I am not going to be able to blog much the next few days, as my “real work” has piled up while I’ve been galloping around the country on the Magical Mises Tour. (Next stop: Greenville, S.C.) For Seattle’s festivities, I’ll post the video when it’s available. There were celebrity appearances by Vijay I-quit-Google-to-campaign-for-Ron-Paul Boyapati, and none other than TokyoTom himself.
For now, check out Jim Rogers’ comments on the mess we’re in.
Mario Rizzo: "Clowns to the Left of Me, Jokers to the Right / Here I Am, Stuck in the Middle With Lu"
Mario Rizzo decides once again that macroeconomics is too important to be left to the macroeconomists. He is disappointed with Paul Krugman and John Cochrane as they sum up the great intellectual divide.
If I may paraphrase: Krugman says that the “freshwater” economists (at places like Chicago) are idiots for failing to see that market economies are fragile things that are prone to systematic, irrational bubbles and busts, which can and should be prevented or at least moderated because their sources aren’t “fundamental” to the underlying “real” economy. Krugman thinks the freshwater economists are being ridiculous when they try to model recessions as being caused by a “real” random productivity shock, or even worse because workers decide they want to enjoy more leisure all of a sudden.
But then Cochrane comes back and says the “saltwater” economists (at places like Berkeley and MIT) are idiots for failing to see that there are serious, structural problems with the economy during a severe recession. You can’t just magically fix a real, underlying mismatch between resources and preferences by spending money. And why, demands Cochrane et al., would we expect a bunch of profit-seeking investors, guided by rapidly updating prices, to make systematic errors for years at a time? That doesn’t make any sense, does it?
Ah, Rizzo to the rescue:
I am reminded of the economist Roger Garrison, quite a few years ago, characterizing Hayekian macroeconomics as the “middle ground.” At the time I pooh-poohed this. I argued that one could always situate something as a “middle” by suitably choosing the extremes. This is quite true. But what I missed was the argumentative context. In the context of today’s macroeconomics alternatives, the Austrian approach is very naturally the middle ground.
The Austrian perspective is more balanced. Austrians have been saying that the current recession was precipitated by excessively low interest rate policy followed by the Fed…
So here you have a real, underlying distortion caused by poor monetary policy. We can call this a disequilibrium, if you like. The recession must involve a readjustment to the undistorted productive structure. This is not to say that the recession is simply resource re-allocation and therefore unambiguously “good.”
It is not good because, after all, the original distortion was not good. But we can go even further.
Once a recession starts certain secondary, but not necessarily unimportant, phenomena may be set in motion – chiefly the threat of cumulative price decline in almost all markets (aka “deflation”), systemic failures in the credit institutions caused by imperfect expectations of what is likely to happen, and general discoordination of plans. Keynes’s macroeconomics seems to be only about these secondary phenomena. Cochrane is right: Keynesians don’t know and don’t care what the fundamental causes of the recession are.
The “bubble” – to the extent there was one – was strictly speaking a dependent phenomenon. It was dependent on the enabling policies of the Fed during the expansion. I do not believe it would have happened in a different interest-rate environment.
Thus the Austrian view really is a middle ground. There are real underlying distortions – not simply animal spirits gone wild. They must be dealt with. But there are also secondary, subjective and expectational consequences induced by the original poor monetary policy. It is not so much that markets are inefficient and that actors can be irrational. Rather, in the process of market correction markets will seem inefficient but they are “trying” to correct errors. Actors may be prone to “irrational excesses” because the level of radical uncertainty has been increased, some of this induced by unpredictable government policies and some by the exigencies of readjustment. But the real misallocation problem underlies this.
I hope this is not too balanced, too moderate, too middle-grounded. Generally, I dislike these things, but bad economics to one side and to the other makes a moderate of me. Woe is me.
Joy is you, Mario. Woe are Krugman and Cochrane.
I know, I know, Charlie Sheen is probably not an expert on structural engineering. I offer the video below (HT2LRC) for two reasons: (1) I think we should acknowledge that Charlie Sheen is at least holding Obama’s feet to the fire as well; let’s hope he ups the ante when Obama continues to ignore him. And (2) listen carefully to the news anchors, cops, and firefighters in the clips. The “truthers”* aren’t inventing their theories out of nothing; people on the scene thought there were charges and that it was a controlled demolition. (And for those who are new to this, the significance of the clips where the news correspondents are discussing the collapse of the Salomon Bros. Building / aka WTC 7 is that it hadn’t collapsed yet. That’s what the superimposed arrows are showing, which are admittedly hard to see in this particular video.)
Note that I am not saying “9/11 was an inside job.” I have looked into this stuff, and I get two apparently qualified experts (airline pilots, engineers, etc.) saying diametrically opposed things, so I can’t really judge.
* Remember, if you can classify your opponents with a two-syllable word (see also: “birther,” “Bircher,” and “Paultard”) then they must be nutjobs. Hence, Austrians should reclassify their opponents as Maynards. “Keyne-si-an” is too respectable.
That’s what I imagine the Philistine commanders asking themselves. Whether he’s a young boy taking out a Goliath of a man with a stone and a slingshot, or whether he’s leading his outnumbered armies to victory after victory, it must have seemed to his enemies that David–father of the wisest man in history, Solomon, and great-great..grandfather of Jesus Christ–was one lucky guy. What was his secret? A rabbit’s foot, perhaps?
As with so many other puzzles, the Bible sheds light on this one too:
17 Now when the Philistines heard that they had anointed David king over Israel, all the Philistines went up to search for David. And David heard of it and went down to the stronghold. 18 The Philistines also went and deployed themselves in the Valley of Rephaim. 19 So David inquired of the LORD, saying, “Shall I go up against the Philistines? Will You deliver them into my hand?”
And the LORD said to David, “Go up, for I will doubtless deliver the Philistines into your hand.”
20 So David went to Baal Perazim, and David defeated them there; and he said, “The LORD has broken through my enemies before me, like a breakthrough of water.” Therefore he called the name of that place Baal Perazim. 21 And they left their images there, and David and his men carried them away.
22 Then the Philistines went up once again and deployed themselves in the Valley of Rephaim. 23 Therefore David inquired of the LORD, and He said, “You shall not go up; circle around behind them, and come upon them in front of the mulberry trees. 24 And it shall be, when you hear the sound of marching in the tops of the mulberry trees, then you shall advance quickly. For then the LORD will go out before you to strike the camp of the Philistines.” 25 And David did so, as the LORD commanded him; and he drove back the Philistines from Geba as far as Gezer. (2 Samuel 5:17-25, New King James Version)
The reason I like this particular passage so much is that the Lord gives David specific military advice. He doesn’t just say, “Go get ‘em tiger! I’ll put the sun in their eyes to give you a hand.”
For those of you who are also believers, how strong is your faith in this regard? I confess that a lot of times I’ll catch myself refraining from praying about something, because it’s a “purely” secular matter and “God wouldn’t understand.” You know, I’m having trouble with an economics paper; maybe I’m trying to figure out the best way to make the point that capital mobility doesn’t weaken the case for free trade. Well there’s no way I should waste my time praying about that! Nah, I should go read Bastiat again or see what David Friemdan’s up to on his blog. God is good when it comes to being a nice person and loving your kid, but what the heck would God know about the work of David Ricardo?
Obviously I am just letting you get inside my head when I catch myself and realize what a fool I am being. God understands international trade theory just fine, thank you very much. If He so desired, He could inspire you to understand the issues in an instant, and even give you a great way to teach it to others.
And one last thing, to tie my points here in with my general theme about how God actually manifests His will in the world He created: Part of what happens when you pray is that you relax and stop worrying. That alone might be all it takes for you to see the point that you will realize is “obvious” once it occurs to you.
Don’t worry kids, I will get over myself soon enough and stop harping on my virgin CNBC appearance. Believe it or not, I actually just watched it in its entirety for the first time a few minutes ago (late Friday night); I was really busy packing etc. after the taping and couldn’t relish it.
Anyway, check out around 5:12 when Kudlow calls me “Bob Murphy.” Now maybe I’m reading way too much into this, but how does Kudlow know I go by “Bob”? All of my PRI stuff (through whom his producer booked me) has me as “Robert P. Murphy,” and that’s how he referred to me every other time on the show. Yet in the heat of the discussion, he calls me Bob.
I have two theories:
(A) It’s a common enough nickname and he just assumed. (But why not “Rob”?)
(B) Kudlow reads LewRockwell.com and/or Free Advice, the only places where I go by “Bob.” This isn’t inconceivable; you would be surprised at how many big guns have Google Alerts tuned to their names, and will respond almost instantly when you post something about them. (In fact, I have a theory whereby this is to be expected: Other things equal, someone really concerned about his image will tend to be more famous than people who don’t care.) Since I’ve written a lot about Kudlow lately, it’s possible he’s seen my work and finds me amusing. (“Heh heh, I knew those purist libertarians would get their panties in a bunch when I came out for the clunkers program. Keeps me honest; I love it.”)
In my exchange with two critics on Kudlow’s show–and by the way, I should acknowledge publicly that Kudlow was extremely nice to me, going out of his way to let me talk on two separate occasions since I’m not used to rumbling with the big boys–I was saying that the conventional wisdom regarding the “rescue” of the credit markets is (as usual) exactly backwards. We were told that TARP and the Fed interventions were necessary to prevent the credit markets from seizing up, lest regular-Joe businesses lose the ability to meet payrolls and so forth.
The odd thing about this claim is that the volume of business loans was at all-time high in October 2008 (when TARP kicked in), and has since fallen steadily, down about ten percent through the most recent data point. (Or is it datum point?) See for yourself in the chart below; note that the huge spike shows when Bernanke pumped all the reserves into the financial system.
And for those of you who despise Monday-morning quarterbacking, recall that I was on this in real-time (picking up on the work of Alex Tabarrok).
Of course, Austrian economists are big on “counterfactuals.” This is why we get so much grief from positivists. At Mises University we stress that economic laws are a priori and can’t be tested, just like you don’t take a ruler and compass (not the needle kind) and go “test” the Pythagorean theorem. For example, the Law of Demand doesn’t actually say, “If prices go up, quantity demanded goes down.” Rather it says, “Other things equal, if prices go up…” In other words, it is a counterfactual claim.
Ironically, I explained the primacy of economic logic, as opposed to simple historical data crunching, in a Mises Daily article from 2004 where my target was a fellow with the initials LK. (And no, it wasn’t Lenny Kravitz.) So I am perfectly happy with counterfactual claims that apparently fly in the face of what “the data” tell us.
However, regarding the Treasury and Fed interventions and the credit markets, I have a perfectly good theory to explain what happened: Bernanke and Paulson started guaranteeing everything in sight, and the conventional wisdom became, “It was a mistake to let Lehman fail.” So of course the spreads on certain types of debt would shrink back to “normal” levels; there’s no reason to prefer Treasurys over Goldman debt if you think Goldman is backed up by the feds.
At the same time, banks would stop advancing new loans to medium- and small businesses, who weren’t ever going to get bailed out, because the economy was still awful and most important because Bernanke literally began paying them NOT TO make new loans.
Economists are big on saying incentives matter. So why should we be surprised that when Bernanke injected hundreds of billions in new reserves, and then began paying interest to banks for keeping those reserves parked at the Fed, that the amount of loans to the private sector started dropping?
No joke, whenever Gene Callahan rants against the people on the front lines in the intellectual battle against the Leviathan State, I get emails to the effect of, “What’s up with your buddy?” “Why do you associate with that guy?” “Should I keep recommending Economics for Real People?”
I know not what course others may take, but as for me, give me more of the guy who writes stuff like this:
You may have seen the status going around Facebook that reads, “[JOHN DOE] thinks that no one should die because they cannot afford health care, and no one should go broke because they get sick.” (This is meant to be an argument for Obama’s health care package, I surmise.)
Well, I posted as my status another blurb, not original to me, that says, “No one should be frozen in carbonite, or be slowly digested for a thousand years in the bowels of a sarlaac, just because they couldn’t pay Jabba the Hut what they owe him.”
Normally the only blog posts that make me laugh out loud are my own. The above was a pleasant break.
So I went to dinner and now I’m back in the hotel room, where it’s 8 pm local time but 10pm physiologically. I could feel myself starting to crash when I was walking back to the hotel, and I knew I wanted to get some work done tonight. What to do?
Some people would get chocolate, some would get caffeine, some might hit the gym for some quick cardio. Me, I popped into the Barnes & Noble to sign my books. That always makes me feel special and gives me the strength to continue.
Anyway, here are some quick thoughts:
* Oh my gosh, I didn’t realize how long the Detroit-Seattle flight would be. Normally I would just nap, but I was in the middle seat, somebody in my vicinity kept releasing greenhouse gases from his rear, and I had slept on the previous flight so it really wasn’t in me. I had foolishly neglected to bring any reading material, and when the pilot said we were 3 hours away, I considered gouging out my eyeballs. Instead, I actually read the in-flight magazine’s 12-page story on how great St. Paul / Minneapolis are for business. Then I solved the brain teasers (except the ones that would take two seconds with algebra; I know I could do it, I just didn’t have a pen handy). Then I read the descriptions of this season’s new TV shows, even though I don’t have a TV. Then I stared at the maps of Delta flight routes for a good 15 minutes. (Did you know Salt Lake City is a much bigger hub than Chicago? OK that’s not shocking, but did you know Memphis is a much bigger hub than Chicago?) If it weren’t for that magazine, I probably would have solved the Riemann hypothesis.
* A guy eight seats in front of me had the exact same shirt on that I did. (Well, not the exact same shirt–that would have been size XXXXXXL. You get what I mean.) Isn’t it odd how rarely that happens? That’s probably the second time in my life that I’ve seen a guy with literally the same shirt that I had on at the time. And it’s certainly not because I have such cutting edge fashion sense. Speaking of which, when movie stars go to the Academy Awards etc., do their publicists or whoever coordinate beforehand, to make sure nobody is coincidentally too similar to each other? That would be horrible in the gossip world.
* In the Detroit airport there were canine units all over the place, letting the dogs sniff everyone’s luggage. What annoyed me was everyone was like, “Awww, what a cute puppy,” instead of, “Umm, I think your goosesteps need to be a little higher.” Haven’t these travelers read Animal Farm? These were not cuddly doggies. I’m so glad I took that ribeye out of my laptop bag last night.
* When you’re walking down a hotel hallway and you see a room service tray on the floor with fries that look fairly new, are you tempted to grab any? Oh, me neither, that’s gross! Sick man! I was just asking.
* Seattle was gorgeous today; it was 83 and not a cloud in the sky when I got to the hotel (around 5pm local). I kept waiting for someone to say, “Oh, you were going to Seattle Washington? You better get back to the airport; this is Seattle California.”
* Scott Sumner’s blog is simply perfect for reading on a Blackberry while you’re at a restaurant by yourself. His posts are too long for me to sit down and read when I’m at a computer and could actually be doing something productive, but if I’m just sitting somewhere and can only surf, then his posts are simply superb. If I could clone myself, I would devote Bob Murphy #8 to making blog posts as sweeping as Scott’s. For example, by the time I got my check tonight, I had catalogued 5 statements in this post that I thought were astoundingly wrong. And yet, Scott makes error seem so easy. How does he do it? Practice practice practice I guess.