The Recession Isn’t Over
[UPDATE below.]
For the documentary on the Fed, I spent about 5 hours under the hot lights today with the cameras rolling. I will never criticize a politician for saying something dumb on the campaign trail; I’m not sure I could have recited my date of birth by the end of this ordeal. Hopefully the filmmaker can edit out the nonsense and make me look sharp in the final cut.
On the flight here, I reread my Depression book. (This wasn’t pure narcissism; the interview was going to be based on my book.) I ended up scaring myself all over again, and remembered why I was so sure the US economy was done for after I finished writing the book. The Fed and the government enacted similar policies back then to “fight” the downturn after the stock bubble burst, and we all know how that turned off.
One of the things that really interested me was a point Garet Garrett made on the 5th anniversary of the New Deal. Garrett pointed out that the surge in official output figures from 1933-37 notwithstanding, businesses were not replenishing their equipment through investment. In effect the US economy was consuming its capital even during the alleged Roosevelt recovery (which Krugman et al. say was aborted through premature deficit hawkishness in 1937).
So regardless of what the government and Fed did in 1937, there had to be a “depression within the Depression” or a “double dip” as we euphemistically will call it nowadays. Bernanke’s insane 0-interest rate policy has ensured that the US (and indeed world) capital structure has gotten progressively more screwed up in the last two years. It doesn’t matter what they do with quantitative easing, targeting NGDP futures, raising interest payments on excess reserves, or pinning the tail on a donkey… There will be another collapse. It might not be a sudden “crash”; it could be a slow-motion train wreck. But if you think interest rates serve a function, then you must concede that that function has not been fulfilled for a good two years.
Many commentators, not just Austrians, would now agree that in retrospect, it would have been fantastic if Greenspan had sat back and done nothing after the dot-com crash. Yes there would have been a painful recession from (say) 2001-2003, but it would be ancient history at this point. Moreover, that painful recession would have been child’s play compared to what we have already been through and will continue to suffer over the next few years.
What we need to realize is that right now we are in the analog of the housing boom years. This is the “soft landing” that Bernanke has provided us. The bubble isn’t in houses, it’s in US Treasurys.
And the coming collapse will make the housing bust look as easy to cope with as the dot-com crash looks to us right now.
UPDATE: I was watching a very interesting documentary on–what else?–World War II in the hotel room. One of the historians explained that the Americans (under the command of the guy preceding Doolittle) tried precision bombing of German targets without fighter escorts. In one raid, the US lost 60 bombers–about 600 men–trying to take out a ball bearing factory. But as crazy as that is, I loved the understanding of capital structure behind it. The historian explained, saying something like, “You use ball bearings in everything. Taking out this factory would strike a crushing blow to the German war machine.”
And yet a mainstream economist wouldn’t be able to capture this in his or her description of the current recession. “Huh, a ball bearing factory got taken out? Well how many marks did those things fetch? Just have the German central bank print up some more, and go buy sauerkraut with the new paper. We have to boost aggregate demand back up if we want to beat the Yanks.”
The Race Against Government
In this article I was trying to go for a saucy new take on things we all take for granted, but I suppose it’s possible it would convince many people that economists are jerks:
I have similar misgivings about the way my school got us kids to raise money when I was growing up. I went to a Catholic grammar school that had annual marathons. So I was a little kid going door-to-door in my neighborhood and asking people to pledge a certain amount of money for each lap I walked around the school. (Some donors would be tough guys about it, asking me how long the laps were and sizing me up like I was a racehorse.)
In my high school, we had candy and magazine drives, where we again went door-to-door and guilt-tripped people into buying stuff they didn’t want. We didn’t get to keep a cut of the proceeds, of course, but the school would give out prizes to motivate us. It was always ridiculous because this one kid would get his parents to get orders at their jobs, so you never had a chance of beating him. I bet Ellery Queen Mystery Magazine owed half its subscriptions to that kid.
Of course, there are adult analogs of these things. For example people raise money for cancer research by “Walking for a Cure” and so forth. Please note, I am not criticizing the people who participate in these activities. I understand that they are social events, and you raise more money than if you simply went around to your coworkers with a hat. But my point is, isn’t there a way we could tap into people’s philanthropic side without doing something intrinsically useless, like having a bunch of fourth graders walk around the school parking lot eight times, or asking people to spend money on candy or magazines they don’t really want?
Why Does God Allow Bad Things to Happen, #2209
I am in a hotel in San Jose. Tomorrow I will be interviewed for a long time for the documentary on the Fed. The strategy is that if you keep a camera on me for 4 hours, surely I’ll say something profound.
This post is not going to be bulletproof by any stretch, but I went through a stream of consciousness yesterday and I thought some of you might appreciate hearing my views on some big issues in a slightly different way.
I believe Dr. Pangloss was almost right. This isn’t the best of all possible worlds, but it’s the best of all possible worlds that God has the power to design. He made it as good as it could possibly be, subject to humans having free will. And He decided (and I agree with Him) that the world is better with free will than without.
So when someone says something like, “How could a benevolent God have allowed the Holocaust?!” I think that’s a rather ill-posed question. I would say, “OK, what would you have changed? You have absolutely no idea what the ramifications would be, if (say) Hitler hadn’t been born, or if he had been struck by lightning, etc. You are simply assuming that God was sloppy and could have retained all the good things about the universe, but without the regrettable necessity of allowing the Holocaust to unfold as it did. Do you really think you are more upset about innocent people being killed–people whom you probably only know about as a statistic in history book–than does their Creator and Father, who actually watched them die?”
My understanding is that God designed the very fabric of the universe–from picking the charge on an electron and deciding how much mass/energy to create at the time of the Big Bang (assuming the cosmologists are right)–knowing beforehand what choices people would make. So ultimately He makes the best of the Holocaust and other awful events, but yes there is a reason (actually an infinity of reasons) that they had to happen. I believe that people who want to spend eternity with God will do so, and when they die they will understand why He made the choices He did. We will then say, “Ohhhhhh, thank you” when we see what would have happened had He allowed history to unfold any other way.
Now my views raise two objections or concerns, which I’ll briefly address:
OBJECTION 1: So it doesn’t help anything if we choose not to sin?
No, this is wrong. You do make the world a worse place when you sin. Conversely, when you obey God’s laws you make the world a better place. Remember, God has made the world as good as it can possibly be, given our free choices. If you are familiar with game theory, it’s as if God moves first, designing the physical universe and all its attributes, and deciding how many souls there will be etc. Then He can look ahead and see all the choices people will make in that particular timeline. He does this for all possible universes, and then actually creates the universe that is best. So one of the constraints He faces is our free choices in the “subgames” after He has moved and designed the universe and its laws of transformation. Every time you sin, you close off avenues to God, forcing the universe into an even less optimal path. When you obey God’s will, you give Him more to work with.
The choices you make really are free; you really do have free will. God doesn’t cheat. He won’t force you to love Him or obey Him; He doesn’t want slaves or dupes, unlike Satan (and unlike some religious leaders). But He does know beforehand what you will do in every possible circumstance, because God is outside time. Every moment of history in our universe’s timeline is the manifestation of one unified decision, a single action (in the Misesian sense) that God performs to create the best of all possible worlds.
OBJECTION 2: Why does God allow sin to be so painful?
This one used to trip me up for a long time. Sure, we understand that unless people have the option of sinning, we really can’t have free will. But why couldn’t the world work such that the worst you could do would be to cause someone momentary pain? And then a forcefield kicks in, shielding the person from any serious damage?
Well, given how complex and interrelated everything in the universe is–how scientists can tell you that life wouldn’t work (at least as we know it) if some of the physical constants were changed by 0.01% etc.–I think it’s a bit sophomoric to say, “Let’s keep all the good stuff, like love and poetry and the first season of 24–but change all the stuff we don’t like.” The point is, that is impossible. You can’t just tweak things a little bit. The present state of the world is directly tied to the initial configuration, whether or not you believe in physical determinism.
The other thing is that we humans have naturally adjusted our expectations to think that “the worst thing in the world” is, well, pretty awful. But we can certainly imagine universes in which being waterboarded would be child’s play. For example, remember Jabba’s sentence to Luke and Han? I don’t remember the exact wording, but he said they would be slowly digested in the belly of a monster for hundreds (thousands?) of years. Now that sounds pretty bad! We can imagine cynics in the Star Wars universe saying, “If George Lucas loved us, why would he allow such awful possibilities?” And then a Lucastian would say, “But look at how cool our world is! We have Jedi knights and get to blow up Imperial walkers.”
I’m trying to be humorous but I’m dead serious. If the worst thing in the world were a wet willy, people would say things like, “I can’t believe God allows such horrors! I just saw on the news that in Uganda, soldiers held a man down, got in line, and gave him 20 wet willies in a row–in both ears at once!”
The Empirical Evidence for Fiscal Stimulus…Anyone? Bueller?
In this post Paul Krugman explains that a popular critique of the benefits of fiscal expansion is a non sequitur, since the authors improperly look at deficit spending in periods where there is no liquidity trap (and hence we shouldn’t be surprised if deficit spending doesn’t spur growth). A fair test of Keynesianism would only look at big deficit spending during periods where central banks had pushed interest rates down to the zero bound:
First, the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound….Yet the Alesina-Ardagna analysis doesn’t make that distinction; Japan in the 90s, which was up against the zero bound, is treated the same as a batch of countries in the 70s and 80s, when interest rates were quite high.
Second, they use a statistical method to identify fiscal expansions — trying to identify large changes in the structural balance. But how well does that technique work? When I want to think about Japan, I go to the work of Adam Posen, who tells me that Japan’s only really serious stimulus plan came in 1995. So I turn to the appendix table in Alesina/Ardagna, and find that 1995 isn’t there — whereas 2005 and 2007, which I’ve never heard of as stimulus years, are.
So to put it bluntly, I’m not much persuaded by a paper that doesn’t even identify the one clear example we have in the postwar period of large Keynesian stimulus in a zero-rate environment.
Are there any papers that, in my view, do this right? Yes: Almunia et al, which uses data from the 30s — a zero-rate era — and uses defense spending as an instrument to identify spending changes. And their results look pretty Keynesian.
Everyone got that? Krugman admits that the only two examples in world history to test the effectiveness of Keynesian policies are:
(1) The world in the 1930s, and
(2) Japan in 1995.
These are the two examples to prove how good Keynesian policies are at fixing economies and stimulating growth.
By the way, don’t say World War II you silly fool–Krugman has explicitly argued that that isn’t a test of Keynesian fiscal remedies.
Bask: Goldman Sachs in the Great Depression
OK kids, I am flying to San Jose tomorrow to be interviewed for a documentary on the Fed, bailouts, etc. I’m not sure how much I’m allowed to say about it, but let’s just say they are also interviewing people with the following initials: RP (MD), PK (PhD), and BD (PhD).
The director wanted to know if I could talk about the allegedly nefarious role of Goldman Sachs during the Depression years, presumably advising Hoover and FDR and steering privileges their way. Can anyone point me to credible (online) sources on this topic? At this point I haven’t found anything reputable enough for me to repeat.
Glenn Greenwald Shocker: Government Officials Are Often Lying / Wrong
I realize Glenn Greenwald is turning into the Britney Spears of Free Advice, but how can I not repeat stuff like this:
If I had the power to have one statement of fact be universally recognized in our political discussions, it would be this one:
The fact that the Government labels Person X a “Terrorist” is not proof that Person X is, in fact, a Terrorist.
That proposition should be intrinsically understood by any American who completed sixth grade civics and was thus taught that a central prong of our political system is that government officials often abuse their power and/or err and therefore must prove accusations to be true (with tested evidence) before they’re assumed to be true and the person punished accordingly. In particular, the fact that the U.S. Government, over and over, has falsely accused numerous people of being Terrorists — only for it to turn out that they did nothing wrong — by itself should compel a recognition of this truth. But it doesn’t.
Bill O’Reilly Interviews Jon Stewart
This is one of the most entertaining interviews I’ve ever seen. If you like Jon Stewart and dislike Fox News, you will adore this and make sure you have a half hour to sit and watch it straight through.
These guys are great together. It’s true that I think Stewart has the upper hand, but I must admit O’Reilly does a good job too keeping his shtick going. (HT2LRC)
BTW if you’re pressed for time, Stewart brings up Ron Paul deep into the interview,* and I barely understand what O’Reilly’s countermove is, but it’s funny that O’Reilly just keeps moving along on that point. He dwells on a lot of other stuff but ZOOM right past the Ron Paul point that Stewart raises.
* At LRC they say it occurs at 34 minutes, but I can’t verify that because you have to wait for the thing to load (I believe) and it’s taking too long.
Free Advice on Underarm Perspiration
So I ran to Subway to get lunch. (If you stick to a 6-inch sub and just drink water, you can have plenty of food without spending $4, at least in Nashville.) The girl behind the counter started the sandwich, and then the guy came over to finish it. Then it hit me. Whoa.
You’ve perhaps heard of the Spector Wall of Sound? Well this was the Subway Wall of Stink. This wasn’t a guy who missed his shower that morning. This was someone who was well-practiced in underarm odor.
I relay this just because there actually was a guy in college who didn’t realize there was a distinction between mere deodorant and anti-perspirant. If someone forwards you this blog post–even if “just because it’s funny, take a look”–then you know what you must do.
Recent Comments