s saying is wrong.

OK, criticizing Krugman on general economics is one thing, but you’d have to be a damned fool to criticize him on trade theory. That’s all Krugman does, academically speaking. The author of this piece is WAY out of his own league. To say that “Krugman is wrong even within the Keynesian framework” is completely laughable; take it from someone who just studied most of this junk.

If you are interested in using Keynesian macro variables to express sound economics, I think you will enjoy clicking the link and watching this guy (?) and me debate. For example here is part of his follow-up:

You’re 100% right; trade barriers adversely affect C and I. But it’s more of a long run effect than a short run effect.

Trade in itself does not contribute to output, it just turns your output into something else that you want. If I’m making 40 bushels of corn and trading them with China for 40 teddy bears (backwards, I know), and all of a sudden a barrier is put up so I can’t trade for teddy bears anymore, if I’m still producing 40 bushels then my output hasn’t changed; it is and always has been 40 bushels. So GDP remains the same.

This is–I believe–totally totally wrong, but it’s a very interesting mistake that I’ve never encountered before. So if you want to see me pick it apart, follow the link.

Last point: I’m almost glad that this guy (?) made this confident comment about my article. Kevin Donoghue and some others had me doubting myself, and thinking that Krugman wasn’t misleading his readers. Well, he certainly fooled this person.

25 Dec 2009

Potpourri

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* It’s the clash of the titans over at Crash Landing, concerning a popular and allegedly circular argument against the State.

* TokyoTom takes a break from discussing my income stream to pointing out the ominous WSJ series on financial “reform.” (I think it’s like health care “reform.”)

* A naive economist allows his anti-Fed arguments to be used by above-mentioned WSJ.

* M4liberty passes along this interesting board game trivia. I’m glad to see I’m doing my share to save the planet.

* Mankiw sees the wisdom in economists adopting the medical analogy for the failures of Keynesianism.

* Gary North writes favorably of Oral Roberts (no surprise) and Frank Zappa (huge surprise). (HT2 Lew Rockwell)

* Tyler Cowen linked (with bemusement I think) to this Italian song about what Americans sound like to foreigners, but I thought the song was awesome. USA! USA! In any event, I’m not sure when this was released, but if it came after Austin Powers, then this guy’s got nothing on Mike Meyers. Seriously, isn’t this video just the opening of Austin Powers II?

25 Dec 2009

When Life Gives You Taxes, Make the Savior of the World

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Merry Christmas! And as part of our ongoing series, “Why does God let bad things happen?” here we explain that if King Herod and Caesar had become Rothbardians, the Scriptures wouldn’t have been fulfilled.

The Jews in Jesus’ day were waiting for their Messiah, but the prophecies said he would come from Bethlehem. So you can understand Nathanael’s confusion when Philip tells him the good news:

Jesus Calls Philip and Nathanael

43The next day Jesus decided to leave for Galilee. Finding Philip, he said to him, “Follow me.”

44Philip, like Andrew and Peter, was from the town of Bethsaida. 45Philip found Nathanael and told him, “We have found the one Moses wrote about in the Law, and about whom the prophets also wrote—Jesus of Nazareth, the son of Joseph.”

46″Nazareth! Can anything good come from there?” Nathanael asked.
“Come and see,” said Philip.

So the confusion here is that this guy Jesus is the son of a carpenter who grew up in Nazareth. Hence, he couldn’t possibly be the promised Messiah, since all educated Jews knew the Messiah was supposed to come from Bethlehem (from the line of King David).

Of course, the wrinkle is that Jesus really was born in a manger in Bethlehem–his earthly parents Mary and Joseph had to make the trek there for a census being conducted for tax purposes:

The Birth of Jesus

1In those days Caesar Augustus issued a decree that a census should be taken of the entire Roman world. 2(This was the first census that took place while Quirinius was governor of Syria.) 3And everyone went to his own town to register.

4So Joseph also went up from the town of Nazareth in Galilee to Judea, to Bethlehem the town of David, because he belonged to the house and line of David. 5He went there to register with Mary, who was pledged to be married to him and was expecting a child. 6While they were there, the time came for the baby to be born, 7and she gave birth to her firstborn, a son. She wrapped him in cloths and placed him in a manger, because there was no room for them in the inn.

So when earthly rulers seek to rip off poor people, they unwittingly fulfill the Scriptures and allow the rise of the true King whose majesty renders them paupers. And later on, when earthly rulers have Him killed, they unwittingly fulfill the Scriptures yet again and allow Him to save the world.

You and I are dirty sinners, but the reason we should feel down is that we’re not doing what God wants. We don’t need to worry that we’re going to screw up His plans. He knew you were going to do that before you were even born. He’s disappointed, but don’t worry–He was ready for it. Good will still triumph, sometimes in spite of us.

22 Dec 2009

It’s All About Me Potpourri

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* I am on vacation and am not getting out my Rosetta Stone, but I frankly don’t know what Mish is even talking about in this response. It seems he is using a variation of the legal defense, “My client wasn’t at the murder scene, and if he were he doesn’t own a gun, and if he did he is legally blind and so couldn’t possibly have been the shooter.” Naturally Mish doesn’t explain why we will have about 2.9% CPI inflation in 2009 if his analysis is the correct one.

* I walk through Krugman’s (apparent) goof on international trade and the Keynesian accounting identity.

* I quintuple-down on my inflation bet, this time with David Henderson. If Arnold Kling wants a piece of it, I will have to buy a credit default swap on EconLog.

* I have been waiting since the summer for this: The YouTube of my appearance on a TV show in the Bahamas. Like Obi-Won, I easily fend off anticapitalist attacks from two assailants.

If you want to see the rest go here and scroll down in the “Related Videos” to see Parts 2 etc. of “Dr. Robert Murphy on Platform TV.” Note that I am at my parents’ house and I can’t figure out how to turn on the volume on their computer, so I hope it sounds OK.

20 Dec 2009

When You’re Right With the Lord, You Make Good Decisions

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I am at my parents’ house so blogging will be sparse for a while. In the meantime check out this passage (2 Chronicles 26: 1-15) which illustrates the way I think God works in history:

1 Then all the people of Judah took Uzziah, [a] who was sixteen years old, and made him king in place of his father Amaziah. 2 He was the one who rebuilt Elath and restored it to Judah after Amaziah rested with his fathers.
3 Uzziah was sixteen years old when he became king, and he reigned in Jerusalem fifty-two years. His mother’s name was Jecoliah; she was from Jerusalem. 4 He did what was right in the eyes of the LORD, just as his father Amaziah had done. 5 He sought God during the days of Zechariah, who instructed him in the fear [b] of God. As long as he sought the LORD, God gave him success.

6 He went to war against the Philistines and broke down the walls of Gath, Jabneh and Ashdod. He then rebuilt towns near Ashdod and elsewhere among the Philistines. 7 God helped him against the Philistines and against the Arabs who lived in Gur Baal and against the Meunites. 8 The Ammonites brought tribute to Uzziah, and his fame spread as far as the border of Egypt, because he had become very powerful.

9 Uzziah built towers in Jerusalem at the Corner Gate, at the Valley Gate and at the angle of the wall, and he fortified them. 10 He also built towers in the desert and dug many cisterns, because he had much livestock in the foothills and in the plain. He had people working his fields and vineyards in the hills and in the fertile lands, for he loved the soil.

11 Uzziah had a well-trained army, ready to go out by divisions according to their numbers as mustered by Jeiel the secretary and Maaseiah the officer under the direction of Hananiah, one of the royal officials. 12 The total number of family leaders over the fighting men was 2,600. 13 Under their command was an army of 307,500 men trained for war, a powerful force to support the king against his enemies. 14 Uzziah provided shields, spears, helmets, coats of armor, bows and slingstones for the entire army. 15 In Jerusalem he made machines designed by skillful men for use on the towers and on the corner defenses to shoot arrows and hurl large stones. His fame spread far and wide, for he was greatly helped until he became powerful.

So of course the writer attributes Uzziah’s (initial) success to his obedience to the Lord’s ways, but an atheist could say, “No that had nothing to do with it. Look the guy was a smart military commander and even spent money on R&D for advanced weaponry.”

18 Dec 2009

Wenzel Flips?

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A few readers want to know what I think of this provocative post by Robert Wenzel, in which he says Bernanke conned a bunch of us (bold mine):

This is big. It is going to knock for a big loop all those concerned about the inflationary consequences of the soaring monetary base. The Federal Reserve Bank of New York today released a report, “Why Are Banks Holding So Many Excess Reserves?”.

Fed economists Todd Keister and James McAndrews state that while the high level of reserves in the U.S. banking system during the financial crisis reflects the large scale of the Federal Reserve’s policy initiatives, it conveys no information about the effect of these initiatives on bank lending or on the level of economic activity. This is another way of saying what I have been saying right along, watch the money supply, not the monetary base.

Keister and McAndrews explain that the buildup of reserves in the banking system is a by-product of the liquidity facilities and other credit programs introduced by the Federal Reserve in response to the crisis. They also discuss the importance of paying interest on reserves when the level of excess reserves is unusually high. But the key point they make remains that the majority of the newly created reserves end up being held as excess reserves and, therefore, the data on excess reserves provide no useful insight into the lending decisions and other activities of banks. Got that? The trillion dollars sitting as excess reserves has had no impact on the economy, and as the Fed stops it’s emergency facilities, it is going to be drained. The trillion never went into the economy and never will.

If Keister and McAndrews are correct, and I believe they are, then the Fed will have little problem in ending its emergency lending facility activities. The banks by maintaining those funds as excess reserves (for whatever reason, even if it is simply to earn interest) have in reality kept those funds out of the economic system. As the Fed ends its liquidity emergency facilities they will have to pay back the borrowed funds.

The alarmists, who have thus pointed to the surge in the monetary base as a sign of soaring Fed monetary “easing” and who have been shouting about the inflationary consequences, are going to go into cardiac arrest once they see the monetary base crash when the Fed winds down its emergency facilities and the banks use the excess reserves to pay back the facility funds. The super-decline in the monetary base, as was the super-increase in the monetary base, will of course mean nothing relative to the actual money supply, which is where one should have been keeping one’s eyes all along.

In a way Bernanke played a huge shell game on the global financial world. All the so called easing never happened. Let me repeat, what was touted by almost every economist in the world as the extremely loose monetary policy, didn’t happen. The money never entered the system. It was a bluff. Bernanke has set us up for Crash II and few see it coming. I wouldn’t want to play poker against him.

So here are my quick reactions:

(1) I think those Fed economists are wrong. I think we are going to get big-time price inflation, and when we do, people will look back at those who were blowing off a tripling of the monetary base in a little more than a year and think, “Wow, that’s as inconceivable in hindsight as the people who said we weren’t in a housing bubble.” And incidentally, two of the people who said we weren’t in a housing bubble were Fed economists at the height of the boom. How do I know? Because Robert Wenzel told his readers about it.

(2) It’s true that Wenzel was the first guy I saw who was warning that Bernanke had put the brakes on M1 and M2 growth back in March or so. But it was also Wenzel who taught me that the Fed won’t be able to simply reverse its injections of reserves, because the assets it purchased on the way up won’t fetch the same price on the way down. I.e. the Fed can’t simply reverse its actions and “suck the liquidity out of the system,” because it may have seriously overpaid for a bunch of the MBS, Freddie and Fannie debt it added to its balance sheet.

So I don’t view the Wenzel quotation above as a shot against me; if it is, it’s only because of views that I literally learned directly from Wenzel himself.

(3) One final thing: I am going to be really peeved if everything I have been saying turns out true–namely that those excess reserves start finding their way out into the hands of the public (through various mechanisms we have been discussing on this blog), and then when price inflation breaks 10% Wenzel says, “See? M2 is up 28% year-to-date. A lot of economists were flipping out last year because of the huge monetary base, but only EPJ readers knew that the monetary base wasn’t the story, M2 was. You need to read my blog to know what’s up.”

18 Dec 2009

Jim Manzi Talks About the IPCC Consensus and Tom Friedman

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I loved this Jim Manzi guest post at MasterResource, particularly because I recruited him for the task. The irony is that the latest IPCC report does not support aggressive emission cuts. You’ll notice that the people who do propose such actions will say things like, “Things have gotten worse since the IPCC AR4 report came out, as this paper in Science suggests…” Here’s Manzi:

It is amusing to watch advocates of rapid, aggressive carbon dioxide emissions reduction, when confronted with the plain facts of the consensus scientific projections for climate change and its associated damages, move from “science says we must do this or die” to “well, actually, the science is pretty uncertain, so it’s possible that we might die,” and then proceed to some restatement of Pascal’s Wager.

Tom Friedman’s recent New York Times column is a perfect illustration of this logic. I’ll quote him at length, before demonstrating that his emission-cuts-as-insurance analogy breaks down once you plug in actual numbers…

16 Dec 2009

Talk to Me Like I’m a 4-Year-Old: Why Aren’t Banks Putting Those Reserves to Work?

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Carlos Lara and I just spent 5 hours in the car driving to an undisclosed location in Indiana to meet with some life insurance people for our forthcoming book. Not surprisingly, we talked about the $1.1 trillion in excess reserves, and what it would take for them to start trickling (gushing?) out.

I explained that I have always found this typical explanation incomplete: “The banks can’t lend right now because they fear another wave of defaults and so they have to be ready for their balance sheets to take another huge hit.”

I don’t think that can be the whole story. I don’t doubt that this is basically correct, but I’m an economist so I need it to be right in theory before I can accept it even if I’m sure it’s right in practice.

Specifically, here’s my problem: Suppose the banks didn’t fear any future defaults. Then they’d start making new loans and earning a lot more than Bernanke’s piddling interest payments. So their balance sheets would get better more quickly than if they kept their reserves parked at the Fed.

OK, so if the way to increase your shareholders’ equity (i.e. gap between assets and liabilities) in normal times is to lend out excess reserves, that fact isn’t changed per se by the possibility that a bunch of your assets are bad. In fact it should make you even more eager to seek the most profitable use of your reserves.

Like I said, I know there is something wrong with my argument; I believe the people who are saying the banks aren’t making new loans because they’re worried that a bunch of their current loans will stop performing. But I just want to hear the explanation spelled out a little more.

For example, is it really like this: The banks are like households, and they have standard operating expenses. Right now they have cash coming in the door every month from people paying down their credit cards, mortgages, car loans, etc. But if those people get laid off and stop making payments, now the banks can’t pay their leases, utility bills, employees, etc. So if they have a stockpile of reserves, they can start drawing them down. But, if they had foolishly invested all of their excess reserves even in super great projects yielding 80% over 5 years, they would have to shut down if those projects were illiquid and they couldn’t meet their basic expenses.

Is the above paragraph in the right spirit?

Last point: If indeed it’s true that the banks are keeping their reserves on hand, in case they need to draw them down to cover their operating expenses, then…

Doesn’t that mean prolonged unemployment will lead to those reserves getting back into the hands of the public??