Ron Paul vs. Paul Krugman
Geez, the guy beats me to getting on Leno and the Daily Show, and now this (it starts at 1:05):
Thanks to a bunch of people emailing me / posting on my FB wall about this…
Wenzel vs. Murphy: You Decide
[UPDATE below.]
Well, Bob Wenzel has already been knighted due to his remarks at the NY Fed, so in the interests of keeping Sir Bob humble, I want to recall something back from November.
Some of you may remember that Tom Landstreet and I had a piece run on Nov. 7 on Forbes, in which we said the following:
Many analysts have been surprised lately by the strength in certain economic indicators, such as the growth in business investment in the third-quarter GDP report, particularly in equipment & software. The hopes for a general rebound are misplaced, however, because temporary depreciation rules may be driving the apparent upswing. The generous bonus depreciation and small business deduction rules begin to drastically phase out in January 2012, which will likely cause a dramatic reversal in investment and other indicators.
Wenzel didn’t think too highly of our view. In a post titled, “Bob Murphy: It’s Not Austrian Business Cycle Theory That Counts, It’s Depreciation Rates,” Wenzel wrote:
Bob Murphy, along with Thomas F. Landstreet, have an odd column out at Forbes, which seems to diss Austrian Business Cycle Theory and promote depreciation rates as the key to the economy…
Say what? Depreciation is driving the upswing? I have been one of those forecasting a general (manipulated) rebound because of Fed money printing, based on ABCT. I don’t see anyway that depreciation is the major driver in this economy.
ABCT holds that central banks print money which generally first goes to the capital goods sector. This flow of funds results in a (manipulated) boom in the capital goods sector. Federal Reserve Chairman Bernanke is now printing money (M2) at a rate of 15% plus. That is a lot of money to be hitting the system. In fact, over the last 12 months, it is nearly a trillion dollars. M and L apparently want to ignore this trillion dollars and hang their hat on depreciation changes.
…In other words, businesses are going to be hit with a big new tax burden.What does this have to do with a general rebound? If you know that you are getting business because of a depreciation law that is about to expire, are you going to crank up your business for a demand that is not going to be there in a year? Of course, not. Do glove makers continue to crank up sales for the summer months? Should we send out an alarm saying, “Hey glove makers, coat makers and sweater makers are going to get smacked when summer hits. The economy is going to tank.” ? Of course not. Expected changes are planned for.
The depreciation change is not fooling anyone. … Do M and R think that the businessmen on the sell side of these transactions aren’t aware of this? Do they think the sellers are idiots?
Needless to say, Wenzel wasn’t convinced of the cogency of our analysis.
Back to our Forbes article, Landstreet and I looked at the last time such a drastic change in depreciation rules occurred:
Note that if the accelerated depreciation rules are temporary, then the long-term impact may be muted. As the expiration deadline for a particular benefit approaches, we might see businesses simply pull forward their routine replacement of equipment. Thus the surge in investment during the period of eligibility might be matched by a collapse in investment after the expiration.
For historical evidence, we can look at what happened when the bonus depreciation rate dropped from 50% in 2004 down to 0% in 2005. Even though investment in equipment and software jumped 21% over the two-year period, the growth was not spread uniformly.
Instead, there was strong growth through 2004 (with fourth-quarter 2004 equipment & software investment up 12.1% from the prior quarter), but then an abrupt slowdown going into first quarter 2005, when this investment category only rose 2.4%. Businesses likely pulled forward much of their planned equipment amd software purchases—which normally would have occurred in early 2005—into 2004, to take advantage of the expiring 50% bonus depreciation.
We face a similar situation today, except that the stakes are higher. To reiterate, the bonus depreciation rate drops from 100% to 50% in January, and at the same time the Section 179 maximum deduction drops from $500,000 to $125,000. Anecdotally, we know many businesses have been rushing to get their capital purchases “placed in service” before the 2011 deadline passes. This has given an artificial boost to business investment and other measures thus far, but investors should be ready for a sudden reversal come 2012.
Now in the actual paper that we put out for Landstreet’s investment clients, we were more specific, and focused on Nonresidential Fixed Investment, as well as Equipment & Software. (The latter is a component of the former.) We showed how, over the period from 2004-2005, average growth in both categories was strong, but that it was unevenly distributed. Specifically, quarterly growth was high in these categories in 3q2004 and then slowed into 4q2004, then fell sharply in 1q2005 before starting to recover in 2q2005. We specifically predicted that we would see a similar pattern, though more pronounced, this time around in both those categories, with reference to the 2011 and 2012 numbers.
Lo and behold, the advance estimates from the BEA released last week show the following (you have to click on the Tables to get these details):
Nonresidential Fixed Investment
3q 2011: +15.7%
4q 2011: +5.2%
1q 2012: -2.1%
Equipment & Software
3q 2011: +16.2%
4q 2011: +7.5%
1q 2012: +1.7%
So, Landstreet and I are declaring Miller Time on this one. Not only did we say that GDP growth was going to be lower from 4q –> 1q (which it was: 3.0% down to 2.2%), but we specifically called one of the components of the slowdown. This is from the BEA’s press release: “The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.”
In contrast, Wenzel has been pushing a “Keynesians are idiots, they don’t see the boom caused by Bernanke’s mad money printing spree” story. Every time a decent economic indicator has popped up, Wenzel has reiterated this line. So if he wants to say Bernanke has slowed his money-printing from when Wenzel bit my head off back in November, OK, but then he can’t at the same time mock Keynesians for being so pessimistic about the “manipulated recovery.” Bernanke can’t be simultaneously spiking and slamming the economy.
If anything I think 1q 2012 showed the exact opposite of Wenzel’s take: Business investment decelerated (or actually declined, depending on the category), while consumer spending and foreigner spending were up. If you were doing a standard ABCT explanation, isn’t that backwards?
Don’t get me wrong, I am fully aware that people can get lucky when throwing out predictions. But Wenzel bit our heads off when our piece came up, so I think it’s not too cheeky for me to mention that at least as far as the crude BEA numbers go, we hit that out of the park. Landstreet’s clients are telling him on the phone, “Huh, you called that one, Tom.”
Discuss.
UPDATE on May 3, 2012: Wenzel has responded here. He makes some good points, especially about the fact that the stock market definitely didn’t move in accordance with the Landsburg/Murphy perspective (though technically we didn’t say, “Short the market!”).
On another matter, Richard Peach of the NY Fed has a different version of how things unfolded that fateful day.
Steve Landsburg, Religious Atheist
I have previously said that U of R economist Steve Landsburg is a very religious atheist, and I mean that sincerely. Steve derives his sense of the universe from mathematics, as opposed to his belief in a personal God. If it turned out that arithmetic contained a contradiction, I really think we would find Steve in a drunken stupor living under a bridge in a few years.
Anyway, in a recent post about mathematician Stanley Tennenbaum Steve writes:
I write as one who believes (like most mathematicians) that the system of natural numbers (including the operations of addition and multiplication) exists in an objective sense. By that I mean precisely this: Statements about the set of natural numbers (such as “Every natural number is the sum of four squares”) have objective meanings; they are not just strings of words. I take it that a thing exists if one can speak meaningfully about its properties. The facts that every natural number is a sum of four squares, that every number can be factored into primes, and that an odd prime number is a sum of two squares if and only if it leaves a remainder of 1 when divided by 4, are all properties of the system of natural numbers. Because it has these properties, the natural number system exists.
…
It would be nice to give a succinct definition of the system of natural numbers. That turns out to be quite impossible. …This means, in effect, that there’s no way to uniquely specify the natural numbers….That’s where Tennebaum’s Theorem comes in. What Stanley proved (and of course I’m paraphrasing a bit here, because this is a nontechnical forum) is that in any nonstandard model of arithmetic, the rules of addition and multiplication are so complicated that no computer can be programmed to carry them out. In other words, you and I, whose brains are computers, have no hope of really understanding those addition and multiplication rules.
…
It seems to me, then, that our only hope for picking out the honest natural numbers from among a sea of impostors is a direct appeal to intuition. Fortunately, almost all of us have that intuition. We’ve known what numbers are since we were three….So I contend that 1) the natural numbers exist because we can make meaningful statements about their properties, and that’s what existence consists of, and 2) the natural numbers are unfathomably complicated in the sense that there is no hope of pinning them down by any sort of description, even if we allow ourselves to incorporate sophisticated ideas like Tennenbaum’s into our description.
As many of you know, I’ve argued more than once (some of you might say more than necessary) that the existence of an unfathomably complex structure that was neither designed nor the product of evolution is a definitive counterexample both to the “intelligent design” argument that says a complex structure needs a designer and to Richard Dawkins’s position that all complexity is a product of evolution. It also settles (for me) the question of why the physical Universe exists — once you’ve explained the existence of something as complex as the natural numbers, explaining the existence of something as relatively simple as the Universe becomes a mere exercise. [Bold added.]
Steve has been an outspoken critic of people who claim to believe in the popular monotheistic faiths. And yet, if you stand back and look at what Steve is doing in the quotation above (especially the parts I put in bold), you will see his own position is pretty incredible itself.
First, Steve says that something exists if we can describe its properties. OK, watch this:
(1) God is omniscient.
(2) God is omnipotent.
(3) God is omnibenevolent.
These aren’t properties I dreamed up; these are standard attributes of the personal God about which mainstream theologians have written for centuries. So did I just prove that such a God exists?
Steve is going to have to say no–since he can hardly believe that people nowadays actually still believe in the God of the Christian Bible–and yet, that’s what pops out of his own framework. Now maybe Steve will say, “Well, your purported principles contradict each other. A being can’t be omniscient and omnipotent at the same time; even Mises has an argument about that in Human Action.” We can all have that discussion in the comments–I fallibly predict we will–but that’s beside the point. I could easily come up with a list of properties describing God that are consistent, and I wouldn’t have thereby proved that God exists, in Steve’s book.
So right off the bat, Steve is in trouble. A principle that he thought was beautiful and elegant when used to support his own belief system, for some reason will have all sorts of caveats when a Christian tries to use it. (In fairness, Steve does take on the ontological argument in his book. I really don’t see how Steve thinks he gets around his own critique, and neither does frequent Free Advice peanut-thrower Ken B. in the comments at Steve’s post. Thanks to Silas Barta for bringing this to my attention.)
But beyond that problem, there’s another with Steve’s commentary above: Look at the part again where he says, “[O]nce you’ve explained the existence of something as complex as the natural numbers, explaining the existence of something as relatively simple as the Universe becomes a mere exercise.”
Come again? I think I missed the part where Steve explained the existence of the natural numbers. Especially if you click on the link and read the whole thing, you’ll see that most of Steve’s time is spent explaining problems with previous attempts to characterize the natural numbers.
Indeed, this is truly the “explanation” Steve offers: “It seems to me, then, that our only hope for picking out the honest natural numbers from among a sea of impostors is a direct appeal to intuition. Fortunately, almost all of us have that intuition. We’ve known what numbers are since we were three.”
Sorry Steve, that’s not an explanation. If I said, “We know God exists because I have direct intuition, and most humans from history–though the percentage has gone down in the last 200 years, I grant you–have the intuition that there is a greater force than themselves in the universe, they think there should be a ‘meaning’ to life to make sense of everything,” I’m pretty sure the atheists would get medieval on me in the comments.
A few weeks ago Brian Shelley sent me this NYT review of a book (The Righteous Mind) that discussed how people deploy their reason to justify whatever views they already hold, on other grounds. I think there is an important point here. I hesitated to bring it up, lest exposing myself to accusations of, “Aha! Murphy finally admits it, Christians don’t trust reason!!”
We can all easily use our minds to spin out all sorts of justifications for what we believe in, or to blow up the intellectual edifices constructed by our rivals. I’ve run into this problem even in my normal work, where (say) I’ll come upon a Krugman piece or something from a think tank pushing federal subsidies for wind power, and it is expected that I’m going to poke holes in them.
It would be silly of me to say that this isn’t a biased structure. The one thing I try to do, to maintain my intellectual honesty and integrity, is to say I can never use an argument to attack my opponents, that I simultaneously would reject if my opponents used it against “my side.” (Well, there are other, obvious things too, like not making up statistics, not using graphs that are misleading, not deliberately taking someone’s remarks out of context, etc.)
But I’ve noticed that even here, things aren’t so cut and dry. If you’re a clever guy like Krugman or me, we can come up with “refinements” of the principles involved, so that really the two things aren’t analogous, and it’s fine for me to use the Principle-Version-A when blowing up the bad guys, but when they try to use something similar on my allies, nope it’s illegitimate because it’s actually Principle-Version-A-Prime.
To be clear, I honestly think I’m on the side of truth and that my conclusions would lead to a better society than what Krugman et al. are pushing, but my point is that I have recognized that my own rational introspection on the matter isn’t a disinterested bystander. And by the same token, I try not to get as outraged at Krugman et al. as I used to, because he presumably thinks the same thing.
Coming full circle back to Landsburg: To me it is laughably obvious that he is using principles to defend his worldview, that he would mock if I were to adopt them in defense of Christianity. This doesn’t underline that reason is useless, it rather shows that our opinions as to what constitutes a “good argument” depends not just on pure reason itself.
Tom Woods & Friends Launch “Liberty Classroom”
The internet just keeps getting cooler. Tom Woods has launched his Liberty Classroom, where he and other liberty-loving lecturers guide you through world history. (An economics program is coming soon.) There is a modest fee that gets you access to everything. However, you can view some freebie material before deciding whether to steer some of those Federal Reserve notes Tom’s way.
I’d like to say I am going to be disciplined and work my way through the whole thing from the beginning, but I’m going to cheat and skip ahead to the lecture on Hebrew history.
Brad DeLong: We Have Always Been at War With Sluggish NGDP Growth
Brad DeLong in his latest blog post is aghast at Ben Bernanke’s recent remarks on why the Fed isn’t doing more. Don’t worry about what Bernanke said; the interesting part is when DeLong, in exasperation after quoting Bernanke’s can’t-do attitude, says this:
Target the path of nominal GDP, people!
You know, I thought that this would work out very differently. I thought 3 1/2 years ago that the Federal Reserve would announce:
* that this was an emergency situation.
* that its task was to stabilize the growth rate of nominal GDP.
*that as long as nominal GDP was below its pre-2008 trend, the Federal Reserve was going to buy bonds for cash–and keep buying bonds for cash until forecasts of nominal GDP were back on track.
Now when I first read that, it struck me as complete BS. When I first encountered Scott Sumner’s writings around (I think) late 2008, I had to think through what nominal GDP was. Just about nobody thought in terms of NGDP at the time. I’m not saying Brad DeLong didn’t know what NGDP was, but what I’m saying is, he most certainly wasn’t expecting the Fed to announce that it was going to implement what we now recognize as the Scott Sumner Plan for Debasement Recovery.
Incidentally, the reason I was pretty sure of my recollection is that I can remember starting to pay more attention to Scott as DeLong and Krugman came around to his views. In other words, I didn’t think there was much need to deal with the Crazy Guy from Bentley when he was just getting the bi-weekly link from Tyler Cowen, but when more and more people starting saying, “You know, level targeting of NGDP might make a lot of sense,” that’s when I realized, “Scott Sumner must be stopped. No matter the cost.”
Anyway, for those of you who would like some more evidence besides my sincere assurances, here is a Brad DeLong post from January 2009. This is right at the time that he says in the quote above, that he was expecting the Fed to matter-of-factly announce that it was targeting NGDP growth. Look at what DeLong from 3 and 1/2 years ago actually was saying. He first quotes Gary Becker, who had been questioning the need for a big Obama stimulus package when people weren’t expecting the recession to be worse than the 1982 one, and then DeLong explains in his patented patronizing pattern:
The difference between now and 1982 was that back in 1982 the interest rate on Treasury bills was 13.68%–there was a lotof room for the Federal Reserve to cut interest rates and so reduce unemployment via monetary policy. Today the interest rate on Treasury bills is 0.03%–there is no room for the Federal Reserve to cut interest rates, and so monetary policy is reduced to untried “quantitative easing” experiments.
The fact that monetary policy has shot its bolt and has no more room for action is what has driven a lot of people like me who think that monetary policy is a much better stabilization policy tool to endorse the Obama fiscal boost plan.
The fact that Gary Becker does not know that monetary policy has shot its bolt makes me think that the state of economics at the University of Chicago is worse than I expected–but I already knew that, or rather I had thought I already knew that.
I knew Brad DeLong from 3 and 1/2 years ago. He was a blogger of mine. And Brad DeLong, you were no advocate of level NGDP targeting, nor did you think the Fed was.
EPA Official Uses Historical Analogy to Explain His Enforcement Philosophy
This is pretty amazing. The fireworks start about 20 seconds into it.
For more background on this, see this Forbes article.
Assessing the Production Tax Credit
Just what you always wanted to know about… The intro:
The Production Tax Credit (PTC) for wind energy is set to expire at the end of this year. In March the Senate failed to pass Sen. Debbie Stabenow’s (D-MI) measure that would have extended the PTC (and other renewables tax credits), while Sen. Robert Menendez’s (D-NJ) bill and a bipartisan House bill are still pending. This morning, Politico reported on the ongoing fight that many Democrats and some Republicans are making to renew the PTC
The present post will summarize the history of the PTC. We will see that despite the billions in tax advantages the wind industry has received over the decades, it hasn’t delivered anywhere near the promises of its proponents. If Congress wants to stimulate job creation and energy production through tax policy, it should avoid picking winners and losers, and instead apply a uniform tax code with as low a rate as possible to all energy sources.
Here’s a Sentence I Never Thought I’d Blog
This is a link to Robert Wenzel’s prepared remarks for the speech he just gave to the NY Federal Reserve Bank. Let’s watch Wenzel’s blogging over the next few weeks and make sure he hasn’t been replaced.
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