Consulting by RPM || Free Advice Blog

Ex-Austrian Declares: "We Need to Save More and to Spend More"

Really, that’s what he says, though not in the same sentence. (HT2 Jim Fedako.) I’m not going to bother quoting this guy, who says he believed in Austrian economics until the Lehman collapse. I guess the guy’s position is analogous to somebody who says, “We never should have gone into Iraq, but now that we’re there, we need to drop a few nukes to show them we mean business.”

Except it’s worse than that; to make it truly analogous we have to add, “So let’s go ahead and drop those nukes, but keep in mind–as I’ve said ever since Bush ordered the invasion–that only a non-violent approach can really resolve this situation.”

Am I being unfair to this guy? Go ahead and read his post if you doubt me. And you don’t need to parse closely; just skim his sentences that are in bold.

Police / Firefighter Shakedown?

I just got a Christmas solicitation from a fireman (yes he was a man) and politely declined. (It was awkward because we both knew within 3 seconds that he was going to hit me up for money, but I had to sit there and listen to the song and dance for two minutes before he actually asked me and I could say no. Now I know how pretty girls in high school must feel.)

Does anyone else get nervous that when you say no, the guy on the other end checks a box that says, “Don’t speed on the way to this guy’s house”?

ISIS Magic Photo Gift Maker

Reader Lance (not sure if he wants me using his last name) emailed me about some issues, and then offered to print me up some free mugs using his business’ new technology. I have now been enjoying hot tea in my Free Advice / PIG to Capitalism mugs for several days now, and no accidental spills yet to report. Thanks Lance!

Sean McBeth: Right or Wrong?

Reader Sean McBeth writes and says he enjoyed the PIG to Capitalism. (BTW, if you want a favor from me, that’s always a good way to start the email.) He has begun blogging himself, and wants to know if he’s on the right track, is persuasive in his arguments, etc.

Unfortunately, due to time constraints I really can’t help Sean out. But I said I would link to his blog post on the bailout and ask Free Advice readers to render their constructive criticism, if you are so moved.

Mario Rizzo Reminds Macroeconomists About Economics

My dissertation chairman, Mario Rizzo, was invited to comment in the Social Science Research Council’s forum on “What Do We Know About Bailouts?” There are some big guns who contributed, and they all say basically variations of the stuff we’ve been hearing from the talking heads over the last few months.

Then Rizzo steps to the plate and shatters the box into which all the macro guys had painted themselves:

I am not a macroeconomist. I am not even a financial economist. So much of my reaction to the current financial and economic problem may seem a bit out-of-step with what most commentators are saying. Yet I think it is important.

The macro-economic frame of mind is quite peculiar, it seems to me. In the name of the emergency, the macroeconomic way of thinking dismisses most concerns about the efficient allocation of resources and throws almost total emphasis on maintaining levels of expenditure and employment….Thus the solution lies is returning to the status-quo ante. Restore the condition of the financial institutions perhaps by buying toxic assets or perhaps by infusing capital into them. Restore the conditions of the housing market by getting the Fed and/or Treasury to buy Fannie and Freddie mortgage securities, thus sending capital into housing and lowering mortgage rates. Restore the condition of industries with large numbers of employees and others indirectly dependent on them….Once economic agents believe all of this will take place, confidence will be restored.

I believe that the above analysis is an intellectual disaster that threatens not only the intermediate-term economic condition of the United States but its long-term reliance on market institution and the liberty they undergird.

The conventional macroeconomic diagnosis and proposed cures ignore many important factors, including the following:

The “irrationality” is not primarily in the system’s response to the initial financial impulse but in the unsustainable expansion of the housing and other capital markets in the first place….Too many resources went into the housing market due to the low interest-rate policy the Fed followed for too long….

Recessions are not simply crises of confidence or of insufficient demand (due to increases in the demand to hold money). They also have their allocational – or microeconomic – aspects….

I do not think that these hastily devised macroeconomic schemes will succeed in promoting recovery because they ignore the microeconomic fundamentals. I do fear, however, that will succeed in fundamentally transforming our economic system for the worse.

Go Mario! I think the only time I was ever more pleased by his words was when he said, “Congratulations Dr. Murphy!” (after my doctoral defense).

More Greenspan Loving: Is Everyone On Crazy Pills?!

I am getting increasingly frustrated by some economists’ attempts to deny that the housing bubble had anything to do with the )#$#4 negative real interest rates that Greenspan foisted upon us…during the exact period when housing prices exploded. What is particularly annoying is when these Greenspan defenders say things that are simply not true.

Take Casey Mulligan, whom I really like by the way, over at Cato Unbound. (Incidentally, I am starting to really love their format. They really take advantage of the Internet. Go Wilkinson!) Mulligan is taking Larry White to task for thinking the negative real rates–not seen since the 1970s, mind you, when I assume even Mulligan would admit the Fed messed with the real economy–might have spurred a jump in home prices.

Mulligan goes through some neoclassical analysis of the rational impact of short-term rates on housing prices. OK fair enough; I may come back to that in a future post. But then he says:

Perhaps Professor White would argue that market participants expected short term interest rates to remain low for much longer than a couple of years. If so, he is on shaky ground. First, such a claim is at odds with long-term interest-rate data. As I indicated in my article, long-term mortgage rates were not low during the housing boom. It’s not hard to find commentary from those years recognizing the low short-term rates were not expected to last.

To this, all I can say is, “What the hell are you talking about, Prof. Mulligan?!”

Seriously folks, look at this chart:

So if by “not low” he meant “the lowest they have been in the 35 years for which the St. Louis Fed keeps records,” then OK I see his point.

In fairness, maybe he means inflation-adjusted mortgage rates weren’t low during the housing boom. But at the very least he could have clarified that.

But this just goes to show that when people start throwing evidence at you for why Greenspan couldn’t possibly have caused the housing bubble, be sure to first make sure what they’re saying is even true. Then, once you’ve verified that they’re not saying the opposite of reality, you can go ahead and decide if it affects your opinion of Greenspan.

"Paul Krugman Is Not an Economist"

So says Bill Anderson. I used to think that was an over-the-top cheap shot, but the more I read Krugman, the more I think Bill is right. In a recent article on deficits, Krugman gives us this gem (amidst all kinds of other basic mistakes):

Should the government have a permanent policy of running large budget deficits? Of course not. Although public debt isn’t as bad a thing as many people believe — it’s basically money we owe to ourselves — in the long run the government, like private individuals, has to match its spending to its income.

It is just stunning to me–though I should stop being continually surprised; my expectations are clearly not rational in the mainstream sense–how casually Krugman repeats throw-off remarks that I used to critique as a fun little exercise when teaching undergrads.

I was going to refute this notion from scratch, but in reviewing the proofs of my Study Guide [pdf] to Human Action, I realized that Mises blew it up 60 years ago. Here he is:

The trumpery argument that the public debt is no burden because “we owe it to ourselves” is delusive. The Pauls of 1940 do not owe it to themselves. It is the Peters of 1970 who owe it to the Pauls of 1940. The whole system is the acme of the short-run principle. The statesmen of 1940 solve their problems by shifting them to the statesmen of 1970. On that date the statesmen of 1940 will be either dead or elder statesmen glorying in their wonderful achievement, social security.

When the government runs a deficit today, it takes real resources from the private sector, in exchange for IOUs. So the total damage is done today; e.g. if the government pays for a bunch of chicken dinners, then that food is gone. The politicians don’t have a time machine to literally steal from our grandchildren.

But what happens is that the people who relinquished their purchasing power to the government today expect to be compensated down the road, when the Treasury debt is paid off. So the taxpayers at that time are forced to bear the brunt of the fact that the economy has fewer resources (because government deficits today lead to less capital accumulation).

So there are two separate things going on. On the one hand, there is the simple transfer. Some people get government handouts today, and those lending to the government to finance it have to reduce their consumption. (I.e. these people have less money to spend, because they bought government IOUs.) Then later on, the taxpayers make a net transfer to the holders of government debt.

So yes, “we owe it to ourselves,” but it’s not much consolation for the average taxpayer to know that at least he is getting ripped off so that another American can live on the government teat. But even on its own terms, Krugman’s analysis is wrong because government deficits tend to crowd out private investment. Thus, the overall pie in 30 years is smaller, and then the transfer occurs on top of it.

Highlights from Marginal Revolution

As some of you may have noticed, the frequency of posts here has plummeted in recent weeks. This is because I actually have “real work” to do, not to mention writing a book in (now) 6 weeks.

But, that doesn’t stop me from being a wiseguy over at MR. In commenting on Chapter 4 of Keynes’ General Theory, Tyler Cowen concludes with: “With this one chapter, Austrian capital theory falls off the map.”

To that, I responded, “And depressions were vanquished once and for all!”

Now here I thought I was merely entertaining myself (and providing needed procrastination from activities that actually generate income), but to my surprise the next comment was: “I clicked on the comments just because I wanted to see what Bob Murphy would write.”

If I can turn one frown upside down, it’s all worth it. My work is done here.